Acquisitions Anonymous - #1 for business buying, selling and operating - Mix and Match in Florida: $12M Well Drilling & Pest Control Business

Episode Date: May 17, 2024

In this episode of Acquisitions Anonymous, Michael, Bill, and Heather review a Florida-based service business deal generating $12M in revenue from well drilling, pest control, and lawn care.With $2.4M EBITDA and the inclusion of $1M real estate. Heather also gave us great insights about the potential complexities of financing the acquisition. If you are considering a multifaceted business, you should tune in! Join Michael and Heather’s lecture here: https://lu.ma/xvvv7ir7?utm_source=audio&utm_medium=description&utm_campaign=aa-podcastCheck out the listing here: https://gottesman-company.com/active_sellers/s-919-8-dbn/?utm_source=acquanon.com&utm_medium=podcast&utm_campaign=ep-298Thanks to this week's sponsor, CloudBookkeeping: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.Learn how to buy a business.If you are interested in buying a business but unsure how to start, you should check Michael's Buy a Business Course:You will learn:• Build a thesis for the type of business that's right for you‍• Learn how to stand out in a sea of buyers• Create a working, scalable Deal Engine getting you leads• Maximize your chances of finding great dealsSubscribe 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]

I think somebody's going to look at this and think it's pretty attractive. And the reason is, is I think they're going to see, you can only go to $5 million on an SBA loan. How could you structure this deal creatively without the $5 million SBA cap? Yeah, to your point, Bill, figuring out the cost structure of a carve-out like that is extremely difficult. And I've seen people do it. And, you know, I know what it looked like afterwards. And I've never seen anybody do it right. My idea what this one is we go buy it.

Ladies and gentlemen, welcome back to another episode of the third. Acquisitions Anonymous. This is the internet's number one podcast on buying, selling, and operating small businesses. This week, we have a well drilling, a water well drilling business in Florida that also does a whole bunch of other home services, pest control, lawn maintenance, etc. So Michael and Heather and I go on for about 25 minutes on this one digging into not just the business itself, but how you creatively finance a business that is a little bit too big to be financed with an SBA loan. So without further ado, I hope that. hope you enjoy this episode of acquisitions and I'm honest.

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. So if Mills is going to be getting fancy camera and microphone, too, that leaves one person as kind of the next frontier, Bill. Do you know what her name is? I know what her name is. I did my homework today. And before we even gone here, I was on with Gustavo working on it.

We found the problem with my camera. I have one. Just wasn't working. So, and do I sound better? I have my microphone working today, I believe. Yeah, you sound nice. And there's a weird light behind me. See that?

I noticed the mood light right away. It's fantastic. Very good. Gustavo's getting you set up. You're going to look like a podcaster in no time. He is. Absolutely. That's great.

Check Heather out on YouTube. You can see the evolution of Heather over the next couple weeks on YouTube on our YouTube channel. Before and after. This is the middle. You look great, Heather. Oh, can I, Bill, Can I shill that Heather and I are doing a free online lecture about how to finance a business purchase? Yeah, everybody on Twitter thought the first one was really good that you guys did.

Yeah. Yeah, so I had 1300. For my first lecture, I had 1,300 people sign up. So hopefully, hopefully we can beat that this time. Hopefully I don't bomb those ratings. So please sign up. Please. I love that you guys have rebranded webinar as online lecture because it really needed it.

Well, so like it was webinar and then everybody started to call them like open houses. Did you see this? Where they're like, oh, we're going to have an open house. I was like, I'm skipping that. I'm going straight to online lecture. I think it's great. It is a lecture. It's like an online class.

Yeah. Yeah. Well, for the first one, I had 22 slides and I only shield, shield products and stuff for one one slide. So I figured that 5% was a good ratio. Well, you can't just say it. If people like, I assume you're going to do it like another one, but you haven't mentioned how to get on it or where to learn about it. So you're not very good shill, as you can tell. Only one slide of shilling and won't even tell you how to get a list. So where can people like actually attend if they want to come? Let's see. I should probably, I will have a pinned tweet on my Twitter account. So just go to my Twitter homepage. That's very cool. Or better get on the acquisitions anonymous email list or get on Gerley's email list at Gerley.

And I'm sure an email will end in your inbox about this. Yes. Good thing you're here, Bill. One of us has to be the marketing guy, okay? I know that's why you keep me around. Somebody has to do some selling around here. Yeah, I'm here to talk about, like, I had to name the podcast. I have to tell people to get on the email list.

And then occasionally I chime on an e-commerce deal, and that's why I'm here. You know, this guy. So 10-second pitch, if you want to learn how to find money to buy a business, as Heather and I are going to talk about all the ways to do it. And it's everything from friends and family to your savings to government grants to an SBA loan, right? And everything in between. And we'll just go through all the options and how people think about it. And it's totally for beginners, right?

So we're not not doing a very sophisticated stuff. Like if you don't know anything about it and you want to figure out how to get the money for buying a business, like we're going to talk about all the options. So that's it. Right. Sounds good. So let's segue in. I brought a deal. And let me read it to you and see what you think. Unfortunately, since the time I found it and the time that we're recording this, it's now pending. So that means it's at least good enough that somebody else wants to buy it. So but it comes from goddess men and company. They're a broker here from 1985. That's what they're established. A broker from 1985. They're also from 2024. They've been around. So this is an acquisition opportunity in our favorite state, Florida, which is, you know, it's better than California, right, Heather? No.

In business for 51 years, this company started out as a well-drilling irrigation and water treatment of business, specializing in well-drilling, well-pump replacement, aerators, softeneres for residential and commercial properties, and is now involved with the lawn fertilization, home pest control, and weed control. stuff. It has a state well drilling license, a state irrigation license, and pest control license required to operate the business. Owner would like to retire, but is willing to stay on in some capacity. Real estate worth $1 million is included with the business. Interesting. Did I have you at Hello? Sounds like a mess already, but let's go. Keep going. Yeah, I have some feces about this, some ideas. Okay, but you can tell that Godisman is kind of old school because they like have you when you call in you refer to seller number s 919-8 dbn it's kind of like if the dms east or if the dmv started to do business brokering how they would do stuff take a

ticket yeah take a number and sit down please will allow you to look at the confidential information memorandum all right so financial summary in 2020 they did 9.8 million dollars in revenue and 2 million in EBDA. In 2021, they did 11 million in revenue, 1.7 million in EBDA. In 2022, they did 12 million in revenue and 2.4 million in EBDA. So basically, revenue is gone 10, 11, 12, EBIT has gone 2 to 2.4. They have compiled financials. They have a management team in place. They've been in business for 51 years, and they operate under five different sick codes. And for those if you don't know what a sick code is. There's, I guess, what is the, Heather, what is the governmental department that, like,

creates sick codes? It's like the FTC here. I don't actually know which agency it is, but, like, the old school way, at least for banking, we used to say sick code. Now we say Nakes code, but it's the same thing. Yeah. It's the industry code. When you look at a business tax return, you look at the upper left-hand corner, it'll say

industry code, and that's sort of the government's way of determining what's a landscaping business versus a contracting business. And this has got five different codes, which is interesting. Can I just complain about these codes for a second? Because they have not updated this crap since like 1972 or whatever. Because, okay, so I sell, everybody knows, I sell dog supplements on the internet, right? Good luck to me finding a sick code because there is no code for e-commerce. There is no code for pet supplements at all.

all. There is not even sometimes a code for pet, sometimes I've got to do pet food sometimes works, but it's under manufacturing, but we don't manufacture. There's no, there's no like code for brand of, oftentimes there's not even like packaged consumer products. And so I'm stuck in like manufacturing, even though I don't manufacture at all, like my accountant, like I'm in the manufacturing group because of the sick code that I had to give them, like the partner is the manufacturing partner. Like this, these things like, yeah, if you got a landscaping company, great. There's a code for that. There is no code for like most of the businesses starting the last decade. It's crazy. Med spa is the same way. Med spa, you would just put it under like a hair salon.

That's what it was. Exactly. I just like the Michael Scott line. There are only four types of industries, restaurants, railroads, sales, dog supplements. Dog sauce. Yeah, exactly. Okay, so let's start with kind of first principles on this deal. So what do they do? What don't they do? Yeah, a lot of stuff. What's the fundamental business here?

I think the fundamental business is they have a well-drink, drilling truck and some guys. And sometimes they drill wells and the rest of them, they try to keep their guys busy. This is sort of how I'm reading this, right? because well drilling, well pump replacement, aerators and softners, this is for like you've got to drill well on your property. I imagine in Florida, the water table is right there. So people probably have well water. It's probably also hard to like do submerged plumbing and, you know, and piping in Florida because the water table is so high. So I imagine wells are common in Florida, which is why this business is required.

But I don't know how you then get into lawn fertilization, home pest control and weed. control from that. I mean, hey, we're here. We'll sprinkle some pesticides on your lawn. Might as well. So I don't, I would, I mean, my first question is show me the split between, you know, the well drilling and pump replacement stuff, which I, I've got to imagine is, I would say a pretty good business.

It's definitely going to be tied to construction, right? Like, you're going to build something. You're going to drill wells. If you're not building something, there is this pump replacement kind of maintenance. I would love if there was some ongoing maintenance for the wells. So like of anything, I love the well maintenance part. So I'm curious how much that is. I'm way less interested in lawn fertilization, home pest control and weak control.

Yeah. What is this? If you run the well maintenance part, I've seen some really good businesses that maintain wells. And there's a certain lifespan where they've got to go in there and do a bit heavy maintenance. I think that can be a really good business. But the way this one reads, it seems to be tied to just a new project, new construction. You've got some project work over there, and then, yeah, they're trying to keep people busy. One of the ways you can sort of tell there's a lot going on here in the different business lines is the margins.

They're not consistent year to year. You know, the business has been growing top line, but it looks like the margins been shrinking a little bit. So, you know, maybe that's the mix of services that they're providing. Maybe they're doing more of the lower margin services lately. But it is hard to analyze a business like this when you've got, you. you know, such disparate lines of business and probably, probably the mix changes a lot from year to years, my guess. If the real estate is worth one million dollars and they do all this different stuff, like my gut goes to that this business is somewhere in like a smaller

rural town in Florida. And you're not, you're not like in Fort Lauderdale or something like that for those two kind of hints. Is there an asking price? on this thing? Nope. Nope. Okay. Interesting. Because this kind of like hodgepodge of we do everything type thing is more common in small towns, right?

Because if you don't, you could end up with somebody who's, you know, the well drilling guy and then they, there isn't enough demand to have lawn fertilization and home pest control as standalone businesses. But there is enough demand to have one company that does everything, albeit probably not as good as the specialist would do it. And also you don't have this army of private equity back pest control companies coming after you, you know, in small town, USA. So it's probably a small part of what they do and they do it and it keeps their guys busy. I'm also kind of a little, you know, curious about all these licenses. That's a lot of licenses to qualify for and maintain who's holding those licenses. Does he have, you know, six different employees that have those?

or is there one or two folks that have tested and hold those licenses? It's always difficult in any business that's got licenses for, you know, as far as who can buy it and how long can they rely on either the seller or existing employees until they can get their own license. But when you have that many licenses, it just, it raises the degree of difficulty by quite a bit, you know, at least on that front. So the licenses are the state well drilling license, the state irrigation license, and the state pest control license. And if you're not familiar with licensing,

very frequently what Heather's alluding to is that the licenses are held by individuals, not by the business, typically. So typically it is the owner of the business that is licensed, and everybody else that the business sort of operates underneath his license. But if he retires and leaves,

you, the new buyer, need to achieve those licenses, typically, and there are varying degrees of difficulty to doing that. I also thought it was really interesting, like the classic sentence here. Owner would like to retire, but he's also willing to stay on in some capacity. That's the opposite. Owner likes pizza, but also hates cheese.

Like, these are not, you can't have both of these. Is he going to stay on? Is he going to retire? Like, this guy does not want to stay on at all. He's, like, hedging here so it doesn't scare you away. Yeah. My suspicion is this. is a small town business that this guy or gal who runs it knows everybody in the town.

It's a little 12,000 person town is seen at the, you know, it's seen at the morning coffee counter, you know, on Main Street. And that's how he gets, he, she gets all their business. And you're going to have to decide to be that person, you know, and move to this town and run this business. At the same time, though, Michael, like, for most of entrepreneurship through acquisition, like, that's kind of table stakes, right? Like, you're going to buy a business.

Like, you do plan to move to the town and go to the local coffee shop. Like, it's very hard to find a business to buy, a small business to not buy, I should say, with one or two million bucks of EBITDA. That does not rely a little bit on being the owner in the market, right? And it's hard. It's just hard to not do that. at this size. Yeah, especially for local services businesses.

I can tell you for software businesses, that's not the case. You know, I don't have to move to Copenhagen. But that's also maybe why software businesses trade at higher multiple. This is probably going to trade. But yeah, but look, that's not a bad life to live in small town, Florida or someplace. I mean, maybe worth talking about how there is just this size of EBITDA is kind of, unless it's going to trade for a lot less than I think it would. It's probably above like the SBA threshold in terms of getting debt to make something like this work.

It probably is. You know, 2.4 million in 22 is in what I call the no man's land. It's over two million. It's below three. Being below three means it's going to be very hard to get any kind of non-SBA debt. And being above two means you're going to go well above the $5 million maximum. or you're probably going to need more than $5 million in debt, and SBA has a maximum of $5 million.

So you are too big for SBA, too small for everything else. And, you know, this is going to trade for a multiple of that $2.4 plus the million dollar real estate, I would think. I know they say it's included in the purchase price, but what's funny is they don't give you a purchase price. So I don't know what that line really helps us with. but, you know, that would mean this is just going to be a challenging business to finance. And if it is kind of a seller dependent or, you know, you've got to be the person that's kind of running everything,

that's more of an SBA type of debt situation. Conventional lenders don't like to lend into a situation where there's that much key man risk. They would rather lend into businesses that have, they're professionalized, they have a management team. there's less key man risk. So there's a lot of challenges to being a business of this size and trying to sell. Or on the other other way to say it is for the buyer to find the right kind of financing. All right. So challenge time, though.

Okay. So this business has two to two and a half million of EBITDA as a local services business. There's a million bucks of real estate. We know. There's probably a truck or two. So there's a few hard assets. You can only go to $5 million on an SBA. loan, how could you structure this deal creatively without going about the $5 million SBA

cap? Well, you need a lot of equity or seller note to make up the gap. So the way I kind of start is, I think, through the rule of thumb, which is you can only borrow on an SBA 10-year loan at today's rates about 3.75 times adjusted EBITDA. That's how much you'd qualify for. But, of course, that's more than $5 million. So let's do that math. 2.4 times, oops, 2.4 times 3.75 is 9 million.

Okay, so if you could get 9 million as a 10-year SBA loan, great, but you can't. You can only get five. So now we have a $4 million gap just in terms of debt. So that could be more equity. You bring in more equity than the usual 10% that you might do with an SBA loan. and or a combination of that and seller note. So you need a bigger seller note. And then you need to be careful with the terms of that seller note.

If your normal cash flow works on a 10-year SBA loan, you can't go and turn a whole bunch of that debt, of that extra $4 million gap into a five-year loan or a three-year loan and think it's going to work. Your seller needs to give you kind of longer-term financing or interest only or something really with light debt service for that to work. You've got a little bit of real estate here. So this is something a lot of people don't know, but you can use the 504 program for the real estate for a little bit above and beyond the $5 million.

You get a little extra runway for that. So this one, you could take this real estate and you could get 504 and there's enough extra runway that you could put that in that program. But you still have this $4 million gap, at least, depending on what your multiple is. You know, that's, that was me just doing 3.75 debt. You're probably paying five to, you know, five times EBITDA on this business. You think? Yeah, all right. Let's just call it, let's say four and a half.

Even so, that's more, you know, that's, that's more equity you've got to bring in to cover that. Oh, you really like this business. I was not going to pay that much for this business. Now you put me out. I don't, I don't know what you should pay for it. But, but, you know, that's kind of what you have to start with is what's multiple. I'm going to pay, how much debt can I raise? And it's tricky on this one.

Really tricky and you would need more equity than the 10% and definitely some seller now. All right. I bet Michael likes this less than five times, EBITDA. I was going with five. It sounded good. You are? Really? Well, look, he lost me and moved to Florida.

Let's just read more with it. But, okay, let's say four and a half times, EBITA. That puts us, what, at nine? Is that it? 9.5 million total. So why do you think this trades that high? I mean, this is a local mishmash services business? I think it's got, well, it has actually,

I think somebody's going to look at this and think it's pretty attractive. And the reason is, is I think they're going to see, oh, look, this actual mishmash is something that at first glance seems like a mess, but it's actually a pretty good countercyclical approach to the whole thing. like home pest control, we control, like, that's not going anywhere. And then I can win on, you know, well pump replacement and stuff like that. And, you know, and then if there's, if we continue to have well drilling, which people keep moving to Florida, you know, I have big tailwinds by me.

So I think people are going to look at this as a, as a good mix, not a mishmash, kind of the way you're looking at it, Bill. Okay. So you guys both like it better than me. Here's how I was going to try to do it. So like if I had to come in, right, so it's 2.4 in EBITDA. Let's take that as face value. I would say to seller, look, I can give you, I can borrow $5 million from the SBA.

I could put down 10%. Let's say I could put down a million. You know, like, so I can give you $6 million at close, which is a little over 2x. And then you've basically got to find a way to deliver another 2x to this person, you know, in the form of a revenue share for a give. seller note, you know, some sort of risk share post close. And I would say, okay, I give you $6 million at close and we can structure a way for you to get another $1 to $2 million. You know, I'll pay $3 to $4.4 for the business. You can earn another $1 to $2 million over the

next five years if all goes well and you assist me in the transition and, you know, we hit our EBITDA targets. That's how I would try to stretch it. I like that. And I want to see something for the nerds out there about SBA rules and forgivable seller notes because this is a topic that comes up a lot. What's interesting is the banks have different opinions on that. So you might hear one bank say, that's not okay. You can't do a revenue share type seller note because it's an earnout and the SBA doesn't allow earnouts.

And you have other banks that say you can do that as long as the note that you create around that and, you know, the purchase price, the total purchase price comes in okay with the business valuation, which I agree with. I think there's nothing in the SOP, the SBA, SOP does not have a single word about earnouts. So a lot of the, you know, rules that you hear people throw out, it's just their bank's interpretation of other things that the SOP says. But I think you can do forgivable seller notes that are tied to net growth, but it has to be not so much that it's above, you know, the current valuation that, you know, the vendors that the banks use can support. All right. You'd be threading it the debt service coverage ratio, but I think there's probably

a way to make it work. All right. Let me give you my creative idea for this one, which you may or may not like. So in effect, we have the hold co kind of like penalty here, which is like we can't value it as a well drilling, well pump replacement business because it's got this pest control and lawn control stuff. And we can't value it as a law control business because it's got this well pump thing. And together, are too big to really hit the sweet spot for financing. So my idea with this one is we go buy it and then we go split it into two individual businesses and find specialists in each individual category. They're rolling those up and sell the lawn, lawn pest thing off to a specialist there.

PE would hopefully pay much more than five times. And the well drilling, like there's people building platforms around that too. We just go in and like sell it as parts rather than one big business. A class of private equity playbook. I love it. Let's go. Let's go. I read Barbarians at the Gate once, which makes me an expert in private equity.

Just see. A private equity hamburger expert, both. I'm impressed. Oh, for those who you don't know, I recorded a video about why Waterburger has gone downhill, which is our local burger chain, and some news outlet referred to me as a hamburger expert. I don't, and I don't even eat beef. And you're SCE either. So next time you read a news article that refers to a quote from an expert, it's probably

Michael Gurdley in a mask. I've gone from Chili's expert to hamburger expert. That's the, that's the story. Anyway, so I think that's an idea here. Or you buy, you buy the parts together and then you sell one of them off, right? And just say, like, okay, I'm going to spin off this, the well drilling thing or I'm to spend off the lawn fertilization, and you just keep the other one. But then potentially you have two SBA buyers showing up and paying a higher multiple, or you have two platforms trying to buy you,

right, which private equity will definitely pay much more than four or five times EBDA for one of these that's a going concern. So, yeah, I think that's my creative idea. The key if to making that work would be that both halves, halves is making an assumption here, would have to be big enough. Like if you had this kind of like split down the middle, so you had, you know, 1.2 of EBITDA and both, you know, I think those are probably both saleable. Now, at the same time, if it's just you got the same guys doing all the services, you know, you'd have to figure out how to split your staff, you'd have to figure out, you'd have to actually, during diligence before you bought it, understand if this thing was actually splitable.

Or if it's, you know, the staff is 50% busy on both or if it uses the same trucks or, you know, whatever it might be. You'd have to figure out if logistically it could be split. and you would also need them both halves to be big enough. Because if you've got like 2 million to be able to die in one thing and 400K of EBITDA and the other thing, the smaller ones can be a lot harder to sell. So those are how I would diligence that. Yeah. To your point, Bill, figuring out the cost structure of a carve out like that is extremely

difficult. And I've seen people do it. And I know what it looked like afterwards. And I've never seen anybody do it right. You know, like what they thought the cost structure would be when things were shared like that and what it actually ended up being, which is usually pretty different. So that's really, that's really tricky to figure out. Yeah.

That's why that gap between the multiple you pay and the multiple you sell at needs to be pretty good. You need a good margin of safety there. This is not, my plan is five. That's not going to get it done. Yeah, my plan is not for the Thane of heart. But it would be a lot more fun than some of the other options. Thrill Seeker, okay. Yeah, pretty much.

Yeah. All right. So it looks like Heather and Michael like this a little bit better than me. You guys think this is going to sell? So you think this will sell for four to five times. Yeah. For the fours. Fours.

But it's going to need some creative structure or a lot of equity because of the SBA cap. That's right. Yeah. I mean, I wouldn't I wouldn't rule out like a searcher backed by a family office. You're seeing more of that kind of stuff doing something like this. Mm-hmm. I'm totally willing to put up a six or seven million dollar equity check and a little bit of Main Street debt on it and a seller earn out. Like I wouldn't put that past happening.

Yep. Yeah. All right. Well, so we like it. Not bad. Michael brought a deal. We actually liked. There you go.

I knew I lived to serve. And Heather, do you want to give us an update on our plan to buy that business from last week? Oh, yes. We looked into it. We were super excited and want, want, wah, wah, they told us that it is already under contract, no longer on the market. So somebody else got there first and probably saw a little bit of what we saw and hopefully we'll hear from them. Hopefully we'll hear from whoever bought it at some point to hear more about it. But we really loved that business.

I think we were spot on about a few things once we figured out what it actually did. If you bought the vacuum business, send us a message. We would love to hear from you. Yeah. Or if it really sucked, call us as well. because we're interested if it either way get it sucked huh thanks now I know I get it oh my gosh I'm slow because poor Heather has to record these episodes at like 4 a.m. Exactly.

I need more coffee. All right. Good episode. We'll catch you guys there because if you guys like this episode. Subscribe or tell a friend on any of your podcast platforms of choice. we are also on Twitter, all the hosts individually are on Twitter, or you can find us on Twitter under Acquisitions Anonymous. You can get on our email list.

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