Acquisitions Anonymous - #1 for business buying, selling and operating - Mills go all in (or not) on another VA roofing business - Acquisitions Anonymous 218

Episode Date: August 11, 2023

Mills Snell (@thegeneralmills)  Heather Endresen (@EndresenHeather), and Michael Girdley (@gridley) break down a VA roofing business. Tune in as Mills gives some detailed insight into a business that's right in his wheel house. Thanks to this weeks sponsor!Employer Flexible will help you take action to streamline your company’s HR processes. They  are the proud provider of flexible and adaptable PEO services. If you’re a small business trying to grow, and you’re struggling with a lack of internal HR or you’re just dissatisfied with your current HR setup, consider Employer Flexible as your next vendor for HR outsourcing services.Check them out at https://www.employerflexible.com/.-------------------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]

Acquisitions Anonymous, Internet's number one podcast about buying, selling, and operating small businesses. Today, and this is your co-host, Michael Gerdley, today, myself, Mills, and Heather went through a deal in the D.C. suburbs that does residential roofing and residential roofing inspection. So very interesting business. They outsource all the labor. It's basically a business that just gets lead gen and that manages the clients. and really fascinating to hear the dynamics of the roofing industry from an insider, in this case Mills, who knows almost everything about roofing, having bought and now operated a roofing company in South Carolina for the past few years. So enjoy the episode a ton. Thank you, Will, too.

We went a bit longer today. We also gave an update towards the end about our quest to buy the worm farm in Sacramento that you may remember from previous episodes. And spoiler alert, the early bird is not getting the worm. Here's the episode. Today's sponsor is Employer Flexible. And what Employer Flexible does is really function as a fractional HR department for your company or business. I've used them numerous times and putting together my companies.

I've used them when I bought companies, I've used them when I started from scratch. And basically, when you're moving quickly or when you don't want to spend the time putting together your own HR department, benefits, all that kind of stuff. And you want to get the scale of being part of a larger group, you can reach out to Employer Flexible. And what employer flexible does is give you that buying power as if you're part of a bigger group and all that kind of stuff. And for me, I love working with them for numerous reasons. One is I know the owners and a lot of the staff and they've always treated me super good. And then the second thing is I hate HR.

Like I don't enjoy it at all. And this way I can know it gets done right. I get the benefits of having a big fully staffed HR department and the flexibility of having a vendor like Employer Flexible being there as a partner. throughout my journey and making sure that everybody I work with is happy, taking care of, and we can focus on what really matters in our business, which is take care of our customers. So you can find their contact details, locations of their various offices, as well as more details on how they will help your business by going to employerflexible.com. And again, that's employerflexible.com.

And thanks to them for sponsoring today's episode. Where are you going? We're trying to record a podcast. Why do you just walk away? I click my gum out. I clicked started. You walked out, you took your gum out. What are you a sixth grader?

I didn't even get the countdown, man. All right. Listen here, nerds. I have a deal for us to do. If we don't do it, I'm going to quit the podcast. You guys are like, okay, yeah, let's not do it. Okay, so here's the deal. Are you ready?

Do you guys know anybody that knows anything about roofing? Nobody here knows? Okay. I brought a roofing, I brought a roofing inspection and installation deal that a listener. Oh, I'm so glad. I'm currently still sweating from coming off of a job site, so I'm coming in with all of the bias and all of the frustration. So bring it.

All right. I'm showing it here. Let me read it. And then I'd love to hear what you guys think about it. Okay. So it is from Bizby Sell, our best, our most inspiring future sponsor. We hope you're listening to Biz By Sell. It is a roof inspection and installation business with $10 million in residential backlog.

located in Manassas, Virginia, which is Prince William County. And I guess that's, is that Baltimore County? Is that where that is? Or is that on the D.C. side? Do you guys know? It's near D.C. It's kind of not too far from D.C. So it's D.C.

D.C. suburbs. Okay. Asking price is $2.9 million. Cash flow is $803,000. Gross revenue is $7.3 million. So $7.3 million of revenue. Asking price of $2.9 million. Cash flow is $800,000.

No EBITDA. listed, maybe because the broker doesn't know what EBIT is. Oh, wait, this is from the firm. Okay, good. FF&E is $66,274, established in 2011. All right, I'll pause there, unless you guys have any things about the numbers so far, otherwise I'll keep reading. All right, perfect. Keep going. Perfect. Okay. Business description, two locations with two general managers and $2.4 million in receivables. This residential roofing business has been in service since 2011, and they have $2.4 million in receivable. Why do they repeat themselves in the first two sentences?

I don't understand that. They have two locations with their main location, Manassas, Virginia, and the second satellite location an hour away. Both locations have a general manager to ensure smooth individual operations. The services offered include roof inspection and insulation, gutter repair, siding, windows, floors, decks, drywall, and storm restoration, which are utilized by over 5,000 clients in Virginia, West Virginia, and Maryland.

The team consists of 19 employees including two office managers, five office staff and seven sales reps. This roofing business not only has an established chain of command, but has also been able to keep their CAPEX and liability low by outsourcing all the labor. Their team works with clients insurance companies to ensure that customers get the most out of their claim. The current owner only focuses on the oversight of sales, and even with his minimal involvement in day-to-day activities, he's willing to stay outboard with the business for two to three

years post-close to ensure a smooth transition. I have to pause there. Heather, is this, we need to have like a name for this segment where you and I just go nuts about misspellings and miss grammar in the listings. But this one is just full of them. Like, use spell check people. Come on. And don't repeat yourself. And he's really fond of the number two here, two locations, two GMs, 2.4 million. He says it twice. We could call it like Gen X Corner. Heather, let's, it's Gen X Corner. It'd be a regular segment where we're like, what? Okay, I'm in.

Just write things correctly. It's not that difficult, people. Right. Okay. Coupled with the high levels of customers coming in due to referral, 70%, and their average online rating of 4.8, this business is prime for growth. The current owner is willing to carry 30% of the $2.9 million purchase price to show their established confidence in the company's ability continues successfully. A 10% down payment of $290,000 is what is needed to step into ownership of this projected $10 million revenue roofing company.

and they're at 7.2 million currently. Okay, so yeah, optimism was good. In the Northeast U.S., April through September is storm season, which is the busiest time of the year for the company. After a hail storm, there's a 50% chance that a roof will have a leak. They have learned to utilize this information by increasing their market to coincide with this optimum business opportunity. Because of this niche market, their business has proven to be pandemic and recession-proof.

Outside of their already incredible client-based, this would be an easy expansion into commercial and government work as well. they have some leased facilities they can grow they're willing to do click on that summary document Michael you see that okay click on the summary document show this time instead it looks like a

this is from the firm teaser is what we have here all right we do get some historical financials that's helpful yeah it looks like they've been steadily kind of jumping around revenue 7 million 6.6 million 8.5 million 7.2 million and had a very profitable year in 2021 of $1.4 million in cash flow.

2020 was $428,000 in cash flow and $533,000 in cash flow last year of 2022. They take the three-year average. How much you want to bet that they put PPP funds in the 2021 cash flow number? Oh, I don't know. High likelihood. Cool. Okay, so I think that's, I don't know if there's anything else I need to tell you about this. They have 19 personnel, two office managers, five staff members, and seven sales representatives,

and all of the bookkeeping marketing insurance work is outsourced as well as the work. So, Mills, is this just basically a lead gen and supervision and marketing to insurance companies' roofing business, or do I have that wrong? Yeah, and this is the case for probably 95% of residential roofers. largely because of the way workers comp rates, workers' comp for residential roofing can be like 30 to 35% of payroll. And so the vast majority of residential roofing contractors don't have like actual roofers on staff. They may have superintendents, project managers, salespeople, but the guys who are going up on the roof, you know, all day, every day, they're not on the payroll. They're subcontractors, which they reference, you know, everything being, um,

subbed out. It's very, it keeps you very lean and it keeps your cost down, but you have a lot less control over, I mean, one of your largest cost centers, because as things get more competitive subs, you know, they ebb and flow and they're not captive by, you know, kind of definition. But yeah, that's the way most of these groups are. You actually don't, the ones who are really good, and there's certain markets that are very, very good for this. In Dallas, there are more of these people. I mean, there's also no roofing licensure required or any, you know, construction licensure required in the state of Texas. So, you know, the guy who's a landscaper one week, hailstorms rolled through town and then all of a sudden, you know, they're a roofing crew.

And I've talked to a bunch of roofers in Texas who, you know, who face this. But you have to be in a hail market to really, you know, capture, like in South Carolina, we might have one major hail event every two to three years. And it's happening across the state, you know, in pockets, not all over. But your customer, when there's hail, you have to go get the customer, and a lot of it is door to door or, you know,

direct response or mail or whatever it may be because you go give that homeowner, you know, an estimate or a bid proposal, and then they file a claim with the insurance carrier, and then the carrier sends the adjuster out to verify, by, hey, yeah, you were, you know, this was the result of a hail event and your roof is covered. The insurance companies are getting a little bit smart, though, and so in these hail markets, the deductible is not, like my homeowner's deductible might be $1,000 or $2,000 here.

In these markets, the deductible a lot of times is like 5% of the home value. And so they are trying to, you know, insulate from this kind of legalized racket of constantly, you're like you can constantly just put new roofs on these things, you know, every two to three years. And the insurance company, obviously, that's not a sustainable model. It seems like a restoration company, but for roofing. That's what it says. It's very similar, right? Well, in a lot of these, yes, yeah, it is very similar to like the mold and remediation and kind of flood response. These folks are also like, we'll do siding, we'll do sheet rock. And, you know, those are, I see those largely as distractions, because if you're really good at roofing, you can get in and get out

and re-roof some of these houses in, you know, two days, three days max. You get bogged down when you go inside the home. When you're replacing windows and siding and sheetrock inside, and then you're like, you've got to figure out how to paint it, what color do they want, you're in and out of the homeowner's, you know, real bubble. When you're on the outside of the house, there's kind of less things that can go wrong or just less, you know, independent variables that you have to control. It's still hard and it's still really freaking hard. But I think the people who are really successful, they get in and get out. They don't get bogged down in a home renovation project.

But both kinds of companies really rely on those relationships with the insurance companies, right? I wouldn't even say it's relational. It's, do you know how to push paper? Do you know how to play the game and be part of the transaction? Because, you know, you have to understand that the insurance company is smart. They know what market pricing is for that type of roof system and that type of neighborhood in that geography. And so we've seen some cases where people claim these just exorbitantly high margins.

I think there was one that was like a remediation business. And it's like, you're not smarter. You know, your business doing two to three million dollars in sales or $10 million in sales is not smarter than the insurance company. Are there certain things? And is there a margin of error that they'll kind of allow? Like, yeah, you got to make money. And they know you have to have a profit.

it, but they're not going to allow you to consistently and sustainably over a long period of time get like 35% net margins. It just doesn't happen. Not that this business is claiming that, but they know what they're doing because otherwise they wouldn't be in charge of billions of dollars. They look like they're rolling, I mean, gross revenue of $7.2 million cash flow of $800,000. So math-wise, that's like 11, 12%. So you're saying that's pretty standard for.

this type of business based on your experience? Yeah, yeah. I mean, I think for this type, it's a little bit tricky to tell that they have 19 people on staff, you know, that tells me that they have probably a pretty substantial sales team, that those folks may not all be, a lot of this is commission based, you know, and it's, you get those people to go eat what they kill. It's very hard, though, this is an affluent market, so I like that. That definitely helps.

but it's very hard to get those people, you know, engaged long term in just the residential market because your average order value is like maybe $8,000 to $10,000 at the most. And the last line in the teaser on Biz Buy Sell is, you know, that they want to grow by going into commercial and government projects. That is like, like what Bill has talked about, you know, any FBA listing is like, yeah, just, you know, the plan for growth is convert to your own.com. it's the equivalent. It's that difficult to go from being a residential roofing contractor

to being a commercial roofing contractor because the products are different, the customers are different, the sales cycle is different. It's a fundamentally different product, different, you know, it's different construction. And so that's why, though,

all these residential roofers want to grow up market and they want to do commercial work. And it's because the average order value on a commercial sale might be, you know, $250,000, $500,000 on a, you know, on a even a small to medium-sized commercial job. That makes sense. I would want to take these sales trends and look at weather patterns in that area. If they're very dependent on hail, any business that's dependent on any kind of weather

phenomenon seems like it would be a little tricky these days, you know, kind of feast or famine. I mean, the good thing is, is that, you know, every single building, every single house has a roof and no roof last forever. It's very, you know, in this type of, you know, home service business, it comes down to the customer acquisition funnel. How good are you at generating a lead and how good are you at converting it? And what's the cost associated with that pipeline? Because, you know, if you're having to spend $1,000, you know, on your customer acquisition costs and you're selling $10,000 roofs, you know, that's, that hurts, that eats into it. But a lot of these folks do it because what's, the alternative, you know. There's low barriers to entry. There's very low professionalism. You know,

guys in just pickup trucks will come and underbid you. And, you know, in some cases, they do just as good of a job. And in some cases, they steal your money and, you know, they flood your house. So not to get us off topic, but, you know, I'd love to do clicking on the names of the broker. And this one was fascinating to me because the listing broker's name is Courtney Sells. Or last name is S-E-L-L-S. She's the main person at the firm. It's like, it's hers, I think. Yeah, so I googled her and her LinkedIn came up.

She started the firm in 2010. And, you know, here's a picture of the crowd here. It looks, that is kind of what I would expect an Omaha brokerage firm to look like. Her last name is sells, which is freaking amazing. Like, I wish I had a good name like that. Like, Gurdley goes nowhere fast. Like, people can't even spell it. But her background was as a talent agent in San Diego.

She did talent placement, and it looks like commercials and that sort of thing, beauty and entertainment industry. So she did that for a number of years in New York and in San Diego. And then she founded this thing called Agency 89, which looks like it did tons of placement and all that kind of stuff. The sole producer of an annual Fire and Ice Show, which captivated 5,000 plus attendees. And then she left agency 89,

which was a talent agency. So I guess it was one of those agencies where you pay tuition to get up to speed and then they place you in gigs. And then she transitioned in 2010 to start an M&A brokerage. That's a career. I've talked with Courtney before.

I think she has a lot of like you know helpers yeah but like she's she's the rainmaker of that firm yeah yeah a lot of these other folks is super interesting okay well i just wanted to bring out because it's like wow that's a heck of a career like i thought going from fireworks to podcast co-host was a big deal but look at that so anyway back to the deal well i mean i love that she didn't come from being a realtor or something that's it's pretty interesting background to bring to business brokerage totally different world. Yeah. Well, you read this listing. I know Heather, you and I complained about the copywriting and grammar, but like, she knows how to sell. I mean, they're, this is a, you know,

I looked at this first. I was like, hey, this looks like a pretty good business. Like, they're positioning this really well. So, I mean, Heather, as you think about this and you see the listing and they're like, okay, here's how to structure it. Like, here's how we're going to sell or finance it. Here's the multiple we have. Like, like, how does the whole picture kind of come together for you in terms of the attractiveness of this deal? This one's tough to finance because of how variable the bottom line and top line are. It's not very consistent, right? We know it's project work, and that's what you would expect with project work.

You expect it to be inconsistent, a bit lumpy, and so you want to, as a lender, always keep the leverage low. And in their little teaser, what they showed was actually a pretty reasonable SBA leverage point of about a million seven. and they showed 30% in seller notes, two different seller notes, one on full standby and one that would amortize, I would presume. So they structured it around the lower end of the cash flow. So they're smart. They knew how to do that math. And they're trying to also get a good deal for the seller by instead of reducing the price, putting more of it in seller note, which, you know, I think that's where we're at in the market, right? now, you know, interest rates went up. It got a lot tougher to qualify for debt, but instead

of prices coming down like they might do or they did do in real estate, instead, prices kind of have stayed stable or multiples have, but you see sellers willing to make concessions on the seller notes. And I think that's what they're suggesting here. All right, taking a quick pause here, I have something to tell you. This is Michael. I hate bookkeeping. I hate bookkeeping. I hate doing HR, I hate doing all that kind of stuff. But for bookkeeping, I have found a solution. It is my friend Charlie's business called cloudbookkeeping.com. So that's cloudbookkeeping.com. They are your perfect partner if you want to get bookkeeping out of your hair and focus on making your company, your customers happier and more successful. So please give them a call, call Charlie, cloudbookkeeping.

com. Tell them we sent you. They're a great way. If you're a business buyer, if you're a business owner, you're tired of hassling with getting your bookkeeping done. He's got a whole fleet of people that are well trained and work for him. He's located here in St. Antonio, so I can tell you because of that, he's awesome. And they're a great partner for you to potentially call to help with all your bookkeeping needs so you can do the important stuff in your business rather than worry about getting your books right. So give Charlie a call, cloudbookkeeping.com, and now back to the episode. Michael, I don't know if you remember, but when I got on my soapbox and was screaming about a deal not penciling, it was the firm. It was one of their deals.

Yeah, but in their defense, this looks like a pencil. Or do I have it wrong? This one does. Yeah, this one does. So, Heather, there was this. I don't even remember what the deal was, but there was an early episode when the, you know, the kind of bow that they put on it to say, hey, look, this is what you can pay. Here's the multiple. Here's what you can put down. Here's what you can finance. When you just, you just, you know, the kind of bow that they put on it to say, hey, look, this is what you can pay. Here's what you can finance. ran the like quick math on amortizing that amount of debt. The debt service obligations were higher than, you know, the free cash flow. And I, you know, it really triggered something to me that, you know, I've yet to live down. Well, maybe they, they heard you and see, they did, they did something different this time. I mean, it's a reasonable number. Let me say that. But I think most lenders would still have some heartburn with any contracting business. They have lots of reasons. they're worried about, you know, again, the project nature of it. You know, also, this is sort of a marketing firm.

So would a lender really understand that necessarily? They'd probably have to dig fairly deep into underwriting before they really kind of understood this more as a marketing firm than really a contracting firm because the labor's all outsourced. So I think it wouldn't be impossible to fund. There's certainly SBA lenders that would do this, but a fair portion of the SBA lenders out there would probably pass on just the industry, unless the buyer was really strong. And that's where that comes in.

You know, just anybody shouldn't buy one of these, right? Somebody with more experience, somebody with a stronger personal guarantee, and maybe excess personal liquidity that they have that they could put in if it was a bad year or they needed to do something. That's the kind of thing. This is that kind of deal where it sort of takes more than just the numbers to work to get alone. Let's talk about the $10 million backlog. What are you guys' thoughts on that?

I don't know. I feel like that's a loaded question, so I'm not going to say anything because I'll look stupid again. I plead the fifth. I refuse to answer that question. Okay, I'll look stupid. Yeah, why would they sell

when they have this great backlog is my first question. And is that just leads? You know, is that like a pipeline, like the biggest part of the pipeline, if every single person they talked to closed, it would be $10 million. You know, that seems like probably what it is to me. Yes, I mean, I think you're right. There's a strong possibility is that let's say it is contracted work, you know,

that's at let's just say average, maybe $15,000 average order value. You're talking about over 600 roofs still. I don't know about you guys. When you have a roof leak, this is just based on the revenue, this is a year's worth of backlog unless they're planning on doubling overnight. and then it's six months worth of backlog. People don't wait six months to 12 months to get the roof fixed, you know, and especially if it's hail driven. It's usually price sensitive, but usually when your roof is leaking, you might have time to get one or two prices.

And then you're like, can you start tomorrow? Can you help temp it in? Can you do something to alleviate it? And if you have a tarp on your roof, you know, even if it's been tempt in, you're not waiting months. You're getting it done. You're getting your roof, you know, torn off and replaced. And so there's something about the backlog that I think is a little fishy. It may be that they're like, like you said, Heather,

maybe they're kind of probability waiting, you know, their lead funnel or something like that. But even best case scenario, if it's all contracted work, the attrition on that backlog, there's just something wrong. There's something off with it. It's a number that is really catchy and probably makes some prospective buyers feel good, but it's not really, it's not really as firm as you think it is. Yeah.

It's not real revenue visibility. And they haven't even done 10 million in any of the periods that we're looking at here. So, yeah, it's definitely suspect that that's too big of a number. I always wonder why they're selling, especially when everything is painted pretty rosy. You know, there's no mention about retirement or what the reason is. So that's always something that jumps out at me. So in the commercial world of roofing, inspection, installation, and repair mills, you guys typically have your staff and then you augment that with contractors as needed? Is that typically the way it works?

We self-perform all of our work with captive labor, but the vast majority of the industry is using sub-labor or is moving more and more in that direction because it's very, very difficult to have captive labor. I mean, it's expensive. It's a lot to manage. And there's no skilled roofers out there for hire. You know, we have to kind of create them, train them. You know, like any skilled trade, there's a massive shortage in our industry. And, you know, if there is a roofer, I like to joke, if there's a roofer, you know, who has experience, who's in the job market, there's a reason, right? There's a reason that his former employers didn't keep him.

Yeah. Because if he's good, he doesn't go anywhere. You know, he gets compensated really well. And, I mean, the wage progression in commercial roofing, you know, I can't really speak to residential because there's not that much, you know, data to go off of. But the wage progression and commercial, I mean, you have people, you know, in skilled trades making, you know, $50,000, $60,000 a year with a little bit of, you know, a little bit of leadership and responsibility. and they don't have to go to, they don't have to go to school, they don't have to go get licensed.

It's not like an HVAC technician or a plumber or an electrician who, you know, the technician has to be licensed. In roofing, the technician is not licensed. It's the owner. It's the qualifier of the business who has to meet the licensure requirements.

Is it getting better from a labor standpoint? Like, at least going to, seeing job sites here around San Antonio, there's more labor. here recently for that kind of stuff. Is it getting better or is it getting worse? Yeah, it's definitely gotten better. I mean, you know, when COVID was really happening and then you had a lot of federal stimulus

and, you know, then the changes, the legislative changes with the child tax credit being refundable, there were several kind of things that kept this type of blue collar, you know, potential employee out of the job market or just made it more of an employee's. market, you know, a workers market and, and they were able to kind of either dictate terms or, you know, just stay out of employment, you know, stay out of fully, being fully employed longer. The thing is, like, this is really hard work. And so it's, it's over 100 degrees in South Carolina today. And we're on top of roofs. So we're closer to the sun. And the sun, you know, is beating down on the metal roof or the white roof or the black roof. And it's baking hot. I mean, it's just

ridiculous. So in the summer, we start earlier, we start at like 3, 3.34 a.m. With residential, you can't do that. You can't show up at somebody's house and start tearing off the roof. You got to wait until, you know, at least seven at the earliest. So there's a lot of people who come in and they say, I've worked, you know, fast food. I've worked at Amazon. I've like done something. But I want a new job. And we say, well, look, we'll pay you $15 to $16 an hour with no experience. And that like rivals Chick-fil-A in our market. And they go, wow, that's great. And after, you know, 48 hours, you know, after two days, they go, this isn't for me. I think I'd rather go make a little bit less money and try and work at Chick-fil-A in the AC. At your service.

Anyway, go ahead. Yes. My pleasure. My pleasure. My pleasure. My pleasure. Go ahead, Heather. But what's interesting is we have very, very little turnover for folks who have been with us for, you know, six to 12 months. Those folks have gotten accustomed to it. understand the value of the work. We have full benefits. You know, you have to kind of do a lot of things to differentiate as an employer when you're in this segment of the market, the skilled trades. 100%. Yeah. So wouldn't this kind of business be sort of at the mercy of all the subcontractors, though, in terms of margin and terms of availability? Isn't it kind of a, you know, a fight for who can, I've got a lead, who's going to take this job and get it done?

Very much, very much so. And what you'll hear almost, I've never met, I've never spoken to or med, an owner of a residential roofing business like this, or even the commercial ones that rely on subs that has not said, well, my sub really only works for me. They're kind of captive, but they're off my payroll, but like I'm the only person they work for. And that is true, usually for a while. But things happen, you know, things get more competitive, supply and demand changes and that person moves on or you have a falling out or whatever. And right now, at least for the past kind of three-ish years, supply chain issues aside, it has been a boom market for construction across the board. And especially in the southeast, you know, I would think outside of the DC area,

this is also the case. And I've kind of heard some of that. Everybody is, you know, everybody is raking in. Everybody's making hay and the sun is shining. As soon as things kind of start to change in the supply and, you know, supply and demand realm, I think this gets a little bit tougher. But yeah, you don't own your subs and you have way less, like I said earlier, you have way less control over one of your biggest cost centers. That like wholesale transfer pricing power is not, you know, it's not there. You all basically buy the same materials for the same cost because we buy through supply houses until you get to a massive size and then you can buy direct for manufacturers. And then you all can kind of use, you know, the same labor pool

unless you have captive labor, and then it just matters how good are you? How many times do you have to go back and fix something that wasn't right? And the yield on labor is very big factor. And then customer acquisition costs, those are the big components. Right. And like you said,

you know, they, it's lead gen and they, someone else is low barriers to entry. That's what I was trying to say. Low barriers to entry. So someone else could come along and offer the contractor more, give away more of their margin. and this company's margins get compressed, just like that, right? And a lot of your competitors literally are just like a guy in a pickup truck who,

I mean, I literally had a guy like this put a roof on my house. I mean, since I've owned Aquasiel, and he's the guy we use. He has no marketing, no website, no presence. He is the best roofer in Columbia on the residential side. He hand-nails everything instead of using nail guns, which is important because on some of these old buildings, you have not plywood deck, you have wood slat deck. you have wood slat deck. And if you miss the wood and you hit the gap,

then that nail is going to come out after the fact. Later, it's going to work its way back out and it's going to cause a leak. So this guy's amazing. But he's absolutely, you know, he knows what he's worth. So he doesn't really undercharge. But he can still undercharge the person who has a massive sales team, a really expensive website, tons of Google ads and paper click, all their vehicles wrapped.

Like, this guy, like, I don't even know what his company name is. And, you know, we pay him sometimes to do stuff. because it's him, right? So in kind of in closing, who should do this deal? Like, or should nobody do it at this price? What do you guys think? I don't know who should do this. This is kind of a scary business to be in.

I think maybe possibly a strategic buyer, someone who's already kind of in an adjacent space or adjacent market that can maybe reduce costs a little bit and actually get a little more margin that way. But a first-time buyer just coming along and just buying this with an SBA loan, I don't know that that's a good idea. Me personally, this feels like a standard girdly go work for six months as a salesperson for this company.

And then if I'm smart, like go take $25,000, get set up an office somewhere in a we work and go in competition with them and keep all the margin myself. But anyway, I say that about every single business we look at. So I'm going to get like, anyway, take it with a greatest song. Like, why would I buy this? I just make it so much easier. Mills. I have a friend here in Columbia who, you know, is kind of doing that.

I mean, there's a franchise, you know, who does residential roofing and he's going to go pursue that. And it's a valid question, you know. I mean, yeah, in this case, you go, wow, you could really step into somewhere between $500 and $800,000 of, you know, SDE. But you do take on quite a lot of risk. and, you know, how predictable is that that stream of cash flows, especially when you go, oh, you know, I do have to personally guarantee, you know, call it two-ish million dollars worth of debt. So I think it is attractive.

And what that tells you, right, is that the transferable value, the goodwill of the business is very low. I mean, they don't have captive workforce. The only scenario where I would buy another roofing contractor, I mean, as an owner of a roofing contractor, is if they have skilled labor. because otherwise, what am I buying? You know, the name is not a ton of value. We all kind of compete on about the same projects because most of them, you know, are just kind of generally, if you're doing it right, you're getting the phone call, you're being invited to the bid.

And so, you know, what in essence are you actually paying for? You know, there's no recurring revenue, truly recurring revenue, maybe service contracts, but it's way less than 5% of revenue. Right. That's the bare case. The bull case is you can make a fantastic. living owning a business like this. It is sunup to sundown. It is incredibly hard work. You're dealing with a very, very particular clientele. They're going to make this purchase one

time in their life. So you've got to be prepared for the fact that once every 20 years, somebody gets their, you know, their roof replaced, not once in their life, once every 20 years, if it goes well. And so they're going to be very particular. They're going to be very picky. If you mess up their grass, you mess up their plants, if you crack their driveway. Like, you are, it is very hands-on, even if you have a great team. But, you know, it is not a bad way to make a living. I mean, truly. And I don't think the purchase price is totally unrealistic.

I think you could probably beat it up a little bit just because I wonder, you know, how sustainable their margins are. I wonder how they're, you know, treating that one-year bump in higher SDE. But, you know, if you're in this area and you're not afraid to get your hands dirty, you could do this for a few years and, you know, pay down some debt. and you're probably are right to get, if you can grow nominally, you're ripe to get acquired

by somebody who's trying to consolidate more of this. Here's the math. I don't think people do enough. And the math is, how many years of running this business, do I have to run it until I pay off the debt? And people are like,

oh, it's three times earnings. Well, no, actually, you forget, okay, so you're going to pay taxes, and some of it might be ordinary income, and some of it won't be. So let's say your taxes average out at 30%. So that means, out of that $800,000 in free cash flow,

the first $250,000 of it is going straight to the government. Then you're going to have some bad years. Hopefully you don't lose. And you're going to pay yourself a salary as well. So, like, you know, when you personally guarantee this stuff, you're signing up for like a five or six year journey. Now, is it great that you own like a great business there after five or six years? Absolutely.

Like, it creates an amazing life for you. But that's the very first math I tell people to do is like, how long will it take me to get all of my debt paid off if I don't take any money out as an owner beyond paying myself a salary? And I think that would change a lot of people's minds about paying three and a half times earnings, including like an outlier year. Like this deal is being asked for. So I think it'll trade. I just don't. I wouldn't pay that much money for it. So anyway, did I just lose the firm as a sponsor for us? Hello. please go to the firm for all your considerations of deals you would like to purchase.

Anyway, sorry. The other thing that I think is we're just commenting on this is, you know, what type of seller does a business like this, you know, kind of lend itself to? And, you know, usually somebody who grows a business in any specialty trade from zero to call it $10 million in revenue, they are a get it done kind of person. They are not necessarily systems builders. They are not necessarily great delegators. They're probably not the best managers.

They probably have some sales, you know, salesmanship. But, you know, it stands to reason with a lot of these businesses that the ecosystem that's been built is going to be very different than the one that you want. And the person who's on the other side of the trade or on the other side of the table, they're prickly. You know, they've been successful for a reason, and it's not because, you know, they're a pushover. It's not because they're not smart. And I think you could say that about any seller, right? But in particular, this industry, this segment, you have some really interesting characters. All right.

Well, we will not be putting an offer on this one like we did on the worm farm. Oh, wait, have you, do you have an update on the worm farm? Yeah. I've not gotten, what was the guy's name? Do you remember? I remember his picture. Bubba. Yeah, yeah.

I remember his purple shirt. He said he would have some more info for us. And I think he was getting, I think the impression I got right when somebody says that is, hey, I haven't talked to the seller in a while. Let me go get an update. I don't know if this is a real listing. Yeah. They're like, let me go get an update because it's kind of stale.

You know, I have year-in 22 financials, you know, kind of thing. That's the vibe I got. So I've not heard anything else from him, but he said he was going to get more info the next day and that's been like maybe two weeks. So I need to I need to be the squeaky wheel with that guy. Mills you got to get on top of this. The early buyer gets the worm.

Oh my gosh. Don't stop. I've really let you guys down. You got to whatever brain baking is going on for being up on those roofs. You got to stop doing that. Put some ice in the hat and get that worm. Just saying.

Yeah. I do think we need to buy a deal just for good radio. It would be so good. Yeah. I mean, could you imagine Bill reporting from the pizza boat? Like, that's totally... Bill, how are things...

We'll go for a live report of Bill down with the pizza boat. For those of you not here, Bill and I fell in love with a pizza boat for sale in the British Virgin Islands. It was good times. And then last two episodes ago, three episodes ago, we decided to put an offer on a worm farm. Just some good stuff. All right. Anything else from you guys? Otherwise, I think we're, we've, we flog this dead worm here and we'll move on to the next one.

So if you're enjoying these episodes, by the way, we set a new all-time monthly download record. I know you guys saw that because I texted it to you three times. But yeah, we're pushing up close to the million dollar or the million download per year run rate, which is pretty exciting. A million dollar, Michael, what are you keeping from us? I had no idea. Speaking a million dollars, we do need more advertisers. And Ty, who is our new producer and CEO for the podcast, is happy to sell you some. And we've had a lot of advertiser uptick, actually. So just email, email us, Ty at gurdley.com is his email address. And he will sell the heck out of you.

But, I mean, the cool thing is I think the advertisers here, and I was trying to explain it to my buddy today, like the audience that we have here is very focused on business buyers, business owners and like business curious people. So they all have like willingness to buy business to business services. And it's a great opportunity for them to buy from any of our advertisers. Get a loan from you, Heather, as they should do. If somebody's going to buy a business, call Vizzo Business Capital.

And Heather will definitely take care of and go from there. Anyway, tell your friends about the podcast. Thank you all for being here. We went longer today, but I thought it was really good. It turned out you know a lot about roofing mills. I just I just pretend. And Heather, I'm sorry for call you a business nerd. Mills, I'm not sorry for calling you a business nerd.

What apology only. All right, we'll see you guys. Bye nerds. Bye nerds.