Acquisitions Anonymous - #1 for business buying, selling and operating - Graphic design firm / A Texas-focused niche media business - Acquisitions Anonymous e8

Episode Date: November 2, 2020

This week, we talk about two small businesses for sale:- an "all you can eat" graphic design firm (user submitted!)- a Texas-focused niche media business, or is it?Great week!(If you have a deal, please send it along! We'll talk about it.)-----* Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.* Do you enjoy our content? Rate our show!* Follow us on twitter @acquanon Learnings about small business acquisitions and operations.-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#62 Two Landscaping Businesses for Sale - Mike Loftus CEO of Connor's Landscaping#66 Analyzing Software Businesses for Sale with Steve Divitkos, experienced industry CEO#42 $900k Moving and Storage Company / $500k Rural Mini-Storage#61 Two Manufacturing Businesses for Sale - Brent Beshore - Founder and CEO at Permanent Equity#24 $5mm pool services and lifeguard staffing co / $2mm septic services business -  featuring baller @WilsonCompanies as a special guest!#45 $800k/yr cleaning business in Midland, TX / a $565k/yr window cleaning business in San Antonio, TX #48 Two Landscaping Businesses for Sale - Mike Botkin of Benchmark Group--- Support this podcast: https://anchor.fm/dealtalk/supportSubscribe 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]

All right, everybody. It's Acquisitions Anonymous time, Halloween edition. Everybody's got their costumes on. We're all dressed as business acquirers, it appears. Yeah, we've got our business acquireers. I'm Michael Gurdley. I'm here with Mills and Bill again, and we are going to do what we do every week, which is talk about two businesses that are for sale. So very excited to do that. Good morning to both you guys. Good morning. Good morning. All right. Well, hey, first two first today. So first, number one is we're going to talk first about a listener submitted business. So we're very excited about this and we hope that more of you do submit things for us to talk about. And then the other first is I brought both deals today. So girdly one, you guys zero. All right. Okay. So first one I have, this is going to become anonymous, but we'll talk about it. So this one is, uh, this one is, uh, the listener submitted one. So it's a design as a service business. Focused mostly on tech startups, and they do everything from branding, product design, sales and marketing,

collateral, all that kind of stuff. They charge on a month-to-month basis. The average client stays for three to four months and pays them a fixed fee. So if you go look at their website, it's like pay us X thousand dollars per month and it's all you can eat. They basically, you know,

they handle all of the work internally and then they outsource it to five full-time designers that are based internationally. Right now, as of the most current month, they're costing about $34,000 a month. They have no KAC. They have been doing no paid marketing, no paid spend.

All growth is through referrals at this point. And so because of that and some other stuff that's interesting, gross margins are huge for them. They're targeting 75 to 80 percent earlier this year, though that's kind of gone down a bit in the past few months. And then they see themselves kind of sticking in this 50 to 60 percent range. And they're a relatively new business. They've been an operation for a little over a year and a half, but they are looking to get out and thinking about how to think about selling the business.

In terms of finances, they're growing really quickly. So they've doubled plus in the past four months. we only actually got finances through March of this year, where they were kind of in the 40 to 45K a month revenue. And then they ended September at 95. And then I think they had a big month in October because what I said earlier is that they're at 150K a month run rate. Interestingly enough, if you look at the finances, cogs went way up in September. They were running kind of in the 20 to 30 percent, cost of goods sold. earlier in the year and they went way up in September and I have to look at what exactly that

number was, but it was closer to 40%, 35%. Also, if you look at the finances, the owners are not paying themselves. So there is some optimism in the finances the way they look because I don't see where the people that are actually running the business have been paying themselves other than from profits, which are huge because they're running at 50 to 60 percent EBAA, which is basically 50 to 60% free cash flow on this business. So it has turned out to be a great little business for them and pretty exciting. And I know we looked at this one beforehand, guys, so I know there's some questions on it. But also, I will pause there in case I did a bad job of explaining anything or something

comes to mind. Maybe I'll just add, we use businesses like this at my company, Elements, brands, it's essentially design as a service. So you pay them like a monthly retainer and you get almost like all you can eat design. Hey, make this Facebook ad. Hey, you know, I need this graphic for my website, et cetera. We don't use these guys. We use one of their competitors.

It has to supplement our in-house graphic design folks. So this is a market that I wouldn't say I know it's super well, but I'm a customer of it. One thing that immediately, you know, I ask about this is how is this different? You know, there are a ton of competitors here. I mean, you can go on Upwork and post, hey, I need a logo and you get a million bids for 50 bucks. And I know this is probably a level of quality above that, but there's a lot of the supply of graphic design in the world, there is a lot of it. And I know there's also a lot of demand. So I know they're not trying here to, I really want to know, you know, how is this

different? Like, how do we win deals? You know, why does, why do people pick this design firm over other design firms? And it might be, you know, maybe they have some just, you know, this is classic, it's big market. There's lots of players. It's no problem. We'll just carve out a little bit and it's a nice little business. And the other thing I noticed about this business is they said the average client three to four months. So on one hand, it's nice and you've got them on this kind of fixed retainer where they pay monthly, but also they're leaving every three to four months. Like if you're churning your entire customer base every three to four months, I wouldn't say,

like that's basically project. Right. I mean, that's not really that different. Like, it's not, you can't even say it's annual recurring revenue if they don't even stick around for a year. Yep. So it seems to me and not think I'm buying an annuity year when really I'm buying a sales engine. You know, like you got to say.

sell new design service every day to keep this business running. Well, yeah, and I think I heard two questions from you, Bill, like, do we think about this as a recurring revenue business? And it sounds like at least what we're seeing now, it's no, right? Because there's churn built into these customers. And also, the second thing, I think what you asked was, how's it differentiated? Like, what is the unique niche that they own?

They do tend to do these West Coast tech startups a lot, But it looks like they're a differentiator at this point is basically we're cooler and hipper and we talk like you, Mr. West Coast tech startup that's of a certain size. But I don't see anything that's not relatively commoditized. Well, and I'm thinking from the customer standpoint, right, they reference being a conduit, you know, between startup ecosystems and international talent. And to me, the risk, right, if I'm a, if I'm a customer's. the risk of doing it on my own and just going to upwork is that I may lose out on some kind of continuity of branding or design. You know, if I need a logo, I need a product roadmap visualization, I need maybe prototype mock-ups or something along those lines. If I want there to be continuity

in branding, then this may be, I guess, at least I would hope, right? I'm buying this because I want there to be kind of a seamlessness. I don't want it to do. just look like I've had five different people design five different pieces of collateral. Yeah, I would guess underlying it all, they most likely would have a repository of what they build for people and design guides and all that kind of stuff. I mean, that has to be part of the MO and also why it would be superior to a Fiverr or an Upwork for that kind of reason. I mean, when I use Fiverr upwork for this kind of stuff, the first thing I do is hire somebody to build a design guide. So they want to hire the next person that they won't give me something.

that looks totally different. What, you know, I think probably a lot of the value here is that we had some correspondence with this user who submitted this and were able to ask some questions. And the niche really is that they have gone viral, so to speak, within a very specific incubator. And the fact that they kind of have earned some trust and credibility, that's worth a lot, right? So it's interesting because we as buyers look at this and go, man, this churn is really scary. And the seller is saying, I get it, right, but we've been okay. We're not paying for any customer acquisition costs.

We're getting good repeat business. And, you know, I think probably, you know, the price, right, per month for an all you can eat buffet of design, to me, my first instinct is somebody going to exploit that, right? If you're paying $4,000 a month for all you can eat. design work, are some people actually only getting $2,000 a month of value out of it? And some people are getting $15,000 a month out of it. And figuring out, can that price actually remain durable over a long period of time? Or are you going to get hosed? Yeah. Well, it does come back, I think, to Bill's question of what is the competitive advantage of this business at this point? And it's that the owner is deeply ingrained in this community where he's able to go

back to the well repeatedly and get more business. Well, in general, like it seems like, as you said, Michael, part of their mode is that they're cool a little bit, right? And that is kind of a scary moat for me because nothing stays cool forever. Nobody stays cool forever. Nothing stays cool forever. So if this business is suddenly not cool, I feel like you need another way to win deals besides just being cool.

And, you know, with the other thing that's interesting about this is I wonder if your kind of your clients are always kind of tweeners. Either they're not big enough to have full-time graphic design in-house, you know, or they just have project work that's overflowing from their in-house graphic designer. So they're either constantly outgrowing you and hiring their own designers or constantly going out of business. And either way, they're churning.

And I wonder if that's part of what's leading to some of the churn. Because, I mean, every three to four months, that's brutal churn. I mean, I get that that's basically selling them a project and then financing it over three. to four months. You know, that's not really a design membership. So I would be thinking about, you know, maybe they, how could I change my client mix to get things, you know, clients who have more of a consistent need for this? And how do I position my business so those clients say, oh, this is a good permanent augmentation to my team of graphic designers or whatever it might be. Otherwise, like, this is a glorified upwork contractor in some ways. And I'm being a little harsh

by saying that, but it's only been around for a year and a half. Like how much brand value is there really. Yeah, yeah. See, though, I would almost take the opposite approach, Bill, because I think with what you're saying, it makes perfect sense if you want to grow and become a traditional agency, right? Because then you're looking for, you know, longer duration retainers, you're looking for stickier client relationships. And to me, I don't want to be an agency, right? I don't want to own an agency or compete with them. I think this is kind of an underhanded way in a good sense, It's a very kind of, to me, scrappy way to basically be an alternative service to an agency. Why would I go hire an agency for $4,000 a month with a 12-year contract when I can kind of gain it,

right, and use these guys. And I think the risks, right, are still there, right? The churn is real. But if you were the right person and the current owner is the right person to be able to kind of be close to the well, like we've said, I think you can make this work, you know, and basically keep the sales up, right? Keep the inbound new clients coming because it's a nice alternative to an agency. True, fair. One other thing I noticed about this business, I alluded to earlier, it's a year and a half old.

It's growing rapidly, as Michael mentioned at the top of the call. So my huge question here is, why are you selling this business? You know, you've only been outed it for a year and a half. You can't tell me you're burned out. It's growing like crazy, meaning it's worth more every single month. The margins are great. It's putting a ton of money in your pocket. Why are you selling this business?

This puts all of my antenna up that the founder does not think this is sustainable and is trying to sell at the top. Short-lived business, rapid growth. These are not the businesses you sell, typically. It is interesting. You do see there's this weird class of sellers that are Silicon Valley people and West Coast people that are surrounded by the world of Uber and all this stuff.

And they're sitting in a diamond mine trying to figure out why the hell they're not in a platinum mine. I see that that happens a lot out in the West Coast and to some extent in New York as well where a lot of these type of businesses are. And you want to shake them up and be like, do you know how rare a diamond mine is? You don't just drive your clown car into that

like on regular basis. They're really rare, so you should love what you got and go from there. But it's surprisingly common. Yeah, there is also another class of seller who starts businesses and sells them every, you know, 18 to 24 months. Yep. You see a lot on Amazon. You see a lot of folks who will spin up an Amazon brand. And they'll, as soon as it hits, you know, 18 months of financials, they hire a broker and they take it to market. and then you ask them and they find out they've done it three times before. And then you ask, well, how did the other ones do after you sold it? And they conspicuously have no idea or can't remember or don't stay in touch with the buyer.

So like any of any of these things that are just only a year and a half old, I just immediately go, why are you selling? Yeah. You know, and are you trying to sell high? Are you looking for a bag owner? Makes total sense. I was hoping you were going to bring that up, Bill, because to me, that's the area, specifically the FBA businesses, that's where I see these quick kind of turns most. And you're right. It's just, you know, hey, look, we started a brand. We stood something up.

We found a way to source product. And then we threw a ton of money at customer acquisition and look how big our revenue's gotten. You know, and I mean, good for them in one sense that they were able to spend something up. But you're right. It does kind of make you call into question, okay, why, you know, why am I the lucky one? Right? Why am I on the receiving end of this transaction? And what do you know that I don't know? Yeah. And a lot of times with these short businesses, it's possible, especially on Amazon or on a Google. Maybe they've found a results page, a keyword, or an advertising niche that they're able to exploit. You know, maybe they've actually found something new. But I will tell you what, the market is pretty damn efficient in the long run. So eventually the competition is going to come flooding in.

Like if you're making a ton of money on a certain keyword, someone's going to figure. it out. And then the competition shows up. And you know, you don't want to be into it for 4x trailing even when the competition shows up. Yeah. Yeah. Great. Well, it's, uh, it sounds like in conclusion we really like this business and we're totally confused why the seller would consider selling it. They should just buy themselves a slightly nicer Ferrari than they're already buying for themselves. And maybe that'll make them have more patience. But great submittal. Thank you so much for sending that in, dear listener. And if you have, If you're a broker, if you're a principal or whatever,

we would love to talk about your deal. And hopefully we did a great job of protecting the anonymity that this person asked for. So very cool. All right, let's move on to deal number two. This is a fun one and also way outside of my wheelhouse, which also makes me question why the broker was sending it to me, but it's all good.

So this is a media business. It's owned by a person who is a serial entrepreneur who came from kind of the corporate finance stuff. So he set up a business basically that he could run as a side hustle. He's done kind of what you talked about, Bill, with this serial kind of fix and flip or start and flip kind of M.O. So he purchased a single website called Houstononthecheap.com in early 2018. At the time, it was producing $68,000 a year in gross revenue.

Two years later, this guy has built up the business a bit. He's expanded into a number of different verticals. He brought each of these properties out as one. So by then he's expanded throughout Texas. So he's got Houston, San Antonio, Austin, I think Dallas, and then there's one in Houston, and one in Boston. And he's taken the business from 68,000 to pre-COVID at being over 450,000 in gross revenue from those five cities.

So the four in Texas and the one in Boston. And he's done some good stuff, right? He put some things in place to kind of grow the business. we'll dig into how he did that. But, well, spoiler alert, he mostly signed up a bunch of affiliate marketing and SEO type stuff. And that's how these sites mostly make their money.

They do have some paid sponsorship, but on top of that, mostly it's an affiliate marketing kind of display ad type situation. So he runs it pretty much hands off. He's got a handful of editors that write SEO-optimized stuff. So he ends up, say,

on this Houston on the cheap, thing. They rank very highly for people searching for the experience of how to go to the Houston livestock show and rodeo, and that sort of thing. So the broker has described this business very interestingly. I guess you guys, hopefully I'll look at your faces. Well, Bill's cameras off, but Mills is smiling. And it's literally, the thing is written like a Hemingway novel in terms of the description. Pretty fun. Just all over this is very colorful language about how the heroic staff that owns this, has managed to keep it afloat and now growing,

despite what's going on with COVID. He claims they were on track to clear $400,000 in net earnings this year, and they had gone out to market in February to try to sell the business for $1.25 million, which is $3.5 to four times annual net earnings. That would be comparable to other media sites. They got an offer for $1.1 million in April. Then COVID came.

That thing disappeared. Then they have recently gone back out at $9.25, and then I got an email yesterday that they have once again lowered the price to 725. So now they are selling at 725 kind of post-COVID. Pulling up the financials, it's been an interesting 2020 for them. If you look at kind of where their revenue comes from, they basically get it from a couple different things. So ticket sales through a deal called Gold Star was one of their biggest revenue sources before COVID.

Post-COVID disappeared. And then it appears they've mostly gone down the path of monetizing around affiliate marketing. So click-throughs and that sort of thing. So if you look at their content, it's a lot of that content that's like, what is the best ergonomic chair for me to buy? Well, thank you very much, the local Houston website for that kind of information that you're trying to get click-throughs to that affiliate marketing platform. And so September bounced back.

They were profitable in the amount of $25,000. brought in revenue of about 36,000, if my math is right. So a very high profitable thing, mostly because he's got a bunch of freelancers and his sales commissions are paid to a stay-at-home mom who is his only sales rep, who generally is bringing in. It looks like about six or seven grand a month in net new advertising.

So I will pause there. It looks like, and it's short, short, We've got a media business focused on the emerging Texas market that can be run independently, highly dependent upon affiliate marketing that can be run as a sideline. So what did I miss? What questions do you guys have about this one? Okay. So I like the fact that it's local media or hyper local media.

I mean, any niche media is really interesting, right? I mean, just this morning, we're recording, and just this morning or last night it got announced that Morning Brew is getting acquired. So niche media, I think, has a really, really strong pull, and it's obvious that it's on a lot of people's radar. To me, I can't really figure out how they're pitching this thing, right? They're saying, look, own the audience. There's six million page views here or unique visitors. And look, you can own this audience for less than the cost of building it.

To me, I don't like the idea that the audience is portable, right? if I've kind of signed up and they have they're doing the right things like they've got a pretty big email list they've got what looks like a good social media following not sure about their engagement but if I've signed up right to get local Houston news right and then all the sudden you're pushing me you know I don't know left wing or right wing politics right because that's one of the things they say is hey if you're if you're you know a political action group come come by this audience right six million Texas eyeballs is really valuable. Or if you're, you know, an energy business and you really want,

you know, to just acquire this audience for the cost, you know, for less than the cost of building it, I just, that to me is not, there's no way that would work, right? You're going to find engagement falling off the map. There are some weird red flags to me about this one. One is that in general, when I kind of look at a deal that is, I don't know, I don't know how I would describe this. And you guys tell me if you get the same vibe. But in essence, the intermediary has kind of already thought of everything, right? They've almost presupposed any kind of question, any kind of contradiction. They're not really giving me the space to make informed decisions or ask kind of questions about the deal.

It's like before the question can get out of my mouth, they're already answering it. Here's what you're going to do. Here's how you can expand nationally. Here's how you can hire, you know, commission salespeople instead of just this. one person. To me, I don't like when the deal is already so baked. Another is the fact that they give, this is, I guess, good and bad. They give this whole kind of description, right, of the deal background. Here's when we first listed it. Here's how much it was listed for. Here's how we've reduced the price. We've gotten offers at this range. They couldn't put together funding. All that, to me, it's really helpful for

me as a buyer. I don't know if I were the intermediary, if I would do that, right? I don't know if I would share all that information. We started at $1.2 million. And now we're, you know, almost half. that? I'm sorry to interrupt, but I just noticed something funny about exactly what you're talking about. The asking price has been such a falling knife that on their asking price slide, they have the word asking price written twice. And in one point, they have it say 900,000 USD, and then immediately next to it, it says 850,000. So like in the span of a half an inch on the slide, they dropped the price $50,000. Yeah. In fact, Michael, you also read your email. It's now asking 675.

So 1.2 to 675 and they say we work with three separate buyers since June and we're no longer entertaining SBA bank loan-based offers or any earn-out offers because everyone has failed to secure their outside Mancing or only accepting cash

offers. And I go, clearly these people know something I don't yet know. Right? Like it has failed to get underwritten by three separate banks. You know, all three buyers have bailed. The guy only he's not willing to take any risk on an earn out as a result, and it's an all-cash offer, and they've cut the price in half.

What is going on here? It is an interesting thing as a seller, and one of the things I've kind of learned, like you think that if somebody drops out of a deal in diligence, that the next time around, the next person is not going to find the same stuff, and I've just learned the hard way. You just assume they're going to find it,

and you give them all the diligence materials that the previous group had. You're just like, okay, well, here's what caused the other people to have a problem with it and it ended up walking away and just not there. So there's some closet and secrets going on here. I totally agree with you. Another red flag to me is that in the summary it mentions kind of as an additional perk that the owner's getting about $20,000 a year in freebies. You know, haircuts, work on his car. It lists some different things, basically in exchange for bartering the services. to me, my, my alarms are just blaring. I'm going, man, if this is happening, right?

And it's well within the owner's prerogic to do this. But if this is happening, what else is happening that's kind of off books? So that one to me is a big red flag. Also, I don't, this is, I'm probably about to step in it because the intermediary sent us this deal. But in the signature line of his email, he touts that he has 100% closing success rate. And I'm thinking if you cut the price by 50% or more, of course you're going to have 100% success rate, right? If the price gets low enough, somebody will buy it. I just think that's a little bit of an odd thing to tout if you're the intermediary.

I will say on the plus side for this deal, and this is not something I have inside information on, but there's a business here in Charlotte called the Charlotte Agenda, who is a sterling example of what these guys are trying to do, done extremely well. And they built it on the back of a newsletter. And they hired some real journalists. They do local media. And they are killing it. Killing it.

Like a handful of employees, hugely profitable. The guy that founded it is doing fantastically well. And it's read by everybody, you know, under 35. Shrap. Killed it. So this model can absolutely work. Although what's interesting is they tried to expand to other in North Carolina and failed and pulled back. So they're killing it in Charlotte but couldn't make it

work even just down the road. So I wonder what it is about local media that's hard to replicate even in the same state. So if you lived in one of these towns and if you really enjoyed, you know, eating at all the latest restaurants and doing all the things, I think this could be a phenomenal lifestyle business. I mean, just you would have, you would be the king of the town, right? Everybody wants to be covered by you and access your audience, et cetera. But I think you've got to want that and you've got to be willing to execute well and sell partnerships to real local businesses that want those eyeballs and actually live in this business. Yep. But, you know, if you're out of town, you think this is a cash cow, like listeners or watchers, readers can smell that, I think,

from a mile away. Yeah, I think that ties back to this like owner personality fit that we've talked about before. I would want to look at this business if I was that person who was in every single club and everybody loved me and what fun for me was spending 20 minutes talking to the guys at the local auto shop. If that's

your schick and that's who you are as a person, that's great. Because this is a great way to monetize those kind of relationships. But if you're an introvert like me, yeah, good luck with that. You need that secret sauce to make this from work. Cool. All right. Any other

pooping on this deal or we good to wrap it up for today? I can wrap it up. Just one thing that to me was kind of a pet peeve, right, is the difference between run rate and last 12 months. I feel like this is something that, you know, you would realize right at some point. But they're saying, hey, look, we have a $360,000 a year, you know, net run rate. But the actual last 12 months because of COVID. And they take ownership.

Hey, COVID was bad. but last 12 months is $240,000. And so, you know, if they're saying, hey, look, pay us a multiple of run rate versus a multiple of last 12 month, that's a big difference, right? And that's just something to look out for. Yep. And I'll even extend that much further, some further. I occasionally see people asking for a multiple of average last three years, EBITDA.

It's just amazing that the different things, buyers, these different numbers, buyers will try to multiply by their multiplier. Yep. You know, and you go, as you said, Mills, like the last average of the last three years is not relevant. It's declined every year. You know, like, why am I paying? Like, how does that make any sense? Like, if you want to multiply that, like, I'll give you one X average last three years.

Yep. Well, and that happens all the time, right? Because at some point, the owner's going to ask, what multiple are you going to pay me? Right. And it's like, well, I can pay you a 28 times multiple of something, right? But let me, let me define what the multiple is based off. of. And so everybody, you know, everybody talks about, you know, at the country club, I got, you know, a six times multiple, I got a 10 times multiple, whatever. It's like, you got to really

press on that and figure out what exactly are you multiplying because not all multipliers are created equal. Yes. And it's important when you're negotiating with the seller, I've found, to figure out what they care about. You know, as you said, Mills, some guys care about getting the highest multiple. And they're really fixed on multiple. And in, In doing that, they're taking their eyeball off the actually the final selling price, which sounds insane. But it happens a lot. People are much more focused on the multiple.

And so if I find a seller that really wants 5x EBITDA, I go, that's fine. And I just work on what is EBITDA, right? And you know, you really scrutinize their adbacks and you, you know, you really push on that. Or you know, if it's down recently, you say, I got to annualize the last three months where it's been down. Or if it's been up, you say full trailing 12. We're not annualizing anything. So you've got to, when you're negotiating, figure out what the seller cares about and try to give that to them and move the other letters. All right, guys. Great job today. 10 out of 10. Would have podcasts it again with both of you.

We've gotten great listener feedback and we love hearing from everybody. I think that's listening. We're getting like four or 500 listens per episode. Pretty nuts. Right. I love it. I guess we'll keep on our mouths. We'll keep going. And yeah, some of my friends have started listening and they think it's great. gotten a lot of good feedback. So good job by you guys. And I learned a lot again today. So thank you very much. We'll catch you next time.