Acquisitions Anonymous - #1 for business buying, selling and operating - Getting rich owning a school!? - With Prateek Aneja - Acquisitions Anonymous Episode 103

Episode Date: June 17, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://landing-newsletter.acquanon.com/-----Michael Girdley (@Girdley) and Bill D’ Alessandro(@BillDA) are joined by Prateek (@prateekaneja), we talk about 2 Government compliance moats where the first one is a healthcare college in California and the second one is a home healthcare business in Connecticut. Let’s take a deep dive into how to generate great margins by allowing the actual service-providing side of the business to maintain compliance with a great moat.-----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.-----* 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.-----Show Notes:(00:00) - Introduction(01:28) - Our sponsor is Cloudbookkeeping.com(03:48) - First Deal: A Profitable Accredited California Healthcare College with title IV for sale(04:26) - What does Title IV mean? Why does it matter?(06:15) - What are the highlights of California Healthcare College?(08:29) - How profitable is this knowing that it has a good margin?(10:24) - What are the online trends in the market? Is this a different business or layered on the fixed cost base?(13:23) - Is it a good thing when the college has an impressive title composite score of 2.77 and a 90/10 ratio of 85%?(16:06) - How is the scale or lack thereof of this business?(17:45) - What are the risks of acquiring the business?(19:30) - Have they built a compliance machine?(23:11) - 300-year old School in South Francisco(26:21) - Second Deal: a nonmedical home care service in Connecticut(28:32) - What is so striking about Home Healthcare?(30:57) - How does this business interact with government money? Is it related to the Social Services that they offer?(31:55) - What are the Pros and Cons of federal and state governments funding low-income individuals as a revenue source?(37:57) - Why would someone consider this a good business?-----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 epiSubscribe 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 on buying and selling small businesses. We have a really cool episode for you today with Pertique Anasia. Pateek has particular experience in the healthcare and education spaces. And today we look at two deals that are specifically organized around what I'll call kind of government or compliance moats. The first one is a healthcare college in California. And the second one is a home health care business in Connecticut. Pertique takes us really deep on kind of how the compliance side of the business can allow the actual service providing part of the business to generate really, really good margins with a great moat, but you have to maintain that compliance. So I think you really enjoy this week's discussion with Pertica in Asia. 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 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. All right, Pateek, welcome back. Glad to have you on the show. We tried to record this a couple weeks ago. It didn't work out, but we got our technical difficulties sorted out.

Happy to have you. Glad to be here. Thanks for having me, Bill and Mike. Great. So just to start off, I'd love it if you could give our listeners, you know, just a little bit on kind of who you are, what you do, all that stuff. Yep. So quick background. You know, I come from a family business in healthcare.

Pharmaceuticals decided not to go into the family business and watching tablets being manufactured for the rest of my life wasn't exciting, as you can imagine. And then for 16 years after that, went into banking and private equity. but all focused on the education space. So worked at two banks, two private equity funds, business school in between. My last fund, we managed about $300 million and focused that on ed tech and human capital and staffing type of companies. So that capital was deployed across 20 companies. We had a nice fund at the end of which I left and have been looking to invest and operate on my own.

Okay, wow, great. All right. Now I'm very excited for this week's episode because, You won guest of the week, as Michael said before we got started, because you brought two deals and they are both right in your wheelhouse as far as expertise. So I'm fired up. I think I'm going to learn a lot today, and our listeners probably will too. So I'm going to read the first one, or I guess Michael's going to read the first one, rather, and then I'm going to read the second one. Is that what we want to do?

Yeah, that sounds like a plane. All right, perfect. All right. So this one is a, it's listed as a profitable accredited California Healthcare College with Title IV. for sale, and then it has number 3333. And it's brought by a brokerage group called the Holiday Education Group, Inc. And they are the trusted authority for school sales. And it says this is an exceptional opportunity to acquire a profitable, nationally accredited

Title IV Healthcare College with an outstanding reputation in the California market, providing vocational educational training in the medical sector. So maybe let's put a stop right there. So Britech, you know, this Title IV stuff keeps coming up, and I know it's super important, but most people are probably not really familiar with what Title IV is and why it matters. Do you mind giving us just like a quick primer on it or if you don't want to, I could do it? Yep. No, I think the quick primer is that, you know, the government, you know, gives relatively cheap money to anybody that wants to go to school.

So most Title IV schools will, you know, find and enroll a student and then have them apply to the federal government, you know, who gives, you know, relatively cheap, call it 5 or 6%, you know, money, that becomes the school's revenue. Yeah, so these are the classic student loans that everybody complains about. This title four is how it happens. You get accredited as you get accredited by a national crediting body, and that opens you up to the ability to borrow, for students to borrow money to pay for their education. So I'm totally digging it.

Okay. So, and if you're on YouTube, also we pull up these teasers and the listings for the business. So you can see them there. But I'll keep reading this one for those of you just on audio. So back to this profitable accredited California Healthcare College. This sought after opportunity offers career-focused programs at the certificate, diploma, and associate degree level in vocational nursing, nurse assistant, diagnostic medical sonography, phlebotomy technician, patient care technician, administrative, yada, yada, yada, medical builder and color, and a bunch of other stuff. Massage and physical therapy as well. Then college's national accreditation and title for approval provide immediate access to the lucrative California.

health care market and ability for program expansion, branch campus development, and capacity to increase both on-ground and online enrollment. The college is well-conditioned for, well-positioned for continued growth and has a place in a solid foundation to operate in a high-quality college in the Covenant Southern California market. Highlights. So number one, it says here it's very profitable and it's located in the right market. Okay, number two, highlight. It has significant margins in revenue growth with a two-year average revenue of $4.2 million and $1.77 million in adjusted EBDA. So they put in parentheses here, it runs at 40% EBIDA margins. But they didn't, it's not actually EBIDA. They put EBIDA.

There's no T. So that's interesting. So EBA, but no ta. Anyway, continued growth in 2022 reaching 5.6 million revenue for plan and 2.64 million adjusted EBIDA for a 47% EBITA margin. So the fact there's no T here leads me to believe this is probably an LLC or some sort of something tax as a partnership. They have a 33% year-over-year increase in enrollment for 2022 within the existing campus, generating a further $1.2 million in revenue. They're in unparalleled market standing, consistently maintaining clean regulatory ratings, resulting in ongoing accreditation.

They have an experience management team, outstanding facility, and a bunch of state-of-the-art simulation equipment that creates a strong selling point for prospective students. And then there is a link to kind of, I guess, sign an NDA and find out more about this. And it talks a bit about the brokerage.

But that's it. So this is a highly profitable, small college with federal funding available to it located in Southern California. So, Pratika, I think you looked at this one. Is that right? You dug into this one. What were your initial thoughts and why was it interesting when you sort of look at it?

So I used to be on the board of a medical school. The, you know, healthcare end market, you know, from an employment, you know, standpoint is fast-growing. Everybody knows there's, you know, demand for healthcare careers. So from that standpoint, you know, I've been looking at education through an employment lens. So any education asset that kind of ties to great fast-growing employer markets seems interesting to me. I guess how profitable is this thing? It seems like it's got good margins, right?

They're going to do, you know, 1.8 million of EBITDA on 4.2 of Topline. Is this the type of thing that it kind of only matters where the market is, you know, and if the market's growing, you get a whole bunch of fixed cost leverage because you've already got the professors and you just put more people in the classes and it's just an enrollment. game kind of once you have the base fixed costs set up or is this the or is it harder to scale on that help me understand no you're right you know these are fairly local businesses you know because this this needs to be in person you know they have a bunch of equipment that they mention um so their catchment area generally tends to be like a 50 mile radius you know around where they are um and then yes there is

you know fixed cost leverage so it's an enrollment game once you kind of cover that at those fixed costs, everything else kind of drops to the bottom line. So, and then it just becomes a enroll more people and raise tuition game, right? Yep, as long as you have the space for it. Yep. But is there a cap on it? You know, you mentioned it's a low, I got a 50-mile radius. You know, there's only so many phlebotomists and nurse assistants, et cetera,

that can be employed within a 50-mile radius roughly. Now, maybe that's a huge number. I don't know how many hospitals should be in that radius. Like, is that a plenty of big market to make a huge business, or is there kind of a cap on this thing? No, I think it limits, you know, who you can drool. Obviously, those folks can then go and work in other geographies, you know, within California or outside.

But it limits, you know, who you can enroll. So the way you grow then is kind of open more locations and kind of try and capture other sort of high density enrollment markets. that's how you grow. And what is happening in like the online, what are the online trends in this market? Because they do say in the teaser, there's a capacity to increase both on ground at online enrollment.

But as you mentioned, some of this stuff, you got to touch and feel it and draw blood from a patient and you can't just do it virtually. So is online stuff like this a totally different business and not the same thing? Or do you layer it on to your fixed cost base? the way you get benefit from online is by doing hybrid so some portion of the clinical so to speak has to be in person so you kind of do that in person and then you kind of do the didactics you know online

i'm not sure how much of that these guys are doing but you know that's how you kind of get juice from the fixed cost you know California isn't cheap you know from a physical location standpoint all the equipment that they manage So the way you make it, you know, more profitable is, is by doing a mix of online and offline. That said, I think, you know, the EB-I-D-A margins do surprise me. Most schools that I've seen are call it 25 to 30 percent margin. So I do wonder, you know, what they're doing to kind of get to that 47%. Well, I guess there's maybe there's the adjustment part. I guess there's also the danger here that, you know, there is, there are some bad actors in the education space.

People, you know, churning and burning, mistreating people. And that's why we have, frankly, so much regulation. I think around for-profit and nonprofit education these days is because some people came in and were super scummy early in this industry's existence. You know, is that, is the level of kind of quality and how much, how much these people are doing things the right way versus the wrong way, Does that come into a factor? I guess we don't even really know until post-kind of management meeting to understand what these guys are really potentially doing and where they fall on that spectrum of, you know, the good versus evil people in education.

Yep, no, that is on point, Mike. You know, maybe about 10 years ago, one of the fastest growing companies in this space was University of Phoenix, which kind of went into trouble later on. And I remember as a banker looking at their financials and, you know, their academic spend was 10% and their marketing spend was like 40%. When you looked at their P&L because it was a public company, so yeah, all these guys have kind of leveraged, you know, the government money spigot and kind of enrolled pretty indiscriminately.

So, so yeah, that is a concern and the way you kind of screen for, you know, good versus bad here is, you know, there is kind of heavy compliance and reporting requirements on, you know, their default rates on the loans. you know, their placement rates and those sort of things. And that's what you screen for, you know, even upfront before you kind of go in and do management meetings. I have a question on that compliance. So I actually click through this link and there's a little bit more information that I can

see without an NDA on the backside. One of the things it says is the college's most recent title for composite score is an impressive 2.77 and it has a 90-10 ratio of 85%. Do you know what those numbers mean? Yes. So the 90-10 ratio basically tells you how much of the government loans can be a portion of your revenue. So, you know, what the government doesn't want is you getting 100% of your revenue from the loans. So they want you to charge something over and above and take that from the student.

So let's say your tuition is, you know, $10,000. and you borrow $8,000 from the government and pay $2,000, and you do that across all of your students, your 90-10 ratio would be 80-20. So this indicates that 85, because they say it's 85%, that 85% of their revenue comes from the government and 15% is out of pocket. That's right.

Is that good? So no, that is very high because there's been a lot of discussion around kind of bringing that back to 85, 15. Any college that breaches that loses access to federal government money, which means you can go out of business pretty quickly. So 90% is the upper limit. So you can't go above 90 and they're at 85. They're at 85.

And most schools, by the way, are between 80 and 90. If you find a school that's lower than that, that means the school is in a much better place. Interesting. And then what is the composite score, 2020 composite score of 2.8? It's a bit of a complicated ratio. But generally, the worst schools are at 1.5 and the best schools are at 3.0. And what that ratio is, is it's kind of a calculation of, you know, how much, you know, you're doing in terms of net profits, how much cash you're keeping on the balance sheet and a whole bunch of other. things that kind of mishmashes and goes into calculation of what the composite score is. And it's kind of an indication of, you know, how's the school doing in terms of liquidity and those sort of things to kind of stay in business. So 2.77 here is actually very, very good. And I suspect that's because they're very profitable. So Pateek, how do you think about

scale or lack thereof of this business. So this is a relatively small revenue-wise business for being a school and having this many programs. And for full disclosure, like, I'm involved in a business that's bigger than this. And I know how big we are. So it's very interesting to me that they're actually running this little revenue. And I know, and I've seen basically when you're kind of at this size as a school. Like there's only so much kind of things that you can do that normally come with, you know, with economies of scale as the business gets bigger, reporting some of the network effects around placement and all that kind of stuff. Like, how do you think about this relative to other schools and also what the size impacts around the quality of this business might be?

Because to me, my initial reaction is, oh, wow, this is a lot more profitable than I expected it to be. And secondarily, like, ooh, this is kind of, this is kind of, this is kind of, as far as schools go in terms of total revenue. So how do you think about this based on your experience in the market? You know, it's kind of been managed like a, you know, small local, you know, one location business. I've seen plenty of others, you know, whether it's one location or sort of multi-location that are much, much bigger.

So it's kind of one of the smaller players in a very fragmented for-profit, you know, industry, education industry. So the way you get scale is, you know, open more locations or acquire this one and acquire other, you know, locations as well. It's really very simple. What a, you know, as you look at acquiring a school like this, what are the risks, right? So we've talked about kind of the government funding. There's potentially reputational risk around this stuff. Subscale, I got to imagine, like, you're, you're pretty risky to, you know, we talked about you're going to be very, you're, you're going to be very, you're,

going to be losing money until you get a certain number of students and you're going to be profitable above that. So you have enrollment risk as well. How do you think about kind of evaluating the risk reward kind of return for a business like this? Generally, you know, for a title for school, I wouldn't pay more than three to four times EBITDA. So the risk reward is kind of baked into the multiple that you pay for a school like that. And you mentioned correctly that, you know, you're signing up for a lot of risk, you know, from a compliance standpoint, kind of maintaining all of these ratios, you know, maintaining that, you know, your employees are not kind of doing things that will run afoul, you know, with the government. And you're signing certain documents,

you know, with the federal government that you are fully directly responsible. And they are trying to be more and more kind of punitive in what happens if things go wrong. So you are taking on a significant amount of risk, and for that you need to be compensated with a lower entry multiple. You know, this business reminds me of a concept I talk about actually internally at my business a lot, which is competence as moat. You know, in complicated businesses, if you are a good operator, it can really become a moat. And this business, if you just look at the financials, it has 40% EBITDA margins this year, and they're growing revenue by 1.1.4.5.5.5.5.5.5.5. $4 million and they think almost a million of it is going to drop to the bottom line, leaving

them with a 47% EBITDA margin next year. That is phenomenal. So if I were looking at this business and I came in, what I would basically be looking for is have they built a compliance machine? Like, are they very, because that's the moat here, right? Otherwise, they pop up like crazy, but the compliance requirements are miserable. So what you have here is really two businesses. You You have the delivery of the service, the healthcare business, and that's the really profitable business. But then the other business that enables it to even exist at all is the machine that complies with all of the BS.

Right. So for me, I would think the operational competence and machine that whoever has created, the founder, owner, et cetera, to me, that would almost be my primary diligence point. Because if that falls apart, this whole thing falls apart. If it's rocks solid, you have a license to print. money with a moat. Yeah. And I think one thing worth noting, the process to get title for funding available to you as a,

as a school like this, there's a moat around that as well, Bill. Like you have to first be in business for a certain period of time, then you have to go through an accreditation process that can only start after you've been in business for a certain amount of time. And then after you finish the accreditation process, then you can go apply for title for funding. So it's like you almost have to. solve for the chicken and egg thing to go in and compete against one of these businesses that

gets Title IV funding because you've got to figure out how to stay in business for three to four years without taking while all your competitors are taking cheap Title IV loans from the government. So it's a huge kind of chicken and egg problem. So that's, you know, I think when Pertit talked about business like this trading for three to four times EBITA, but it's not reoccurring or recurring revenue, you know, some of what you're buying is how do I skip that chicken and egg problem? that I run into over three to four years of trying to start a business like this from scratch.

And it keeps competitors out. I mean, people wonder, like, why isn't there more innovation and college education? It's because of that cycle I just told you. Like, you can't, it's so difficult to go in and create a different model that doesn't fit in the accreditation bucket and then innovate. Like, you see that with all the boot camps

and everybody that's been trying to replace college. Like, the government is the biggest mode around college that we have right now. So anyway, I'll get off my soapbox down. Thank you. That's very interesting. makes a lot of sense. And I think bootcops have kind of scaled in a pretty limited fashion because they don't have

government money behind them, right? So they're kind of working around the regulation. They're providing some education. And they kind of have the same model. It's all private pay, but they haven't scaled as much as people thought they would. Yeah. So I, you know, Prateke, I think we talked about in the pre-show. I'm involved in a boot camp and helped start one here eight years ago in San Antonio.

And we've done really well because we've played a really long game. But when we first started, everybody thought that boot camps were going to be these, like there would be, you know, an Amazon of boot camps. And all these folks went out and raised venture capital funding. And then that didn't really kind of work. So then a bunch of PE guys came in and decided they were going to roll up boot camps. And where me and my partners are sitting here, I'm like, do any of these people know there's like dis-economics of scale in this business? Like you get bigger and it gets harder. It doesn't get easier.

So, yeah, it's been a grind to just get to where we are today and be kind of starting to see the scale stuff. that I was talking about with compliance being easier and brand being there and all that kind of stuff, the virtuous cycle being what it needs to be, but it's hard. Like, it's, that's a hard business to get a school going. And one of the antics I tell people is like, Warden currently has two campuses and it's 300 years old. And it took them 200 and something years to start the second campus in San Francisco. So like education, pretty hard business.

Bill, we're coming up on kind of halfway with this one. Pertique, did you dig into this business? I know you had a little bit of a story about it. What was your journey with it? Did you end up pursuing it or why did you end up not going deep on this one? I did not go into it. I did click into it. I talked to the broker, but kind of managing a highly compliance-driven school in California

where I'm sitting in New York didn't appeal to me. You kind of have to be there for the risk-related reasons I mentioned and the location doesn't work. Yeah. If this was in New Jersey or something closer to your home, would you have considered this? Or was that or were there other factors as well that it didn't make sense for you? I would have considered it a lot more and kind of double clicked into and checked into some of the things that I mentioned before in terms of placement rates and kind of how's the management team and how's the compliance team. But the location was kind of a significant, you know, downside for me. A deal killer.

I do wonder, I've seen this one a couple times come through my inbox. So, and A, I'm like, I love this. It's like stretch goals for life. I'm like, holy crap. Like, this could be a great business. But the second thing, I wonder, I wonder if there's something going on. It kind of smells to me like baby boomer owner with unrealistic price expectations. Yeah.

That's what it smells like to me. So by the way, you could say that about like every business for sale today. So it's not like that's so magical insight. That's like every single company I run across. But anyway, super cool. Okay. So if you were to do this deal, like, what, what do you think the right, who do you think the right person is for this?

And how would you structure it? And you mentioned you would pay at most three to four times EBDA for this. You know, kind of would, would you walk us through like, what's your thesis on, on who should do this deal of anybody? I think it should be, you know, somebody local, you know, who has kind of a strong understanding of compliance. I think I would expect somebody from the education sector who kind of, you know, knows 90-10 and composite scores and how to manage it. You know, the other thing that's becoming important is relationships with the Department of Education are also becoming important because you want them to be a friendly, you know, party to the journey.

So there's a big change of control process that we didn't talk about. You know, when you acquire the school, you kind of need to go. through a pretty rigorous change of control process. So all of that, you know, just implies you kind of need to be in the sector and kind of be an operator to kind of manage it well and kind of be heavy compliance oriented. Interesting. Okay. Cool.

So if you live in California, you can get them to agree to a nice price and get through all the compliance hoops. Kind of interesting. All right. Let's move on to our second deal for the day. This is different, but also equally interesting. So this is a non-medical home care service in Connecticut with, it's been around for 20 years. It has 269 full-time employees plus 11099 contractors, a lot of people.

In Hartford County, Connecticut, they're doing about $13 million, $13.5 million of sales and about $2 million of SDE. Here's the description. This is an outstanding opportunity. for a buyer in the home care industry. One of Connecticut's top home care providers is seeking new ownership. With many loyal customers and over 100 contracts, this business has thrived for 20 years. The contracts for service include the State of Connecticut, Medicare, and Medicaid for non-medical home care services to elderly and disabled adults. Programs provided include long-term and short-term personal care assistance, adult foster care, companion services, homemaker services, overnight and live-in

companions and disabled assistance. This business is known for its quality care and trustworthy staff. There are 270 employees plus 100 contractors, as I mentioned, with the Department of Social Services, making this one of the largest home care providers in its service area. This is ideal for an established home care provider to expand its revenue and service footprint. And of course, your benefits as a buyer are you acquire existing contracts from recurring revenue. In addition to establish advertising, the new business comes frequently from word of mouth referrals due to their excellent reputation. It says there's a motivated seller. It tells you what counties they're in, Hartford, Tallinn, Wyndham, New London, and Middlesex counties. I assume that means something to you if

you're from Connecticut. It also seems like the owner owns the real estate and there's an opportunity to discuss the purchase of the real estate. So it looks like this is going into people's homes. This is not nursing. It's not medical, you know, but it's kind of personal care. I would imagine, you know, just kind of cleanliness, hygiene, things like that. Companion services, services, cleaning, overnight, living companions, disabled assistants, foster care, that type of thing. This is not a space I know a ton about, so I'm excited to learn. So, you know, Pertique, how does this strike you? Oh, and by the way, I forgot to mention it's $2 million of SDE and it's priced at $13 million. So that's six and a half times SDE is what they want. So Patee, what do you think about this one?

look, in home health care, I'm kind of the outsider. In education, I was the insider. I've kind of, you know, looked at maybe seven, eight of these. It's a great, you know, growing sector, baby boomers, you know, all of that. You know, the secular trends behind the sector are great. People want to age in the comfort of their own homes, et cetera. But, you know, this one seems interesting. I think, you know, it's kind of been steady.

You know, if you look at the sales and the SDE, It's been steady through the pandemic. And I was excited to kind of dig into it and learn more. Happy to kind of give some voiceover to it. Yeah, it's interesting that, you know, as you noted, in 2018, they did 2.7 of revenue. In 2019, they did 2.7, 12.7, 12.6 in 2019, 13.6. It actually went up a little bit when COVID hit. And they think they're going to do 13.

They did 13.5 in 2021. This teaser's a couple months old. So it looks very stable. SDE has oscillated between 2.3 million. They did decline to 1.6 million in 2020. So I would definitely be curious about, you know, while their sales are going up, their SDE is declining semi-linearly. Of course, they thought it would rebound to about $2 million in the year they're selling the business, as is typical. So I'm interested, Pritke, do you think this is, I would imagine their whole cost is labor, right? I mean, this is like basically a labor arbitrage business.

So is this just we got to pay people more to go into homes during a pandemic? Yep. That has been the key issue in home health care. How do you find the talent? Especially when you've had, you know, government PPP money and another money that's kind of going to individuals. How do you kind of inset them? And this is low-skill labor, right? So how do you kind of inset them and retain them?

Generally, you know, turnover is pretty high. So everybody in home health care is kind of struggling with the same, you know, talent issues. And you mentioned kind of the government money. I'd love you to kind of expand on that. How does this business interact with government money? It says in the teaser, there are contracts for service that include the state of Connecticut, Medicare and Medicaid. It says they also have 100 contracted positions with the Department of Social Services.

Can you help us kind of unpack those two things? Yep. So when you think about, you know, activities of daily living, all the types of services that these guys are providing, you can either pay for it yourself if you have the means for it or if you are a low income individual, you can get Medicaid money for it, which is how this company gets most of their revenue. So in some ways, it's similar to the other business. You know, the revenue source here is the federal and the state government because they are funding low income. individuals to get a companion or some help, you know, in the comfort of their own home. And what are the plus and minuses of that? So I imagine that there are some home care businesses that have a high percentage of their revenue from Medicare and Medicaid and some that are a high

percentage of private pay. We don't know which one this is, unless maybe you can tell from something. What are the pros and cons of being mostly private pay for home care or mostly Medicare Medicaid? The obvious con, you know, of being a government-funded company, you know, through Medicare or Medicaid, is the government decides for a certain service or by the hour what you should be reimbursed for that hour or for that service. So, you know, and then on the flip side, you know, because you're paying for labor, you have minimum wage type of trends. So as you mentioned, you know, the way the business works is labor arbitrar. The way you make your money is based on the gross margin between what you're paid by the government and what you pay for your labor. So that is your biggest con and the biggest benefit obviously is scale.

You can get lots and lots of money by expanding into new locations by kind of having access to a Medicaid license. You compare that to private pay. You don't have the similar pressure because you can raise prices as your minimum wage. and as your labor rates are going up, but you are limited in the amount of scale that you can get because you can only focus on, you know, certain high-income areas. So the private pay is likely better margin, whereas the Medicare Medicaid is maybe a little bit more stable

and helps you expand, but it's lower margin. Yes. I have a buddy that's in the DME space, so medical equipment space, And, you know, this reimbursement thing turns out to be a huge problem because I think kind of what you're talking about, Prudique, they end up with these situations where they're forced to take customers who are unprofitable to them because they don't want to let down the referral sources, but the government will only give them so much money. And they need to, they need to, you know, take the whole batch of people. So it's been very painful for them in terms of getting the company off the ground because they may get 100 referrals and 10 of them are going to cost. the money of either hassle or brain damage, but they can't charge those people more because of the reimbursement problem. And the government, as I've learned, is very slow to recognize that inflation is happening on their cost side.

So, you know, you can't get out ahead of that, which is I think exactly what you're talking about with this business. And as scary as kind of wages continue to push up is they're going to be trying to find more, you know, home health care providers. You know, is the government going to increase the reimbursement to allow you to stay as profitable this company has been? I don't know. Yep. And I think the smartest operators kind of make their back end, you know, corporate overhead kind of as efficient as possible because you can't control your gross margins if you are government funded.

So you use as much technology as you can and kind of, you know, make sure you're efficient with the back end. I have a buddy who runs one of these as a franchisor. So he's gone and signed up a bunch of people that do these that, and he's the franchisor. And he has invested immense amount to create all kinds of automation to reduce his headcount, to be able to run the business superficially. Even so far as like figuring out how to put cheap like internet connected iPads in the customer's homes. So like there's that whole like it's automatic when the service providers check in and all that kind of stuff or report problems.

Like all that happens without him having to have staff on the back end. So just exactly what you're talking about. the only way really to get ahead on this is just to be totally like focused on that fixed cost side and make sure it doesn't eat you alive. Partique, can you help me understand it says they've got a hundred additional contracted positions with the Department of Social Services? Do we not like, what does that mean? I can't tell if they're contracted out to the Department of Social Services or they're

contracted them from. Yep, that wasn't clear to me. But that is a concern. in the sector generally, you know, the 1099 versus W2 argument that you see across, you know, this business and other businesses, you know, what happens if you have to convert those employees

with full benefits and that sort of thing? What does that do, you know, to your margins? But I wasn't sure what that contract is. Yeah. And this may be a, may be the sign that build and predict that there's a customer concentration problem here, right? You know, if you have,

sometimes I think you'll see businesses like this that have 300 customers, but you realize that one of those customers is a local municipality and happens to be a third or 40% of your revenue and becomes really a big risk as you look at a business like this. So I definitely would want to dig into that. And that doesn't make sense. Like, who are these 1099 contract positions? Yeah. One thing that's concerning to me is I just did some basic math. So they've got $13.5 million of sales for 2021. And they've got $269 full-time. and 11099ers. So 369 folks providing services. And even if those contractors are, say, half times, so I only count 50 contractors, say, this is the equivalent of like $42,000

of year of revenue per like full-time employee equivalent, assuming the contractors are half-time. And, you know, if you assume they're full-time, it's actually down to $35,000 a year of revenue per FTE equivalent. And then you've got to pay the FTE equivalent. And then you've got to pay the FTE, right and bennies and overhead so to put an earlier critique i mean this is pretty low end labor i would think which you know as you said lots of turnover this strikes me as a tough business if you are averaging 40,000 a year revenue per employee it's it's really hard it's kind of like doing laundry you never stop recruiting you're you're always you know you're always recruiting you know because your turnover is kind of close to 50 or 60 percent for you

Wow, brutal. So overall, should I take it, Pertique, this is not a business that you love or want to be in? It's a, I do like the business, you know, for a few different reasons. It's in a good state. You know, Connecticut, you know, is a certificate of need state, you know, meaning, you know, they kind of prioritize these sort of services. You know, they've already been through a few Medicaid, you know, reimbursement cuts, which means they likely won't do it again unless they want to drive providers are a business. And then the other reason I like Connecticut is they're kind of prioritizing independent owners versus large, you know, big companies. They don't want to see big companies come in and kind of just manage companies for a profit. So it's one that I did double click into. I don't think it is priced appropriately. If SDE is, you know, let's say

two million, you know, and I know there's a few, you know, family owners kind of already working in the business. Once you peel that back and then apply the multiple, it starts to look pretty expensive. Interesting. Yeah. Yeah. Yeah. The SDE idea is so pervasive, but also pretty flawed, I think, because if this is the first, it makes sense as an ad on acquisition, right? Because the SD, you know, you kind of already have the management overhead. But in the first acquisition, like, this requires you to work in the business. Like, if you buy in an SDE multiple, you're in implicitly agreeing with yourself that you are going to go be the CEO, right? Otherwise, you've got to add in a CEO salary and that will definitely change the multiple.

It's actually rather good sleight of hand on the part of the entire brokerage industry in this end of the market. And it makes sense on add-ons. It really does. But you've got to be real sure you want to work there if you're buying on an SDE multiple you feel good about, but not an EBITDA multiple you feel good about. What's fascinating me about this industry is it's almost like a rising tide has kind of lifted everybody. And it's almost like, you know, you've got all of these, you know, relatively scaled companies, but they're kind of in a child's body. I mean, they still do things in the era of fax machines and they don't know how to manage that. In fact, there's one company I went in, in the history of being a banker.

I've never seen that. When I started doing diligence on them, their EBITDA was higher than what they were claiming by 20%. it's it's it's almost always the opposite so and it's because they they don't know how to manage you know their kind of large company operations they're kind of like hey I have more money in the bank today than yesterday I must be doing good you know type of thing so the question is pretty did you tell them and raise your bid by 20% no again highlighting the importance of a competent and sell side advisor and accountant to get the best value for your business. All right.

Cool. Well, I think we can wrap that one up. So really like an interesting sort of moats on both deals with, you know, the Title IV license and the Medicare license. One provides a much more lucrative mode, it seems, than the second. So that was great. Thank you, Pertique. You know, super helpful.

Thank you for being with us today. I would love to just give you here a chance to do a plug as we traditionally do. Where can folks find you on the internet and how can they help you out? Yep, they can find me at, you know, infinitivecapital.com. You know, that's our website. And then, you know, if folks have, you know, deals in the education space, you know, we're the right people for it. Awesome.

Cool. We'll reach out to Pertique if you want to talk education. He is one of the smartest folks out there. Thanks for being with us, Pertique. this concludes another episode of Acquisitions Anonymous. We will see you next time.