Acquisitions Anonymous - #1 for business buying, selling and operating - Get a buzz from an $8mm distillery? - Acquisitions Anonymous 211

Episode Date: July 18, 2023

Mills Snell (@thegeneralmills), Michael Girdley (@girdley),  and Heather Endresen (@EndresenHeather) review a distillery that gives the group a buzz. Today's deal comes from Axial.  Axial is a trusted deal sourcing platform serving professional acquirers in the American lower middle market.Axial partners with over 2,000 boutique investment bankers and business brokers who use the Axial platform to market their deals to lower middle market acquirers. Sweetspot on Axial in terms of deal size is from $5M to $75M in enterprise value, located solely within the US and Canada. Deal activity occurs in five industry verticals: manufacturing, tech / IT services, healthcare, B2B services, and consumer. ___________________Thanks to our sponsors!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]

Welcome back, everybody, to another episode of Acquisitions Anonymous, Mills Stell. I'm joined today by Heather Indreason and Michael Girdley. And we talk about a very fun episode, very interesting that I don't think we've talked about before, but it is a ready to distribute and ready to serve, which basically means like White Claw, truly ranch water, all these different kind of premixed. But it's a vodka distillery that is in that kind of segment of the space. And we talk about some of the different hurdles, a lot of the different regulatory constraints and aspects to those types of businesses, blue laws, capex associated with these businesses, is it able to be financed by the SBA and what are some of the different constraints? So it's a fun episode. We joke that Michael was actually drunk the entire time and we

had no idea because he thought we were testing the product midway through the episode. But fun episode, thanks for joining us and I hope you enjoy. I was not drunk, by the way. That was just a joke. How dare you? All right, enjoy the episode. Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com.

So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around. QuickBooks and other technologies that you're using as a small business owner. So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your

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

So thanks a bunch and cloudbookkeeping.com as the sponsor for today's episode. Welcome back, everybody. Another episode of Acquisitions Anonymous. It is 11 a.m. Eastern Time. And I feel like we're not really doing this particular episode justice because we should be doing it at 505 p.m. And we should all have a very fancy mixed drink in our hands. we were really doing this wrong. But have we got a very enticing, intriguing, hot episode for today.

Michael, take us away. Take us away. It's worth noting it's from our friends at Axial, good people. And I mean, Axial, it's a combination of like, how would you describe it, Mills? The way that I describe it is kind of upmarket from Biz by Sell, and it's where investment bankers put, you know, put their listings if they're going to list them anywhere. And there's not a ton of information here. And that's that's kind of on purpose. It's so that you, you know, go actually talk to the investment banker and, you know, get the teaser, sign the NDA, get the SIM. But this is,

it's the nature of finding better deals is that you're going to have to play in more competitive circles. And, you know, this type of listing, this type of asset and company doesn't get sold on biz by sell for a reason, you know, and it probably doesn't get sold by kind of a main street business broker for a very specific set of reasons. Yeah. I've been a member there for a while. It's axial.net. So I like it because it's where you start to find lower middle market deals and not necessarily like the small business stuff that's on biz by sell, which frankly is a lot of junk. But anyway, not that people would think that hearing that's the way we talk about deals on here. So all right, I'll read this one. And then we have our resident vodka

expert here, Mills. No, I'm just kidding. I thought you were going to say Heather. I was right to agree to say Heather. Look, Heather's new to the pod, so I'm waiting a little bit to... You don't pick on her as much. Yeah, don't pick on me yet. No.

Give me some time. Yeah. Well, yeah. Okay, anyway, all right, so this one, I'll go ahead and read it. It is a fast-growing, super premium spirit brand and distillery. And a summary here, the company is a leading distiller of American vodka. The company markets a popular lifestyle brand that has successfully extended

into the ready to drink and ready to serve categories. Long-term relationships with large national distributors have allowed its products to be enjoyed throughout the U.S. Total case volume was over 45,000 nine-liter cases in 2021 and is forecasted to exceed over 60,000 nine-liter. It says 9L, is that 9-L? I think so.

Nine-L cases. Let me Google it. Nine liters, yeah. Okay. The on-premise versus off-premise channel split is 6535. Okay, so on-premise means they're operating a facility where they're selling spirits and stuff directly to consumers. Is that the way you read that?

I thought so too, but I think this probably means that a bar is buying this and selling it. It's a wholesale type relationship versus, just being bought at a grocery store and people take it home. Okay. I thought the same thing because alcohol typically is defined that way, but I don't think that they're doing, you know, six million or no, it would be, I guess, maybe four and a half million dollars of sales, you know, in kind of a like, hey, drive over to our establishment and sit outside and drink vodka.

What is ready to serve and ready to drink? Does that sort of imply cans of like it's already mixed? in with something, some juices or whatever, and it's some kind of cocktail. So would a bar buy that? That's what I guess I'm a little confused by. So this category is crazy. And you can find a bunch of really cool articles. There's one that I found about this.

And this category, like you have Whiteclaw. You have ranch water. You've got all the different like hard, seltzer, you know, type folks. truly, there's like every single beer manufacturer has gotten into the space now because the name of the game in this industry is regulation and compliance. And the difference between manufacturing and selling and distributing beer and liquor is light years difference in terms of the regulatory environment. So there is a kind of loophole, so to speak, that a lot of these manufacturers find,

And it's in these ready to drink and ready to serve categories. So it's different. You can sell it at the grocery store. You can go buy Whiteclaw or Truly or any of these others at the grocery store, which is not typically the case in most states if there's liquor as a component of it. So ready to drink, I think is canned version and maybe ready to serve as some other kind of pre-mixed. I don't know for sure, but it might be like a larger format that gets poured into something in a bar. But that's the difference.

Yeah, so I googled it. Ready to Drink is a pre-mixed alcohol beverage, popularly a malt-based beverage sold in single-serve containers ready to drink. Ready-to-serve stands for, is RTS, and generally denotes a pre-mixed cocktail beverage that could be poured in several servings. So I guess if you're a bar, you don't want to buy single serving, you want to buy it ready to be poured out of a jug or a keg or whatever it comes out of. it's similar to you would think about it in terms of like the like bag in a box wine you know

where you're kind of changing the medium and the rules sometimes change you know alongside that okay so i live in california and um we don't we we buy everything at the grocery store so i forget sometimes that uh that there's these regulations and and you can buy hard liquor you can buy everything wine beer everything at the grocery store here i met a guy here in Texas who basically they have the contract to put the auxiliary liquor stores next to the Costco's, which is its own separate liquor-only store, but it's like a little like thousand square foot add-on. It's just like, oh, what a great, what a great scheme to be part of. So. Yeah, I didn't think about Costco. Yeah, we, Costco is where people buy their liquor.

Yeah. Here, you know, the big quantity. Yeah. Texas, we have some backwards laws. Texas, like, talks a big game about how, like, free trade and all this stuff. And then we have, like, some really unfree trade, like, liquor laws. Like, you have to go through these distributors. And we've talked about how, you know, my ancestors decided to sell explosives on the side of the roads. And their ancestors decided to sell, you know, become liquor distributors.

And it's like, oh, man, I want to go back and shake them, be like, guys, red ocean versus blue ocean. fascinating though because like in South Carolina at the statewide level you cannot own more than three liquor stores so you know all the mom and pops they don't care it's just one but the biggest liquor stores in South Carolina they have a location in Charleston they have a location in Columbia and they have a location in Greenville and they're only allowed three yeah and I don't know if you brand them differently if you can call it something else but I'm pretty sure you can't like there's there's very very specific rules around it But it is, like Michael said, states have these different distribution models.

But the way that it typically has worked and the way that the blue laws have evolved is that the federal government and state government did not want brewers or distributors, or distillers, sorry, selling directly to customers. So like tasting rooms at breweries, those have only been around in South Carolina for like less than 10 years. So all the breweries from an economic standpoint were very limited. Then all of a sudden they could start to sell a pint or maybe two pints on premise if they had a kitchen and served food. So state by state, it varies very, very drastically. But distilleries have a much harder battle at the federal level because of all that compliance.

I met with a guy who was in this space. And he was just kind of complaining and venting about the fact that every single ounce of their manufacturing process has to be, you know, incredibly just documented down, literally down to the ounce, and they could be audited in any time and have to be able to account, like, there's no, you know, just random, hey, this stuff spilled or somebody came and tasted it, or, you know, we slipped some out of the back. So it's very arduous process. Vodkas is interesting. Just really quick, vodka's are interesting because you can make them so quickly compared to whiskey and brown liquor that has to age. Okay, so I have two anecdotes for you.

In fact, one anecdote. So you talk about, like, here in Texas, we used to have the same thing where you could only own five stores or something like that under an individual. So there was a family here in St. Antonio. It was like a huge family. And, like, suddenly they looked up and I was like, how did these guys have like 80 stores? And they're all under the same brand. Well, it turned out when you double-clicked under it, like every cousin, uncle, nephew,

like, the grandma, everybody owned. Everybody owned five stores, and that's how it all went down. Like, that's how they got around the idea of creating a big chain. I do think it is interesting looking into the vodka space. Have you guys ever looked at, like, the study of how vodka is made and, like, the difference between expensive vodka and cheap vodka. Have you ever looked at this? Okay.

So this is one that will blow your mind. Vodka is different than tequila or different than whiskey or some of the other spirits, which is they're basically all identical. Like, there is no different. between Tito's and other stuff, once they reach a certain level of goodness. Like, they can taste a little different, like Smyranoff may put in or what is it absolute is the one that may like flavor the vodkas and stuff? Like, that all happens.

But except for once you reach a certain level of impurities, like, they're all identical. Like, there's no substantive difference just because of the way it's made. So, and I think it was like three or four years ago, like there was a story about a study that had been done about different vodkas. And they actually went and compared the impurities and saw if that, like, correlated to how expensive the vodkas were. And they just covered, like, you know, like, remember, you know, the pop-off vodka that used to buy, like, in a handle, like, that?

You know what I'm talking about? Like, you guys went to college, right? So, so it was like- I didn't buy the liquor, though. I was a girl, so I didn't buy it. Oh. Okay. So anyway, we would be the degenerate that I am, we would go buy this, you know, as

college kids, because it was cheap and you get it in this handle. But like, it turned out when they did the studies of impurities of the different vodkas, like it was actually one of the most pure vodkas of all of them. Like, there was very little to no correlation of price versus up. And someone like the over the top, like surrog and stuff like that, it was like junk. It was like full of impurities. But it all tastes basically the same. So the crazy thing about vodka is like there's this huge differentiation. People are like, no, I like the way Tito's taste. It's like, no, it's the same crap. It may be even worse just because they put like gold flakes in it or something stupid. Anyway, that's my vodka story. So it's all marketing. It just says it's all marketing.

And that's, I guess, what I was thinking about this deal is super fast, super premium. There's a brand here. And there's only one year of financials. Yeah. Well, let me let me actually read them. So sorry. So in 2021, which is, it's kind of odd. We're in 2023 now. And that's the only one year of financials. In 2021, which I I guess was peak pandemic, and people were sitting at their house getting their drink on. They sold $7.3 million of product, revenue-wise. EBDA was listed at $1.7 million, and EBDA margin was 23%. They are located here in the United States, and then they list the different industries that they're in.

They're a distillery and a wholesaler of beverages. So, yeah, I think that's interesting, Heather, like, they're telling us very little about this and also very little about free cash flow. These are hugely capital-intensive businesses. And it was interesting. Especially the initial startup cost is just multiple millions of dollars. So there's a business that I know of, and they had a very popular beer brand.

And they came to me and they're like, we have this great beer brand, right? And like, here's how we have it done. We're a virtual brewery. So we just go and use Excess Capoeuv, and these different breweries, and they bottle it. And then as we need it, like, we call them up and they make us new batches and we sell it to our stuff.

And I'm like, this is amazing. Like, you fixed the brewing everything. Like, no CAPEX. You don't have to have a bunch of capital invested. You can scale up, like, almost infinitely. And you can use other people's excess supply. And it came to me and they're like, okay, we're raising money. We want to build a brewery and a restaurant and a tasting room and, like, take on all this

capax. We're going to have minimums yada, yada. and I was like, where are you doing that? Like, you have the most beautiful business in the whole world and you want to build a party house and take on all this capax and go from a beautiful cash conversion cycle to a terrible one.

And anyway, so they didn't really like that investment feedback. I gave them. They wouldn't build it anyway. Well, at the last bank that I worked for, we had a vertical that was focused on distilleries and breweries. And what we learned is it attracts a lot of people just because that sounds fun, you know, and they kind of put the blinders on

and they don't think about the business really. They are not sober about it. No, that's just a joke. Ever! And I just think there's a little, it's interesting how that happens. And there's also a lot of wealthy people who get into wineries and things like that

more as a hobby. And you find that a lot of them really aren't very successful on the bottom line. But this one I kind of wonder, what happened in 22, because then the bars all really kind of filled back up, right? Yeah. So you'd think that 22 would be good and they'd want to show it, but we don't see it here. Yeah.

I mean, in theory, these guys are selling into bars because they have on-premise versus off-premise channel split. So on-premises 65% of their business. So potentially that's good that they're selling at bars and restaurants. And I believe these ready to drink and ready to serve categories, they can be sold by people with a beer and wine license and not just a spurious license, which is a distinction to have here, right? Like, at least here in Texas, liquor is, if you sell liquor, you're like basically

borderline criminal. That's the way the police look at you. And if you sell beer and wine, you're like, okay, well, you're like an upstanding business, like a, I don't know, like a Chili's or something like that. One other weird blue law thing is that, you know, certain states have different alcohol limit thresholds. Like, if you go to Utah, which is a very religious state for Mormons, the, there's like, the beer cannot have, like, over, I want to say it's like a 2.8% ABV.

So all the beer is just watered down from an alcohol standpoint. And it's like mud light, but like also there's no like high gravity beers there. There's no, you know, craft beers with high alcohol content because they just are saying, hey, look, from a, from a, you know, legislative standpoint, we just don't want people to get drunk as easily. and we're going to mandate that and dictate that. So you've got to think, right, part of the value of this, when you're underwriting this particular brand and this deal is, okay, what is their brand and is it valuable?

That is ultimately going to be based on like brand awareness and their gross margin. If it's a really popular brand, they should command a higher gross margin. But then the biggest kind of criteria for these types of businesses is distribution. They say they have great, you know, great distribution relationships nationally. which would be a big deal.

But when the rubber meets the road, how good are those relationships? Are they getting distributed in all the markets that they can and should? And could they even keep up with growth? That's a big question here. Like Michael said, if they're using their own facilities

and using their own distillery and they're at capacity, all of a sudden, if you want to grow this thing to $10 or $12 million in revenue, you probably have to spend a few million bucks. And not all of that really gets through to the bottom line right away.

and your return on invested capital could be fairly low if you have to make a huge cap-ex jump. So, I mean, here's what I know about the way this kind of spirits market works, right? Basically, like, you have the big liquor brands and big spirits brands, and they watch the market to see when there's emerging trends and what's going to be hot,

and they go and they snap up the winter, right? So, like Ranch Water, I guess, was the most recent one. Have you guys tried Ranch Water? Do you like it? No. I've just seen the commercials when I watch Yellowstone. They have the Yellowstone actors, you know, market it.

It's a great idea. Ranch water is great, right? It's actually, it's basically seltzer water with basically alcohol in it and just a tinge of sweetness. So thank Bartles and James, Heather, for our generation, but not a sweet. Oh, please don't bring back that memory. Okay, Zima. Think about Zima. Okay, Zima.

Yeah, like, it's, it sounds better. It's basically Zima, but not as sweet. So anyway, like, because this is a brand-driven business where you have Tito's or, you know, Budweiser or absolute vodka or surrock or whatever, like these big conglomerates who have all the shelf space and the leverage over the retailers, wait to see what brand is going to become a thing. And they, that becomes a winner. They go pay big money for it and they make it even more of a winner by applying their leverage onto the retailers, right? and they can go to like local grocery store chain here, H-E-B, and say, H-E-B, we're the only thing just as big as you, and this is the deal that we need in order for you to have T-Dos

on your shelf or whatever, a ranch water. So that sounds great if you're the winner of these emerging brands, right? And they'll see entrepreneurs like this start these emerging brands. The problem is, well, what about the rest of the stuff, right? The losers. What's the number four vodka beyond the one I just talked about, right? Smeared off absolute, you know, T-dos, like number four, who cares? Nobody cares, right? It is a winner-take-most market because you get that,

that brand idea inside of your brain, and that's what you buy. And so I think that's the problem here is like, what are you buying here? Like, you're buying problems. You're buying a distillery, you're buying a bunch of capex. You're hoping that you're going to be cash flow positive, and you're buying a brand that isn't really much of anything in the face of brands that are going to be growing and coming after you. So anyway, I love to steal otherwise. And back to what I said earlier, you're maybe buying the prestige of telling your friends and colleagues that you own the blah, blah, blah brand of vodka. And I do think that's a big part of this industry, is just being able to talk about it. Yeah, there's a, I once bit on a building here, by the way,

because I was going to move one of my companies into it. And I lost out by 10% to a couple of eye doctors who wanted to start a whiskey brand. And that's still a money losing. losing whiskey brand. That's the standard here. Maybe that's the right buyer for this. Do you want to have fun and like tell people you own a distillery and write checks every month to keep it afloat? Sounds great. Go have some fun. Yeah. And have a place to go hang out with, you know, your friends or people who you think are your friends. Ask us how you really feel about it. I have some friends that did precisely this that were doing pretty well for a few years before COVID and they were like, we're going to go open our own whiskey brand. And for them, the fun was like designing the distillery, like doing the design. They like traveled around and did like whiskey tasting at Kentucky and like, I don't know, where else do you go? Scotland, I guess. I don't know if you go to get whiskey.

But like they were just like, they were just having a ball just with the creative aspect of it. And they were convinced they were going to make money. But anyway, they never put it over the finish line. But they were precisely that. It was like a lifestyle type. It wasn't just a lifestyle brand. it was a lifestyle opportunity for them.

So if you want to have fun, like, go for it. No problem. Did I talk you guys out of this one? Yeah, I mean, I was going to say, I think we talk about this pretty much every episode, but buy our business fit. I think this is a really, really difficult business for somebody to buy who's not already in this space. And we, you know, highlighted probably a half dozen reasons why that's the case and why it would

be an uphill battle. Can you SBA loan this stuff? Heather, there's no... You could. I mean, it's not too big. You could go SBA. And like I said, we had a vertical at my last bank that did a lot of SBA loans in distilleries and breweries. And so you could, I think you need like a specialized SBA lender who understands that space because I think most would probably shy away from it for all the reasons we just discussed. But the right buyer could get an SBA loan for this.

Yeah. There you go. Well, then you could personally guarantee the opportunity. to write checks to this every single one. Even that enhances the fun, right? You know, the fun that you're having with all those tastings. Now you've got the PG on the line. So you're excited every day, every day.

I don't know. This would be a tough one for me. If you drink a lot of vodka, maybe that moderates the risk that you're going to lose your house. It helps. It helps. I've heard. It's a lot of vodka.

All right. Well, we'll wrap up here. This was a good one. And like I said, we should have done it at five o'clock. and it would have been more lively, and we could have had a truly or a white claw. Wait, you guys aren't drunk right now? It's 8.30 in the morning in California.

You guys haven't been drinking? Well, and kudos to Axiol, right? Like, people ask a lot of times, like, where can I find deals that are more like banked deals and not kind of not to pick on? To dig through so much. Yeah, like, just the like the country chicken fried steak restaurant and you know BFE like where can I find those tiny deals and Axial is a great place to go through

and kind of see what's out there and make sure you understand what's going on. So they're at Axial.net. So I I love it. I like their model too that you don't have to pay as a buyer until you actually do a deal. Like I think that's some good stuff. So anyhow, okay. All right, time to click stop. That's a wrap. All right. Thanks, bye.