Acquisitions Anonymous - #1 for business buying, selling and operating - Printing Money in the Liquidations Industry - Acquisitions Anonymous episode 167

Episode Date: February 15, 2023

Michael Girdley (@Girdley), and Bill D’Alessandro (@BillDA) review a business that liquidates old voice-over IP telephones. They have 32% margins and only 11 employees while doing $4M in revenue. Impressive.We also steered away from the deal to talk about how to convince a broker that you’re not a tire kicker, how to make deals with celebrities, pricing a business with upcoming unforeseeable risks, different structures to share risk with the seller in a deal, and much more!Company:                 Highly Profitable Supplier of Used & Refurbished Telecom EquipmentLocation:                   United StatesStated Financials:     Revenue ‘22  $ 4,000,000   |   ‘22 Adjusted EBITDA   $ 1,300,000Asking Price:             Contact the broker-----Thanks to our sponsors!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.-----Show Notes:(0:00) - Introduction(0:57) - Our Sponsor is Cloudbookkeeping.com(2:25) - Update on Michael’s Spanish lessons (4:52) - Deal & financials: Highly Profitable Supplier of Used & Refurbished Telecom Equipment(6:05) - What do these guys do?(7:00) - How might Covid have affected this?(8:48) - What do we think about the customers and the operational structure?(15:56) - How to convince a Broker that you’re not a tire kicker?(18:58) - What happens when you try to make a deal with a celebrity?(20:44) - What is the elephant in the room for this deal?(21:18) - Are there headwinds for this? Should you be scared about it?(24:05) - How would we price this business, and why?(25:30) - What is the most important thing of Due Diligence for this business?(27:05) - Audience request: How would we structure this? What are the depreciation benefits? (30:52) - What are the challenges to estimating the risk here? How would we split the risk with the seller?(33:26) - Why are entrepreneurs in liquidations so rich?-----Additional episodes you might enjoy:#166 - A legal tech business doing $7mm a year #165 - Should we buy this airplane ad business?#164 - Annual Report Filing Software#163 - Make $2.3M/yr owning a Flight School#162 - Cleaning up crime scenes for big money!#161 - How to spot red flags in eCommerce listings?Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hey, everyone. Welcome back to another episode of Acquisitions Anonymous. My name is Bill Dallisandro. And this week, I'm with Michael Gurdley and we go pretty much totally off the rails in great ways. We talk about a business that liquidates old voiceover IP telephones. But we spend about 15% of the episode talking specifically about the business. And Michael and I also dig in, though, into topics like how to convince a broker that you're not a tire kicker, how to make deals with selection. celebrities when their names are on the business, how to price a business when there's a lot of difficult to foresee risk in the future, some different deal structures about how to share risk with the seller. And we also just talk generally about the liquidations industry and some people that we've just seen make oodles and oodles of money in the liquidations industry.

So it's a really good one that has much more inside than what it says on the 10. I hope you enjoyed this episode of Acquisitions Anonymous. Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner.

So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your quickbooks online set up in the right way, and a number of things around payroll as well. So definitely know them and recommend them. If you want to find out more about Cloud Bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie. I know many of you have and see if he can help you make running your business easier and more fun

by letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast, it would help us and help Charlie know that we're supporting him as well. So thanks a bunch. and cloudbookkeeping.com as the sponsor for today's episode. All right, here we go. Another episode of Acquisitions Anonymous.

You've got me and Michael this week. Michael, how are you, man? Your Spanish is struggling today, it sounds like. It takes me three or four minutes to get warmed up. Yeah. So if you don't know, when I am late to the recording, Mirko, our producer, Grills Michael in Spanish. Michael's learning Spanish, as you know,

from our language learning episode a couple weeks ago. So every time I'm late, Michael gets like five minutes of practice. And I come in to usually Michael saying, how do you say blank in Spanish? America's growing them. Well, we did cover that it turns out that, you know, Spanish is not Spanish everywhere. And that comes up as a recurring theme, which we're discussing today that there are like 14 different words for sandwich. Do you know how many different words there are in Spanish for Turkey, by the way?

Is this like the number of words in any rate for ice? There's like 25. There's a lot. Yeah. And some narrow ones in slang for the word turkey. But Paavo is the most common one. By the way, we're getting definite hate mail about my English or about my Spanish. But there's one rarely used one for Turkey.

And it is the most funniest literal translation ever. And literally some cultures refer to a turkey in Spanish as a dizzy duck. Like a dizzy duck. I don't know the exact translation, but I looked at it. I was like, what the hell is a dizzy duck? Like, this is a great language. That's awesome. Love it.

I love, like, all the different, you know, foreign languages that have especially colorful compound words for things. Obviously, German is famous for that. But so many languages do it. It's really fun. Totally. And it, you know, it creates, like, this really fun, like, opportunity as a tourist to just go in there and say ridiculously stupid things.

And there's little translations for stuff that you're just, just like, where did they come up with this? And then you realize, you know, I think that's fun because it also makes you think about English and American culture and how we have all these weird words as well, and we don't even think about it. Like, you know, and even the very obvious ones where it's like, okay, we got to get the ball across the finish,

you know, get the crawl past the ball across the goal line. Well, like, that doesn't mean anything if you play soccer or international sport. And by the way, it's not called soccer anywhere else. So it's a really great opportunity not only learn about these other cultures, but language learning teaches you a lot about your own cultures, well. Yep. Well, the cool thing about this week is we have a deal that it relates to lots of cultures because it is about salvage and recycling. Will you read it for us, Michael? Yes, this is a very

exciting one. And also in our theme of trying to do bigger deals, this one does a million point three a year in estimated EBITDA. So that's probably pretty close to profits, given this looks like a low capex business. But this one comes from generational equity. And Mills is not here today. So So at least two of us are okay with the feel good about this brokerage choice. But anyway, the title of it is, a highly profitable supplier of used and refurbished telecom equipment based in the Midwest and the Great Lakes region of the United States. So I guess somewhere between Cleveland and Milwaukee, you know, kind of what you're thinking about here.

2022 revenue for this business was $4 million estimated. So I guess as of this writing, they haven't closed out there, 2022. and estimated profits is 1.3 million. So they run about, I guess, 30%, even a margin on a $4 million business. So pretty interesting. And you and I were talking to the pre-show, like this type of recycling and refurbishment of stuff, like there's some really, really rich people that do this kind of stuff. So it would be interesting to see if this is one of those.

So they're liquidating phones, right? Like office phones. Yeah. So, yeah, they are a privately owned secondary market supplier of used and refurbished office phones. They specialize in new overstock inventory and work closely with corporate clients on creative solutions to liquidate overstock office phones, network switches, and private branch exchange. So called PVH. So if you're going to have landlines in your office, they do that. And they buy from disposition folks. I guess this is a new type of, I've never seen this kind of

acronym before. It's IT, asset disposition and enterprise customers located around the country. So I guess basically, Bill, this is when a big corporation has, phones that are four years old and they're going to upgrade them, they find these groups that go and basically resell them. IT asset disposition? Is that the way to think about this? That's part of it. The other reason you would engage these guys is if you closed an office or you're moving out of the building or, you know, whatever. Or say if, you know, you sent most of your workforce home to work from home, you might need to liquidate a whole bunch of the phones that are still perfectly good but are on their desks. So I wouldn't be surprised if this business was a huge

COVID beneficiary as all these businesses move to work from home. And they've got rows and rows and rows of cubicles, each one with a phone. And no one has any use for that phone. And people are trying to recover value from those assets. Every time I think about these landlines, like it takes me back to the late 90s when I was working in corporate America in an office and you'd be like walking down the hall. And there's just like a phone is like ringing in an empty office on somebody's desk. And then, and I don't know, were you around in business when people used to do

ass voicemails. Oh, yeah. Absolutely. The light would start blinking on your phone. Yeah. So for those of you that never experienced this, it was just like the craziest thing. So you know how you have that one relative who like just sent,

won't send you texts? They like record a text and send it to you. It's super annoying. By the way, I do this to my team. I send them looms. And so I'm very cognizant. I'm sending people looms because I remember this experience. But like bosses at big companies used to send like voice members.

most to like 100 people at once. Like, hey guys, happy Friday. Like, we will be having bagels in the conference room and then we're going to have a team meeting at 1 o'clock. I hope everybody can be there. And this was kind of, you know, in the transition to become email-centric in business, people would do this on these phones and you'd be just sitting there and then like, just like Bill was saying, like you'd have this huge anxiety because you would never hear the phone ring, just the light, the message light would start blinking like it's a bad hotel room. He was just like, oh no, somebody's telling me something. But yeah, one to many voicemails.

And it's important to note that these phones, at least from the photo and the listing, it look like they're voiceover IP phones. So like when we say landlines, I don't, I think mean it technically in the pots, the Plano Telfill system. It's almost all even that connected office phone systems, right? So moderate enough, these aren't total garbage. Cisco Avaya type stuff where it talks over Internet protocol to whatever kind of hardware is in the background. and that gets on the telephone network.

So more about this company, they have a client base comprised of 100 active accounts, 100 plus active accounts, 90% rate of repeat business, and they operate from a 25,000 square foot warehouse facility, and it's currently staffed by 11 full-time employees. I'll just pause there, like 11 full-time employees to do $4 million in revenue.

That's pretty cool. Yeah. Like, and, you know, this ain't no Chick-fil-A. Like, this is pretty cool in terms of the revenue per head here. Yeah, I like it. it. So more things to make you get excited about this and want to sign the NDA. It's a highly profitable niche business, according to the broker. Between 2019 and 2021, they average 34.6 even a margin. And given the company's established history and consistent performance, they're well

positioned to demonstrate significant profitability in the future. They have a national reach. So not only did they say that they target kind of this Great Lakes area, but they service clients wherever they may be located, and it could be expandable into these new geographies, and they have management that will remain throughout the transition. The current officers are willing to remain through the transitionary period and would entertain remaining with new management for a longer period of time on a consultancy basis. Additionally, all key employees will be available,

remain with new ownership beyond the sale of the company. So do you read this that the owner, this is not an owner operator of business, or that, how do you read, is the owner running this business or not, I guess it's tough to tell from this paragraph. It's tough. It says the current officers, which makes me believe that they would have just said owners there, if that's what they meant. So this does give me hints of, you know, absentee, owner of business.

The thing about this, though, right, is maybe the owner isn't there repacketing telephones, but this is very much a relationship business, right? Like, you've got a, that's 90% repeat clients. It says here in the listing. So you've got to have like a couple corporate clients that are always opening or closing offices or, you know, needing to to liquidate these IT assets. And you're just the guy they call. And if you lose those, you know, I think it's probably hard to break in because everybody's got a guy they call typically. Now, there's probably two types of clients here, right?

There's like the good ones who are always opening and closing offices and these are usually bigger companies. And then there's the less good ones, which is my company just went out of. business. We just went virtual. It's like a one-time shot. You know, like you might, you might make some money, but like that's it and then you're hunting again. But it sounds like they've got some 90% repeat, which is pretty good. Solid. So we'll now do a business buyer trick here to kind of think about a factor of whether it's worth calling and getting the sim. And in the recent days, I don't know if you've seen this happening more and more, Bill, but like more and more brokers, especially small business brokers,

they're making you go through hurdles before you get the SIM. This is a new thing for me. It's happened in the past year or so, but because I think so many brokers are tired of having so many buyers and dealing with 30, 40, 50 people in data rooms, a lot of times you have to have a call with the broker

and convince them that you're worthy, you're SIM worthy. So it's kind of like, I don't know if you remember the old Seinfeld episodes where Elaine did a spongeworthy thing. Do you remember, are you old enough for this for Spongeworthy? I think so, yes. but for all of our listeners who have not seen this.

So, I mean, it's an interesting point, right? Like, one of my new hobbies is actually to go back and watch clips of TV shows that is just impossible for it to get made today. Like, you go look at like some of what Happy Days was doing or all in the family is kind of the classics example where you're just like, there's no way. Or, you know, some of the Mel Brooks stuff, like, there's no way that gets done today. Like, just there's no way that gets through the whole. All good comedy is not possible anymore.

Definitely not. So anyway, I kind of feel off describing this episode of Spongworthiness, but basically Elaine, her brand of birth control was not going to be available anymore. So she was limiting who she was dating based on her limited supply of these things. Then that's what the Spongeworthy thing was. And this was on national TV, like Thursday night at like 7 o'clock. Like I feel uncomfortable talking about it now because the world has shifted. that much in the past 25 years that you're like, I don't know if I could say that, right?

But anyway, so brokers have become like very much like hardcore. Like a lot of times you have to prove you can be like a valid buyer. They don't want tire kickers. They want to waste their time with you. So a lot of times they'll be like, yeah, call me back when you do a deal. Like I'm hearing that more and more from people. And it's really interesting. And my second point of all this is after the last five minutes of ranting, I don't know what

my original point was, but it was really good. There was something about this deal that was. Well, the original point was that you got that, you know, this guy, he's got 90% repeat business, and he's got the broker's generational equity who probably, you know, these brokers blast it to everybody and their mother, and they get a million tire kickers. So how do you prove to a broker, Michael, that you're not a tire kicker? Okay, I remember what my point was now. I just looked at it.

Okay, so one of the tricks you can do with these brokers is you, 99% of the time, small business like this, the broker is co-located in the same city with the company being sold. So you can kind of do a little trick, which is this guy, Steve Dinehart,

who's the broker, is located in the 608 area code, which I look up is Madison, Wisconsin, southwest Wisconsin. So that's actually pretty good. Madison's like a pretty cool place to live. It's a college town. You know, UW is there at University of Wisconsin.

So anyway, that was the trick. That was the whole trick. Great trick. Yeah, yeah, thank you. I knew I could do it. I'm the, you know, I'm the Sherlock Holmes of small business buying. How do you convince somebody that you're not a tire kicker? Man, like, it's hard.

Like, we've tried everything. I'm interested in your opinion on it. But, like, you know, there's definitely like associating with somebody that's done deals before. So that's some of what I've tried when I've kind of partnered with other people who are doing searches and stuff is they'll say, like, well, my partner is done this, this and this. And that's helped. But even still in some markets where they're like, look, if you haven't done a deal in this space, like you're wasting my time, it's very difficult. Like we've just been told no. Like we're not going to talk to you, for example.

Like a lot of the financial services or manufacturing stuff, they're like, yeah, I'm not talking to you until you've done one deal. So that chicken and egg problem is very difficult. So I don't know if you've figured out how to solve it. So I have a couple tips for folks because I've dealt with a lot of business brokers. From easiest to hardest. Let me see. I get this the right order. So from easiest, do not email business brokers from your Gmail account.

Buy a domain. I mean, I know you're laughing, but like this is basic stuff, right? You know, buy a domain. It's $9. Throw up a website on that domain. It doesn't have to be fancy. Just with a little bit of information about, and it's not about you, like if it's the website, just like your LinkedIn page effectively translated, that doesn't work.

Try to look like a firm. Try to look like somebody who has an. investment thesis. And hopefully the business you're required about, it's the thesis that's on your website. So don't email from your Gmail, buy a domain, email from that domain. And then the first thing that broker is going to do is click on your email seeing and sure you're going to look at your website. Make sure the website, it can be short and sweet, doesn't you be super complicated. It just at least mentions your investment thesis and that should overlap with the businesses that you're inquiring about. The other thing the broker is going to care a ton about

is whether you have committed capital. Because they do not want to waste their time on, you know, Johnny Search Fund, who, you know, wants to buy this business and is bidding with money he doesn't have and then has to go back to his LPs and then the LPs veto the deal or tell Johnny he can't pay that price or whatever, right? There's just a recipe for a broken process. So brokers and sellers want to know that you have the checkbook. Even if it's not money in the bank, that's the best. Next best is we have committed funds. We feel as though we can close in X days. You know, last best is we're a fundless sponsor, you know, we need LP approval to do this deal, et cetera.

So the more certainty you can provide the broker that you have the cash and no one else can tell you know and you're the decision maker, I think you get calls back. Yeah. And we've played that game some in the past also where you, you, if you're a fundless sponsor, for example, you bring in a big name partner who you have a co-investment deal with, right? And they say, okay, look, we're going to look at deal. with you along the way, and here's how you're going to get cut in, and here's what you're going to do, and here's what we're going to do, and we have a committed capital fund, and that can go a long way.

And it's super even more powerful if that fund has a big name, that the progress are like, oh, okay, I get it. Because, like, that's the one thing, like, I've realized there's a huge, like, mental fallacy that people get wrong is they'll, like, if you show up and let's say, okay, everybody knows Blackstone, right? Like, okay, Blackstone's huge. And it's like, okay, you show up and say, like, well, I'm from Blackstone or I'm from GE, right? Oh, that's a big name.

Okay, well, they must have money and it must be a certainty they're going to close the deal. And actually, what you don't realize is because those names are so big, like, it doesn't tell you that much. Like, there's so much kind of corporate bureaucracy that you're going to have to go through

just to get a deal done with those folks that a lot of times you have a higher likelihood of closing with a fundless sponsor who ours just a search funder, right? Who's going to have to go put together financing for the whole thing? So it's this kind of mental fallacy. And it's, I think you also see it also

when you co-invest with people who are like big celebrities. Have you ever done that? Like worked on a deal? Oh, gee. No, that sounds terrible. I have been in deals, and I fell through this pencil fallacy where you're like, we're investing in this deal. And let's say it's a startup deal or whatever. And you invest in a startup deal.

And so-and-so big name, maybe they're on TV, right? Or they're an ex-president or like somebody who was on the Theronose board, right? Tom Brady. Right? Tom Brady's co-invest. Tom Brady's on this deal. You know, and we got Giselle on the cap table. Well, guess what?

They know a lot about not tech startup investing. They know how to do. They know how to throw footballs and be models, right? Like, that's a totally different thing. So, like, you know, just because somebody's a fancy celebrity or they sometimes say smart things on TV, like, you cannot assume that they're going to be additive. And actually, it's typically because they are so busy

with their other stuff. Like, how helpful do you think if Jay-Z is going to be if he's on your cap table and he gives you $2 million? Like, it's just not going to happen. Like, the dudes are busy. Zero. He does not care. Yeah, zero.

Yeah. And actually, when things get hard, the richer somebody is, the more likely they are to just be like, well, you know, just part of my prop form here. Like I invest 50 million a year in startups and this is one of the million that I lose money on. And it's like, well, no, no, no, we need some help. We got to save the money. Like, get in here, do some work.

No, no, I'm busy. I got to work on my next black album or next white album or whatever Jay-Z's next album cover. Anyway. Yeah. Yeah, celebrities are very tough. I have looked at doing some deals with celebrities and the level of errata coming from that side of the email account is not, seems not worth it to me. Look, I think let's go back to this deal. So these guys recycle phones.

They take use phones that happen, let's say, if a company's upgrading or they're closing down in the office, you know, I think we got to talk about the huge elephant in the room. And I don't know how things are doing in Charlotte, but downtown St. Antonio, the numbers are between 30 and 50 percent vacancy rate for our office buildings. Like, guess where I'm at right now? Oh, my house. Like, like, like, this is, this is definitely not a. tailwind business and has me scared.

And they may be very busy right now because people are transitioning out of office to fully remote. But like you got a bit of, is this business is betting that's going to come back, right? Like that's, I don't think so. I could actually argue, Michael, that this business is betting that it goes totally work from home, right? If the whole world goes 100% work from home, think how many millions of voice over IP phones need to be liquidated.

Now, of course, at the same time, who's going to buy them, right? you've got to match buyers and sellers a little bit here. But, you know, what I would think about more is just the obsolescence risk of handsets generally. You know, like how many, you know, cubicle farm workers are even going to have a hard phone on their desk? You know, all of the modern corporate phone systems are just app-based. Everybody has a smartphone, right? And so your work number rings through the app on your cell phone. So fewer and fewer people, I think the buyer's market for these is shrinking.

And that would worry me a little bit. Have you ever seen, there's this interesting meme on the internet, have you ever seen where somebody does a picture and it's by year, the number of like things that used to be separate appliances and the PC or his telephone subsumed it, right? And eventually it got to where the PC subsumed so many different things, everything from a desktop calculator to like a Rolodex, that eventually it got so many subsubed so many things

that one year it just came along and unfortunately like the cell phone just went and did that to the PC because like I don't know if you've ever seen this like we had interns in our company that happened in like 2019 and like we got them desk set up and we got them like PCs and they were like 19 year old kids right young people

and they show up and like I'm like okay I need you to reformat this PowerPoint and I go over there and they're not using the PCs they're reformatting the PowerPoint on phones. I'm like, what is going on here? What is going out here? But I think to your point, like, you know, who wants to pay $40 for like an Avaya phone system? Like, why do you need this? Like, just put it on, put it integrated on the computer. Like, another head, anyway, that's just my headwind thesis on this. I'm like, oof, not, not great. So you want to hear something really

stupid that I actually own. So I actually own, I don't have it so I can't show it on the video, a USB handset, like from like a, like a plastic chunky handset, you know, and you can plug it into your computer and it has, you know, a speaker in the ear and a microphone in the mouth, and you can actually hold it up to your head because honestly, like this little rectangle of metal and glass is not super comfortable to hold up against your face for a while. You can't like do the thing, you know, where you put your ear on your shoulder and you kind to hold the phone hands free. Right?

So I, if you call me on the phone, there's a chance I am talking to you on a fake pay phone that is attached to my computer. Because it's a better tactile experience. So this deal, though, like, so it's making $1.3 million bucks. General relational equity does a thing where they don't have an asking price. Yeah. Is there a price that you would buy this at, right? Like, this guy is making over a million dollars a year essentially hustling and flipping these

handsets. You know, is this a saleable business? Is there a, there might not be any terminal value to it in 10 years, but you could make $13 million between now and then. Yeah. Look, I think you have, I think you have a headwind here. Like, I think there's some significant headwinds. And having spent time working out businesses with tailwinds and headwinds, I can tell you

which one is much more fun. Tailwinds are a ton more fun than headwinds. Headwinds cause you to do a bunch of really painful, tough decisions, and tailwinds make you not have to do those things. And so I think that's the reason I would be personally scared of this is just because life's too short. You know, I've got enough battle scars from headweds. But look, I think you could do really well here.

Do I think this business should trade at, you know, five or eight times EBDA? Definitely not. Like, you know, I think this starts to get interesting at two, three, three and a half times, especially if there's some performance earn out that's tied to the seller. You know, I think that's really, that's where I would kind of price this. And if it was priced around there, I think it would be interesting for the right buyer. Do you want to live in Madison? Do you want to do what this guy's doing?

Because it's not like you can pick this thing up and move it to Charlotte. Like your clients and your people and everything is you're living in Madison for this deal, assuming that's where it is. So to me, the major diligence item is the customers, right? Because what makes, if this business is a bad business, it's a guy that's country club friends with a few VPs at large corporations. And so he gets the work, right? Like, that's a bad business.

If this is a good business, it's professionally branded. It has an end to the IT department at Target or whatever. Pick your Midwestern headquartered company, right? It's on the official vendor list for a couple Fortune 500s, right? And they're the go-to guys to liquidate the phones. In that case, the question is, I got to get a call on the phone with the IT guy at Target and see what else I can liquidate for them. Like, I, like, the value here is tapping into whoever these customers are.

I guarantee you they're liquidating a lot more than phones. If you're liquidating a phone, you're almost certainly liquidating a desk chair and a computer. Like, at the same time, right? And office furniture and printers and routers and routers and network equipment and all this other stuff that is immediately tangential of these things. So if this business, you know, has, has procurement numbers and is in with some large Fortune 500s, that would be some potential real expansion you could have. If it's just a guy with some country club relationships, as our friend Brent from permanent equity,

we would call it a hustler with help, you know, there's wheeling a deal in and flipping phones. That's less attractive. But if this is ingrained in some corporate IT procurement, that's potentially interesting. Yeah. So let's say you wanted to buy this business. How would you structure it?

By the way, I've gotten this DM a couple times. I wish you would tell me how to structure these deals. So let's say you could buy the business for three times EBDA, which by the way, I think EBDA versus free cash flow is a number to really look at here. It looks like they are taking possession and creating inventory of the things that they buy from these companies. And this is telephone equipment, so it is highly likely they are depreciating everything in year ones.

So there's some bonus depreciation going on here, but also massive depreciation means you have capital tied up. So inventory turns seem like something very important here. But let's say that's a pretty close approximation of free cash flow, and you can buy it for three times learnings. How do you structure something like this? So I wouldn't pay up front. I think you bring up a great point about the value of the inventory.

The inventory is probably worth, it's weird because it's worth zero, and then also whatever you can sell it for all at once. So I think a lot of this inventory comes, they'll get it for free a lot of the times. Half the time on this liquidation stuff, the prices show up and make it disappear, right? So they go into these office buildings and they just round it all up and they pay you pennies on the dollar or even nothing, right? So I don't know how you value that inventory. So you'd have to find some way to like actually go through the, what I guarantee you is a warehouse full of a giant rat's nest of like phones and old, I mean, like the warehouse

in this thing has got to be impressive, right? Scary. So you got to figure out how to value that. I would not pay for the inventory at all because let's be real. He knows what it's worth way more than you. So I would try to structure a price where he's going to share in whatever money we make over a period. Maybe he gets a million bucks up front, tops, and then he gets 75% of EBITDA the first year, 50% of EBITDA the next year, 25% of EBITDA. I bet, da, the next year, and 5% of EBITDA the next three years after that. And I don't know if my math works, but then it adds up to 3x, EBITDA, right, over time.

That's how it was structured. Yeah, it's super interesting. So, I mean, a classic searcher would do this. I mean, give you the classic searcher. Let's say the price of three times EBITDA, it's $4 million. You just described something that put a lot of the risk on the seller. But the classic searcher would be like, oh, okay, three times EBDA, you know, I'm going to go do two turns of EBDA, or let's say out of the $4 million,

I'm going to go two, two and a half turns of EBITA. So I'm going to do $3.5 million as an SBA note. And then another $500K in equity or full standby note, you know, that the SBA, the SBA lender likes, and the seller walks with that much more. So I think what's interesting here is you just described a way that it's much harder to do the deal you did, which that's a screaming deal.

And that's the way you would structure because you do screaming deals. That's where you're very successful. Other people structure stuff the other way, the other way I just described, which, like, the big difference there is you put all the risk on the seller with a little bit up front and the SBA route, who takes all the risk there? The buyer does. The personal guaranteeing buyers who takes all the risk, right? Yeah.

Well, I think it's very interesting because the more time I spend with really rich people, there's just a great way to get really rich. Only do screaming deals. That's it. Like, just don't do anything that's not a screaming deal. and like you have a huge margin of safety that where you're just like, I'm doing screaming dollars. And once you described those,

there's a screaming deal, like, I would invest in that deal. That's a good deal. Like, let's do that deal. Yeah. The problem is there's a lot of stupid people out there. There's sometimes bidding up assets and prevent you from doing screaming deals. So, yeah, I think the reason,

the reason that I tend towards a structure that I did is there's two things here embedded in this deal that I think are very hard to handicap, to estimate the risk of. And whenever it's hard to estimate, if the risk I can understand, I can price it, right? But when you can't really understand the risk, you can't price it.

And so you have to share it with the seller. It is sort of my general framework. And this thing has two bits of risk that I can't really price. Thing one is what we mentioned or what you mentioned before is like, are people even going to be using these phones in five years? Like, is there any terminal value of the business at all? Is how much of this is COVID? What happens to the office real estate market going forward?

like these are heady questions that no one knows the answer to on which trillion dollar industries hinge and if you could predict you would be very much wealthier than if you bought this deal. So that's one, I can't price that risk, right? So I need the seller to share that risk with me. The other thing that I have a hard time pricing is I know that this is 90% repeat business, but it's not reoccurring, it's recur or whatever the difference is. It's not recurring, it's reoccurring.

Like each one's its own deal. You know, like Target closes a store or they call you, you make 20 grand. You wait until Target closes in the next door. And then they call you and you make 20 grand. Right. So you're sort of, you're not in control of your demand really on this. And it's like you're just making deals and stacking up deals. And relationships matter and kind of that seems very hard to price for me going forward.

Yeah. So for those reasons, I would want to share it with the seller. And that's why you're the Mr. Wonderful of the podcast. podcast. Oh, God. I think that's a great case. I don't know if you've ever, it's really interesting, let me try to say this in a politically correct way. It is very interesting to go look at when people actually dig into the claims that people who purport to be very rich are making. And it's one of those things where there's like an inverse thing where people who tell you how rich they are and espouse it are usually, it's usually not true. Like the rich people who,

The really rich people that you and I know, they just walk around like normal schmucks because they realize how expensive it is to go tell everybody how rich they are. So, like, there's this idea where it's like, okay, like you should really be careful if somebody's telling you how rich they are. But if you kind of have to figure it out,

like that's a pretty good sign. They're probably actually really rich. So anyway, about that particular, about that particular Mr. Wonderful. Speaking of really rich, I know some exceedingly wealthy guys in liquidations, which is what this is. This is liquidations.

I know some bananas those wealthy guys in like clothing liquidations, electronics liquidations, like basically will buy whatever shit you're selling at the right price, like government auctions, store closing sales, they buy out all the inventory and then they sell it on Amazon or they I know a guy who buys all of the closeout inventory from like almost every retail clothing store that closes, just buys it all. And he has so much that he has opened his own chain of stores, retail stores populated only with the close-out merchandise. You know, it's like, and he crushes it.

Like they have these in malls and stuff. Crush, I mean, like so much money. It's crazy. Private jet money. So I think the coolest thing, and I've seen it before, like, if you can figure out how to get the person who's supplying you the good that you're going to go resell, if you can get them to pay you to take it and then you sell it, like, I've seen that model before. And truly, like you, I can't tell you exactly who these people are because I don't want to

out them because they're making so much money. Like, they're very, they're very secretive because it's like they don't want anybody to come in and they're, you know, they work with a factory or they work with somebody. And it's like, hey, like, do you want me to clean up all those like iron shavings that you have there? And like, want you pay me to do that? And they get that contract. And the next thing you know, it's like, they're the world's biggest iron dealer. And it's like, they're making money on both sides. which is just so, it's just beautiful when you see it. Like, I just, I envy some of these folks. So that's somebody who pays a lot of money for inventory.

Amen. You do you. There's a business that I'm not under NDA for a bit so I can talk about generally. It's cooking oil recycling. Do you know about these businesses? Yeah, we did one on the podcast. It was a day you didn't make it. Yeah, phenomenal.

Like, they come to restaurants and empty out the friars. They charge the restaurant to dispose this because it's like, hazardous waste. You can't just, like, throw it in the dumpster, right? Or they even will set up these special oil dumpsters, like out behind the restaurants. And so they empty their friars into the dumpster. And then they drive around a truck and suck it out. And they charge the business. I don't know, they charge them hundreds of dollars a month to dispose of this oil waste. They get it back to the facility and, like, they clean it and like turn into biodiesel or resell it. And it's, they're making it coming and going. They're awesome businesses. Did you, did you ever hear the story?

I mean, it's a public company now, but the lady, who was a Chinese immigrant to the U.S. And when the big flood of Chinese goods started happening, she figured out that all of the container ships going back to China were going empty, and basically she could pay nothing for freight going that way. And what most people don't know about China is not a lot of raw materials, not many trees, like, it's not, it's the opposite of America. Like America is like the most gifted company geographically in the world, like by far.

Another random Gen X facts that you can make fun of me about, did you know that it's something like more than half of the navigable waterways in the world are in the United States? Really? Yeah. And by the way, that's the cheapest way to travel to make goods travel. So anyway, that's a girly fact. When I heard it, it was extraordinarily high.

Google it yourself, but it is unreal. Like what the Mississippi Delta system and all those rivers in the West Coast, like we have like the greatest gift to mankind. So you may be Googling this. But anyway. So what she discovered was like because China needed raw cardboard to package up all these materials that they're sending to the U.S., she could go buy all the cardboard in the U.S., ship it back to China, sell it there. And this would be billions of dollars a year. And so she's a billionaire, just because she found these goods that nobody wanted the U.S. is waste paper.

She shipped it back. They recondition it, turn it into boxes. Do you ever wonder why cardboard boxes are brown? I assume that's just what color they are. Right? They recycle. They grind up the pulp. the color.

Yeah, when you, so I've seen the cardboard recycling operations. They have these giant vats. They heat up the cardboard. They cut out all the, all the stuff that's in it. And when you cook it down, it turns that color. And there will be guys like standing over the top of it. Yeah, it's a color of cardboard sludge. And it comes out the other side.

It looks like that. But if you take all of the recycled cardboard and you put it back, that's what comes out of it. And like I saw a dude once, I was watching one of these operations in China. and the dude's entire job was to stand over a vat of boiling water where they were cooking the recycled cardboard and fish out using a pitchfork all of the pieces of plastic and metal that would float to the top.

That was this whole job all day. And they cook it and it's squirts out the other side and there's these machines that make boxes. It's crazy. If you're really sad when that guy dies of cardboard cancer inhaling all those fumes all day long, cooking cardboard. And then at the time, do you know what they did

with the wastewater after they cooked the cardboard? they put it in the river. I turn it animal food or something. I don't know. They put it straight in the river. It's straight in the river. That doesn't happen as much anymore. Like the central government cracked down on a lot of that pollution.

But at the time it was like seven, eight years ago, they were just putting, I was like, where's the water go? They're like, there's the river. The river. That is the default mode of trash disposal for most of human history, actually. Yeah, yeah. You just take it to the river and you throw it in. Yeah. It's crazy.

They're crazy. That's why people are like, you know what we need to bring back to the United States? Textile manufacturing and all this stuff. I was like, there's no way. Like, it's impossible. It's impossible to compete when you can't flush the waist down the river, right? Unbelievable, difficult. Anyway, man, we went on to like super duper tangis today.

This was a tangent-filled episode. All right. Let's wrap this one up. That was not at all about recycling telephones, but I think we talked about some very interesting things this week. So thanks for listening for another. episode of Acquisitions Anonymous, the internet's number one podcast about buying and selling businesses. We will see y'all next time.