Acquisitions Anonymous - #1 for business buying, selling and operating - Recycling Gold or Rust? A $20 Million Metal Business Under the Microscope

Episode Date: September 27, 2024

In this episode of Acquisitions Anonymous, hosts Michael Girdley and Heather Endresen evaluate a metal recycling business for sale in Pennsylvania. With $1.1 million in cash flow and $20 million in annual revenue, the conversation explores the business’s asset value, including $2 million in inventory and $2.5 million in equipment. Heather and Michael also dig into key factors like the potential impact of commodity price fluctuations, the importance of owning the real estate, and the environmental concerns tied to the business’s location.Key Points Discussed:- Inventory & Pricing Risk: The challenge of managing $2 million in inventory and how commodity pricing impacts profitability.- Environmental Concerns: Why it’s critical to understand the environmental state of a property in a recycling business.- Location Dependence: The importance of owning real estate in a business heavily tied to its physical location.- Low Margins: How operating at a 5% net margin presents risk and the challenges of maintaining profitability in a low-margin industry.✉️ Subscribe to our Newsletter and get more deals like this every week**: https://www.acquanon.com/newsletter🎧 Listen to our full episodes on your favorite podcast platforms**: https://www.acquanon.com/episodesThanks to this week’s sponsor:Acquisition Lab and their team have been longtime supporters of the pod. Acquisition Lab exists to help people buy a business and navigate all the complexities of the process, as well as provide a trusted framework, tools, and resources to support you from search to close.If you are serious about buying a business, check out acquisitionlab.com or email the Lab's director Chelsea Wood at [e-mail] and mention us ;)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]

I wonder if these guys are smartly selling it out at the very tippy top of the market. This is the regional metal scrapyard since the 1940s and there's not going to be another one. So yeah, it is very, very much dependent on the location. Welcome to another edition of Acquisitions Anonymous. I'm Heather Anderson and today Michael and I go through a scrap metal recycling business. Really interesting deal. Michael is a little concerned what might be going on. It's got a few mysteries to it.

We're not sure about the margins as well. So take a listen and tell us what you think. This episode of Acquisitions Anonymous is sponsored by Acquisition Lab. Acquisition Lab and their team, they've been longtime supporters of the pod, and they provide a really great service for people who are looking to acquire a business. So it's created by Walker Dival, who's become a friend, the author of Buy, Then Build, how to outsmart the startup game. So Acquisition Lab is an accelerator with a highly vetted cohort-based educational and support community

for people who are serious about buying a business. So a lot of our listeners like you, you turn in every week to our deal reviews. You want to get in on buying a business. You're on this podcast because you're trying to learn how to buy a business. But if you're not quite sure where to start, Acquisition Lab is a great place to start. So they exist to help people buy a business and to navigate all those complexities of the process, everything you hear us talking about on the show. they provide a proven framework tools and resources that support you all the way from search to close.

They do it. There's a whole bunch of educational material and support. So if you're serious about buying a business, check out AcquisitionLab.com or you can actually email the program director Chelsea Wood directly. Her email is Chelsea at buy then build.com. Heather, welcome back. Good to see you, Michael. Excuse me. How are you feeling about middle age right now?

I'm 49. We have never asked you your age, and I'm never going to ask. But how are you feeling about it? Yeah, it's not allowed. It is not fun. You know, like it's rough. I just had a skin cancer. My first one ever removed yesterday. And it's just not a pretty thing. But you got to, you know, you got to do it. You got to deal with it. So I had the same thing. We talked about. It's called Moe's surgery. And for those of you don't know if you get skin cancer, and I have, I have a scar right on my face. I think it's right there. It looks. looks like just a new new wrinkle to go with the other wrinkles that I have going on. But if you don't know, the way it works is you get skin cancer and if it's subcutaneous, so like slightly below, they come in, they dead in the area and then they cut the cancer out and then they go take it to a lab next door while you sit there with an open wound, just like staring into space for like 20 minutes and then they'll come back and either try to dig out more cancer or they will close you up and say, congratulations, we got it all.

So I had the same surgery. And my story about that surgery, Heather, was that. I show up and the guy's like, oh, you're currently from Twitter. I follow you. Oh, man. Like, it was like, it's become kind of a problem when I go see specialists. They'll like want to talk about business or Twitter or whatever. And I'm like, no, no, dude.

I just want to talk about this cancer thing we got going on. And then I'm going to go home. Yeah. Well, my story is, see, the color of my shirt is sort of. my back of my hair is about the same color as this red shirt that I'm wearing today. My mo surgery was on the top of my head where my hair parts. So everybody wear hats. I know we talk about sunscreen, but wear hats in the sun because it's very common, I guess,

to get these skin cancers on your head, which is terrible. Well, it turns out we lost all this melatonin and it turned into Northern Europeans because we were supposed to live in Northern Europe. Right. That's why that's why we have white skin. So anyway, or yellow, whatever it is, if you're more of a sentence kind of person. Cool. Well, I brought us a deal.

And I think it's just going to be you and me today because Mills evidently got called back to court today. That's the one thing people don't talk about. We should maybe talk about this. That is the one thing people don't talk about. Like when you own a business that employs like blue collar and lower socioeconomic workers, you invariably end up dealing with. legal system. Like if you're like a white color law firm or whatever and do it like you don't have a

problem like and this literally happened to me last week. We got a call and somebody was like, yeah, hey, the warehouse. We don't have anybody to manage a warehouse today. And I'm like, what's going on? Well, our warehouse manager got arrested down at the convenience store, you know, for whatever, drive without a license. Let me just something totally not there. So people don't talk about like, and so Mills has got his construction company that does roofing and guess where he is today? He's at federal court for something going on, you know, and it's just like, inevitably, he's dealing with stuff like that. Yeah, I literally just told one of my clients who's buying a roofing company, uh, some of these stories and said, you know, you do need to be prepared for the,

these kinds of, uh, issues that might come up. So yeah. For sure. Uh, well, that'll be a perfect segue to, uh, let's talk about the recycling business. So I brought a recycling business from Pennsylvania, my story about recycling businesses. So, you know, for those of you don't know, there are these places where you can go and take metal, cans, wood, iron, all this kind of stuff. And you can go take and they will pay you money to buy your spare stuff, right? And so it's, and they recycle it, right? So, um, so one time, uh, one time we learned that you have to watch these recycling businesses because back when copper was like super expensive, like 10, 12 years ago, Do you remember this when there was like a huge shortage in copper?

Absolutely. So copper went through the roof. So if you had constructed anything, you had to worry about somebody coming and stealing all of your copper wire. And so people figured out that because copper was so expensive, these recyclers would pay you a ton of money for it. So like we caught somebody running a scam where they would take our Home Depot card. They would go to Home Depot. They would buy copper wire at retail. And then they would go straight over the recycling place and sell it for half of what they just paid for it.

So just straight up, straight up theft from the company. And, you know, the interesting thing about it was, you learn that these recycling places, they track the buyers and take ID from the people who bring them the recycling stuff. So that's how we called over there. We're like, hey, has this guy been coming over, like selling brand new wire? And they were like, yeah, yeah, we have him. He's been here every week for the past three years. He sold like a new wire.

Yeah. Yeah, well, at least they take the ID. But of course, the thieves gladly provide it, which I think is always kind of funny. But good that you caught him. 100%. So let me read you this one and see what you think. So this is a metal recycling business for sale. Its price is $3.5 million.

Annual revenue is $20.3 million. So basically it's selling for over six times revenue. Net cash flow is $1.1 million and it's located in Pennsylvania. Established in the 1940s, this business is a leader in the market. for recycling, specializing in non-ferrous metals like copper, aluminum, brass, and stainless steel. It has unique expertise in recovering copper from insulated wire and also offers dumpster container services through its affiliate company, which is included in the sale. Located near a major metropolitan area and close to the highways, the company is poised for

the right buyer to expanded services. The company's clients include contractors, electricians, demolition firms, and smaller scrap processors. This sale includes inventory averaging $2 million in value and equipment with an estimated replacement value of $2.5 million. It excludes the real estate buildings, real estate and buildings, which are valued over $3 million. However, those can be purchased separately. There are 20 employees, including the three operating owners who work full-time. The business generates operates on a two-acre site with multiple warehouses and office space. They have a strong team with excellent regional reputation.

They're profitable with solid cash flow and the ability to expand services and regions. The owners are willing to remain through the transition period and thereafter and it's well-made equipment with high replacement of value. Further details of the business were revealed only to the buyer. prospects with whom the broker has screened. Furniture's, fixtures, and equipment is $2.5 million and inventory is $2 million. And so, yeah, so we have this for $3.5 million for sale. We have a net cash flow, $1.1 million business with $20.3 million in annual revenue.

So about three and a half times cash flow, not bad. Yeah. What do you think? I mean, that sounds pretty good right there. I wonder how much this cash flow swings around with commodity. prices, you know, I would have to think it does a little bit. You know, perhaps not. Perhaps they're able to kind of maintain their margin. That would be something I'd be interested in. But three and a half times cash flow sounds good. I do think you need to buy the real estate though here. Yep.

Yeah, you are very location dependent in this business and I think you want to own it. The problem with owning this real estate, though, is you've probably got some environmental work to do. You know, when we look at commercial real estate, especially for lending, a bank won't lend until they see that they've got all the environmental reports and everything's clean. And a lot of times businesses in this industry will have difficulty with those kind of passing the environmental tests. So that might be something, you know, you probably want to own the real estate. And if you do, you really want to check out the environmental situation, what the records show so far on the property. Yeah. Well, I think the positive from an environmental standpoint, it looks like they've specialized

in copper, aluminum, brass, and stainless steel. So I don't think most of those do not have any sort of weird coatings or chemical treatments, but I mean, man, to your point, back in the 60s, they did some crazy stuff. Like all those toxic waste sites and stuff like that, so you don't know what's on this thing. It's a question of how long has it been used for this purpose and what else did they do? Yeah, back in the past when things were, they didn't really have the same level of regulation. And whether or not they use any solvents, you know, around these metals because they can, you know, seep into the, into the soils and the water table that way. So I just, I would think there's a, you know, a lot to check out.

It might be fine, but it might not. And that's just, you know, one of those things you really want to understand. Even if you were just to buy the business and become a lessee, you'd want to understand sort of the environmental state of this property for whoever owns it, your landlord or you, and I guess your landlord would be the seller here if they didn't sell it to you. So what do you think, though, about the commodity pricing, Michael? I think I would be really curious to understand what the velocity of materials out of this place looks like, right? I have to imagine what you're buying here is a couple things. You're buying the location, and I'd love to.

come back to that in a second. But I think you're also buying the relationships with the folks that are buying these metals downstream, like people that are, you know, making, making copper wire, manufacturing stuff, or overseas buyers, right? Like there's a whole trade of people who take things like, you know, cardboard boxes and raw materials from the U.S. and put them into empty containers going back to Asia to make stuff to send back to the United States. So I think you're also buying that. I think I'd be really curious as to who's taking the price fluctuation risk in those situations, right? Like are you as the owner of this paying, you know, people that come up to you, let's say $3, and then the price of copper goes down by 50% and suddenly you can only sell it

for $3 or $2 to the next person in the chain, right? So I'm curious who's taking the price risk, if that makes sense. Hi, Heather here. When I'm not breaking down deals with these guys, I'm helping people get the right SBA loans for their business acquisitions. Because when you're buying a business, the best financing isn't one size fits all. There's the best rate, fastest to close, the specific loan structure that you need, or a little of all of those things. That's why my company, Vizzo Business Capital, works with over 30 different lenders to find you the best funding in less time and with less friction, so you can focus on the deal. Sign up for a free live Q&A session on

SBA loans at Vizzocap.net, then click Zoom sign up in the top right corner. That's v-I-S-O-C-A-P dot net and click Zoom sign up. So they say their inventory average is $2 million. Right. So they are holding $2 million of inventory. And I am always any inventory business. I'm always, I always say that's a yellow flag immediately because I want to know a lot about the inventory. Like you said, the velocity, you know, who's taking the pricing risk.

But also, how do you manage this? inventory. You know, this is junk, a scrap metal, you know, how are you accounting for it on your balance sheet? How do you come up with that $2 million? How are you pricing that? And how do you know how much you really have? You know, a lot of small businesses don't have great inventory management systems. Right. Even for brand new kind of stuff. And this is, again, scrap that's coming in and all kinds of shapes and sizes and conditions, I imagine. So I think that's where I'd probably really dive in as a buyer is trying to understand that $2 million of inventory and the velocity and how much of it is sitting around, how long it's really been there. And then I would kind of,

on the inventory side, I'd kind of want to try to feel out, is this more of a supply side business, meaning that it's more, it's easy to sell, you know, the commodity, the metal. There's always a buyer for that. Of course, you've got to find the right price. But is this more of a supply side business where the key to the business is the relationships with the folks who bring in the scrap metal. Sometimes they are in recycling or any kind of used inventory type business. I have often found that it's more of a supply side business. Yeah. Look, I think there's another thing that comes to mind on this deal. Like, where are we in the cycle of, you know, the reindustrialization of America, our demographics, all that kind of stuff? Like, I don't know how it is.

Well, I know how it is in SoCal. Nobody builds anything. But, you know, in the rest of the country, including here in San Antonio, like, everywhere I turn, there is basically brand new Class A light industrial space. And it all appears to be vacant. Like, I'm driving around on the highways here. It's just like, it's like, oh, this is definitely like a cyclicality situation. And I think this business is subjected to that as well, right?

You know, everybody I know is drowning in inventory over. supplied, pulling back, high interest rates are doing their job to slow down the economy. And like, this is a situation where, you know, are you buying this at the absolute top? Because these numbers represent what's happened over the past few years through COVID up until recently. And we're recording this, I guess, you know, September 2024. Like, like, I wonder if these guys are smartly selling it out at the very tippy top of the market. So you feel like this business revenue is dependent. on construction building?

Yeah, I think that's who's buying a lot of this stuff, right? Things like copper is going into construction and wiring and stuff like that. You know, stainless steel may be different. And then there's probably different users for aluminum and brass, but, you know, I think people dismiss or discount

how much of our economy is construction related in the U.S. Yeah, and also trying to figure out the end market of some of these kinds of these kinds. of businesses. You know, I've looked at a lot of them where, you know, we've said, who are the end users and can we break it down sort of by channel? And sometimes it's very difficult to do. You know, it's not clear where the copper is going exactly, you know, the use, the final use. And it is important to know, like you said, if it's going somewhere where it's subject to cyclicality,

you've got to know those cycles and where you're buying on those cycles. Yeah. It wouldn't surprise me if a lot of this stuff is getting loaded up onto containers at the port of Pennsylvania and finds its way to China, China and Southeast Asia. I bet you a big percentage of this goes straight back over there. Yeah. I would think so too. So I think the other thing about this, which is super interesting, and I'm with you, like I would want to own the real estate here is I think that's probably 80% of the enterprise value here. and that's one of the things that has happened as America has gotten more affluent over the past 30, 40 years is when you have a nuisance type business like this, one that is like people don't want around it. And like the classics example is the local dump, the trash dump. Like have you ever looked in the economics of trash dumps? No.

Fascinating. So there's a dynamic with this kind of class of business that the once you have a staff, one, like they become incredibly valuable because it's very difficult to build a new one. So examples of that are like trash dumps, quarries, so like a quarry where you dig rock out of the, out of the ground. Another one are oil refineries. Like new oil refineries haven't been built in the US for a really long time because the regulations have made it so difficult to open any of these new things. And it's so easy for some like voiceiferous like public folks to be like, no, no, no, we're going to make it so this new dump can't set up.

Auto scrapyards are another one. And so a business like this, a lot of your enterprise value is because it's difficult for somebody to go open new recycling business because nobody who owns a nice house and is making a good wage wants to live an extra recycling business. And they go and fight it and keep it from coming to their community. Everybody wants office buildings and, you know, beautiful, redone, hipster type stuff like our friends on Real Estate Anonymous talk through a lot. And like I think this is a lot of the enterprise values is this because I guarantee this recycling business is probably very closely located to Philadelphia, right?

We talk about it being in Pennsylvania and the area code of the broker kind of reflects that. I think you have a situation here where 90%, 80% of the enterprise value is because these guys own a property that you can actually run one of these businesses on and trying to compete with them would be virtually impossible. Just like the dumps, just like the quarries, just like the refineries, like, same kind of stuff right so the idea of location dependence this is extreme location dependence the fact that you have permits and you're there and it's established there since the 1940s I guess that's our hint right this is this is the regional metal scrap yard since the 1940s and there's not going to be another one so yeah it is very very much dependent on on the location and then you've got to value the real estate we talk about this a lot

is that net cash flow, is that with normalized market rents or not? A lot of times what we see it's not, you know, because the owners of the business own the real estate and they're not expensing market rents through the business. And so some brokers are good at normalizing it before they put it out to market, but we see a lot that don't do that. So even if you buy the real estate and they haven't done that, you've got to first figure out what the real EBITDA is. And I don't know what did they did they give us a hint to what they would ask for the real estate down there they just said it was available for sale i said it was available uh like a lot of smart business owners i bet they want to keep you know they're doing they're doing the retirement plan where it's like

hey i'm going to sell my business but i'm going to own the land and get a residual from that like yeah i know that's a good idea because i'm pointing on doing it's pretty good use use the business to buy yourself some land that then pays you rent in in your in your old age which but is it a good idea for a buyer for this business to be the tenant, you know, of the seller. I think you'd have to really negotiate a great lease if you were going to do that. I mean, then you'd have to pay a, you'd have to lawyer up for the lease the same way you lawyer up for your purchase and sale agreement. Yeah. And like I would want to own, be able to control my destiny with a 10 year lease with four or five year options. Like I want to be, by the time this lease ends, I want to be,

have been dead for a long time. Like that's my goal. I saw something really interesting in the last couple of weeks that a buyer did. A seller did not want to carry a seller note. And we like those for skin in the game. As lenders and buyers, we like those. So that you've got a right of offset. If there's some misrepresentation or something, the seller loses some money. And that's a whole other topic because sometimes brokers are telling sellers to get a personal guarantee.

And I'm like, no, no, that's not the point. The seller's supposed to have skin in the game. They're supposed to lose money if things don't go well. but this seller didn't want to like a lot don't and they were leasing the they're going to the buyer's going to lease the real estate from the seller so they wrote some right of offset into the lease into the rents so instead of having it against a note they could get free rent for you know x number of months or whatever if if there were certain mess representations so i thought that was interesting i thought that was a creative structure yeah getting creative these days is the way to get deals done

That's what I'll tell people. For sure, for sure. So I want to talk about one of the things I hate about this business. So they're carrying $2 million in inventory, and the annual revenue is $20 million. So that means they're turning over their revenue. They're turning over their inventory. Let's say they can keep a consistent level. They're turning it over 10 times a year, which is pretty good.

But for that amount of kind of revenue and how much turnover they're having to do, the cash flow from this business is not that awesome, right? It's 5%. They're running at a 5% of revenue net margin. And to your point, like, this suddenly creates a ton of risk that price fluctuations can kick you in the butt or you're in a situation where you have too much inventory and you're stuck with it, right? And you only want to get rid of is it a loss.

Like, how do you feel about the level of risk that operating at this low margin presents to a business like this. I don't like it. Yeah, this is really skinny margins. And, you know, unless you have direct experience in this industry, it would be kind of scary, you know, for a buyer to step in. I'm sure the seller, the seller's been doing it a long time, and this is still the margin that they're eking out. And, you know, it makes me think a buyer could actually do worse. You know, it's all, probably it's all about what you pay for the scrap. And, you know, how carefully do you evaluate a big truckload of scrap, right? You can probably easily miss, right, and say, I'll pay X for it, but then you get it and you,

and you sort it out and realize it's not really, you know, maybe I overpaid for that truckload. Some of this isn't what I thought it was or isn't usable or whatever, whatever it may be. I think that's probably the key here is having the experience to know what to pay for the goods that are coming in the door. Yeah. So we got to wrap up today because I think both both you and I are on a tight schedule. But I have one more question about this. And maybe you know or maybe some illustrious now, like, why didn't private equity come roll this space up already? Because it seems like typical private equity, find a cornered resource, lower what they're paying, charge more, get economies of scale, like get smart data. Like, why is this still out there? And frankly, I found this for disclosure. I found this listing like a month ago. So I sit on listings and then I bring it to the show. So do you have any thesis around YPE hasn't bought either this one or rolled up this industry in general? I think it may have to do with the real estate dependency and the fact that you can't expand. You know, private equity likes to be able to grow something.

And it may have a little bit to do with that and a little bit to do with how hard it is to price the margins, you know, and achieve good margins here. I would guess it's both. So definitely SBA financeable. In terms of stuff, we think, right? I mean, size-wise it is. It depends on what the real estate does to the whole picture. But yeah, it could be. I just think it needs to be somebody, this is one where transferable experience is probably

not enough. It probably needs to be closer to direct experience and some knowledge of the commodity pricing and how all that works. And probably some rollover equity, quite honestly, where the seller stays on more than 12 months. Because, you know, SBA says if you buy them out in full, they have to leave in 12 months. But if they roll over some equity, they can stay longer.

This is a case where I'd probably want that. I want some rollover equity and I want the, whoever the right seller that really knows how to do the pricing and really understands the business to stay longer than 12 months. So I think it will take that to really learn this business. Yeah, I hear you. All right. So thumbs up, thumbs down on this one?

I'm like sideways. Depends on the buyer and the real estate. state price? There's something weird going on with this one. If there's not something weird going on with this one, I would be thumbs up. I think this has got a lot of future. I think it's a right size for somebody to come in and get their hands dirty literally and move to Philly and do something with this.

So I'd be thumbs up for the right buyer. I think for an independent person trying to get an entrepreneurship, I like it. But I guarantee there's something weird with this deal that makes it a non-starter. I just don't know what it is based on the list. Cool. All right, everybody. we'll see you next week thanks for another episode of acquisitions anonymous heather great job today thank you michael good to see you all right catch you later