Acquisitions Anonymous - #1 for business buying, selling and operating - How much would we pay for this Water Safety and Compliance Co? - Acquisitions Anonymous episode 124

Starting point is 00:00:00 Hey, everyone. Welcome back to another episode of Acquisitions Anonymous, the internet's number one podcast on buying and selling small businesses. I'm one of your hosts, Bill Dallessandro, and we have an awesome episode this week for you guys with the deal we actually like. But before I get to that, I want to just make an ask. If you were listening to this podcast, you were with us every episode and you enjoy our podcast. It would really help us out if you could go on Apple Podcasts or wherever your podcasts are sold and leave us a review, sharing. your opinion. We'd love to read it. And it also really helps us in the rankings. We're making a case not just to be America's number or the world's number one podcast I'm buying and selling small businesses, but one of the world's top podcasts generally. And we're actually climbing the charts pretty quickly. So if you're a loyal listener, it would really help us out if you go on there and leave us to review. So this week, not only do we have a deal that Mills and I like, we have a deal that we said we would pay probably north of seven or eight times EBITDA for. So this is a really, really good one.

Starting point is 00:01:02 It's kind of half software, half services, captive municipal customers, services mandated by law, and bonus, it's from the intermediary that we've never seen before that we were really impressed with. So I hope you enjoyed this week's episode of Acquisitions Anonymous. This episode is sponsored by Live Oak Bank, the number one SBA lender in the country by dollar amount. But they're more than the top SBA lender. They also provide USDA and conventional financing, tailoring each loan to, to their customers' unique needs. Whether you're looking to buy or expand a business, let Live Oak be your financial guide.

Starting point is 00:01:36 With Live Oak, you get a partner who believes in your success and is willing to take the journey alongside of you. Live Oak's M&A financing experts lend across many industries nationwide. They also have over 30 industry-specific teams whose lenders are experts in industry-specific small business loans. Some of these include health care, seniors housing, and service contractors as well. With their dedication to efficiency, collaboration, and in-depth knowledge of M&A financing, they'll take you where you need to go. Visit live oakbank.com slash aA and make sure

Starting point is 00:02:07 that's a lowercase a and another lowercase a to connect with a lender today. So again, that's live oak bank.com slash AA with two lowercase a's to find out more about Live Oak and to connect with the lender there and tell them that the acquisitions anonymous folks sent you along. Thanks a bunch. Mills, you found a super interesting deal this week from a super interesting broker with a extremely uninteresting name. Can you tell us a little bit about the deal you brought this week? Yeah, yeah. So this is a deal that kind of jumped out at me, I think,

Starting point is 00:02:42 for a few different reasons that we'll talk about. But this is with a firm called Business Acquisition and Merger Associates. They're in Charlotte, Bill's backyard. And their name is the most confusing, most difficult to remember name. They're not sponsoring this. by the way. Their website is catchy. It's buy sell your business.com. So I can always remember that. But they have consistently unique companies for sale. Every time I look, you know, they are actually moving them. Like it's a red flag anytime you see a broker and they just always have the same

Starting point is 00:03:17 companies for sale and they never seem to actually sell anything. It's probably because expectations are off. But this one is a water safety and compliance company. So, the tag they put on is purity. It's $11 million revenue, $2.2.2 million, water safety and compliance company. So their revenue projected in 2022 is $11 million. Projected cash flow is $2.2 million. It's based in the U.S.

Starting point is 00:03:45 Purity is a leading water safety and compliance company, serving municipalities, industrial customers, and healthcare systems across the Midwestern and eastern U.S. The company enjoys a highly recurring revenue stream, supported by multi-year contracts and consistently generates 20% plus EBIT down margins. That checks every box for every buyer who's read a book about buying a business, just in case you have. We have some very excited search funders right now.

Starting point is 00:04:13 Yes, yes. Annual top line growth averages 12.4% over the past five years and trending at similar levels in 2022. Services offered by purity are state mandated and enforced by local municipalities. to ensure safe drinking water to the public, resulting in stable and predictable cash flow profile. So think highly regulated testing, compliance. This is not like you're going door to door selling stuff, probably a long sales cycle, but very sticky customer base. In recent years, the company invested a million dollars on a proprietary software platform

Starting point is 00:04:50 that is currently being commercialized as a subscription-based SaaS application sold into municipalities. approximately 65% of their revenue is scheduled monthly or annual bill billings with the balance driven by contracted service billed build just by occurrence or by service revenue and operating profits are very stable and reliable month a month it's led by a strong executive team comprised of industry veterans and supported by a certified non-union workforce total headcount is 88 people it seems like a lot of employees like a low revenue per employee, but maybe not. Many of the key leaders are well credentialed and hold training certifications to help build and develop the workforce as a human capital intensive business model. Purity prides itself in providing in-house training and competitive pay and benefits packages. The company culture is centered around integrity, professionalism, and being the industry standard, which has resulted in market leadership for nearly 40 years.

Starting point is 00:05:52 So this is an old business. This is probably maybe it's, maybe it's still a first. generation business, but you're probably pushing it. Maybe it's early second generation or something like that. In their mid to late 60s, well, here we go. In the mid to late 60s, the two shareholders seek to align with an experience, capital partner, or strategic acquirer that will support continued growth and professional development. One of the owners is semi-retired today and works part-time out of his Florida residents. He desires to phase out fully within the first 12 months, as his role is minimal in the business today. The other shareholder is acting CFO and open to

Starting point is 00:06:27 of supporting a two to three year transition. Both are open to retained equity and longer and taking a longer term consulting or board level role going forward. The remaining management team is fully capable of running the day to day and eager to align with a growth-oriented partner. Additionally, the opportunity for management to participate in equity or equity-like incentive plans is viewed favorably. They lease a 6,000 square foot facility in the Midwest, and then they give some kind of general market outlook that I think kind of repeats what was said above. So we don't have, we don't have a sim or a teaser, but this is pretty detailed, I would say, for what's publicly listed. Bill, what do you

Starting point is 00:07:07 like about it? So I was super turned on by the first half and then it got a little confusing by the second half. Because as we're going through this, I go, you know, wow, it's got solid EBITs, you got 25% EBITDA margins. It's got contractual recurring revenue. It sounds like a 65, percent of it is recurring revenue and probably 35 percent of it, while not truly recurring revenue, is like reoccurring revenue, where it seems like they ding them like every time they need a compliance audit done or something, which is legally required to happen on a regular basis. So loved all of that and thought that, geez, this is, they got captive customers. It's legally mandated municipalities who are super sticky. Like once you get in, SOPs with government, you know, they don't switch out. especially if it's kind of proprietary software like it seems like these guys have. So I was like all into it. And then I got confused because it's supposed to be a software business, right? And it's got $11 million in sales and it's got 88 employees.

Starting point is 00:08:12 And then it said the key leaders are well credentialed, have training certifications to build and develop the workforce as a human capital intensive business model, which is never what you want to hear in a sample. I just cannot believe they wrote that. So I'm like, is this software? Is it a consulting business? You know, it's started making me wonder that it's more a consulting business because software margins, software companies don't have 25% EBITDA margins. They have 50% plus EBITDA margins. And so I'm like, how do you deliver?

Starting point is 00:08:43 So I just did some quick math. 88 people, even if they make like on average fully burning like $60,000 a year, that's $5.3 million of annual payroll. So like this is a chunky, it seems like the cogs on this thing is the people. So, Melz, do you think this is, do you think it's more consulting than software? Yeah, I, the way I read it is they are traditionally like a professional services firm, like architecture, engineering, environmental consulting, but, you know, kind of in a regulated subset of that that has to do with municipal water.

Starting point is 00:09:18 But they also saw maybe some potential to become a, software business or become, you know, a software provider that maybe either entrenches them further with those customers or provides access to new markets or maybe it's just, you know, a revenue play. But my guess is if you look at the pie chart of their revenue, the software is very, very small. They're touting it here because it's a growth opportunity. Well, so that's what confused me because it said 65% of revenue is scheduled monthly or annual billings. So that's would be 7.1 million. Okay, you think that's like we come audit you and do a professional service every year.

Starting point is 00:09:59 Yeah, yeah. I think, I think it's confusing because it's in the same paragraph there. But my guess is, is that, like, you know, Mecklenburg County has, you know, wastewater treatment. And they have to be tested on a regular basis by a third party who's not, you know, a municipal employee and maybe not even a state employee. And they come in and they do the same thing every month. They test the water, they test the filters, they make sure all the levels are right.

Starting point is 00:10:27 And then this one-off, you know, service billings is, hey, you know what? You need to schedule, you know, some downtime on the equipment for filter changes and we have to be present while that happens or something like that. Or we're going to sell you the filters or we're going to sell you, you know, some, you know, some specialty kind of one-off service. But my guess is this is these employees physically being on premise. and that's why, you know, that's why they talk about, you read it, you read the employee heavy thing as bad. I read it as a moat because how quickly or really how long would it take to get 88 employees who can do this? It would take a decade, you know, if you really wanted to go grow it organically from zero. Yeah.

Starting point is 00:11:14 So you're saying they got 88 people who know how to serve this market. Yeah. Yeah. And I see that as they're like, that's. their competitive advantage. Yeah. Interesting. So maybe it's, maybe the software is something that kind of augments their service stack.

Starting point is 00:11:29 It makes it easier to, you know, maybe they don't need to come in and actually paper log book it. Maybe the municipalities can log it. So it's probably sold, you know, in conjunction, I guess, with the service offering. I mean, this, this is really interesting because this could be one of those things that's in like a nichey market that people don't really know is. there that requires a lot of kind of expertise and experience to understand, a lot of reputation to get in.

Starting point is 00:11:59 And it's possible they understand the municipality testing and compliance market better than anyone in the world and have the credibility to sell software into it. So this could be a service business kind of on the cusp of pivoting into a software business. They mentioned at the bottom here that the two shareholders are both in their mid to late 60s. So this could be some older guys who are smart enough to realize what needs to happen, right? Obviously, they've invested a million bucks in software, but maybe not quite smart enough to actually execute it and roll it out and finish the transition to making this a SaaS business, potentially really interesting. So, Mills, you're exactly right.

Starting point is 00:12:43 Like, this is the type of thing that once you're in Charlotte Municipal Water, it makes it a million times easier to get into Raleigh Municipal Water and Columbia. be a municipal water because like the thing you know about people who buy software for government, like their number one thing is risk aversion. Like nobody gets fired for buying IBM. So like if these guys are IBM and it's just a matter of saying look at all the municipalities we already do, they also kind of insinuate in here in this in this overview that there's sort of being a shift where municipalities used to do this with internal resources and now more and more of them or contracting it out. So it's possible they are kind of perfectly positioned as an industry is changing over.

Starting point is 00:13:26 And they've got, you know, 20 years plus of experience or 40 years of experience, you know, and all these other municipalities, I would think you could roll this thing out broadly and quickly kind of using your resume of other municipalities. So I really, you can't clone that overnight is what I'm saying. You also mentioned, you know, I really like this. them, you know, it's detailed, it's professionally put together. You said you've seen deals from this advisor before. Yes, they are a total unicorn when it comes to sell side advisors.

Starting point is 00:14:03 They have a very atypical process. So there's some clues in this teaser that tell you. One of them is in the next to the last paragraph and it says the two shareholders seek to align with an experienced capital partner or strategic acquirer that will support continued growth and professional development. In the past, when I've signed NDAs and talked to these guys, and I've looked at a number of deals from them, they are kind of the opposite of the just, you know, mile wide, inch deep, like, we'll let anybody see the SIM.

Starting point is 00:14:35 All you have to do is e-sign an NDA. You, I think, can maybe e-sign their NDA, but they're going to call you before they send you the SIM and vet you, like pretty hard. I've been surprised in the past. Like, Matt, we've talked, you know what we like. You know, we have committed capital. all those things. And he's like really pushed hard. Like, no, this is what we're seeing. People are paying, you know, six or seven times for this type of thing. We know what it's worth. You know,

Starting point is 00:14:59 and they will really, like if you, if you're a searcher and you try and get information about this business, I would be willing to bet that they may not even give you the SIM. Just because they're being judicious about their time, your time and the seller's time. One of the really cool things that they do, though, there's Sims. If you can get one, you should try if you like any of these businesses that they have for sale because the unique thing they do is they do blind sims in almost all cases. And what that means is you sign an NDA, you get more information about the business, but you don't actually find out the company's name. And I'm trying to think, I guess maybe they typically tell you the city, or at least the state. But as a buyer, it's kind of comforting

Starting point is 00:15:41 because you realize, okay, if I'm looking at the sim and it only took me three clicks, how many thousands of people know all this information about the business that I hope to own. Whereas in this case, you might, you might have to be like under LOI to find out the name of the business and to actually go meet and talk to the sellers. I love it as a filtering mechanism. And it is very atypical, but I think it yields a really good experience for the buyer if you can jump through those hoops. And it ultimately, I think yields a really good experience for the seller and the company, which is what you ultimately care about, you know, post-close. Which is why you mentioned that, you know,

Starting point is 00:16:19 these guys aren't typically slinging your three to four times EBITDA engagements, right? They've got much higher quality businesses for sale. They're going to trade for much higher prices. That's probably because they operate professionally and protect their sellers. Yes. And I mean, I think it's worth noting because a lot of people will ask us this as follow-ups for the episode. I'd be willing to bet that this business sells for north of seven-a-half or eight. eight times cash flow. It just checks too many boxes for traditional private equity that,

Starting point is 00:16:51 you know, it may be a tuck in. It's kind of small for a platform investment, but I bet it goes for, you know, every bit of, you know, $15, $16 million, which it's really, really hard to make that work unless you have a super aggressive growth pipeline that you feel very confident about hitting. Yep. Yep. And it's hard to make that work that's like above and beyond. SBA loan folks who tap out at $5 million of leverage. Like, you're going to have to either have kind of private equity style leverage or committed equity here. I would think maybe I'm wrong, but there's too much to like about this.

Starting point is 00:17:27 And I want, unless you get in here and there's something deeply wrong, I expect actually you get in here and there are some things that are deeply right about their opportunity to scale. That's why they probably want to remain involved. That's why they want to roll equity. You know, it seems like this thing. is probably ready, which is exciting. It seems like these guys, and that's, it kind of tracks that they have hired a more investment

Starting point is 00:17:52 bank like intermediary rather than throwing it on biz by side. Yeah, yeah, big time. I mean, you know, north of $2 million in cash flow, you definitely see that. But I think also, you know, if you're looking at businesses for sale on a regular basis, you kind of start to get, you know, a flavor for working with certain advisors. certain brokers. And I mean, I have brokers that, you know, I have horror stories about. And I still get like, DMs from people who are like, can you believe what this guy said? And I'm like, oh, yeah, so and so from that guy. Yeah, like, doesn't surprise me at all. He just is that way, you know, and these are people like

Starting point is 00:18:27 around the country that just they, they have a reputation. These guys have a reputation for, you know, knowing the quality of the asset that they're selling, really coaching the sellers and setting expectations appropriately, which you may pay up a little bit for in certain cases, but you're de-risking other things. You're de-risking the transaction falling apart at the 11th hour because all of a sudden the seller's like, oh, I had a guy who told me last minute that, you know, he could totally get me more money for my business. That kind of stuff happens all the time. You just want to know that there's somebody sitting in your seller's corner telling them, this deal is the one that you need to actually close.

Starting point is 00:19:07 Don't go chasing a million dollars more that's pie in the sky. So again, this episode is not sponsored by these guys. They don't even know we're talking about this deal, but you'll start to notice patterns with brokers and sell side advisors and when they play games. Yeah, I mean, I think the other thing that stands out about this listing in that regard is there is no asking price, which I'd always just felt was like the most junior thing. Like talk about like a huge tell where you can tell if you're dealing with like a really professional intermediary. There's no asking price because why would you negotiate against yourself?

Starting point is 00:19:42 Right. It's like the most small time thing. This business, as we talk about, this could trade for $15 million. If they put a, even they put a six X asking price, right? That'd be $12 million. They could be negotiating against themselves by millions. That's the thing. They've established a ceiling at that point.

Starting point is 00:19:58 Nobody's paying more. Nobody's paying more, right? Unless you like get a real bidding war going. But like all the professional. like real investment banks, no asking price, you know, on real deals. So that's a tell right away about I think about quality broker. It's also a tell about how much you're going to pay. But, you know, if you for a quality, yeah, yeah, it's not, it's not going for three times.

Starting point is 00:20:18 Yeah. Yeah. What's that? It's interesting, though, you know, you know, like I'd rather pay like a fair price for a great business than a great price for a fair business. Yes. Yes. It's interesting because, you know, I've made a comment in one of the more recent episodes about

Starting point is 00:20:33 look at the other listings that the broker has to help you, you know, get a feel for what the, what that advisor's specialty is and do they actually have the experience that they probably tell? And where does this business fit in the spectrum of, you know, size transactions that they're used to? It really jumped out at me that they have a $14 million ebid dot business that's listed here. That's a global sourcing and manufacturing business. I, I, you know, they'll never talk about this publicly, but I love asking advisors, sell-side advisors about these crazy outlier transactions. Like, there is some specific reason that they have that listing and that mandate and, you know, some other major investment bank doesn't because at 14 million in EBIT dot, you are in a totally

Starting point is 00:21:17 different ballpark. You're in a totally different, you know, that's, that's lower middle market. That's not lower, lower, lower middle market. I mean, you're, you're pushing at that point, you know, north of a hundred million dollar purchase price. It, it, there's something. about that that really piques my interest, but I don't have, I don't have any more info on it. Yeah. And you're probably not credible enough to get the SIM either based on what you said. So we'll never know. No, no. Yeah, definitely not. Yeah. Interesting. I love it. I did actually, I was not familiar with this broker before you brought it for today's episode Mills. I do think they need to upgrade their domain and their name from buy sell your business.com,

Starting point is 00:21:56 which sounds remarkably lower rent than they appear to be. You know, they need to follow the classic, like, you know, street you grow up on and mountain nearby, private equity or investment bank, plus capital partners on the end, right? They need something like that. Yes. Yeah. So, cool. I love this one. Well, this is good.

Starting point is 00:22:15 Anything else to add on this one, Mills? I don't think so. If somebody, if any of our listeners do go get the NDA or something, we'd love to just know, you know, confidentially, you don't have to tell us anything about the business. But we'd just love to know, hey, do you go pursue it? what did you find about the process and about, you know, about going through these hoops because it, you will learn something,

Starting point is 00:22:37 um, about, you know, an alternative kind of broker experience, alternative advisor experience. So let us know if you check it out. All right. Cool.

Starting point is 00:22:45 Well, thanks for joining us for another episode of Acquisitions Anonymous today. We'll see you next time.

Acquisitions Anonymous - #1 for business buying, selling and operating - How much would we pay for this Water Safety and Compliance Co? - Acquisitions Anonymous episode 124

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