Acquisitions Anonymous - #1 for business buying, selling and operating - Should Girdley buy this sign business? - Acquisitions Anonymous Episode 111

Episode Date: August 3, 2022

Michael Girdley (@Girdley), Bill D’Alessandro (@BillDA), and Mills Snell (@thegeneralmills), talk about an interesting sign business in Texas regarding oil field services. We discuss financials, operational aspects, growth opportunities, and more.-----Thanks to our sponsors!* Guardian Due Diligence is the diligence solution for first-time buyers and self-funded searchers.You should be able to acquire a business with the comfort that the numbers are solid and the seller is not fooling you. Your lenders and equity partners want and need the same.Guardian's Quality of Earnings reports give you this confidence.Guardian Due Diligence offers free reviews of LOIs and company valuations at www.OfferFromElliott.com Contact Elliot Holland at [e-mail]-----Show Notes:(0:00) - Introduction(0:30) - Our sponsor is Guardian Due Diligence(1:39) - Deal: National Pipeline Sign Markers(2:40) - Financials & Listing(6:15) - What kind of signs do they sell? How does this business works?(9:30) - Who are the customers?(12:19) - What are common misalignments between seller and buyer?(15:00) - Do we like the deal at this multiple?(18:00) - How does this business grow?(21:00) - What is the competitive advantage of this deal?-----Links:https://www.bizbuysell.com/Business-Opportunity/National-Pipeline-Sign-Markers/1998362/?utm_source=bizbuysell&utm_medium=emailsite&utm_campaign=emalert&utm_content=viewdetailtext-----Additional episodes you might enjoy:#110 How to save a dead deal? With Jake Wakely#108 A fireworks store and a ski rental business for sale#106 A Pet Product and Saas business for sale - Which one do we like?#105 How to Make Money in the E-Commerce Game - Bill D’Alessandro gives an e-Commerce masterclass - Part 1#75 SBA Loan Secrets with Heather Endresen, expertise from a Billion-DollSubscribe 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, the internet's number one podcast on buying and selling small businesses. I am one of your hosts, Bill Dallisandro. And this week, we have a cool business. This is a one-and-done, a quickie episode. But we found this really interesting sign business in Texas. It's very Texas business. It's oilfield services. And Michael actually likes it. So I hope you enjoy this week's quick hit episode of Acquisitions Anonymous. But first, a word from our sponsors. Hey, Michael here. Today's sponsor is Guardian Due Diligence, and that is run by our friend Elliott, who was on our episode number 88. And what Guardian Due Diligence does is provide the diligent

solution for first-time buyers and self-funded searchers, so people that are buying businesses. And they believe that diligence is critical. We believe the same thing as you're digging into a business. And he thinks that you should be able to acquire a business with comfort, that the numbers are solid, and the seller is not fooling you, and your lenders and equity partner, they want to know the same thing too. So that's where a Guardian comes in. You can get good financial diligence and providing you comfort that you're not buying a bad business and risking your entire net worth on a personal guarantee.

So Guardian's quality of earnings reports will give you that confidence and belief in what you're doing and peace of mind. So, you know, they offer free reviews of LOIs and company valuations, and you can find out more from Elliott at offer from Elliott.com. And mention that Elliott's been on podcast number 88 and that you heard him, and tell him we sent you. And you can reach them at E. Holland at Guardian Due Diligence.com. And again, also at Offerf from Elliott.com, so you can get in touch with him.

Now, back to the episode. All right, welcome back to another episode of Acquisitions Anonymous. We've got a fun one today. It's one and done. It's a lightning round. We got one deal for you guys today. It's a pretty cool one, though. So I'd like to throw it over to Michael to read it.

Okay, so the deal is we're going to figure out how to get a startup that gets Mills's internet working better. I think he's coming in. Are you back now, Mills? Perfect. All right. So the deal that I have for us today is, I actually looked at this. And I was like, hmm, this looks pretty interesting.

This seems like a nice boring business I'd be interested in. And I'm interested in it because it's near me in San Antonio. It's technically not exactly in San Antonio, but it's in the next county over called Comel County, which is just northeast of where I live in San Antonio. So the Biz Buy Sell listing says National Pipeline Sign Markers. And then I have a big picture of a warning, do not anchor or dredge, because there's a pipeline crossing sign, as the actual image on the listing here.

And the asking price for the business is $2.5 million. It says cash flow not applicable. gross revenue is about two million a year. So asking two and a half million for the year, they have two and two million in revenue and about a million dollars in furniture, fixtures, and equipment. They also have some real estate that we find out later that the real estate is worth a million dollars and not included. So business description, this business is in the pipeline marking industry and they are one of the most well known and respected for what they do. They are contracted with Fortune 100, 500 oil and gas companies out there. If there is a warning,

sign on a pipeline or a gas line or whatever that has to be made, this group can make it. The company was founded in 1985 and its mission has been to produce great products with even better customer service, capitalized customer service for some reason. It is a tight-knit group, tight-knit misspelled, a group of employees who all respect one another and work well together, run on sentence. Okay, 2021 revenues. By the way, this is driving me crazy. Could this broker not have somebody read this over? Like, there should be no reason it looks this unprofessional. Anyway, okay, sorry, I'll get off my high horse. Yes, I went to college and I act like it sometimes. So 2021 revenues were just under $2 million and has an adjusted net income of $396,000,

furnitures, fixtures, are going to $1 million, and they're asking $2 million for it, and so on. The business occupies two acres of a 10-acre parcel. Seller is willing to split the 10 up and sell the two separately. Real estate is not included in the asking price here. seller would like $1 million for the 10 acres. If split up, that would be negotiated. Although the business can be run absentee, it is recommended that the new owner live out in the new Bromfels area, which is this Comout County area.

And if they can't bring on a strong operations manager, you have to sign a nondisclosure agreement to find out any more about this. And I think that's it. Did I miss anything on this listing, Bill? Oh, this was important. They have an adjusted net income of $396,000. We actually weren't going to do this deal. until they actually did list what the earnings are.

So $400,000 in adjusted net income, I guess you'd have to figure out what the adjustment actually is, and they want to sell it for $2.5 million. So my math is, is that five times, five point, almost six times. Yeah, so a little pricey, but there's a business been around for a while. So what do you guys think? So the thing that I jumped out of me right away is that last week we had a guest on that said he really wanted to be in Vail, Colorado.

So he only looked at businesses in Vail, Colorado. And then he wanted to move there. But then you said, Michael, he's doing it all wrong. He really should be looking at businesses in San Antonio slash Comal County, Texas, especially ones they have to cause you to move there because that is the place to be. So that's a fire business tip for Michael. Yeah. Well, I mean, it's, for me, I know that New Bromphels is a 30-minute drive away.

So there's actually, you know, I feel like if you're going to own a, buy a commoditized business like this to some extent, there's something to be said for having it, you know, nearby. And in my situation, like, I'm in St. Antonio. So like, well, I might as well take advantage of being there. Yep. So this one, Michael, what I couldn't tell is, I'm not in Texas, maybe you're closer to it and have seen more of these signs. We don't have oil pipelines in North Carolina. So is this, the sign companies I'm familiar with are the ones that do like, big custom on the sides of buildings and you sell a corporate job it's like a you know it can be a five or six figure deal when somebody builds a building is that what this is and there's like custom fab and like they care about design or is this more like i need you to put a sign every 50 feet for a hundred miles and i'd their cardboard or metal and that's fine like what like what is this exactly it's the second one so if you go all across texas right so texas um you know, has the most productive oil field in the United States called the Permian that's out by Midland. So it's in West Texas. And then there's another couple of oil fields kind of more closer to where I live. There's the Eagle Ford Shale, which is down between San Antonio and Corpus Christi. And then there's actually oil production that happens in spots throughout the rest of the state, Amarillo, Dallas, all that kind of stuff. It's actually interesting. If you, if you ever want to drive around kind of rural Fort Worth or northwest Dallas, you'll just be like driving along.

and they'll just be like an oil derrick like sitting there going up and down pumping stuff just right in the middle of suburban Dallas it's pretty funny but anyway so all that oil gets accumulated in these like accumulation stations which are just basically like tanks right and then those get put onto pipelines and then they make their way to refineries so the deal is is those pipelines will go like along an interstate or along a road and if it's a natural gas pipeline or if it's an oil pipeline or whatever, like the worst thing that could happen is some jackass decides to come in with like a jackhammer or a backhoe and like cuts the pipeline open. And you've got 500 PSI oil sprain everywhere in the middle of, you know, some some some yard somewhere. So these signs get mandated by the state and by the federal government and the regulators to come in and say, you got to have these signs every certain feat that says like don't dig. here or call 811 or whatever the number is before you dig. So when somebody's building a pipeline, they have to have these signs and then they fade over time and they have to get updated. And so

these are little two by two or four by four or whatever signs that are like, don't dredge here, don't dig here. And there'll be hundreds or thousands of them along, you know, miles of pipeline throughout Texas. Interesting. So is this, this makes me feel like it's as much a logistics, sign maintenance and replacement business as it is a sign manufacturing business. I would imagine the sign manufacturing could almost even be outsourced, would be trivial and commoditized. Really, this is about maintaining a map of where you have signs, contracts with the people who are your customers who own the pipelines and like a schedule to change them out and regulatory compliance and the signs are there and all of that stuff. Yeah. I love this if it's a business like what you're saying where you're in there and you're

contracting with, you know, whoever owns the pipeline because these pipelines are, you know, they're privately owned. And whoever's job is to operate that pipeline, if you have a contract with them where it's like, okay, you pay us and we make sure your signs are up to date and compliant and we print the signs, we make a lot of habit, that sounds like a great business to me. I want to be in that business because that sounds really sticky, high margin, you know, and the oil people are known to throw around money. If it is, I'm just a printer who prints a lot of signs that other people do that kind of stuff with, that seems much less interesting to me. Bill, this, we do have pipelines in the Carolinas. There's two, one that runs kind of through like Augusta, Columbia, and up through Charlotte. But if you look at a map, like, you know, it looks crazy in Texas and we just have two here. But I think a lot of ours are like more subterranean or they're just off the beaten path. Also, Michael, there, you know, a lot of, a lot of these pipelines are owned in publicly traded entities that are MLPs, master limited partnerships, because there's preferential tax.

treatment and they have to, it's like a reed. They have to pass through like 90% of their net income and they get preferential tax treatment. So you could arguably figure out who are the customers. That's my first question is like, who are the customers here? But you could definitely figure it out and you could get some intel and go figure out how to sell to them. My guess is is that it's not a, you know, contractual relationship to put up the signs. Probably the guys who maintain the pipelines and cruise them and make sure that they're, you know, following all the EPA regulations, but the signs is maybe on the more commoditized side of the spectrum. So how do you think they, Mills, how do you think they got into this niche of we're just

going to do these types of signs? Because I think that's, to me, that's an interesting kind of yellow flag. I'm like, how did these guys just do this stuff? Because if you're just in the commoditized sign production business, I would have wondered how they ended up, you know, just in this niche, right? Instead of making stuff for everybody. I wouldn't be surprised if they also put them up, you know, and have, you know, have some guys who roll around and make sure that, you know, the pipeline company has a maintenance contract with somebody. That guy calls and says, Michael's literally entering information as we speak in.

Do you think if I write, I am very interested. He will learn how to use your IRA and forward. I am trying to figure out what you can enter into the biz buy cell comments box that will get you not. Any. Does this make me rich? I am very interested. The sad thing, you know, we're going to talk later today about another deal where my buddy

sent it to me and he's like, I'm very interested in this deal currently. I was like, okay, fill out the form and ask him to send you the stuff, crickets. Like, these brokers are like the worst. So I'm clicking send here. I give it a 0.1% chance I actually hear about. about this guy. There'll be a follow-up episode on this. Or if he does, he calls me like at Sunday at like 4 a.m.

It's like, hey, call me back. All right, I clicked the button. One interesting buyer or broker thing that stood out on this listing to me is that it does say proof of funds required. And on the lower end of like Main Street and even kind of up to the lower end of like the very, very lower end of the middle market, this is so common. And it's so difficult because somewhere along the way the seller is convinced that, and it's not always the case, but a lot of times the seller's like, I need to see that you have $2.5 million in a bank account in order to give you my financials. It's like if anybody had $2.5 million sitting in the bank, they're not asking you for the NDA and the SIM on this thing.

Like the person who's buying this business might have access somehow to beg, borrow, and steal to get half a million dollars down. But the proof of funds thing is so interesting because they think it's a good like gate mechanism when in reality it's just a total, you know, it's just like a loose facade in my mind that doesn't really help. It doesn't help the seller at all. Yeah. So I don't know if you guys. It frustrates for buyers, right? Yeah. Yeah.

I don't know if you guys remember the. the wine rating business that we did, you know, a guy reached out to me and he was, he was, he was an onophile, so he was big on a wine. And, you know, he had just left a high paying corporate job and he was starting out on his own to do this stuff with buying a small business. And he really wanted to buy that business. And those people would not give him anything unless he could prove that he had three and a half million dollars in cash in the bank, which was their asking price. And he's like, wow, Gertling, I'm trying to do like an SBA loan on this. like I'm trying to finance and I may raise some money from other people.

And like this buyer who potentially had like the best potential or the seller who had the best potential buyer in the world, like an onophile professional guy who was passionate about the business, like just couldn't get out of her own way. And I don't know if the business ended up selling or not, but it just made me sad to see it happen. There's another interesting kind of classic small business faux paw, I would say, in this listing, which is where, which is towards the bottom. it says, this business can be run absentee, comma,

but it is recommended that the new owner live out in the new Bromfell's area, and if they can't, that they bring on a strong operations manager. Does that sound like a business that can be run absentee to you? I mean, like, that's the opposite, right? This can be run absentee, but you better live there. And if you don't, you better hire a full-time person that lives there. You know, one thing I do like about this listing is I know I poop. on how unprofessional the listing sounds from English on down in the way they describe stuff.

And then I also kind of like that there's that aspect of it where it's just like, okay, this is an unprofessional broker. Maybe there's an opportunity here to make a reasonable deal. But then they, on the other side, they kind of ruined that by being like, here's this main street business. And by the way, we want six times, even six times adjusted net income for it, which really means I mean, you've got to wonder what the adjustments are. There's maybe 150 or 200,000 adjustments, I'm sure.

And we'll see when they don't respond to me with the actual financials. But then that puts the deal like 10 or 12 times from earnings. Like, give me a break. Well, especially because I'm going to come in with an adjustment for a general manager because I don't live in new brothels at all, right? So this is clearly, if you're going to be at absconding, I'm like, well, you sold this is absentee business and you, but you also said I have to live in new Bronfell. So which is it?

So I'm reducing your SDE by the salary for the general manager. I think that thing you're talking about, Michael, is like the white whale to everybody. Like I usually play up market, but I am going to, you know, check in with local brokers, check in with Main Street guys in the hope that they have an amazing deal and I can scoop it up. And almost because they're unsophisticated or because they're not as used to playing at this size range, you know, it can go favorably for me. I've heard that kind of thesis a lot. And when I was at permanent equity running the deal team, like, we blasted brokers and we were just like, look, what do we have to lose? We'll make sure that we're on their radar in the event that they get like

the biggest listing of their life. And it's a $5 million EBITDA business and they don't know what to do with it. I would say 999 times out of 1,000, it just does not go that way. If they have a whale of a deal and if it's the listing of a lifetime for them, it's terribly mismanaged. And they will do anything and bend over backwards to get the seller on the hook, including telling them like this, your business is worth six times and we'll find a buyer who will pay six times because I've heard people do that. And they won't set expectations. They won't manage the process. They're afraid of the client because they're like, if I make them mad, I won't get to close this listing and I'll miss out on the commission. Like the incentives are all weird and wrong. It can happen. I just don't know of

instances, you know, first hand or secondhand either where that has played out. It does come down to the lesson I've learned with stuff like this is exactly what you're saying. Like, unless I'm willing to pay, unless there's a scenario in which I'm willing to pay six or six and a half times, you know, EBITDA for a business like this, like it's not worth it to spend a much of time on it. And I say that just as somebody who filled out the form asking for information about it. They're not going to call me anyway. I mean, these are brokers. They don't answer to the Forbes. Give me a break. Michael, how does this business grow? So it says it's been around since 1985. We're hoping it's got maintenance contracts on a bunch of these signs. Maybe I'm wrong,

but it doesn't seem to me like, are they building new pipelines all day, every day that all need signs? And so there's new business to win. And if so, like, do I need to live in this area and know all the guys that own oil field services companies and is it the seller key here? Like, how do I grow this business? Yeah, well, I think there's one thing, which is really interesting to me is why this is out in central Texas, right? This is in New Bromfels, which is between Austin and San Antonio. The world hub for energy production is in Houston, which is three hours to the east by the interstate. So that has, that has me thinking there's some level of locality in this business, right? And especially if these guys are out putting in the signs themselves or installing them,

or even above and beyond that, checking on the signs to make sure they're still in place because these oil pipeline companies get in trouble if they don't have signages up and they're not doing the right stuff to make sure they have them there. You know, I think the thing that I like about this business is potentially that locality bill. And I think the other thing is really interesting is these signs, like they sit in the sun all day in Texas. So they don't last forever. So it's a recurring revenue stream where every few years you're out there putting in new

signs or you're doing an audit of what they have and replacing signs and stuff like that. So I think that's potentially very attractive. You know, growing, maybe you take your expertise from this area and you go open a new office someplace else. Maybe you roll up other people that are doing this because if it's a somewhat local business, potentially there's some geographic expansion that you could do around it. So that's my first thought there. It wouldn't surprise me if these guys don't actually have any formal sales process and it's all

the owner, knowing guys from Whalefield Maintenance from 1960. And is that transactional? Like, would you buy that business? If there's no formal sales process, it's all the owner in his relationships? Not a six times. Yeah, everything has a price. Well, it depends also on like what is there in writing. You know, how often did they put stuff out to bid?

You know, how likely and predictable is that future revenue? I think potentially, yeah. Enough to fill out the form. The easiest way to grow, like the, of the, the total addressable market for signs for oil and gas, they probably have saturated as much as they're going to get unless they want to like start opening offices elsewhere. The problem is, is to grow, you could add services. Like same provider, same customer. What else do you need from me? And I'll just open up, you know, additional revenue lines. It's probably things that aren't

in their core competency though. Like, you know, vegetation managers. around pipelines. I worked on this deal, pretty large power line, you know, managed, it was basically a landscaping company that cleared the right-of-ways around transmission lines. And it was also really, EPA and DOT regulated. If a tree falls on transmission lines, it's like $100,000 per hour fine to that power company. So every six months, they have guys who just walk with chainsaws and weed killer, and they just make sure on thousands and thousands of miles of lines. My guess is that for the pipelines, obviously when you drive by and see them, it's all clear cut.

There's no, you know, the weeds don't get past a certain height, all those kind of things. Those are more competitive contracts. But if you have the guy's phone number who handles procurement for these pipelines, stands to reason that you could say, hey, what else do you need? It's just not going to be in your core competency as a, you know, sign manager. Interesting. I, uh, this is tangentially related by her really interesting. story of a guy. He was in a maintenance business like that. And there was an adjacent,

let's say it was vegetation, right, that he wanted to get into. And he couldn't get in because there was an entrenched competitor who had all the contracts. And why wouldn't they leave the entrenched competitor? He found out it's because they love the sales rep at the competitor. So he calls that, he finds a sales rep on LinkedIn and goes, I'll triple your salary. Come work for me. Hired her away and triple the salary and stole all the contracts. Like grossly overpaying. this woman, but it didn't matter because he stole all the contracts and doubled his business. I thought it was genius. What's funny about that is like, you're like, well, okay.

But then you have the other problem, which is if they just did that, if you just did that to the competitor, somebody else can come do it to you. You better make sure that competitor that sales rep is locked in for the long term. Or when you steal those contracts, like you really need to, you know, lock them up for the long term. All right. Well, I think this was a good one. I mean, Michael filled out the form, so that got over that hurdle.

Yeah, so I fill out the form. I will promise to report back when I don't hear from the broker. It'll be our weekly check. Well, at least he's not wearing a hat or touching his face. So he must be a decent guy. Hilarious. All right. Well, this was just a quickie.

This is one and done. So thanks for listening to this episode of Acquisition Anonymous. We'll be back with another quick hit episode soon.