Acquisitions Anonymous - #1 for business buying, selling and operating - Girdley Sells a Business - Acquisitions Anonymous 192

Episode Date: May 12, 2023

Bill D’Alessandro (@BillDA) and Michael Girdley (@girdley) go an interview style episode around Girdley selling his coffee shop business. -----Thanks to our sponsor!This episode is sponsored by Acquisition Lab. Acquisition Lab, created by Walker Deibel author of Buy Then Build: How to Outsmart the Startup Game, is an accelerator with a highly vetted cohort-based educational and support community for people serious about buying a business. After going through the Lab's month-long intensive, you have ongoing access to almost daily Q&A sessions with advisors, regular live deal review forums with Walker, hand-picked vendors for your deal team, and a very active Slack group with other searchers on this path. Our team personally understands how to buy a business and will help navigate all the complexities of the process, as well as provide a trusted framework, tools, and resources to support you from search to close. The Acquisition Lab recently celebrated its 70th business being acquired and well over $100m in aggregate transaction value. The Lab is there to stand by your side, so you can take the right action (at the right time) and avoid wasting countless hours trying to "go it alone".For more information, check out acquisitionlab.com or email the Lab's director Chelsea Wood, [e-mail] 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 to Acquisitions Anonymous, Internet's number one podcast about buying and selling businesses and the case studies we do around the ones for sale. I am Michael Gurdley, one of your hosts. Today, we had a killer episode and a special one, which is I sold a business. So I own, you know, close to a dozen businesses and decided one of them was not good to be in my portfolio. So we sold the business and we did a special deal where Bill went and interviewed me to understand the process that I went through and how we thought through it. And Bill, was super kind about how he did it. So I wanted to do this because I thought it was interesting to give you a perspective on what sellers go through when they're running a process. And as you

as a potential buyer or you as a future seller can understand what the other side is potentially doing and be able to do things better based on hearing my thought process and what we did and go from there. So with no further ado, here is the episode. This episode is sponsored by Acquisition Lab. Acquisition Lab, created by Walker Debel, author of Buy Then Build, How to Outsmart the Startup Game, is an accelerator with a highly vetted cohort-based educational and support community for people serious about buying a business. After going through the lab's month-long intensive,

you have ongoing access to almost daily Q&A sessions with advisors, regular live deal review forums with Walker, handpick vendors for your deal team, and a very active Slack group with other searchers on this path. Our team personally understands how to buy a business and will help navigate all the complexities of the process, as well as provide a trusted framework tools and resources to support you from search to close.

The Acquisition Lab recently celebrated 70th business being acquired and well over $100 million in aggregate transaction value. The Lab is here to stand by your side so you can take the right action at the right time and avoid wasting countless hours trying to go it alone. For more information, check out AcquisitionLab.com, link is in our show notes, or email the Labs director, Chelsea Wood,

at Chelsea at buy then build.com. Hello, everyone. We are back this episode with a special emergency episode. Emergency pod. Emergency pod. Michael has sold one of his businesses, and I thought it would be fun to interview him about it and learn a little bit.

So the business Michael's, Mike, don't hear from me. Michael, what business did you sell today? We sold the coffee business, Red Runner Coffee. So it was a business we started in 20, I incubated it with one other partner when we started it. And then eventually a third partner bought in as a CEO. And then we sold it this month, well, May 1st, 2023. So I owned it for a little for three years.

Congrats. And it's a coffee business for people who don't follow it. It's a drive-through coffee business, right? Yep. You get free fireworks with every cup? That would be nice. Yeah, so it was standard drive-thru. So if you're in middle America, you're familiar likely with scooters, which is a big franchising chain.

Dutch Brothers has come out, Seven Brew. There are a ton of regional chains. I can't even name all of them with 50 to 100 locations around the country. Low footprint, Starbucks with no dine-in. I don't know if you've seen those. So all of those are basically in the same kind of vein, same business. You know, quick serve, very sugary caffeinated drinks. And you started with one location in the park.

Was it the first one in a parking lot of a fireworks store or no? Yep. Yeah. So we did a very MVP type move, which was my business partner who I'd always wanted to work with. His name's Tom. He, I saw one of these coffee shops doing really well when I was traveling during COVID, specifically around Bentonville because I was Mount biking there. And I just couldn't let the idea go.

So I called my buddy Tom. I was like, we should do one of these. And then I said, I have a property. We can try. and we put it on our piece of property that we owned already for fireworks. So that was a low investment way. You didn't need a real estate, didn't invite the real estate. You didn't need, I guess you need a little bit permitting, but you just need to put up some sticks, right?

Yeah, so we called. So my buddy, Tom, he has a lot of experience in construction. So I don't really, I can do construction, but I don't really like it. And his day job is to work for a modular building company. So he had connections with all the factories that make. modular buildings. So we said, okay, well, let's go through the process. We have this unused land and get driveway permits and electricity and sewer, and we'll put the store there. Okay, cool. So you start with one, and you literally just hung a shingle like a sign. Do you do any

advertising or just like now open in the front? Some social signs and a little bit of PR. Do you think any of that moved the needle? PR did, especially because all my friends started texting me because they would like drive across town to go to our location, which was super cool. All right. I think for those type of markets or those type of businesses, whether you're McDonald's or our Starbucks or us, like proximity really matters. So on-premise signage was our number one advertising investment.

Like, you know, our initial buildout for kind of the first one was like $450,000. For just a little drive-thru coffee thing, half a million a month? Yeah. Oh. Yeah. Okay. So here's, you're like, okay, well, that's not that bad. It can't be that expensive, right?

Like, so to build one of those things, the building itself is like 100 grand, let's say, rough. Roughly. Yeah, that's what I was thinking. And these are all pre-inflation numbers, right? Because it's all gone up since then. But say, like the first one, let's say you spend 100 on the building, you spend for the equipment and build out on the inside, you're spending 70 to 100. Because, like, you know those Lamaroscco like coffee machines, the espresso machines that you see at Starbucks?

Yeah. Those things cost like an Audi. Like, that's how expensive they are. They're like 50 or 60 grand. We bought an off-brand version of Lomarosco, which is like made in China and it's like 40% the cost. But like even still, like just for your espresso machine to start, one of those things, you're spending like 20 grand, 25 grand, maybe more. That's not even talking about grinders, blenders, crap shelves.

Okay, so you're in for 200. Now you got a building and it can make coffee. Then you have another kind of 25 grandish that you're going to spend. spend before you can build a business up to hopefully be daily cash flow profitable. You have refrigerators and stuff like that. Okay. Now all the leeches show up. That's permits. So you've got to get everything engineered. You got to get, you have to hire an engineer who can be a utilities engineer. You have to have a civil engineer. You have to have a construction engineer. Then you have to hire the contractor to put it all together for you. And then you have to build parking lots and you have

to build signage and you have to build a dumpster spot like where the little dumpster sits and then landscaping. Oh, and you got to pay a landscape architect because you can't just do regular landscaping. You have to pay somebody to actually draw where your landscape is going to be so you can get a permit for that. Even though this is in a pre-existing parking lot that you already own. Yep. Welcome to America. Oh, geez. And this is in Texas, which is pretty laissez-faire about the whole thing. Oh, my God. Like, people are like, it only took you a year to, open a location, I was like, yeah, can you believe it? It was terrible. Like, I don't want to do this ever again. And like, people in California are like, it only took you a year? Like, that's like light

speed to do anything in these other markets. Jeez. Okay. So you got one open for half a million bucks and it's working because your friends are driving across town. I assume the plan always was to clone it out, right? Take us through like the next couple years. Like, how many units was it when you sold it? So we got it up to three units in operation. And they each got better, because we got better at building them. We got better at doing signage. We got better at opening them. We changed our menu over time and evolved that. So they were each getting better. They were also getting more expensive to open. By the end, you were spending $600 to $800 to open each one of these. And then we had our fourth location, like halfway built.

Like it was through permitting and stuff like that. Okay. So you essentially had four and you had because you knew what the fourth one was going to do because you had pro forma on the first three. So you could say to a buyer, this is what four is going to be. So you had four open. Why did you want to sell it? So I think.

Let me guess. Spend more time with family, retire? Oh, yeah. I definitely. I wanted to retire. Yeah, whatever. No, no, I think there, we had a hard talk. like Q3 of last year.

And in my world of my holdco, I have one business that's very capital consumptive. Fireworks is the hardest cash flow business in the world. We're buying land, fireworks, all this kind of stuff, and then the revenue comes in two days a year.

And so, you know, I looked at it and I said, okay, well, that's the path here because I think you own a coffee chain like this, and you can either run one location and run it really well in effect. or you need to get to scale of like 10 or 12. Like those are your two options. And as we looked at it as owners,

like we saw that dynamic happening where like we were a subscale player and it was either going to require a ton more capital to keep going into it. Or we were going to start to try to grow quickly and do battle with a bunch of super high capitalized folks coming into San Antonio. So we were all in San Antonio for this.

And what happened? Can I pause you right there? So you've got to spend $750,000 to open one of these, which means that you, how long was the payback? How long did you have to sell coffee until you had your $750,000 back in profit? It could be anywhere from three to four years. Okay, so you have to finance three quarters of a million dollars for three to four years per location. So if you want to go right from three locations to 13 locations, you need to finance $7.5 million. Correct.

That's your point about how capital consumptive this is. Capital consumption. And if you want to go faster than that, let's say you want to get to 100 locations someday, which was the other thing that's gone on over the past few years. Like, I've made a transition now where I only want to work on ideas that have a high ceiling. That can be really big someday. And like you see that aspect going on where it's going to be super capital consumptive. I don't have a love for hospitality.

The more I dig into it, the more I don't really enjoy it. But then the other bigger thing that's happening in this market is, like there are a lot of entrants coming in. Like the chain that bought us is coming in. They're going really hard. Dutch Brothers has come into San Antonio. They have deployed $55-ish million in terms of growing their business already, and they've been doing it for three years.

Like they're running around trying to swallow up all the oxygen in the air. And then there are two or three more chains playing the same exact SPAC, public market, big private equity playbook with big dollars behind them that are coming in and doing the same thing. And those guys are comfortable bidding everything down to 15% yields or 20% yields. But as like Joe Schmo, like, that doesn't sound very good from a risk adjustment type thing. I see how all the Dutch brothers like CEOs and executives think that's good for them. For me, like, man, that sucks.

This is my money that I'm playing with. Yeah. And then you got to finance it, right? Like you can use debt. If your bottom line is 15% and then you got 15% capital cost, you're not going to Cash flow. 100%. Yeah.

You're profitable. It's just all turned into dirt and buildings and Lomorosco machines. Exactly. Unlimited coffee. Yeah. And so, like, I think the analysis was, like, let's be realistic. Like, I have gifts and strengths and things like, you know, PE, software, tech, like, other businesses.

Like, do I double down and go all in on this thing that's a good business? but potentially like it's not the best business for me, right? And that's when the seller's asked or when the buyers asked, that was the answer I gave them. Like I straight up told them the truth, which is this is a good business. Like you can deploy capital at 25% yield. It's just not the right business for us.

And they bought it because it's true. Like if you objectively like it. It's true because they're trying to. And who did you sell to? You sold to a strategic? Yeah, they are a chain here with like 15 locations called brevity. They started a year. before we did. There are two guys that used to work for another competitor, and they decided to go

all in. This is their whole life. They're all in on doing this. This is what they love this. They wake up every morning tap dancing to work to think about how to sling people of sugary coffees. And so that's, this is actually a really interesting point about creating businesses, is that when you find an industry that is what you just described, Michael, is sort of in the land grab mode, right? Yeah. It can very much be a business strategy, of we're going to open five of these in San Antonio and then sell it to the guy who wants to cannonball into San Antonio all at once because he's already got Dallas and Austin and Houston or whatever, right?

It can very much be, like you can build businesses and your customer is the guy doing the roll up with low capital cost. Did you set out to do that at the beginning, Michael, or did the market kind of evolved to become that while you were doing it? It evolved to become that. I did not anticipate that people were coming that quickly. Like I thought we had three, five, seven years until people came that hard. And then after we got going, you know, Dutch brothers went through a SPAC.

They got valued at like $18 million a location, by the way, and their SPAC. To put that in perspective, that is like nine times earnings per location, something stupid, like SaaS multiples. And like they generated so much capital. And we would listen to their shareholder calls, right, for the quarterly. And like the business is like crumbling and doing really poorly. Like all the KPIs are bad. And the executives are like, screw it. We have all this money.

We're going all in. Let's keep going. And like they took the half billion dollars or whatever they raised from the SPAC. And they are just like running around like they just got off the ship in the harbor and they're a Navy. They're a Navy sailor. And like so that all evolved much faster. And it was a byproduct of I think the zero interest rate, you know, period when money was just so easy. and Dutch brothers, Seven Brew,

all these folks that are just stupid capitalized, they just, they got money faster than I expected they would. And they're deploying it all still like crazy. Well, I think it's also important to note that you realize something had changed, right? Like, you came into this market, probably thinking you would get it to 10 to 20 locations, right,

or more, right? We had a gold 100, yeah. Yeah, so you had a model that said over 100. like you were going to go get it. And it would be very easy for an entrepreneur to kind of not want to admit, it's almost defeat, right? It's like, oh, crap, the competition came in way faster. All the oxygen is getting sucked out of the room by all this cheap capital.

You know, I'm going to lose. I mean, you still sold the business, right? But they're going to beat me to 100 locations. Like I'm not going to be able to get there. Many, many entrepreneurs would just keep slogging, right? against all odds, you know, valiantly, the hero's journey, all that stuff. But you were smart enough to say, oh, the priors have changed. I need to recalibrate.

We should sell now. Yep. You know, that's important to recognize. That's hard to do. Oh, that's super kind to you. Yeah, I went to my partners and I was like, all right, let's talk about this. And I like laid out all the data. And I was like, this is my conclusion from this data.

And I just gave you the same pitch that I just gave, right? And I looked around the table and said, like, you, you're really good at construction and you have all these opportunities there. Is Dutch brothers going to come to the construction world and outbid you there? No. No, like, but they're going to do it here and they got a shit ton of money and they're blown it like crazy. You know, me, I was like, well, look, I could start scale path or near or podcasts or whatever. Like, is Dutch brothers going to come compete with me here? No. Like, like, you know, it's like, and then my other partner, like, he's got a background and see. stores and finance. Like, is Dutch brother going to, you know, compete with you there?

Like, so, yeah, that was exactly the meeting we had. And it was, it was interesting. I was a little butterfly when we went in to have that call. And, you know, we met on Zoom. And I said, here's what I think. And, and like, my partners are like, yep, hard to disagree with all that. Like, let's be objective about it. So, yeah.

So, okay, so you guys said, smart enough to update your priors and say it's time to sell. Yep. Then what? Did you hire a broker? Yeah. So I argued for hiring a broker. You know, I think that the data shows when you hire real estate or when you hire a broker for stuff like this, it goes better. Almost every single time you get more.

You pay for the broker, but you get more in the long run. So we went out to interview a handful of brokers. We got three finalists. So we just said, hey, here's our business. Clint Fiore and the Bison business brokers were the most professional of all of those. Wow. Awesome. We chose.

We chose Clint, famous Clint Twitter. Though he tweeted today, he almost didn't take the listing. I was like, well, you didn't tell me this before.

That's awesome. Okay, so you chose Clint. And did you, how did it go with him? Did you say, hey, just sell this business, or did you say,

here's the names of all the strategics, like one of these guys got to buy it, or did you say, sell it for any price, we got to get rid of it fast, or not a penny less than this number? You know,

what were your guidance to your broker? Well, he had a tough road to hoe because there's a three-headed monster running our company, three people with input. So he was managing three sellers. And he did a nice job of that. I had told the other guys, look, I see where this is going and there's an opportunity cost for me staying in it. And I'm going to sell at whatever price we can get within a reasonable time. I just told him that's how it's going to be. Even if that's selling to one of you guys, like I'm just, I'm not, I want to, there's an opportunity cost of staying involved in this and doing what I'm doing, and I want to maximize my time on these

ideas that are in line with my strengths and where I want to go. And so, you know, Clint started to run his process with us. We did a process where, you know, normally in a situation like ours, you can do just a one big, like, here, here's your biz by sell listing and you go from there. We told him, like, we think it makes sense and he agreed. Let's go out to eight to ten strategics and see if anybody's interested there because we think they'll pay more and they'll be easier to deal with. Especially because our business was pretty old or pretty young. We didn't have like SBA level financials that were old enough for somebody to come in an SBA buy the thing and probably not at the multiple that we wanted. And so because it's a young business. And the FBA buyer would

have gotten trampled immediately because we had all the same problems that you had. Right? Potentially yes. Like the subscale, you know, we did try to argue and I think and I think we still have that we had a CEO and a general manager for a three-chain, three operating chain, four-location company. Like, that's over-investing in infrastructure. So we argued for some ad-backs there,

and you could imagine a really involved buyer also being there or being in a no-man's land where we were. So I think I agree. Anyway, I think I violently agree with you. And so we went to those guys first, and we never made it to the second phase, which was to go more broadly. So he went and contacted people.

people that had reached out to us before, people that were interested in growing quickly, called all the usual suspects, and a couple showed interest at that point. Okay. And then did you end up with multiple bidders at the end, or you're just trying to squeeze one guy for the highest price? We got one offer that we really liked and one that we didn't like. And that's all you need. The one we didn't like was from the bikini chain.

It was from a bikini chain, which my wife was like, are you going to take that? I was like if they pay the most. This is like the girls in bikinis serve coffees to you in your car, right? Still drive-through? Oh, same exact model. Just, yeah, just what Hooters is to Chili's. Bikini baristas are to Dutch brothers. Well, it sounds like it's a land grab.

You've got to differentiate somehow. Yeah, that's where you're going to do it. That's where you're going to do it. I suppose they're very popular in the Pacific Northwest. Like, there's a whole segment of the market that thinks they're great. You know what you should have done. You should have done the mail. version. I could have worn my chaps and slung sugary coffee.

You totally could do that. I have one of my funniest business startup ideas, by the way, Bill, you'll appreciate this, is you do a male version of Hooters, but you call it Peckers. Someone must have tried this, right? But, I mean, I think people that freak out about that idea, they have the target demographic wrong. I think they're both target markets for Hooters and Peckers. would be men, just different. You think?

Just different men. Just different men. Yeah, that's probably, probably good. But anyway, that's not a good off topic. That was not Red Runner's angle. No. Like, I don't want to run a business like that. This is like yucky.

So I want to go to kind of selling to a strategic and the price and don't disclose anything. You're not comfortable disclosing. But everybody tends to think, wow, if I could sell my business to a strategic, I'm going to get a whopper bananas go to the beach number, right? Can you share it all? So you have three stores, roughly how much revenue from the stores? Significantly into seven figures. Okay, a couple million, millions of revenue. And what kind of multiple or price did you end up selling the whole thing for? So Clint did a study in the market as to what businesses like ours had trade for, which I think is one of the things that goes well for business brokering or using a broker,

is they have potentially data to help you price it. And we saw where the range was. Typically, stuff like this was selling in the three to five times SDE in terms of what it was. We ended up kind of right in the middle of that, which we were happy about. Were you able to adjust the SDE? I assume you had stores in different phases of ramp. Were you able to try to say, yeah, we got three stores, but two of them are still ramping? Let's sell it as though they're all three mature stores.

Were you able to play any games like that? straight up trailing 12 SD. Price did not end up being like a big factor. Because we're like, they didn't end up looking at it from a like, I would say typical financial buyer multiple because they're like, they know what they could do with it, if that makes sense. So in their mind, they had a pro form of what they thought they could do running. And frankly, the new buyer will run it better than us, I think, just because of expertise

and energy and all that kind of stuff and scale. So after like an initial conversation, we never really had to justify the price discussion. Clint may have, but I wasn't involved in one. And to some extent, what has benefited us is that when we built the store, say like that first one we built for like 450, if you want to build that same store now, you're building it for 750. So like there's some dollar cost averaging over time that really ended up helping. So is there a little bit of like they're buying it way below replacement cost?

Like, they could build three locations of their own, and it would cost them when you include amount of time that you've got to lose money before they break even and all that stuff. It would have cost them more. So it's just better to buy three Red Runners. That and we have control of limited spots that they couldn't get otherwise. I mean, that's the thing that happens in these land grab things. Like, they're buying the spots. They're buying the equipment.

They're buying the team. They're buying additional scale. All of it makes sense from a synergy standpoint. So much more driven by, and this is. This is, I think, the thing that differentiates a strategic sale to a private equity or private capital or private buyer sale. The private guys tend to look at it as what's the business going to provide as a return on my capital as is today. The strategics typically look at it as a sort of replacement value or what would it cost us to build this thing. What does this business look like in our operating model and compare the purchase price to that?

And it sounds like that's what happened to you in this case. It totally does. Which is interesting because usually, though, that results in purchase prices that are higher than three to five times SDE. I think we would have probably, if we went to like standard SBA or buyer, I think we probably would have gotten lower than we did. Interesting. So this actually was good for what you got. I think they got a better deal than an SBA buyer would have been paying less, if that makes sense. Like I think it's, they got a discount to what it's really worth to them.

but I think an SBA buyer would have paid less, and it would have been a worst deal for the SBA buyer. Does that make sense? Yeah, because it would have been a hard business and they would have been undercapitalized and they probably would have lost their shirt eventually anyway, even though they bought cheaply. Yeah, or for example, I think that when this ties into the strategic platform,

let's say that they'll make $50 in profit. And I think that an SBA buyer running subscale without knowing about it might run $30 in profit. So, but the price difference there is radically, is not that much higher for the strategic, but it's a better value for the strategic. Yeah, if the strategic can make twice the profit margin, they can pay twice as much

and it still be the same amount of return. Or pay 50% more and get a screaming deal compared to somebody paying less. It's all relative to what they can do with it. Which comes back to you got to be able to operate the business. That you buy. Yes. Yes. And guess who's problem that is now? Not mine. Not you.

So all you listeners out there, you can stop going to Red Runner Coffee. I know you've all been going weekly to support the pod. You need to instead tell your friends who want to sponsor the pod. That would be much better than buying sugary coffee now. Yeah. And by the way, one last point, I do feel kind of bad for Clint. I was a very demanding seller.

Like I think compared to his random walk-in seller who's probably not as sophisticated or hasn't been through as much M&A and has many scar tissues as me, like, kudos to Clint. Because I was like, no, no, Clint, we're doing it this way. get your butt back at your desk and go do it this way. Like, I was very difficult. So he earned his fee on this one, and I would recommend Clint as somebody that's great about taking something from, you know, Clint's specialty and I really, really admired it. Like, navigating the deal from start to getting across the finish line, that's where business brokers need to make their money.

It's not like how well do they list stuff. And I think that's where Clint does exceptionally well. And, you know, they're good people. So I would recommend it. And that's all I got to say about Clint. Awesome. Well, congrats to you and your partners and congrass to Clint. That's awesome. Let's go. Let's go. Let's start something else now. As long as it's not CapEx heavy. I'm totally in. No more CapEx heavy stuff. P.S. Joint Scale Path. The podcast is not capital intensive at all. That's what I love about it. Oh, yeah. Yeah. Well, it's not capital intensive. It's just not making much capital. That's right. P.S. Please be a sponsor.

That's right. All right. It's a good one. Thanks, Michael. That was fun for me. It was cool to learn about it. And congrats. So for listeners, thanks for tuning in. We'll see you next week.