Acquisitions Anonymous - #1 for business buying, selling and operating - GRE Test Prep Business with 87% Margins - Acquisitions Anonymous 212

Episode Date: July 21, 2023

Mills Snell (@thegeneralmills) and Heather Endresen (@EndresenHeather) break down a test prep business this week. Check out the listing here: https://quietlight.com/listings/13904750/Thanks to this week's sponsors.WebAcquisition.com is an M&A agency focusing on online business due diligence. They provide due diligence analysis for e-commerce, Amazon FBA, content sites, SaaS businesses, and more. They’ve analyzed well over 1,000 online businesses to date totaling over 9 figures in value. They’re known for catching red flags that others miss.The WebAcquisition team consists of real practitioners who run online business portfolios in excess of 7-figures. Each deal gets reviewed by a team of expert specialists with real-life experience.You will receive a deep-dive PDF report with an extremely quick turnaround time for the online business you want to acquire.Podcast listeners will receive an exclusive 10% OFF on all services for a limited time.Visit go.webacquisition.com/podcast and mention Acquisition Anonymous when filling out the contact formOr email the founder, Mushfiq Sarker, at [e-mail] for more details.------------CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hey, everybody. Welcome back to another episode of Acquisitions Anonymous, I'm Mills Snell. We have a fun episode today. We talk about this really interesting, we like to make fun of it, but it's a, quote, partially SBA pre-qualified. It's a test prep business in the GRE sector. And so these businesses are really interesting, typically. They're very high margin. They usually kind of create content one time, spend some money and some cost associated with creating it, but then it can kind of live on in perpetuity with updates. And so they're typically very high margin businesses. Some of them are super specialized. Some of them are kind of more broad and generic. And we talk about some different instances of that that we've seen in the past. But this is a GRE one. It's been around just for

a few years. It's incredibly high margin. They have a really high expectation around valuation and purchase price. And Heather and I talk about how realistic is that? Will they actually be able to get this purchase price, will they fetch what they're looking for? And is it even financeable at those levels? We talk about some of the different kind of roles of the founder and how it plays into a business that's kind of content and curated based like this. It's a fun one. And we do try to. We're not always good at this, but we do try to present kind of the bear and the bull case. So hope you enjoy it. And a big thanks to our sponsors this week. We have a new sponsor this week, web acquisition.com. They're an

M&A agency focused on online businesses and due diligence specifically. They provide due diligence analysis for e-commerce businesses, FBA businesses with Amazon, content sites, SaaS businesses and more. We talk about one of these on our episodes, probably once a month, but they're out there. They're very prevalent. These guys have analyzed over 1,000 online businesses to date. They say totaling over nine figures in value. They're known for catching red flags that other people miss because you got to know what

to look for in these types of business. The web acquisition team consists of real practitioners who run online businesses in excess of seven figures, and each deal gets reviewed by a team of experts and specialists with real life experience. You'll receive a deep dive PDF report if you engage with them, an extremely quick turnaround time because time matters for these types of things on any business that you send to them. Podcast listeners will receive an exclusive 10% off for a limited time. If you go to go. Webacquisition.com forward slash podcast and you mention Acquisitions Anonymous when filling out the contact form,

you'll get that discount. You can also email the founder directly at info at webacquisition.com. If you have questions or want more details, check these guys out if you're looking for a business in this sector and you feel like you need some help with due diligence to catch some of those red flags and make sure that you're underwriting the business correctly.

Thanks. Welcome back, everybody. Another episode of Acquisitions, I'm Mills Snell, joined today by Heather Indreason. Heather, how are you? I'm doing great, Mills. It's a great day. I've had a great week, and I've got a lot of customers with new signed LOIs, so I'm fired up. There's something in the water. It's that, it's that time of year. It is. It is. We like to joke. There's always different things that kind of catch our eyes when we, you know, when we look at listings. And one that we like to joke about a lot that you've helped educate us on is this idea of, you know, SBA pre-qualified. And I sent everyone one the other day in our signal chat because I thought it was so funny.

And it says partially SBA prequalified, which you'll educate us more on in this episode, but prequalified is not a real thing per se. And so partially prequalified is even funnier. So I'm going to pull it up on the screen for the people who are watching on YouTube, but you can start reading and it'll be, I think, pretty funny. All right. So we have, it is the headline by the, way of this listing starts out partially SBA pre-qualified test prep membership business 100% organic

zero marketing 14,000 subscribers revenue is 787,000 earnings 685,000 so wow asking price 6 million seller has never attempted marketing or any kind of any kind for the business it's grown completely through word of mouth and referral traffic seller has not tested the pricing it's It's $5 a month for the main subscription and $7 for the upgraded version. Maybe there's room for a price increase. He says the competition charges at least $100 a month on average. Strong monthly recurring revenue, according to Stripe Data, the monthly recurring revenue has grown by $25,556 over the last 12 months, very specific.

Huge expansion opportunities. Offering similar training for LSAT and G MAT would, would provide growth opportunities and would be a low-cost solution. Large subscriber base, 14,000. Seller has proven how large the market is. He's not a well-known brand when compared with some of the larger competition, but he has a growing number of monthly subscribers. He launched it in 2019.

It's an affordable low-cost, so they're really emphasizing that low-cost, but at the same time saying they could increase. a low-cost test prep program for students taking GRE and T-O-E-F-L. I don't even know what that is, exams. Most of the customers access the site for GRE prep content. There are study plans, practice problems, quizzes. Prior to the business, the seller would never have described himself as a businessman. He was a teacher, interesting, with over a decade of experience teaching both domestic and

international students. Much of his teaching was done in the test prep niche. He noticed a hole in the market, and for the afforded. portable test prep, and he sought to undermine the very expensive options. Why, this is pretty detailed. I'm trying to screen through it here quickly. A high-quality GRE tutor costs $200 to $500 an hour. In this industry, consumers are willing to spend a lot of money to help their kids do well in those test scores. Boy, it keeps going. Let me get to the rest of it here. The seller, okay, we got that part. I love this line. The seller has spent a large amount of time in the GRE subreddit,

which has yielded a substantial amount of referral traffic. I mean, that's actually some great probably guerrilla marketing. Yeah. That's what I, sorry, it was a, my, my screen was trying to find the rest of it. But yeah, the sellers receive unsolicited officer offers for the business and is interested in exploring other opportunities following the sale. And they say here, 140,000 YouTube subscribers. I would be really curious about, you know, the revenue that they're pulling off of, you know, off of just those YouTube subscriptions because that's not insignificant. I've noticed Quietlight does this weird thing where they give you information in the email that is, because you were reading off of the email I forwarded you, but then when you actually

go to the page, the website page, and you click on, you know, on the link, so to speak from the email, there's information that was in the email that's not in the main listing page. like that that whole detail about $5 versus $7 a month and stuff like that. So no, that's kind of quirky of them. But this is this is kind of interesting. So it's GRE test prep. Yeah. So what I,

one thing that just jumped out at me is just kind of a personal story. My best friend is a teacher. And I always tell her about what I do. And I always say, gosh, you could buy a business. You know, we have these talk talks. And she says, no, what kind of business could I buy? Okay, this is for my friend. I'm going to make her watch this episode, this one.

Or you could start a business like this. This is a teacher that saw the opportunities. I think that's really, really cool personally. It's obviously got a huge margin. So it sounds like it's just the one person, the seller, creating the content, probably hired some developers and built this business and built up the subscriptions really sounds like totally driven by the low price.

you know, that I'm sure quality content as well, but low price. I'm sure that there is just, you know, to their credit, you know, the blue ocean here is probably going on this, you know, this subreddit and maybe creating some kind of unique and identifiably, you know, unique content on YouTube. But my guess is it's the Google paper clicks, the Google AdWords for this is probably insane. You know, there's, this is, I mean, so the GRE test is if you're going to go to grad school, you got to take the GRE, unless you can exempt out for some reason.

And they don't say anything about this, but like the elephant in the room to me is the churn on this. Like if they're doing their job, you know, you're constantly going to be churning your subscribers because they, they pass the test. They don't need to keep taking it. There's some businesses that almost have kind of inherent, an inherently finite life for customers. The hospice business is this way.

They pay per head, so to speak, that's what they call their census. And they make a boatload of money per person, but it's a very, it's hospice. So by definition, these people are not expected to live more than six months. This business, this testing business has got to be a much shorter time horizon than that. I think you can take the GRE once every maybe three or four weeks once a month. So if you don't pass the first time, you probably go pay for a service like this. And if you don't pass the second time, you're talking about maybe two to three months max. I was going to say if they have a lot of repeat customers, that's not good.

Yeah, yeah, that's a problem. In every other software system, it's good. But in this, it would be really bad. Well, you know, I mean, you could ask probably, you know, a half dozen to a dozen questions of the seller. and really understand a lot more about the business that we obviously don't know that much about it now. But I would want to understand what's their revenue by kind of category or revenue by a kind of channel because, you know, you would think at least 75% of this has to be the subscription. And maybe there's some incidental things like, you know, one-on-one coaching or the YouTube channel or maybe they sell some test prep materials, physical materials, or digital down. downloads, but the vast majority of this business has got to be, you know, this subscription offering.

But it could tell you a lot because there may be some kind of diamonds in the rough. Yeah, absolutely. And like you said, they've got to have a lot of a pretty extensive marketing channel so that when the person searches for these, for this kind of test prep, they're finding them, whether it's pay-per-click or, you know, they didn't mention SEO. So I would imagine, you're right. It's probably pay-per-click at this point. trying to go back to what year did this business start, 2019.

So it's not very old. And so I would expect, if we would look back historically, there's been a pretty hockey stick growth curve probably here. And this person's probably selling where they feel like maybe they're at the top. You know, because there is also a finite market, right? They said something in there. There's a little hint. He's proven how big the market is,

which maybe kind of means he thinks that's it. Now that's as big as it is. and I've reached it and now I'm ready to sell. One of my favorite soap boxes is, you know, in the time that I get most opinionated and passionate on the podcast, which doesn't happen very often, is whether or not a deal pencils. And so, you know, I look at this and just kind of trying to reverse engineer it,

it can make me kind of mad because, obviously, this business has insanely high margins. $787,000. of revenue and $685,000. That $100,000 of cost is probably, you know, hosting fees, maybe some third party, you know, copyrighting. I don't know. It's minimal, right? And maybe, you know, maybe there's even some comp in there for this seller. So, insanely high margin business, a lot of respect to them for that. But they want an 8.75 times multiple on that net income to get to a $6 million purchase price. And so you think about it.

just to recoup your outlay, because we'll talk about the SBA financeable aspect of this next, and I want to spend a lot of time there. But let's just say this was cash purchase price, and it's not levered. On an after-tax basis, you're talking about 10 to 12 years before you get your money back. And when you think about this kind of as simply as you can, will this business keep doing what it's been doing for the next decade or more? there's a lot of competition. And those really high margins attract a lot of competition.

And so it just seems a little bit far-fetched to say, this business can keep doing, the market won't move from underneath it, and this business can keep doing what it's been doing for a decade. So that tells you, if you're going to pay that price, you have to have some eye towards some part of your underwriting is, it's not margin expansion. You're not going to make more money off the revenue that you already have,

you're going to grow. You anticipate being able to grow revenue significantly in order to be able to pay that price. And that seems like a really big if. Right. And I'm kind of going to counter that, that they've already kind of hinted to me that they don't think you can't.

You know, like we've proven how big it is. And yeah, there's just only so many people every year that are going to take these tests and try to get into grad school. So what they're, I mean, what they hinted at is margin expansion, right? They said, oh, it's only five. $7 and they never did any testing on these, you know, so you could come in and raise the price. But on the other hand, they're saying the whole reason this guy or gal figured out how big the

market is is by offering the low price. So I think that would be extremely risky for a buyer to do that, to come in and say, I think I can just raise double these prices or raise them by 30% or whatever it might be. That would be really scary. So to your point, to pay a multiple like this would be really tough to make money. I think what happens, at least in my mind, is people who have small tech-enabled or SaaS companies, they just read the headlines. I should be getting paid eight to ten times,

and that's what I've read, and so therefore that's what I want. And no one really sits them down and go, well, you know, let's get a little more granular with your business about this. But having said that, I see a lot of deals where the price comes down as we get through the process. Even if the LOI is a little too high,

I see that very often, honestly. In fact, lately I've had a few like that, where the LOI came in too high. We like the company, it's good, but we sort of coached everybody through. This is too much. And the sellers were willing to retrade after a little bit of diligence and discussion.

So maybe there's a deal there that could be financed, but it probably wouldn't be at this price. And I think, I mean, this is the bare case, right? This is, you know, hey, I don't know that this is going to work and here's all the reasons why it shouldn't. I think the bull case for this is this person, they've said, I'm not a marketer. I don't know how to do this. I'm a teacher and I wrote the content and I've managed to, you know, do way better than I expected with this. I think the bull case is there's somebody who really knows what they're doing with online advertising and the ability to, you know, kind of poor, poor, poor, some fuel on this fire already. And, you know, if you are, if you're good at the marketing, if you can generate demand and kind of a distribution channel for this, that's scalable, I think that the TAM for this is way larger than a million bucks a year. You know, I think there's, this is a hyper competitive space.

If you Google GRE test prep, I mean, it is just insane. So if you had somebody who knew what they were doing and could monetize, you know, the ad spend and kind of a real return on investment sense, I think you could go somewhere with it. The other thing that a lot of people do in this space is they branch out. So I looked at a business, it was actually surprisingly large, like two point, maybe it was $2.8 million in EBITDA, and they were selling $8 serve safe certification test. So if you're, you know, going to go work in a kitchen somewhere, they say, you know, show up next Monday, you need to have black shoes, black clothes shoes, black pants, and you need a serve safe certificate in order to work in the kitchen.

And these things were $8, and this business was netting $2.8 million. And obviously, there's a lot more, you know, there's a lot more kitchen workers and people who go, you know, take on a part-time job than there are people who, you know, are going to pay money to get their GRE. But it kind of, it reminds me of that, especially in the low-cost category. But what that person did in that business that was so unique was they realized, you know, this is a fairly standardized test, and you kind of have to know the nuances if there's differences per state and things like that, which the GRE wouldn't be that way. But somebody who's really good at

this, they could say, I know how to, I know how to distribute it. I know how to get customers in my pipeline and convert them, potential customers, and convert them to customers. So I want to do this with the LSAT. I want to do this with other exams, you know, and it is, I mean, exam prep is, it's a pretty high margin business, not just this one. I don't think that this is a huge outlier. I think it's probably a little bit, a little bit rich. But I don't think it's outside the realm of possibility in the bull case to take this and really do something with it. But I think if you're going to if you're going to predicate your purchase of this on that much, you know, that much of a purchase price, you're predicating on that much growth. You can't pay this purchase price.

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cloudbookkeeping.com, And now back to the episode. I agree. And I also worry about content businesses because the seller was the creator. That's such a good point. Yeah. And maybe these tests change over time, you know, or if you're going to expand, you're, you need that creator. There's some magic in what they're doing.

It's not just a marketer can't do that. So maybe if a marketer did buy it, they still have to pay somebody to be a good creator and they have to find that person. So when I look at financing these kinds of things, that's the big transition risk question, right? Is this a transferable business? Lenders would start to think maybe not because let's look at this content and do these tests change over time? How often is the founder going back and changing the content and updating it for whatever test changes are happening? And I also wonder if there was a COVID bump because I thought there was sort of a surge, you know, when people were stuck at, home, let's just go back to school. Maybe this is the time to do it. Yeah. And so I wonder,

you know, if we look back historically, if there's maybe a little bit of a COVID bump that happened and maybe there might be some normalization after that, that's something that all lenders kind of look at these days. Yeah. No, you're absolutely right. I think there's a lot of kind of, you know, not to not to say this in any condescending way, but like the nerd, so to speak, creates this business. And I say that very lovingly because they are the one who can go into the subreddit and can, you know, really do something incredible because they can navigate the nuances, you know, of this subculture, right, of people who are looking for test prep. And they know the questions people are asking. They know, you know, exactly how to position themselves. And,

and they can obviously, you know, navigate the curriculum and not just the curriculum right now, but the nuances of new curriculum and testing being updated and those kind of things. Let's talk about Heather the financing aspects of this. So I guess maybe let's start with the SBA pre-qualification and partially pre-qualified and just help kind of pull the curtain back on that a little bit. Yeah, I forgot about my favorite part about this deal. Yes, so there is no such thing as SBA pre-qualification. I've talked about this before.

All that that's really going on there is the broker is going to approach a lender who is a salesperson. They're not the credit people. credit people trust me do not have time to look at deals that don't have signed LOIs and you know an actual buyer so they're not looking at marketing packages and sims that's just a salesperson and the salesperson is very going to be very reluctant to say no to a prequalification because they're relying on that broker for referrals it's a you know it's a sales relationship so they're going to just give you a prequel and they might run a cash flow but what cash flow

what does this even mean if we don't have a buyer? We don't know how much equity. We don't know the price, any of that. So it's just a marketing tool that brokers use. And I think it's funny that this one said partially pre-qualified because it's a it's not a good, I don't think that's good marketing. At least SBA pre-qualified is, it's not real, but it's good marketing. And this one's kind of not good marketing, in my opinion.

Yeah. Yeah. I think that, so basically the pre-qualification letter is just a lender saying, and, you know, an SBA lender. So, so that's not somebody from the small business administration. This is somebody from a third-party bank who does SBA loans. And they're writing a letter saying, you know, hey, yeah, you know, this business isn't disqualified at face value. You know, they're not, you know, a prohibited category for the SBA. They're not, you know, a lender. They're not, you know, a gambling institution. They're not, you know, a vice business that's, you know, just prohibited by

by category. And so, yes, it's pre-qualified in the sense that, you know, it's not on the big no-no list, but it, you know, the merits of the deal have to stand on their own. It's not just to get out of jail free card. And yeah, you can sail all the way to closing. Yeah. It's like saying it's possible. Okay. Yeah. It's possible under, you know, it's all the details that make it possible, really at the end of the day. And they're not going to go through any of that. And they're also not going to ask hard questions. So one of the things that we all see with Sims is they don't, they try to highlight the positives and they don't usually touch on important questions, especially if their answers aren't great. And so in a pre-qual scenario, that lender, that SBA lender

at a bank, they're not even going to ask the hard questions because why, why piss off the broker now? I want the referral later on, you know, so it's all very light touch, no hard questions. so it's not really meaningful at all. Yeah, yeah. What, I mean, what do you think about this scenario and how financeable it is? I mean, at this multiple and this level of debt income, when you just kind of try and do the math to say, even if there's, you know, a million or a, let's just say it's a million and a half dollars down, it's 25% down, 75% loan to value.

So on $4.5 million worth of debt, I don't know that you can make your debt service payments unless the amortization goes 15 to 20 years, which it won't. it won't yeah so you cannot get more than 10 years if you go sba and so a good rule of thumb whenever we look at these higher multiple businesses instead of thinking about how much what percentage down payment what percentage seller note the easier rule of them is just to say how many turns of sba could this afford and maximum four you can't at today's rates and with a 10 year amortization do the math you'll see you can't get more than four so if you're paying eight uh then you've got four returns a gap. Of equity to come up with. Yeah. That's right. So it's a lot of equity. And to your point, then what's the return on equity in that scenario where you can't really lever up very much?

So, you know, if we say, you know, comfortably maybe between two and a half and three million worth of debt that could be put on this business. And then you're having to come up with, you know, another 50% of the purchase price, a little bit more than 50% of the purchase price in the form of, you know, equity and maybe some other kind of consideration or just reduction of purchase price. It can't even be a seller note that amortizes because you're, you know, when I say four turns, that's because you're maxing out your DSCR, your debt service coverage ratio. So you don't have any room for any more payments in there. It'd have to be equity. Maybe some rollover equity. The SBA allows that now, you know, and maybe that would be good in this scenario

because of that creator situation. Maybe this individual would roll some equity and stay, for, you know, building new content and not run the marketing side of the business. But if a lender looks at this, I know it sounds great. Annual recurring revenue is X and that's wonderful. But churn, to your point, you said it earlier, is it recurring if the churn is really high? And we know it's really high. It's got to be 100% churn, you know, I mean, within a 12-month period. Yeah.

I don't really know that that in my mind as a lender feels like recurring revenue. That feels like a marketing business, that a content business and a marketing business that has to have a robust channel that works. And I've seen even just this week small businesses that are really dependent on their SEO or their pay-per-click and Google has done something or they did it. We're not really sure what caused it, but they drop off. And, you know, that's what can happen to this business, I think, or the price change or anything. It feels like it's a very fine balance to keep the numbers where they are. And that would be something a lender would really underwrite. So they may not even want to go four terms of EBITDA, you know, in that case.

Yeah, yeah, exactly. So I think that tells me that, you know, this either, I mean, they have 14,000 subscribers right now. It's amazing. Very impressive, you know, really, really cool that this person built this. To me, it's almost a little bit like, you know, the guy who built the, the wordel, you know. he's kind of, you know, has some innate skills. He builds this thing. It serves a purpose. This could have started out as, hey, I do GRE, you know, test prep for people. Maybe this is more in a, more efficient way to deliver it. And then all of a sudden you have something. The guy who built

Wordle is like, oh, man, now, you know, I have all these people. I can't keep up with it. It kind of defeats the purpose that I intended it for. Okay, New York Times, you can come buy it. And, you know, this to me is probably, you know, it's very, it's a reach, right, in terms of evaluation expectations. But as one of my really old friends here in Columbia says this older guy who's been in the real estate market for a long time, he says, all the fools ain't dead. So there are people who are willing sometimes to come along and do things that don't make any sense, you know, and they don't pencil and they aren't logical. But, you know, I think a lot. Yeah. So that's what I was going to say. I think there is, there's a chance that somebody just comes along and they have more money

than they have sense. And that's always a possibility. But the market is usually going to tell you what a business is worth or what an asset is worth, there is a chance that somebody comes along and they go, oh, we already have great test prep in these categories, but we don't have GRE. The problem to me with that is, is that this is not an inherently high barrier to entry business or category. They could go spend $100,000 building and recruiting the best possible you know, test prep folks in the GRE space and just pay them a fee to help write the content and the curriculum. And, you know, your customers probably don't last more than three to four months. And so I don't know that there's a ton of value. The YouTube base is arguably very valuable.

They probably have an email list, you know, that they could sell something to in some way, shape, or form that's tangential. But to me, the case against a strategic buying this is that that they could build it or they probably already have it unless there is some major intellectual property, you know, kind of component to this that is truly unique and truly differentiating. But my thought is it's probably not worth, you know, that delta between the cost to build and the cost to buy this. I have to agree. Yeah.

There's a, there's a nice deal for someone here, but it would be a lot lower purchase price than what you're seeing here. And I agree. If it's a strategic looked at this, they'd, probably say, well, I could build that. We could build it cheaper than paying, you know, 10 years worth of, of its current revenue to own it. So, yeah, tough one, tough one at this valuation. I guess it will depend on how motivated this seller really is. Yeah. You know, and I kind of look at these sometimes as this is maybe a seller is not ready to retire. So maybe he's just

testing the market. And I always tell my buyers, don't get sucked into that because you're wasting your time helping them test the market. Yeah. You know, if they're not really motivated. Yeah, yeah, exactly. I think, you know, I say that like things need to marinate sometimes, you know, that person has to go get disappointed. You know, they have to kind of, they kind of have to go out there and go, you know,

somebody told me $6 million or, you know, eight to 10 times, but it's not actually panning out for me. And if you're waiting, you know, and you have money that's burning a hole in your pocket or investors who are like, hey, it's time to get something done. you need to go put this capital to work, you can't always wait on people's education, you know, about about what is fair and what is market and what is equitable. As a lender, I see that actually play out over like years. So I will see the same deal.

You know, I'll see that they attempt and it falls apart. People are interested, but then they figure out it's not going to work. And then it comes back. You know, it's so many, it's funny how many, I've seen one that it took two years and three different brokers. before they got to, and lots of, who knows how many buyers wasted their time on that deal. And finally, they did sell, and it was a good deal in the end, but their valuation was completely different than where they started. Yeah, yeah.

And I see it a lot like that. That's the nature of it. Well, thanks, Heather. This was a fun one. Thanks, everybody for sticking with us and hearing the nuances of this business. Thanks to our sponsors for this week, and tune in next week for another deal.