Acquisitions Anonymous - #1 for business buying, selling and operating - Importing ice cream machines for fun and profit - Acquisitions Anonymous 172

Episode Date: March 3, 2023

Michael Girdley (@chilis), Mills Snell (@thegeneralmills), and Bill D’Alessandro (@BillDA) review an importer of ice cream machines.----Thanks to our sponsor!Acquira - your acquisition in a box service. Acquira offers training to help you find, evaluate, and close on a small business. All in under a year.    Their team has bought over 30 businesses across  3 different portfolios. Whether you’re just beginning your business search, actively pursuing a specific deal, or looking to grow your existing company, Acquira’s training and team of experts can help. Their M&A advisors provide individualized support through the entire process. They will provide guidance toward your offer structure, drafting your LOI, in-depth due diligence, and securing funding for your deal.  They will even fly out to the business with you.  Once you acquire a business, they can help you grow it too.Acquira’s ACE Framework will help you transition that business from owner-operated to management-led, increasing profits and allowing you to step away from the daily operations and enjoy doing more of what you love.  And if “more of what you love” is buying and growing more businesses, they can help you build a portfolio of businesses, and eventually get liquidity from that portfolio by selling it to a financial buyer, or selling it to its employees.Space is limited each month, so if you’re looking to acquire a cash-flowing business this year, sign up now at acquira.com/pod-landerSubscribe 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]

What's going on? Welcome to Acquisitions Anonymous. This is your favorite vest-wearing host, Michael Girdley. And we are back this week. Bill and I recorded an episode digging into and discussing an exclusive distributorship that imports soft-serve and ice cream machines from overseas and sells them to dealers here in the United States. And this was a deal that I think we liked. And you may like it as well. the owner makes a lot of money and claims to only work one hour a week. So we will dig in and figure out if we think that's actually true. And maybe this is a deal we call on. So see what you think and enjoy the episode.

Today's sponsor is Acquira.com. And Acquira is your acquisition in a box service. They offer training to help you find, evaluate, and close on buying a small business, all usually done within a year. And their team has bought over 30 businesses across three different portfolios, to whether you're just beginning your business search, actively pursuing a specific deal or looking to grow your existing company,

acquireist training, and team of experts can help. Their M&A advisors provide individualized support throughout the entire process. They will provide guidance towards your offer structure, drafting your LOI, helping with due diligence planning, and securing funding for your deal. They will even fly out and do on-site visits with you

as you look at the business to consider. Once you acquire your business, they can also help you grow out as well. They use a proprietary framework called the ACE framework that will help you transition that business you buy from owner-operated to management-led, increasing your profits, and allow you to step away from the daily operations and enjoy more of what you love. And if more of what you love is buying and growing more businesses, they can help you build a portfolio of businesses and eventually get liquidity from that portfolio

by selling it to a financial buyer or selling it to your employees. They run cohorts each month, so space is limited. So if you're looking to acquire a cash flowing business this year, sign up now at Acquira.com slash pod-hyphen lander. And again, that's Acquira, A-C-Q-U-I-R-A-com slash pod-hyphen lander, and tell them that the acquisitions and onoos folks sent you. Bill, I have one question for you. Are you impressed by my new Zoom background? So impressed, but I'm getting whiplash.

Like every three weeks, you have a new Zoom background. That's part of the fun. You just go through and you have to work on making it better all the time. And that's what I tell people who are like, how do I get like a fancy professional style Zoom background? And I'm like, oh, like either pay somebody to do it or like enjoy it as a hobby. And frankly, like I enjoy like taking 15 minutes during the day and be like, you know what I need to do?

This picture right here, Bill, is three inches too high. I need to move it down. Like if you don't enjoy that, pay somebody to come in and make a badass Zoom background for you. So you know that feeling where like you get to find a hobby you like. In your case, obviously it's manipulating your Zoom background and optimizing it. But you find a hobby you like, you know, you spend a lot of time and probably money on it and like really get into it. And then you kind of get it to the point where like it's perfect. Like you've reached the apex.

There is no further optimization to do. And it's like really sad in a way. You're like, damn, like I have reached the ape. It's like there should be a German word for that. Like the blend of satisfaction and sadness of knowing that it is absolutely. absolutely perfect. And yet, you will not be able to improve it any further and tinker. I don't know. That sounds terrible. If I got there, I'll let you know. You're still not there. That's a background. Well, I can't, there's a full circus going on behind

you by the next, by the pinnacle. It's, I don't know if you've watched kind of the arms race going on on YouTube recently. Like, some of these guys are taken their, like, in-house video production, like MKB HD. I don't know if you've seen that guy. He's like one of the OG tech YouTubers. Literally, he basically has,

he's super good, super smart. And literally like some of his stuff is like full on industrial light and magic stuff now. So we're going to have to up our game. No more, I don't know whatever the hell this is behind me, but like we're going to need some minions.

You got like a fax and stuff like CGI? Yeah. Seriously. They do. Marquise Brown. Right? The tech of you guy? Yeah. Yeah. All I got to watch some of those videos. He's really good. He's really good.

All right. Well, hey, so I think, speaking of A.V., we have a special deal today because this is the first time anybody's recorded a video as a broker. So we're going to go through this deal. You're going to read it. And then I think we're going to try to play the video from the broker. And maybe we do it in that order. Does that sound good? That sounds good. So, yeah, huge ups to this broker. This is a deal from business exit. It's this guy recorded a custom one minute and 15 second overview of him talking to the camera, like pitching you on buying this business. So we will play at the end. But first I will read you what it is.

It is a soft serve and frozen drink machine manufacturer. It is doing $4.2 million in revenue and $1.5 million of income. And they're asking $8.8 million plus inventory. So that is a 5.94x multiple plus inventory. So got high hopes here on this thing. That being said, the description is pretty interesting. So for sale is an 18-year-old company in Texas that offers a variety of 14 different soft-serve and frozen drink machines to commercial and residential customers in the USA, Canada, and parts of Mexico. The drink machines are designed to be more reliable than the competition.

there are several trademarks on the machines, and recently one patent was filed for motor control. Over the past year, commercial sales have increased, and residential sales have decreased slightly. The residential decrease is likely due to a shift in the economy. Whatever that means. Wait, can we stop here?

Can I stop and ask a question? So these guys sell frozen drink machines and soft-served machines, and they have a residential cost of the machine. I think. What kind of lunatic buys a soft-serve machine for your house? Like, who are these people? I never knew I needed one. Who are these people and why am I not friends with them?

These are the people that do to their home bar, what you do to your Zoom background, Michael. It's the same thing. By the way, you know, I invited you on my guy's ski trip, which, you know, you declined because you had something better to do, go to Costa Rica. But, you know, one of the things we talked about is there's this whole class of people who have become so rich they don't have to work anymore. And so all they do is just like run around and ski and party and have fun. And by the way, that would be nice.

I would love to do that someday. That was great. A couple of my buddies on the trip had a brief discussion about how do you locate these people who have houses in Aspen or just desperate for other guys to go ski and hang out with them? And how do we increase? We need to make some new friends. So basically.

Warm body available for guys trips.com. Basically the moral of the story was I invited a bunch of friends to go on a ski trip and they proceeded to have a discussion about how to find better friends than me. I was like, wait a second. This sucks. Yep. They're friends that will not make them pay for the ski trip, I think. Yeah.

I'm sorry, pay your own way, sucker. Yep. Okay. So this guy sells, or this business sells commercial and residential frozen drink and ice cream machines. 60 to 70% of sales are to commercial establishments like restaurants and convenience stores. So I'm now picturing slushy machines. And 30% is to residential customers.

The machines are manufactured in Asia, contributing to the attractive 35% margins. There has been an exclusive contract with the supplier for 18 years. In 2022, soft-served machines accounted for $1 million of the $4.2 million in sales, while frozen drink machines accounted for $2.8 million of the $4.2 million of sales. That only adds up to $3.8, but okay. dealers, which seems like not this company, dealers using map pricing, sell the machines, which has been vital in growing the company. There are eight full-time employees and the owner, on average, spends about an hour

per day working. And just the revenue trajectory has been in 2020. They did $2 million in 2021. They did $3.5 million. And in 2022, they did $4.2 million of revenue. And their SDE over that time went from $504 to $580. to 1.48. And with that, Michael,

would you like to hear the broker, say it in his own words? Okay. First of all, I want to get something on the table. For those of you that are regular listeners of this program, I am the curmudgeon of the program,

and I've been scolded multiple times by Mirko and the other members to not poop on the deals immediately. But I just want to come out and go on record before we watch the video. There is so much to like about this. I like this deal a lot. Okay.

Instead of pooping, you are pouring creamy soft serve all over this deal. This is one that I'm like, should we click, should we stop clicking, should we click to stop record right now? And should I call this guy? Because like there's a lot and we'll talk about why I like this deal. So let's watch this handsome young man and play him talking to us about the deal. Here we go. Hey guys, got a cool business for you today.

As you can see, it's a wholesale business that sells ice cream machines and frozen drink machines all across the nation through a network of about 50 dealers. He's got an exclusive agreement with this supplier who is based out of China, where he's the only guy who can sell these machines in all of North America. Most of his clients are in the USA. His dealers do the sales for him. He's working one hour a day at this point. Very, very low workload for him. He's got other businesses. He wants to sell this one to, he's looking at retiring in a couple of years and focus on his other businesses. He's got one that's doubling this year. He wants to buy more. inventory for that business. So just good timing for him to sell. It's been around for 18 years,

got four or five people in place that fulfill the orders, patents and trademarks. It's got a lot of things that you want in a business, honestly. Very optimized. You know, he wants low workload on this and therefore the buyer's going to have low workload on this too. He's willing to transition, very down-to-earth guy. I do a video inside where I chat with him directly about the business on a Zoom, so you'll see that video once you sign the NDA and go to inside. That's about it. So I'll see you in there. How about this broker? I'm impressed we found a broker that knows how to operate a camera. It's pretty impressive. But look, like, man, like the guy's giving you a nice pitch. Like, it's enthusiastic,

saying the right stuff. Like, man, this guy's good. He's good. That's good. And it sounds like he's recorded if you sign the NDA, it sounds like you get a whole video interview with the seller and the broker, which makes real. I am working on a transaction in my universe and we did a video. And I did not get exposed to this until recently. And it's really good. Like the broker interviewing the seller, I think it's actually a really good thing

because you can knock out the 12 annoying questions that the seller gets asked over and over again. And if you're broker, if you're selling your business and your broker asks you to do it, I would definitely be in favor of it. Assuming you are articulate and can avoid giving stupid answers, it's a great, I think it's a great move.

So I like it. All right. So Michael, is this a great business or what? I like this business a lot. I like this business a lot. So like here's, let me just,

let me list the ways. So basically, if this sounds very practice, this is the same thing I did to my wife on Valentine's Day. It's like, okay, honey, let me tell you all the ways

you're so amazing. You read her a script that Chad GPT had written about all the ways that you loved her? The difference today is, after I tell you all the ways I like this, we'll talk about some things

I don't like. But anyway, okay, things you got to like. You are a distributor of these products, right? They're coming from China. So while it says manufacturer in the description here, you do not have all the downside of being a manufacturer. Somebody else owns all the capital expenditures, right? They have to have dealing with all the employees and the factories and all that kind of stuff. It all happens over in China. You just call up and say, I need the machine. The machine shows up. You sell it, you take your cut. And that's kind of the beautiful thing about this. You look at their revenue, 4.2 million, and they only have eight people, like, sign me up. Like, that sounds like a ton of fun.

So all the hard stuff about this business to me is outsource to these people in China, and they're doing it there. And that seems pretty great. I like that, above all of that, they have an exclusive contract for the United States. So the problem with being a wholesaler is if somebody else can sell the exact same product you have, that cuts into your margins. and you have a possibility of not making good money. So it's the difference between Bill,

I don't know if you've ever looked at this. There's a reason why the Toyota dealers, the guys that own Toyota dealerships, they own NFL teams. The people that own like regular old like a lawnmower distributorship, their kids ride the school bus to work, right? You know, it's even better than a cog dealer, a caterpillar dealer or a John Deer dealer.

Those are the best. Absolutely. So there's one, the family that owns the San Antonio Spurs here in San Antonio, a very nice family. They're called the Holtz. And while my ancestors were deciding to sell explosives on the side of the road in little shacks called Fireworks Dance, their ancestors decided to get the exclusive license to Caterpillar in most of the state of Texas. So if you have Caterpillar. And so, Bill, tell us why Caterpillar is an even better business than being a Toyota distributor. Well, it's exclusive, like regionally exclusive sometimes.

Huge tickets. I mean, I, like, I think, like, some number of the richest families in Charlotte, like the Caterpillar family. Absolutely. Crushes it. It's just every single region. What? There's like 20 of them. Didn't we do one of these, by the way, on, on AA, like 50 or 100 episodes ago?

We did a, we did a generic rental. We did an unbranded rental shop in Colorado, but I don't remember doing a branded dealership of a big name thing. I thought we had something maybe Mirko will put in the show notes for us. So those are great. It's not quite soft serve ice cream machines, but soft serve ice cream machines are pretty good. Absolutely.

Look, and then there's the next thing about this business that I like is if you go look at how a Toyota dealer makes money, and by the way, like, if anybody ever ask you, like, you know that scene from Ghostbusters when they asked him if he was a god or not? Do you know what I'm talking about? If anybody ever ask you, which car dealership brand would you like to be a dealer for, the answer is always Toyota.

Like, that's the answer. Toyota's have more demand than anybody else, and that's just the one you want to own. And they trade for the best multiples by far. But if you go look at their P&L for these exclusive distributorships, they have a typical razor razor blade situation, which is they don't make any money selling you the car, but they make you money when you come in and service the car or you have to buy Toyota, certified parts to repair your car. And all of that together makes you a ton of money.

They are basically Toyota dealerships or service organizations with exclusive capabilities that just happen to sell cars on the same thing. So that's the same thing going on here, which I like, which is like assuming these guys have the type of distributorship that is similar to the way the auto dealers work or the Caterpillar dealers work, you have a situation where they got to come to you for parts. Because guess what breaks all the time? home soft serve machines.

Sure as heck, those things don't keep working forever. And that's the thing I love more than anything about this business. So do you think this is, I agree, like an exclusive contract. No one else can sell these things in the United States. That being said, this isn't exactly, even if it's Toyota, right, there's always a Honda. You know, like this isn't, they're only doing $4 million in sales. Like this is not all of the soft serve and smoothie drink machines in the United States, right? surely like there are comparable replacements here, substitutes.

100%. 100%. But there's a dynamic in the marketplace, I think that is very much in favor of this, which is if you go look at the coffee machines, most of the coffee machines are made by one high-end Italian company called Lamarosco. And like they, people will pay up for those things. And like our coffee business, we bought cheaper off-brand coffee machines.

They're just as good as Lamarosco. but you still go into every single Starbucks or you go into every single other competitor and they all buy these $60,000 machines when we bought a $20,000 machine. It takes Hutzpah to do that. And so what you have is a situation like this where once you get into one location

and they buy your soft serve machine, they're pretty much going to stick with the same one forever because they don't want the chase to change even a little bit from location or location. So I like that. But to your point, this isn't that big of a business. It's only $4 million.

Like they're sure as heck are a lot. more soft-served machines sold each year than what's going on here. Yeah, so I wonder how, I wonder how you grow this business. So let's talk about our go-to-market here a little bit. They are also, in the same way that they are not manufacturing the soft-serve machines, they are also not selling the soft-serve machines either. It says the soft-serve machines are sold through a dealer network at map pricing. So these guys are like a pure distributor in that they've got, I assume these dealers also sling coffee machines and, you know, all kinds of other machines. And they've gotten in the catalog of these dealers.

So when this dealer sells a soft serve machine, this business sells a soft serve machine, orders it from Asia. I'm sure they maintain some inventory. But they're just a go-between. And somehow, how in the world are they maintaining 35% EBITDA margins being a middleman? I mean, that seems abnormal to me. That's something we're digging into. I don't understand. I mean, because like this middleman like true distributor where you don't really even have to sell

the thing. You have a dealer network and you don't have to make a thing either. It looks like such an incredibly awesome business model. And then the dot dot dot butt on all of these is always the margins are terrible usually, right? It's like a 3% net margin business, right? Because it's all you deserve because you're not having any value. Not doing anything. Right?

You're not doing anything. But this business seems to buck that trend. it's got, you know, five to 10x the typical margin flow through of a business like this usually does. I would really want to understand why that is. What value are they adding? Is it purely just that they have the contract, like the exclusive contract? Maybe that's it. That may be what you're buying here. Are you familiar with Gulf States Toyota? Have you ever heard of Gulf States Toyota? Do you know what that is? No, no. Okay. So this is the story that opened my eyes to how powerful exclusive distributorships like this could be.

So Gold State's Toyota, and I'll read a little bit from Wikipedia because I want to make sure I get the names right. But Gold State's Toyota was started by this guy named Thomas Friedkin. And during the 1960s, this guy was friends with Carol Shelby. You know, Carol Shelby, like the Shelby GT and all that kind of stuff? Famous for Coburn, all that stuff. So back in the day, the Japanese cars were kind of jokes, right? Like nobody took them very seriously.

And they were, you know, it's kind of like the early VW bus. showing up to the United States. Like everybody thought they were just a toy, right? So Carol Shelby had been offered the rights to import Toyota vehicles into the United States. But this guy, and Shelby turned it down because he thought it was more lucrative to do aftermarket improvements of American muscle colors. So anyway, long story short, this guy, Freedkin was friends with Shelby, and Shelby said, well, I'm not interested in being an import of Toyota, your joke cars.

Why would anybody want to be an importer of your Joe cars? So Freedkin went in, flew to Japan, talked to the Japanese, and got an exclusive agreement to distribute Toyota vehicles from the port of Houston. Wow. Is that still enforced? Like the last I looked,

they had like exclusive, like, ability to import into like all of the southeastern U.S. And like, it's not here in the stuff. But basically, fast forward, they imported in 19, In 1779, they imported 66,000 Toyotas, and they would take a cut of each single one coming in. And the reason I got exposed to this is one time I was in Fort Lauderdale and like, you know, being a girdly move, I was like riding my bike along the road. And I like, I stop in front of the very, like, richest, biggest house.

And I'm like, well, I wonder how this happened. And you Google the address and it turns out it's like this guy Friedkin who had like a boat that was like bigger than everybody else's house put together. And like you put the together. So anyway, how it works these days, I'm not sure. They've been sold multiple times. It appears to be run by, you know, Freakin's son. They did $8.3 billion in revenue with 2,000 employees in 2020, just importing these Toyotas.

So I believe they still have some sort of deal where they're getting, you know, last hour ago is like $50 per Toyota sold or something like that. Just totally free cash, like on top of stuff. So anyway, I have, I too have a super interesting exclusive district. of your story. Let's go. Which is cool. So you're familiar with the brand Electrolux.

They make appliances. A huge portion of their business is commercial laundry machines. So like you would find in a laundromat. So the Electrolux is like the cream of the cream. Like your good laundromats have Electrolux machines. A lot of them. And they're expensive. There is a family-owned business called Laundrylux that owns the in-perpetitive.

in perpetuity, exclusive contract to import, sell, distribute, they own the entire United States market for Electrolux commercial machines. And the way they got it was that way back in the day, and I have heard, I have this on good authority from a primary source, that way back in the day, the Electrolux guy, like the fact, he's Swedish, right, Electrolux Swedish company. and he comes over the United States, and he's in New York City trying to sell his washers, like trying to crack the American market, done no crap about American market. He sits on a ferry next to this other guy, the Laundry Lux ancestor, right, and just gets to talking

and basically convinces him that the Electrolux laundry machine is the best laundry machine. And the guy is like basically, as I heard it told, like a small time hustler and is like, I think I can sell 10 of these machines to a couple laundromats in New York City. Right. And he gets an exclusive contract to sell these things in the entire United States. And now that business does like mid double digit EBITDA every year and has for 120 years or something. Wow. Unbelievable. And is a perpetual contract, no end date.

What I think that ties back to you, you can see this pattern over and over again. Like you've got whatever Ray Kroc with McDonald's, right? He discovered that and figured out how to open it into a broader market. And then arguably transformed it because you realized it should be a real estate business. But this Gulf States Toyota, this Electrolux guy, like there is money to be made by unlocking a bigger market for somebody overseas or who just can't figure it out. And like you go make it happen. So yeah, I like it. I like it a lot.

But you have to set it up the right way. You can't let them, I think Nike is a good example there. When they first started their business, they were importing these Japanese branded shoes. And then the Japanese tried to have other distributors. And then Nike tried to buy shoes from other people, and they both ended up being unethical. But don't worry about that part of the story.

But you have to set it up the right way to make sure that you, in the long run, you're like Gulf States Toyota, these Electrolix guys, and you're not going to get cut out of the middle because that's the other danger, right? And so my grandfather, who is deceased, by the way, Bill, you'll appreciate this story. We were the exclusive distributor

for a brand of fireworks in the state of Texas. It was all a handshake deal because, you know, 1960s. As you do. Yep. Yeah. Well, I mean, look, you're either getting drunk as a skunk or like chain smoking marlboro as to when you do your business deal.

So that's just the way it worked. and then they discovered like two years into this exclusive arrangement that said distributor was shipping that brand of fireworks to our competitor. And so my grandfather allegedly sent a TELX. Back of the day you sent TELX to overseas. And the quote was, hey, we figured out what you're doing. You don't need to call us back. And by the way, don't piss on my back and tell me that it's raining.

That was the last. Classic. It's like, oh, well, in between chain smoking marlboroughs and drinking whiskey to do your business deals, that's the kind of language that you used, but it's just so cool. I was like, oh, great tax, certainly is a badass. He's such a badass. So it comes down to you, right, like the contract is the business, right? This exclusive contract is the business.

So if you're doing diligence, you've got to understand, you've got to hire the most expensive lawyer you can possibly find to diligence to this contract and ensure that it is absolutely airtight. that it is transferable, that they've never breached, that there's no way it can be terminated, et cetera, because if you lose that contract, you are cooked. And all the dealer network in the world is it going to help you? Yeah, it's that, I mean, it's that question that I ask every time, like, what am I actually buying here?

And the cool thing is, you know what you're buying, this contract? And you got to figure out. And, you know, I think the cool thing about it is when you have something that is that simple, you know, it's just like, okay, well, I just have to underwrite one thing. What is the net present value of this contract? the next 25 years or 50 years until I die, and then I can figure out what it's worth for me to, you know, for me to pay for it. Let's talk a little bit about price on this. It is at six times net income is the way they describe it. Plus inventory. Plus inventory. Are they holding

that much inventory? Hopefully they're not right. I bet they are. I bet they got to buy the machines from Asia and sit on them. Big. Okay. So you got like a cap. So it's, you know, you have to factory and you're going to have capital tied up in this inventory over time. And these, by the way, like, I think these are several thousand dollar machines. So, you know, at retail, so I don't know, half that. Like, you could have a couple hundred grand here in inventory easily, maybe a million dollars. I don't know. Yeah, 100%.

So they're asking, well, before inventory, so let's say there's a million dollars in inventory, you're really going to pay six and a half times? Mm-hmm. At least, six and a half seven times. for this business. So you better be sure it's going to be durable. Yeah. So that means, just to be clear, it has to be flat for seven years before you're in the money before you get your money back. Now, of course, debt and all that stuff. But in general, right, there's a seven-year payback on this investment. Oh, Bill, there you go again, try to get your

money back. How dare you. Don't you know how the new economy works? You don't ever have to get your money back. You just borrow money, you know, you raise money from idiots. Pretty much, yeah, pretty much, yeah. So, but like, that being said, this business has been around for 18 years. You know, who's to say it's not going to be around for another seven? And also, if you can double it, you got your money back in three and a half. You know, maybe you have eight dealers now, yet 16 dealers. Here's something we're digging into.

All right, let's go through the numbers. You didn't do those, right? I didn't space out when you did them. I read them, but I didn't analyze them. Okay, so we've got revenue over the past three years. 2020 was $2 million, 2021 was $3.5 million, $222.2 million in revenue. So $3,3.5, $4.2.

Sellers' earnings was $500,000, $600,000, $1.5 million. Bill. Hmm. One of these things is not like the other. What do you notice here? So what happened is from 2020 to 2021, he added $1.5 million of sales and about $75,000 of net income.

The next year, he added about $700,000 of sales, about half as much of sales growth, but instead of adding $75,000 of net income, he added a million dollars of net income. So one of two things is happening here. Either in the last 12 months, he either dramatically hit some sort of scale or leverage point where all of that incremental,

I mean, he added more EBITDA, then his revenue grew by. His revenue grew by $700,000 and he added an incremental million of EBITDA. That is a more than 100% margin on incremental revenue, which sort of doesn't make sense. So he either cut out a bunch of cost and hit some sort of incredible scale inflection point 12 months ago, or 12 months ago he decided he was selling the business. He should goose the revenue numbers. Right? I mean, do you see any other reason here, Michael? Yeah, I mean, I think also I could tie it back to potentially there's something in the macro happening, like supply chain disruptions during that period of time.

And I bet you anybody that wanted to pay a soft, buy a soft serve machine had to pay exactly whatever you were asking for it. And it wouldn't surprise me if, yeah, it wouldn't surprise me if in the 2022 numbers, they got to charge whatever they wanted for their inventory because people were just paying for it and you have no choice there. So it's worth digging into,

and this is the first place I would go on this business, if you look at it, like the business did $1.5 million in SDE, which is how they're figuring out the multiple, if you take the average of the last three years, the average is actually more like $800,000 in profits. So really they're asking close to 12 times earnings for this little business. Unless you know. Trailing through your average, yes.

For trailing through your average. Unless you know that this 22 is what's going to happen in 23, I don't know. I don't believe it. And now you start to wonder why he's selling the business, right? Yeah, I will tell you, there's a lot of businesses I will sell you for 12 times profit, a lot of businesses. All right, Bill, you're going to have to talk to me down. This is my chance to really love the deal.

Like I loved the casino that turned out to be a brothel in Costa Rica or the Lego mini-figs business, you know, or the wine stuff. Like, I was there. I was there. And then they just lost me at the end. So what recommendation would you have for me to cope with this loss? hire a good accountant and figure out what's going. I mean, their SDE margin goes from 25% to 15% to 35% to 35%.

And, you know, year to year. And I mean, that is wild, right? Like, that shouldn't happen, I wouldn't think. Especially because this whole business is couched as it's boring. It's 18 years old. It has only eight people. The owner only works an hour a day. Like you clip a coupon.

is how this guy says it. And then he shows a P&L that Whipsaw is from 25% net to 15 to 35% net. I've got questions. I mean, if there was a situation, you know, and I think this highlights what we're talking about, potentially,

which is if you could become a distributor for a highly in-demand brand, just like you can become a franchisee for Orange Theory or McDonald's, you could do great. If you choose the 15th best burger chain or something totally commoditized, like you're going to be in big trouble.

And I've gone from in love to slightly dubious about this business. You're cooling off just because the financials are all over the place? It just smells funny. I would totally dig into this one. I like this deal. But I would totally dig in and understand what's going on here. And do I really, you know, really like it as much as I thought I was going to like it? I don't know.

Yeah. I also have to understand they go to market here, right? They got eight dealers, which probably means they have effectively no sales and marketing lever or engine of their own. So if those eight dealers go away, you're stuck with a warehouse full of soft-served machines that you don't know what to do with. So I want to understand contracts with all those dealers, why those dealers sell your brand of soft-serve machines and not another brand of soft-served machines.

Can I add more dealers? In addition, understanding your contract on the supply side, you've also got to understand your contracts and your value proposition to these dealers who add your stuff in your catalog. Because if you could add 40 more dealers, holy smokes. Now that leverages that exclusive contract with the source in Asia becomes way, way more valuable. So if you're a type of buyer or you dig in and you go, oh, boy, this guy is actually working one hour a week. He could triple the size of the dealer network.

And I don't need a chance. And my supplier can hit that volume. This is an instant triple. Yeah. You know, pay $8.8 million all day long for. Yeah, so I think it's worth digging into. So people want to know how to you structure a deal like this. How do you make it work?

I have my idea. How would you do it? See if we agree. So I do think this is a type of business that will sell for a decent amount of money up front. I think you've got to share risk on this contract. I mean, you've got to have some kind of payover time component that gets canceled. If the distributor or the manufacturer contract gets canceled, something. Right? What do you think, Michael?

I think, yeah, I think this is one of those ones that structuring is going to be very dependent upon how your diligence goes. So I think you and I've brought up some really good questions. Like, what are the dealer contracts look like? What brand is this? Like, what's happening to the different use cases? What is your supplier relationship like and how scalable could they be? And I think you're in a situation there where you want to understand what the key risks you're trying to mitigate are, and then you structure around that. I do think it's pretty tough to be like, hey, I'm going to give you $8 million up front or whatever, $8 million plus inventory.

Like, it's going to be rough. Plus financing that. Good luck. Well, yeah, financing real tough. I mean, so this is like classic, right? The broker is like, this guy only works one hour a week and he makes $1.5 million is the best business ever. But then always, like, why is he selling it?

He knows more than anybody else about this business. It's stable as hell. He's only wearing one hour a week. right, there's got to be a reason. He must have had a super normal year of profits in 2022 and wants a multiple of that. You've got to answer that question. Any deal you're buying, any business you're buying,

you need to understand crystal and not because they just told you and you believe them, but actually understand the motivations. Why are they selling this business now? 100%. Yeah, it's totally there. And by the way, it's never, it's never other interests or to spend more time with family.

It's never those things ever. Unless they're old. It's okay. Unless like they walk in, the guy's got two canes and like clearly can't do it anymore, right? You know, but what always happens, right? The broker is like, this owner is retiring to spend more time with family. And like in walks, you know, a 42-year-old, you know, spry dude. And he's got like, no kids.

And you're like, hmm. Yeah, no, he knows something you don't. So a rough model here. So let's say it has, let's say you can predict that 1.5 million income is going to continue, which I'm dubious. But let's say you do go in and kind of get a good, good belief that that's going to happen. So you need to put together, let's say, $9 million to buy this business. you can probably borrow three times, two and a half times income on the business.

Let's say from a bank. Let's say half, you get half the purchase price, so four and a half at most, four. And that means you need to come up with another $5 million to buy this business. Do you then go put $2 million in and then have $3 million on a seller note or seller earning? Yeah, he's going to have to help you. I mean, you might even consider like rolling some equity, like make him roll some equity and with an agreement to buy it out at a predefined price, you know, in five years, something like that, which is another way to make him share the risk, you know, so you can pay the less up front. So his equity goes to zero also. You know, if the contract gets canceled, that's another way to bridge a financing gap. Yeah, that could all work. If he doesn't want to roll equity, you really want to understand why as well. Yeah. I have other interests. Yes.

are their interests. Spend more time with family. Spend more time of family. All right. Well, I think, look, I think I went from hugely in love. This is one of those ones where I went from hugely in love. And as we read through more of it, I'm like, I'm probably still in love. I would definitely, I would definitely call this one.

Hit stop, pick up the phone. Everybody holds. I need to go do this deal. I don't know. It seems all right. Seems all right. Yeah, yeah. It's a sandbag, sandbag.

So no one calls it. Yeah. I don't think anybody's going to do. going to call on this footbill. No, I mean, I think this is one we're taking into, and I like that we're dealing with more higher quality deals. So this is definitely one of those ones. And this came from a listener, too, right? I think it did. Yes. Thank you for sending it deals. We do read them and record them. So keep on coming. Or in my case, somebody emails me the link and I forward it to you guys. So that's what happened. Yeah, that's how this works. Somebody reads them. Thank you, Mirko.

No, no, I can tell you. This one came from Brian Swartz. And I don't know much about Brian Swartz, but I'm sure he's a cool guy. Appreciate you, Brian. Awesome. All right. Catch you next week.