Acquisitions Anonymous - #1 for business buying, selling and operating - Rural broadband - Sticky customers or sticky situation? - Acquisitions Anonymous 284

Episode Date: March 29, 2024

In the episode of Acquisitions Anonymous, Heather and Bill discuss a rural broadband provider in Utah. The company is listed for $3 million with $340,000 cash flow and claims to offer cheaper infrastructure. However, the hosts express skepticism due to emerging competition from Starlink and uncertainty about government subsidies. They question the business's scalability and suggest it may be better suited for acquisition within a roll-up strategy. Overall, they highlight the risks and challenges in the broadband industry, emphasizing the importance of customer acquisition and regulatory factors.Thanks to this week's sponsor:Are you looking to buy, grow, invest in, or sell profitable businesses? Well, guess what? The M&A Launchpad Conference is happening on May 11th, 2024, in Houston, Texas, and you're going to want to be there. It’s a one-day event where you can network with individuals who've been there, done that—think successful business owners, savvy acquirers, and private equity investors.At the M&A Launchpad Conference, attendees will gain first-hand insights from over 30 industry experts who have masterfully navigated the journey of acquiring, operating, scaling, and ultimately selling businesses for significant returns, including Walker Deibel WSJ & USA Today bestselling author of Buy and Then Build.And because you're awesome and part of the Acquisitions Anonymous community, we've got a sweet deal for you—200 bucks off your ticket. Just head over to malaunchpad.com and enter the code AA at checkout to claim your discount. I'll say it again, head over to malaunchpad.com and enter the code AA at checkout to claim your discount.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]

Welcome to another episode of Acquisitions Anonymous. I'm Heather Anderson, one of your co-hosts. And today, Bill and I break down a broadband, a rural broadband company, which I think a lot of searchers have been interested in over the last few years. We get into some pretty interesting details around government subsidies and also around the threat to this industry from Starlink. So I hope you enjoy the episode. And if you are an expert in this industry and you know more about the Starlink part of it,

We invite you to tell us what your thoughts are on that. Hope you enjoy. If you're looking to buy, grow, invest in, or sell profitable businesses, guess what? There is a cool conference coming up that I think you'll be really interested in it. The M&A Launchpad conference is happening May 11th, 2024, in Houston, Texas. And if you're interested in small business deals, you're going to want to be there. It's a one-day event where you can network with individuals who've been there and done that.

successful business owners, savvy acquires, and private equity investors. If you go to the conference, you're going to gain firsthand insights from 30 industry experts who has masterfully navigated the journey, acquiring, operating, scaling, and ultimately selling businesses for great profits. You're also going to meet my friend Walker Diable there. Walker's a great guy who is the Wall Street Journal bestselling author of Buy Then Build. And also Walker and the guys over at MNA Launchpad have extended a special offer for acquisitions anonymous listeners. So we got a great deal for you, $200 off your ticket to the M&A Launchpad

conference. So to claim it, all you have to do is go over to MAA launchpad.com and enter the code AA at checkout to claim your discount. So head over to MAlaunchpad.com and enter code AA at checkout for $200 off a ticket. So don't miss out on the conference. One of the big levels up for me is meeting other people in person that are doing the things that I want. want to do. It's one thing to follow them on Twitter, but the depth you get in person is just so much more real. So if this is something you're interested in, head over to maelanchpad.com and get registered. They'll see you in Houston on May 11th, 2024. Hey, Bill. Where are you? I am in our new offices. If you're watching on YouTube,

you'll notice my background is different. We have just closed our 50,000 square foot distribution center and moved to a co-working space. So I'm trying to figure out how to podcast out of a co-working space right now. Okay. Well, you look good and I'm glad to hear you've made that big move from the big distribution center to, I guess, fully remote, right? Well, yeah, we have four people here in the co-working space, but of the almost 30 employees, there are only four of us coming into the office here in Charlotte. Everybody else is distributed. This is the future. It is. It's worked out pretty well for us, although I will say the having people together has been, I'm at least some fraction of people,

has been better than having everybody fully remote. Sure. Yeah. So we're four days a week here together in the co-working space, one day a week from home. But to be honest, like we had that big warehouse and everything, but here they have an espresso machine.

We got like fancy bubbly water. I don't have to clean the toilets. Like so many huge advantages. I'm loving it. I mean, the coffee machine is everything. I know. I think I told you on a prior episode, we bought a coffee machine here.

and it was a very exciting week for us and probably a little too much caffeine that week. But we got a lot done. Yes. This has one of those where it consumes the coffee beans in the top and you can choose like a mocha or like all the fancy drinks. Yeah. That's great. But we also have a wonderful internet here, which is great for podcasting and also a good segue to today's deal. Yeah.

We have found an interesting deal. It is an internet service provider. So definitely topical here. Would you like me to go ahead and read it, Bill? Yes, read it. So this one is super interesting because I know this type of business is like a grail business for a lot of searchers, or at least was over the past several years. So it'll be a fun topic. Right, right.

Might be changing. So this is from Biz Buy Sell. It is broadband service provider in Utah. Asking price is $3 million. Cash flow is $340,000. Gross revenue is a million. It does say real estate a million. FF&E 771,800,

and it was established in 2017. This is a triple growth fastest in Utah, top-rated broadband internet service provider in Utah. Utahans, I guess, that's the way you say it. I guess. Utahans were able to provide speed test results directly to state of Utah, which included ISP information. We scored highest with a CI of 101.5 compared to Comcast, CenturyLink, and Utah broadband,

who all scored lower than 27.5. Well, that's a big difference. Our average speeds were higher than all competitors except Comcast, which had 202 megabytes per second versus 208. We have lease agreements with all of our infrastructure locations. we have sufficient infrastructure in place right now to double our subscriber count. A purchaser will receive a roadmap that, that if followed, should result in doubling or tripling revenue with an increase in operational expenses beyond, I'm sorry, without an increase in operational expenses beyond infrastructure maintenance costs typical for our industry. Real estate is owned, so that is what it's included in the price, it sounds like. five employees, FF&E is included. Facilities is a fixed asset covered trailer,

5 by 10, 754B election fixed assets. I don't know, I guess this tax code here. Computer fixed assets, vehicles, et cetera. Accumulated depreciation purchase of small broadband company, $375,000. So it looks like they did an add-on of a home-based So they've got some goodwill on the balance sheet, I think. Goodwill is what they're trying to say, yes, yes.

Our infrastructure engineering design will allow the buyer to create an excellent fiber infrastructure at 20% of what the competition is paying for their infrastructure. This is one of the primary reasons we're able to go against all West Communications, who we've been told has a $120 million infrastructure fund, and Utah Broadband, who we've been told has a $25 million infrastructure fund, despite having a fund of $250,000. This deployment method would likely make it so they can compete in any market they choose that has electrical pole infrastructure.

This is a home-based business, but wait a minute, I thought they have real estate included. So I'm confused. It's probably real estate for the towers or for the network of the way if I had to guess. Yes, that makes sense. Okay. So, yeah, so they own the real estate. I guess those are leases, though, right? You don't really own the real estate fees.

It is weird because, all right, so this business has $340,000 of cash flow. They want $3 million for it. So that's like eight or nine times cash flow. They say they got a million bucks of revenue. And then they've got, so they got cash flow of $340 on revenue of a million. But they've got FF and E, furniture, as fixtures, equipment. I assume this is just broadband equipment of $771,000. and then they list a million dollars of real estate with an asterisk that says not included in the transaction.

Then in the description, they say that most of their locations are leased. This is just a little confusing as to what you're getting here. I think typically what you would see is a bunch of lease locations and owned equipment or potentially even leased equipment. Yeah, and I think you would get leases for the, like you said, the towers or wherever the electrical poles are. long-term sort of leases, but they're very, very specific. I know I saw this with cell tower leases and things like that. So it's not like real estate the way we would traditionally think of real estate. It would be some kind of valuation on the lease that they have. And you'd have to really analyze the term of that lease and all the conditions. So that's kind of complex and

maybe, you know, requiring some specialized assistance to kind of figure out the valuation But what I can't tell is, is this sort of serving a rural market? I guess so, but maybe not if it requires electrical poles. So it has to only, you know, they're saying you can expand into markets as long as it's got electrical poles. What does that tell us? That is weird. So at first reading this, you know, let's kind of zoom out and say what this does.

So this is an internet service provider. So these guys compete with Comcast, CenturyLink, you know, all those places, people who you could get broadband internet service for. This business model bringing broadband to rural areas has been very popular in recent years. Basically, what you do is you set up a whole bunch of long range antennas and you create like a wireless mesh and you can bring broadband to rural areas where they previously only had like terrible low grade like HuesNet satellite. You can typically charge more and deliver much better broadband experiences to these rural

areas. And then your customers tend to be very sticky. You know, you kind of buy the equipment once. There's a great ROI. There's also been a ton of roll-ups in this space over the last five, 10 years, tons. Because, you know, in capital, you can kind of model it out. You know, the return's very predictable. You can use leverage here. So there's been a lot of capital in search and private equity that has flown into this kind of rural broadband market. Yeah. Now, I did look at some rural broadband deals as a banker. And what we learned as we dug in is that a lot of them, well, a lot of it, what they were doing, the infrastructure built has been government subsidized.

And actually, you know, even I noticed it even in the last state of the union speech, you know, the president kind of touting that again, that they're going to bring, that's what that is. They're subsidizing these kinds of companies to, you know, to, to, to, to, to, to, to, to, to, absorb some of that cost of building the hard cost of building the infrastructure there. The problem as a banker that we looked at and asked a lot about was, what about Starlink? You know, why are we, I mean, nice that the government's subsidizing some things. As we all know, sometimes the government's contingent to subsidize things that they shouldn't

or they don't need to. And that's kind of one thing I would think about here is, is Starlink just going to take over this stuff? If you're rural and you haven't had access to internet, and it's not a huge cost to get onto Starlink now. And they've made a lot of progress recently. So we were only at the beginning of seeing what that's going to do to this market. And one other thing that I thought was really interesting, a little anecdote, in looking at some of the companies that I looked at, and it certainly doesn't apply to all of them. But in some that had already built the infrastructure, the revenue projections, they were coming in short of what their projections were. And we ultimately concluded that a lot of folks in rural areas that are living without

access to the internet don't care. Or the cost is not worth it. You know, like what they're going to get out of it. They've been fine without it or without faster service and they've made due and it's just fine that way. And they didn't buy it in the levels or at the levels that some of these smaller companies predicted. So I think there's some challenges with kind of the future of this rural broadband market, at least in my opinion. To give you an idea of the amount of government subsidy that has flowed into this. So in 2021, there was a bipartisan infrastructure bill passed, which included $65 billion to expand affordable high-speed broadband and reach universal connectivity, whatever that means, by 2030. And so this money was split up.

About $14 billion of it was basically to subsidize low-income people buying regular spectrum, Comcast, you know, whatever, where they happen to live. But a full, you know, $40-plus billion has been spent subsidizing these rural broadband companies over the past several years to bring broadband to rural, rural everywhere. And to give me an idea, so this article I'm reading, it says, for example, like, this one company got a half a million dollars to bring. build out infrastructure, and it benefited just 228 people. So, like, these are often very, very rural projects that don't make sense economically to build. But if the government buys all

your infrastructure, you know, the returns might look very, very good, which I guess is the point of the program, right, to incentivize to put the infrastructure in places where it's not economically viable. So you'd want to understand, you know, it could be that these guys did benefit from a whole bunch of those programs. And, you know, maybe it's hard to compete with you because maybe those programs are closed in your area and no one else can build the infrastructure because they don't have free money and the economic incentive is not there for anyone to compete with you and you have functionally a monopoly because the door has been closed behind you and no one will ever compete with you. That could be potentially interesting. At the same time, you need to understand that if you can't

grow, if it's not economic for you to grow unless you have government subsidies and those government subsidies are going to disappear or have already disappeared, it's going to be very difficult for you to put in new infrastructure. So then again, becomes entirely saturating your current infrastructure. Right. And so, and this is the other thing about any business that's got government subsidies heavily involved with it. And this is obviously in health care. We already know this kind of inherently, but in this business, the same is true. What you have is what we like to call stroke of the pin risk, meaning it's just political risk. You know, somebody can change the, rules or change the amount of subsidies and it goes away overnight, billions of dollars of

support goes away overnight. So I think that's something I would be cautious of in any business that's heavily subsidized. But also, like, to your point, well, once you build it, you won't have competition. I think that was the premise for a lot of these small businesses. But I don't think that's true anymore with Starlink. Well, yes. Game changer. There is a competitor and they're out in space and you're not going to go to space. So, yeah, I mean, like, you know, very classic, you know, government spends billions of dollars, private enterprise comes in and just does it way better and affiates all of it. So that, because that's the thing.

So for years, forever, HughesNet has been kind of the dominant roll up of satellite internet in rural, at least in the United States. And the service is not good. It's slow. It uses satellites that are not designed for this, et cetera. And I think the big breakthrough of Starlink is that their satellites are designed to bring broadband anywhere. And I have never met an unsatisfied Starlink customer. I've met tons of people who love it.

Like they put it on top of their truck and go overlanding and rural everywhere and have perfect gigabit broadband. I would be pretty worried if I own one of these businesses about Starlink. Right. And, you know, you could have a different person step into whatever government group is doing this. funding or in Congress or wherever it has to change and say, hey, instead of spending money on building stuff, we no longer need to build, let's just subsidize people to get their Starlink equipment. And it's, right, that could happen very, very easily. Or a company like Starlink could afford lobbyists to help make that happen, right?

At the same time, that would require the government directly giving money to Elon Musk, which they would rather die than ever do. So I would be willing that that's never going to happen. That's a moat. That is a moat. But you're right, that would make perfect sense. It would be way cheaper just to subsidize 228 people's Starlink bills for 500 years than submit a half a million dollars to build out all this infrastructure.

Exactly. One thing I have heard is that these rural broadband providers can be cheaper. I mean, Starlink is 120 bucks a month or so, which is pretty expensive, you know, in a rural area. That's like the base plan is 120 bucks a month. like standard for Starlink. So these guys can come in significantly cheaper. And these houses maybe don't need, you know, super fast, play games, stream 4K video. But, you know, 30 bucks, 40 bucks a month might be more attractive than Starlink.

But again, to your point, Heather, subsidized Starlink, it'll be way cheaper. It'll be way cheaper. They'll have better, they'll have faster service. And I think, you know, when you're tapping into a market that hasn't had access to something, It's hard to predict what the price point is, how many customers will buy. I think once you give somebody access to streaming, I'm sure there's kids out there in the rural areas that are going to go bananas for it, and they'll find a way to get $120 to get their Starlink and have it work. So it's just any time I see a business that's just heavily subsidized.

And I see it in behavioral health as well as just regular health care. There's some kinds of businesses that are set up around special state programs. They can be very good businesses, but also really scary because it just can go away overnight with political change. The other thing that is strange about this, as I read it, they seem very high on their in-house infrastructure, engineering design, and all these things. And they say that they can build fiber optic infrastructure at 20% of the cost of what the competition is paying, meaning Spectrum and all these other guys. And like, that's great. If you can really do that, that is your business. Like, you should be doing that because there are like huge demand for laying fiber all over

this country right now. And if you can do it at one fifth of cost, you're going to be a gazillionaire. What I read when I hear this is we cut a lot of corners when we lay our infrastructure. And so it's much cheaper, right? Like, this just reeks of like somebody that did it on the back of that napkin. and they'll say things like, you know, Comcast lays four fibers. We've found that that's totally redundant and we only use two. And it's like, do you think Comcast's ever thought about that?

Like maybe there's a reason they'll leave, you know, this just seems fishy to me. Yeah, I agree with you. And there's only five employees. So how would they be having some kind of proprietary process to do things so much cheaper with only five employees? That sort of says they're using contractors probably to actually do the installs. You know, maybe this almost sounds like an engineer owns this, and they do some of design work for the towers, and, you know, they've got sort of, they're good at that.

And you can sort of tell by the technical jargon that I sort of stumbled through a little bit, that sort of being the highlights here. That comes from an engineer that is speaking to other engineers who would understand that. So that's what I'm guessing is this is that kind of person, maybe not, you know, a very transferable business other than to another engineer.

that's always something I look for. I always want to know a lot about the profile of the founder and their role. And that's kind of what I'm thinking through when I ask that. And I'm trying to match that up with the person that wants to buy it. And whether or not this business can really transfer to that person. Now, that's because when I look at deals, I already have a buyer. This one, we're out there with a listing. I think he kind of need to be an engineer that already lives in Utah.

that doesn't want to be a W-2 perhaps anymore. And this is an area that you're interested in and you might be able to make some money. But as long as the subsidies last and you'd probably want to grow, you'd probably want to take advantage of these growth opportunities. Sounds like they're saying the existing infrastructure could be sold to so many more subscribers.

But then I always ask, why haven't they subscribed yet? Yeah. Yeah. I think this is like one of those traps. businesses where I agree Heather does seem to be owned by an engineer because they're very focused on the technology and the buildout. But the only thing that matters is go to market. Like, can you acquire subscribers and keep them? And I didn't see any discussion of that. I would be much more interested in this business if this whole teaser were about, you know,

net MRR retention and KAC for new subscribers and pay back over the lifetime value of a subscriber. And we believe we have a really unique go-to-market and we can really scale us up. That's what you want to hear. Like, the infrastructure at this point in 2024 should be a commodity. I mean, this is like small-scale ISP. Like, this should not, does not need to be rocket science. So, yeah, I would worry you will come in and find a founder, an engineer who was, you would immediately need to hire another $200,000 your network engineer if you weren't that, which is most of the cash flow of this business. And you've got to plug in some marketing. You know, they're saying that the total addressable market, this is what I think they're saying, is to at least two times what the number

of subscribers is right now. So then how are you going to get them? And what prior efforts have already been made? Why haven't they converted more of those to clients, two subscribers? So you've got to spend money to do that too. And this is not a lot of cash flow already, $340,000. And we're already chipping away at it. Well, and there's also no debt service in that either. Right. I mean, You're asking nine times. I mean, this is not going to pencil. Mills isn't here to scream. This doesn't even pencil.

This does not even pencil. I mean, you're going to have, if you put $2 million SBA debt on this, you've got $200,000 interest every year, right? It's just not going to work. It's not. I think this person is, whoever's listing it for them, is listing it at multiples where, like you said,

private equity has come in and done roll-ups. and when that happens, you hear founders that heard, I heard nine times, so my business is nine times. You know, they don't understand there's a hierarchy there. Everybody in broadband is not worth nine times. Yeah, so I think that's one problem is that the expectations of this seller are way too high. And, but even if you have a much lower price, $340,000 of cash flow when you probably have to layer in more expenses,

can disappear to zero very fast. Yes. Any additional expenses. I mean, it could be that this is not transactable except as a target for a roll-up. You know, and maybe then it makes perfect sense, right? Because you already have network engineers on staff, like you're just acquiring the customers and the fiber that's already in the ground or, you know, the infrastructure that's already on poles or whatever.

And you understand exactly how to diligence to this and you're trading in a multiple that's higher than this and you just roll it up. Maybe it's as easy as that. I think this is probably pretty tough as a standalone. And then to your point, if that's where the real value is, why is it on biz by sell? Because it's not hard to figure out who your targets are for potential acquirers if it's the roll-up guys. You know, you could go to them directly and yet, here it is on biz by sell.

So maybe that's already been tried. Yes. Yeah. Yeah, this is like the classic, why am I seeing this deal? You know, like, why am I the lucky one that gets to buy this deal when all the logical acquires have already passed. Yeah. I would be nervous.

Yeah, me too. I have seen some very attractive rural broadband businesses, none that have solved the Starlink question. I don't, I've not heard anybody articulate that, the answer to that. But I have seen a lot of people who have made a ton of money in this space because the lifetime values are massive. The marginal cost to serve a customer is nothing. And then it's just a cack problem.

and the CAC is relatively straightforward because you kind of know these people. You just send them letters. You know, and they tell their friends, oh, we got the really fast broadband thing. I've also seen businesses try to get households to club together. Like they'll blast postcards to like everybody in a rural zip code. And it's like if you guys can get 10 people to commit, we will bring broadband to you. That's great. Yeah.

Which kind of gives them a reason. It makes them cross-sell each other and then helps some. subsidize the infrastructure, so the feds are not already subsidizing it. So I have seen a lot of people build out rural broadband networks and make a ton of money because the equipment's not that expensive. You get it in place and then you just clip coupons forever because there's zero churn until Starlink comes along. Yeah. I mean, I'm sure there's consultants out there that do feasibility studies for these new builds,

you know, wherever they're trying to go into the newer areas. and I'd just be curious what they'd be saying now about Starlink, you know, how do you protect from that? Or is everyone just trying to kind of ride this train, you know, until it kind of fades out? Because I just, I can't believe in five years that the government's still going to be putting this stuff in. If Starlink continues to work. Which is maybe good or maybe not, because if they're not putting this stuff in, maybe the doors close behind you until they're subsidizing Starlink. Yeah, you have five years. And that's an interesting.

I've looked at businesses before where the buyers knew that this was a declining kind of forever. It's kind of hit its peak and it's declining because of technology or whatever was changing, but that it still made sense to buy at a really cheap price because they would still make a very good return and even expecting the business to kind of not be there hardly at all in five or seven years. So there is a strategy there. I will say this. If you go with a strategy like that on any business, whether it's this or something else, it's not really financeable.

Banks don't really like that. But if you can come up with some other capital to do it, that can actually work. Yeah. So this one, I don't know. I'm super interested in the industry. I would love if somebody on Twitter who owns one of these or understands it would answer the starlight question. I wonder if it's just purely a cost delta and they can provide broadband at 30 bucks. But then the second part of the question is what happens if the federal government

subsidizes Starlink instead of building all this infrastructure. Or maybe they won't do that. Maybe they say we've already built infrastructure in this area. It's there. That area doesn't need any more subsidy. And so you're safe. Yeah, it's somewhere else. Yeah, really interesting.

I would love to hear an expert tell us. Yes. And that's my favorite thing about this podcast because we'll publish them. And somebody on Twitter will be like, you guys have no idea what you're talking about. Here's how it works. And then we really get to learn. Disclaimer, we know. We don't.

We don't. We know we don't know. We know what we don't know. All right. Anything else on this one, Heather? Nope. All right. We'll wrap it up. Thanks for joining us for an episode of Acquisitions Anonymous. We publish twice a week. We will see you next time.