Acquisitions Anonymous - #1 for business buying, selling and operating - Sail Away on an Alaskan Cruise Line with $2M of EBITDA - Acquisitions Anonymous 276

Episode Date: March 1, 2024

In this episode of Acquisitions Anonymous, Bill, Heather, and Mills delve into a small ship cruise line operating in Alaska. They explore various aspects of the business, including its revenue, EBITDA, and unique selling points such as its reputation for offering intimate cruise experiences in Glacier National Park. The hosts discuss the challenges the industry faced during COVID-19 and uncertainties surrounding post-pandemic recovery. Mills raises questions about logistical challenges and asset ownership, prompting a discussion on valuing the business and potential growth constraints related to permits and capacity utilization. The hosts emphasize the importance of institutional knowledge and understanding the seller's motivations in navigating the deal, while also considering financing options, debt assumption, and the challenges posed by distressed acquisitions. Overall, the podcast provides a comprehensive analysis of the cruise line business.Thanks to this week's sponsor:CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hello, everyone. Welcome back to another episode of Acquisitions Anonymous. I am one of your hosts, Bill D'Alessandro. And today we have a listing with beautiful photos. If you go on our YouTube channel to watch it, it is a cruise line in Alaska. Big boats, not boats, ships, up to 200 feet long, 76 passengers. They go out for a week to Glacier Bay National Park in Alaska. Two million box of EBDA. It's a permit limited industry, and this is one of the largest permit holders to actually enter the bay. So there's some nice moat built into it. Mills has great comments about kind of how to think about underwriting the assets, all these boats. Heather has really good comments about how to kind of, are they good collateral or are they not? And I just try to

throw in a few jokes when I can. So I hope you enjoy 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.

Heather, it's good to see you. Welcome back. Sorry, now we talk over you. Welcome back. You've been kind of busy lately, Bill. What have you been up to? I've been having my third child, and he's a month old now. So I'm back in the chair.

Thank you. I was actually able to take a month off from work, which was the most I've ever taken off now. It took three kids from me to figure out how to go on paternity leave, but it was pretty nice. That's great. I'm glad you did that. And I'm glad that, and you're getting some sleep.

I think you told me you are. Oh, yeah. That's good. Amazing. So our baby, he was born at almost 10 pounds, so he was huge. So like, it's C-section. So they're like pulling him out and all the nurses are like, this baby is giant. Like they immediately, like they all thought it was so.

And he was a big baby. But the great thing about big babies is they sleep because they can eat. And, you know, their stomach is warm enough to hold enough milk. They're mature. Yeah. They're little. He's been a great sleeper because he was big. So, I mean, of all the three kids, like, he's sleeping some nights six hours in a row already.

Wow, that's great. Oh, here's Mills. Hey, Mills. Welcome to the show. Hey, sorry, y'all dealing with roofing problems. Mills is running a business while we're over here trying to do a podcast. Yeah, right. All right.

Well, we've got a fun deal today. It is a cruise line. It's another tourist business, which we've had some fun with in the past. So I'm going to put it on the screen. It's on the screen. And you can also see our beautiful faces in Mills' majestic beard. And also the teaser for this small ship cruise line. So this is from Mills' favorite business broker in the whole world, generational equity.

So I know you're excited at Mills. Yep. It says, this outstanding acquisition opportunity is for a small ship cruise line operating in Alaska. The company operates vessels that range from 104 to 207 feet in length, and they have a capacity of 12 to 76 passengers each. So these are big boats. Revenue is generated from sales of a variety of five to eight-day overnight cruises. The company also operates week-long charters for private groups. They have $13.5 million of revenue and $2 million of EBITDA in 2023, located. Alaska. The investment appeal, if you're on YouTube, the beautiful photos need no further description

of Alaska. Superior name and reputation. The company has an excellent name and reputation for its small ship cruises in Alaska with a track record for unique itineraries that leverage local knowledge and cuisine, superior customer service, and exceptional client satisfaction.

They are one of the largest permit holders for Glacier National Park. The Glacier of National Park area, in Alaska is one of the most sought-after tourist locations, and it is only accessed via sea and requires a permit for entry. The company is one of Alaska's largest permit holders for entry into Glacier National Park with over 100 entries per season. The company has also been awarded many awards and accolades and recently has received

awards in major travel magazines and publications. It says there's also a favorable outlook for industry growth, revenue for U.S. Water Transportation Services, an indicator for cruise ships is forecast to grow in an annual keager of 6% between now and 27 based on changes in physical volume and unit prices. The company will outperform this growth through enhanced sales and marketing efforts, which will yield higher occupancy rates. And that's all we've got from the folks at generalational equity.

No asking price on this thing. 13.5 million in revenue, 2 million in EBITDA. What do you guys think? Well, first of all, I just want to go on this. visit, of course. When I see businesses like this, I get excited, just think, oh, I just want to go check it out. You know, that's all. It looks like a fun business, for one, you know, that these are the smaller. I've been on a big cruise ship in Alaska before a couple of times. And you do see these smaller ships going, you know, they can get further in to some of the, you know, closer to the glaciers and really just see things a lot more up close. So I think it's a really kind of unique, you know, piece of the cruise. And, you know, cruise industry. It's not like the big carnival cruises. It's a little bit more intimate. And I think

you can get closer to nature. And so I think there's a definite appeal. And these are 12 to 76 passengers, so it's not like being on a giant cruise ship. Great, great industry for as far as being a lot of fun. I'm sure devastated like all the rest during COVID.

You know, that was a really, really tough time for that industry. And I'm sure this was probably shuttered at that point and then has come back since then. And so everything like that that really had a dramatic negative impact during COVID, okay, now it's the beginning of 2024. So we've had, you know, two, three-ish, more like two years that are really kind of post-pandemic numbers to look at. It's been hard to buy businesses like that because it's really difficult to know, is this a post-COVID bomb that's going to normalize and flatten out? Or is this permanent?

And I would think for this industry, even 23 wouldn't necessarily convince me that this is normalized yet. That's kind of how I feel. What do you think, Mills? You know, I got very distracted as you were reading this bill because they say Glacier National Park is only accessed by sea. And glaciers in Montana. So I was like a bend of glacier. I know there are lakes there, but I was really confused for a minute. I think what they mean is Glacier Bay National Park.

which is up in Alaska and it makes more sense. And it's a bay. Yeah. I was incredibly confused for like three minutes of Googling. This is one of those things where I was like, that seems like it's a real perk. Like it's a real asset to the company if they're one of the biggest permit holders to actually be able to take tourists in. But then, you know, my geography, you know, got the best to me and I just had to look at it. But I think this is interesting.

I mean, my goodness, I would love to see their balance sheet. I'd love to see, you know, do they own these boats? Do they lease them? You know, how, you know, absolutely depreciated are they? And, you know, what's the kind of plan? Like you said, these are big boats. You know, if you have a 200-foot-long boat that as a fishing vessel, you know, it's okay if it isn't pristine and the paint isn't, you know, perfect.

and the customer experience is non-existent. But if you have somebody who's paying a boatload of money, pun intended, to come sail with you, and all of a sudden, you know, your water pump breaks or something like that and you can't flush toilets, like these are not things that you can just kind of let fall by the wayside. This would be a very, very logistically intensive business.

But I think you're right, Heather, is super cool, and we should go check it out. I can't imagine running a 270, foot boat with 76 people on board for a week. I mean, food, like, this is a legit cruise line. Yeah. Right? You need a doctor on board. Like, you need an evact plan. Like, compliance is probably crazy. You know, you can't just buy a boat and crack into this industry. Yeah. So barriers to entry are, and the permit alone, you know, just even if the permits weren't difficult, you're right. All those other things would be huge barriers to entry. So you do have a very insulated market. But, you know,

then there's the question of growth. Okay, we're in a little insulated market. We only have so many boats or ships. Maybe we should be calling them ships. I don't know. You only have so many. And so, you know, is there growth potential? Where are they as far as capacity? You know, could they add on some weeks? They're not really telling us much here, but that would be sort of interesting to know what are the capacity constraints if demand were to grow the way they're sort of suggesting at the bottom. But you are sort of insulated and you are sort of limited, I would think. And also I want to say this is another one of those businesses, to Mills's point about maintaining the ships and the maintenance cap-ex.

This is not an EBITDA kind of business. We shouldn't just be adding back depreciation and saying that's for cash flow, because it probably is probably your maintenance cap-ex is at least equal to your depreciation. you know, so we, we wouldn't be adding that back. But, you know, cash, so this is, let's just say that $2 million is really $1,5. Now this isn't really, you know, it's, it's a SBA sized, but I don't know many SBA lenders that would, you know, be especially good at underwriting something like this and would really be excited about having their collateral be a bunch of chips.

And maybe that's not even the collateral, to your point, also Bill, like, They didn't say they own these boats or ships. We don't know if that's part of the purchase price or they lease them or what it is. So, Heather, that, you hearing you say that surprised me because I would think big ships that can be resold would be pretty solid loan collateral. No? Well, it falls in the category of what we'll call rolling stock, although this is not rolling, of course, but anything that can lose.

Floating stock. Yeah, there's two things lenders worry about that there. It tends to disappear in bad loan situations, right? Can be kind of hard to find. And you could sell this thing into, you can tell one of these into international water and say, come and get me, you know? Yeah, absolutely.

The planes and the boats are the scariest because they can go way far away from you where you can't get them. So that's one concern. And second, they always have to look at the liquidation market. Let's just say they can get their hands on these boats. Well, they're probably going to be pretty dilapidated. You know, you have to expect.

that they're not going to be well maintained when you get them. And then what's the limited liquidation market? You know, the haircut, so to speak, that a lender would apply to these kinds of assets is pretty big. They would not expect to realize a lot from liquidating ships,

old cruise ships. So, no, not as valuable as most people would think. Well, you know it is valuable to lenders. Real estate. They like real estate. That's the only thing lenders like. Really. That and doctors.

Yep. They like doctors who, you know, are involved in real estate. Owner occupied, medical, definitely. Yeah, yeah, we like doctors and we like real estate. Those are very, very stable. But every other kind of asset is not too exciting for a lender to think about ever getting back and having to liquid. As I think about this business, there's a lot to like, right? I mean, I think on this show we tend to be like, oh, here's all the things that scare me, right?

but there's a lot to like about this business because it's supply limited so there's only so many permits you've got a lot of them you're the largest holder of permits if they're issuing new permits you probably know exactly who to bribe to make sure that you get them right and your competitors don't get them um i would think this thing i find it kind of hilarious that like oh this business is going to outgrow the market et cetera and then they turn out and say growth is limited by permits. And the only way you can grow is cram more people on the boats or get more boat entries into Glacier Bay National Park. So if you want to model the growth of this, it's basically like a capacity utilization model, right? How much capacity do you have? And is it

fully utilizing? Can you get more permits? And then I think you're almost paying a discount rate based on, like if you can't, like you just fill the boats up and you just kind of run the the cruises every week, I bet it's pretty predictable with tourism to the Glacier Bay area, absent natural disasters or whatever in that area. So I mean, I'm valuing this thing. You know, I don't want to say it's like an annuity because obviously it's an operating business. There's a lot of risk. Yeah. But that's kind of how I would think about it. I wouldn't be planning for a bunch of growth. I'd be paying a multiple where I was receiving, you know, a brave return on my cash that compensated me for the pain in the butt of operating a cruise line. Yeah. And, and, and,

When you talk about the permits and that constraint, I looked at a business in Hawaii, and actually, I think we ended up doing that loan, where they ran tours for snorkeling with the Manorace, which is a very unique thing, and just one part of Hawaii. And it was totally constrained by the number of permits and you had to buy a permit to get into that business. What I found interesting was they cooperate amongst each other, all the permit holders and the runners, if they're not full one night, they give, or they have too many, they give their excess leads to the other guy and they kind of all cooperate so that everybody's kind of full at the end of the

day. They might get different rates from different, you know, deals that they have, but, but they all kind of work together. And I would imagine there's only so many of these small cruise ships up there and they probably do the same thing. So if I was a buyer, I would want to ask, kind of where did this, where does this one stand in the packing order? Does it have its, does it have really good SEO and it tends to have more leads that it passes on to its competitors or is it on the receiving end because that does affect the margins to some degree. And they say that the biggest one, they're one of Alaska's largest permit holders for entry into the park with over 100 entries per season. Now that's just that park. So like the skeptic in me says, okay, Alaskan cruises are

huge, you know, and all the major cruise lines have, you know, these kind of these routes. it may be that they have a unique corner on this one park, you know, and other people maybe have unique corners on other parks. Or there's much larger hubs that would only really host a carnival cruise line, you know, a mega ship or something like that. I've never been in Alaska Cruise, but I know plenty of people who have and family who have. And, you know, just like any other cruise, part of the experience is getting off the boat. And so if somebody has a corner on, you know, a dock, so to speak, or a port, that's pretty interesting and pretty valuable. But there's not an unlimited number of those, but I think there's definitely more than one in this

case. They just maybe have the corner on this one. Yeah, I know these can be very good businesses. I think our friends at Chenmark own a boat tourism company also. I think they do well with it. Because you've got, so if you are able to get one of these captive, kind of permitted tourism comes through. This is the thing you see in this area when you come through. It's sort of a license to print money as long as you don't sink your boats or kill somebody or, you know, whatever, operate at high quality and the customers just kind of come to you, you know, automatically.

So I think these can be really good investments. Of course, you got to operate a cruise line. So I would be asking, I don't know, Jack about that. So I'd really want to understand what the management team was like, how long tenure they are, you know, you'd want a whole bunch institutional. knowledge, which I think is a big value of this business. Like, how do you swap leads with the other people? Who do you need to bribe when new permits come up?

You know, the institutional knowledge of being in and around this industry, it's a local business, and it's definitely a lot of who you know. I want to make sure I would continue to employ a lot of people who knew all the people you're supposed to know. Right. And don't we think that the seller probably is a local, Alaskan person, you know, who is well tied in? And so why are they selling?

You know, I wonder if, you know, after, like a lot of businesses that I've seen where they had a really tough time during COVID, they're just, that was it. That spried their nerves and they don't really want to be in that business anymore now that things are going better. Could be that. But this would be a little scary, kind of like the car rental place that we looked at in Alaska. I think this would be a little scary for a non-alaskan to kind of step in from the outside to buy. that would be a little concerning. I just am so scared of, I mean, you could get this answer fairly quickly, but if they own the boats, you could spend 10 years worth of earnings replacing a boat, a vessel, you know, I just think,

you know, my first order of business would be what's the nature of their fleet? And is there an alternative, you know, is there a more capital, you know, is there a more capital, you know, efficient model to say, okay, maybe we're going to sunset these. Margins may decrease if we're leasing vessels and operating them. I mean, that's how a lot of hotels operate, right? They don't own the real estate. They just operate. And maybe it's a ground lease.

Maybe they own the building, so to speak, own the structure. And here you have a hotel, you know, on water. But is there a model where you don't have to continue to constantly reinvest all of your free cash flow into, you know, into the main driver of revenue, the only driver of revenue. It's not like they do other stuff. If any, if they do anything, like if they have, you know, food related revenue or drink related revenue or, you know, tours, right? There's, there's multiple facets probably of revenue, but if you don't have the boat, you don't do any of that. Yeah, I mean, you're underwriting these assets as much as you're underwriting the business. Like, you need a shipbuilder

to come out here and comb every single boat and make sure they're in good, in good health. because, yeah, a 200-foot boat costs millions of dollars. Millions. And that, by the way, also you run into valuing this thing because seller goes, I've got $40 million of vessels here. What do you mean you're going to offer me $10 million for this business? Right? And then you're like, yeah, but that's what you spent on these vessels 20 years ago.

And they're depreciated. The engineer says the useful life on these is only 10 more years. I'm staring down the bailer of another $40 million of Kappex. I can't pay you new price for your 30-year-old boats. And a lot of sellers don't always understand that. Yeah. So that makes us a really tough business to be in. And we do really need to know lease or own.

And then what is the supply like? You know, when we need a new boat, are we buying them new? Or is this some kind of, you know, where you buy it used and it's been used for something else and you repurpose it over for, you know, passenger cruise? That would be interesting to know. I would imagine it could be a little bit of both. One thing I love about businesses like this is like the catch 22 makes it so difficult to do anything, but it also makes it so incredibly defensive. The replacement cost, if you just had to start this business from scratch, I mean, the pile of money that you would have to have to do it would just be huge.

And that's assuming you can even get in, right, to the market and throw a bunch of money at access to certain, you know, ports. I think we've talked about someone before, but I remember looking at this business that was a fish farm. And they had, you know, just tons of real estate and tons of ponds and, you know, tanks and vats and all these different, you know, really land intensive assets that were part of it. And the business really didn't make that much money. And the value of just the land was a lot higher than the value of the cash flow of the business. But it, the family who had started it two generations before, they didn't pay that much for the land. And it was the highest and best use at the time was to put in a much of fish ponds and, you know, farm, you know, marketable fish. But then you get to this place where you're like, hey, we really care about the business, but the land is worth 10 times the amount because it's, you know, thousands of acres or whatever it was in this case. Tree, tree farms are that way, you know. Most of the timber companies got out of, most of the, you know, lumber-related companies got out of the land-owning business because it was just

so capital inefficient. So you wonder, you know, you come in and if they do own the boats, is there a sale leaseback? I'm sure there are plenty of ship leasing companies. You might be able to finance this entire deal with a sale lease back of the boats. Yeah. And, of course, you'd have to make sure it pencil because obviously now you'd have lease expense. But there's all kinds, when you got a whole bunch of heavy assets like this on a balance sheet, you get all sorts of creative financing options

that are now on the table. Yeah. Well, you just reminded me of a deal that I've been looking at that involves airplanes and they're trying to figure out, you know, there's sort of the enterprise that they want to finance,

and then there's all this, it leases aircrafts to, you know, to, anyway, it leases aircrafts. And they've got to figure out that side of it. And it is, you know, it's very specialized financing when you're talking about,

whether it's ships or airplanes, you almost have to like go to just those specialty financing providers, figure that piece out first, and then come back to what can I now, how can I finance and what can I pay for the enterprise? It's almost like kind of two pieces to a puzzle you have to put together with two different vendors. So kind of trying to bring this to a close, two million bucks of EBITDA, very defensible here. You know, let's just let's just kind of take it to the face value. Is it even possible to put a price on this without knowing about ownership of the ships and the condition of the assets? I don't think so.

And I think there's a lot of, you know, there's a lot of other questions, but I think that's the big one. And then also, you know, what, what does the balance sheet look like? You know, Bill, your, you're, you know, famous line that we repeat so much, like, you know, basically pay me my mortgage. If, let's say they do own them and that isn't a deal killer, what is it? if they owe, you know, let's say they want a five times multiple or something like that and it's $10 million. What if they have $15 million worth of debt on the balance sheet? Because they do have modern equipment and they have constantly kept up with it. And the CAPEX has just put them in a, in a barrel of debt. You know, the balance sheet, not just do they own them, but what's the composition of the balance sheet beyond that? And how have they acquired the assets is a big, big deal.

Yeah. Yeah. Can you actually put a deal together here that gets them out from under their debt and they take some money home that also makes sense to you. Some businesses are just stuck in that way. Well, and that brings up a point that we haven't really talked about that much, but one of the forms of considerations sometimes in deals like this is assumption of debt. It may just be that part of your purchase price, part of your consideration is we do a workout with your current lender, and maybe it's not a true workout where it's distressed debt and they're in default, but it may just be that, hey, I'm willing, the bank's going to underwrite me, and this is going to re-go-through underwriting, but the bank may say our best chance of repayment is you, new buyer.

And we're willing to assign that debt over. And the seller goes, hey, if I just walk away with a million dollars, but I get out of $10 million worth of debt, I'm happy. Those are tough. I mean, good point. That's a way some deals have to come together. But whenever you have to negotiate like that and the bank already kind of knows we're not in a good position on this company and these assets.

it goes on for a long time before you reach a conclusion. You think it's hard enough to negotiate between two lawyers, a purchase and sale agreement on a healthy business. Try adding a bank and all their attorneys and, you know, just buckle up for about six months before you'll know whether you even have a deal. I feel like this is such a large portion of the M&A market right now, as we record this in early 2024, is sellers who, you know,

it's basically a controlled crash landing, right, where you need to do work out as part of the transaction. And the sellers are not going to have a good outcome or even their lenders not going to have a good outcome. But what amazes me is how long sellers and lenders are willing to go with their head in the sand. That's what amazing. Like, guys, anybody can see it's over. Like, it's written on the wall.

Like, it's not coming back. Like, take your loss and move on. and lenders just, they will stick their head in the sand forever. And they will veto deals that get them half their money back because they don't want to recognize a 50% write down because it doesn't hit their bonus until it actually happens. There you have it, Bill. You figured it out.

And I wrote, there's a particular chapter or subchapter of bankruptcy that's designed just for this, but it only works for small companies. I wrote about it on Twitter, and I'm going to forget the number. It's like subchapter 9 or something. Look in my Twitter if you want to know. But basically it says it's a form of bankruptcy where the seller has a buyer lined up, can't get through this bank nightmare. They're wasting all the time.

And it bypasses the bank and goes straight to the judge. And the judge can decide, boom. And they happen in like 30 or 45 days. You can sell it. There's a form of bankruptcy just to deal with how bad the banks are. in these situations. I think that's kind of fun. That is very interesting, in fact.

I would like to learn more about that. It's only for companies under a certain size. And so, yeah, definitely. I can't remember the exact number right now, but I wrote about it on my Twitter because I talked to an expert who handles those in a particular district. It's really interesting.

Well, I'm going to go scroll your Twitter right after this. There we go. And everyone should because Heather is awesome on Twitter, like really good lending, structuring stuff like this. All right. Well, that was a good one. I'm not as into it as the pizza boat, but I do still like it. I'm still going on the site visit. No problem. I'm going. Yep. All right. We will see you guys there, and we will see you on the next episode of Acquisitions Anonymous.