Acquisitions Anonymous - #1 for business buying, selling and operating - Should we buy a CBD shop? - Acquisitions Anonymous Episode 125

Episode Date: September 21, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://landing-newsletter.acquanon.com/-----Michael Girdley (@Girdley) Bill D’Alessandro (@BillDA) and Mills Snell (@thegeneralmills) talk about an established herbal and CBD shop in Central Texas. We go deep diving into this hidden gem and have you think about whether or not we like this deal.We’ll uncover the likelihood of having a lawyer as the broker (How to go around that), RE considerations & the Girdley technique to buy a business in ANY market.-----Thanks to our sponsor!MoreNow.co: We help you hire exceptional manager and director-level talent that costs 80% less than US-based staff.Tap into one of the world’s most talented labor pools - The PhilippinesGo to morenow.co/aa and fill out the form. Or email [e-mail]. Mention this pod for 15% of your first hire. ----- 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.-----Show Notes:(00:00) - Introduction(00:22) - Our Sponsor is MoreNow.co(01:27) - HOT LISTING PRICE DROP!(01:48) - Deal & financials: Established herbal and CBD shop in Central Texas(02:40) - Is this deal a hidden gem?(04:59) - Why would you sign a lease where a competitor is?(06:22) - OK, pros and cons of this deal from Bill’s view.(07:23) - What are the perks of being a lawyer in the State of Texas?(11:00) - What is the place of this business in the value chain? What is going on with CBD retail?(14:34) -What’s going on with CBD eCommerce on Social Media and Big Platforms? How does that impact your CAC?(16:40) - Is this business sellable at all? How could you make this work?(19:28) - The “Boomer” wealth transfer: Real vs. Zombie businesses(23:15) - How to buy a business in ANY market? The @Girdley technique!(26:26) - What is the bull case for this deal? -----Additional episodes you might enjoy:#122 ATMs are a sick business. Cash is King!  #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 Acquisitions Anonymous. Today's episode is a deep dive into a CBD and related products store in Texas. It's up to you to decide if you think we liked it or we hated it. I will tell you, it's one of those two things. Thanks again to our sponsor today, more now.co. And here's the episode. Hey, today's sponsor is MoreNow. And you can find them at MoreNow.com.

And they are friends of the podcast, Greg and his partners there. They specialize in helping businesses of all size build overseas teams made of folks that aren't just your standard VAs but are above and beyond in terms of experience, seniority, and all that kind of stuff. So look at my notes here. They do all kinds of stuff. Accountants, supply chain managers, operations. So everything from specialized individual contributors up to directors and above, all located offshore and really a good resource for small businesses and businesses of all size trying to

build out their teams, especially in today's super tight labor market. They'll go and help you find talent across the globe. Definitely encourage you to check out more now.co. Greg and his friends have been great partners to podcasts and are really part of helping us grow this. So go check them out. Mournow.com. Tell them that Acquisitions Anonymous sent you. Thanks. All right, good morning, guys. We've got another banger deal. Let's do this. Mills, so you're going to read it, and I'll put it up here on the screen.

Yep. This is on bizquest.com. First lines out of the gate, price drop. That's when you know it's either really good or really bad. It's usually really bad. It's paid to break it to you. This is an established herbal and CBD shop in central Texas. It says the business is poised for growth, and it is a hot listing on BizQuest right now.

It's in Temple, Texas, and they're asking $175,000 for this business. Gross revenues of $257,000, and the cash flow, which they define as seller's discretionary earnings is $96,852. They don't list any EBITDA. They say there is $40,000 of inventory included in the asking price and $5,000 of furniture, fixture, and equipment, FF&E. It's interesting. The listing agent on this, this kind of jumps out at me, is a guy named Blake Sawyer, and he is an attorney. It's Blake Sawyer law firm. So this is a lawyer broker. You don't

run into that every day. The business description, this is an established business. It's a hidden gym of Bell County with specialty herbs, housemade teas, and high-end CBD products. It's truly one of a kind. I feel like I see, you know, 10 of these every day just on my way to and from work. So maybe it's one of a kind in Bell, Bell County, but I'm going to try and withhold judgment. Beautifully designed and brick and mortar store as well as fully functional e-commerce site with registered domain name and lots of potential for growth. Annual increasing revenues with over 70% increase in 2021, located in central Texas close to a major hospital and VA healthcare. Center. That is actually interesting. With low rent in a highly trafficked intersection makes this

an ideal location for both established customers and new business. The price includes the proprietary tea blend recipes. I just can't help myself. I feel like tea is like a euphemism here. It's like a coffee shop, right? Yeah. Yeah. The majority of products are organic and vendor introductions will be made as a part of the transition and training. This is a great opportunity to purchase a business poise for growth. Current owners are happy to assist in onboarding and ownership transition to ensure the store success. Representative has store and inventory experience and is happy to answer any questions. I'm not sure what that means. Oh, this guy, the broker. Contact the representative for NDA. There's his email. Business has been around for about seven years. They lease a thousand

square feet of space. They don't tell you what the rent amount is, but their lease expires May 3,000, 31st of 2024. So you've got, you know, not quite two years left on the lease. It's a single-story business plaza that they're located in, major street with high traffic. Rent figure does not include insurance, maintenance, or taxes. So it's a triple net lease. They do have their website here. Hemp and Herbs. Well, is that their website? They want you to sign. That's their website. Here, I'll pull it up. Hemp and herbs LLC.com. Are you over 18 years of age? CBD, essential oils and herbs. Interesting. Bill, you can do some analysis on this e-com here in a minute.

But market outlook and competition, the pros, well-established business with loyal customer base and rewards program, carries higher quality products and other stores in town, continued annual revenue growth, even after competitor opened a store in the same business park. That is terrible. Con, expanding market and paid advertising could increase revenues. Oh, expanding marketing. That's not a con. but that's okay.

Let's see. The reason for selling, they say that the owner has health issues, and the business operations are straightforward with commonly used business software. Seller will assist with training. Seller financing is unavailable. That's pretty much what we got on this one,

other than the website, which is kind of funny that they put it, they put it up there and they still want you to sign it into you. It's always ironic to me, and there's lots of ways to get unhealthy and sick, but you know, you own a business that is all about, CBD is the way that you're going to get healthy and live a longer life and then the owner is selling because, unfortunately, they have health issues.

It's like, okay, you know, the irony, the irony of placebo is not lost on me in this situation. So, so I actually don't hate this one. I'm just kidding. I hate this one. What? What? You don't like the fact that somebody selling the same exact crap is in the same exact shopping center as them? Does that not bother you at all, Bill? you think that's a good deal for them? I mean, the fact that this thing opens with price drop.

This reminds me of something that website closers, the broker does. Every Saturday, they send an email that says Saturday fire sales. And it's like all businesses that aren't selling. Like, you do not want to buy a business in a fire sale. Like, this is not what you're looking for. But man, so a competitor opens in the same shopping center, which just kind of proves exactly. exactly how commodified all this stuff is. The one thing I got to say for these guys is they

actually priced it not insanely. So assuming it actually does $100,000 of cash flow and has $40,000 of inventory, which is included in the asking price. The asking price is 175. So take, you know, if that includes inventory and assume the inventory is selling and moving through and that's actually worth something, right? They're asking a buck 35 for, for 96 in cash flow. I mean, it's a little over one times. So, like, I mean, I still don't think I want to own this CBD shop in Temple, Texas. But at least, like, you got to hand it to the lawyer who usually you got a lawyer broker. You should run the other way because they don't know at all what is market.

You got to hand it to lawyer broker, Blake Sawyer, in this case, for pricing it at 1.2x or something. So, wait, am I reading this wrong? It says cash flow is 96,000. They're asking 175 in the listing that I'm looking at. Am I looking at something wrong? Yes. We're subtracting out the inventory. Oh.

These tea things are not worth anything. Okay, that's fine. So, yeah, I think you back out the inventory from the 175, you're at 135. So you're paying 135 for 96 of cash flow. You guys are so nice. Yeah, I mean, how did they let somebody selling the exact same thing open up in the same strip center. It's like 101 when negotiating a lease for retail is make sure like your direct competitor

can't open up next door to you in the same strip center. Like what sort of legal reputation does this guy have to sign a lease like that? Like it's just insane. Like I'm still, you know who is legal representation is. I was going to say, I hope Blake Sawyer didn't execute his lease for him. So I don't know if it's this way in other states, but in Texas, is lawyers can, like, lawyers basically run this state. Like, they can commit, like, almost to the edge of, like, everything crazy. So they can, they can act as real estate agents, take commissions,

all that kind of stuff. They don't have to go through any training or anything like that. If you're a lawyer, it's like, fine. You can act like a real estate broker. You can be a business broker if you want. When you're in the state legislature, you can run all kinds of side hustles in Texas because you're a lawyer. You get hired by firms to like one of the scams that lawyers do in Texas. This is the greatest scam ever. If you're a lawyer in the state legislature, basically the law creates automatic stays on cases that you're part of. So lawyers who are in the legislature, they basically rent themselves out to get attached to cases where the litigants one side wants to delay things. And what they'll do is they'll go in and during the, during the years, they attach the law,

they attach the state representative to the law case, and it stalls the whole thing for like nine months. And it's like a leverage thing that they do. Like it's just the craziest thing. And there's millions of things like that that lawyers do in the state of Texas. I don't know if it's this way in other states. But every time I click on, I'm like, I should have gone to law school. These guys really have so many hustles just by being lawyers. It's crazy. Well, you also have attorney client privilege. And so what a lot of them will do is, you know, they'll be on retainer, right? You're in the state legislature and you know you avoid a potential conflict of you you avoid an explicit conflict of interest and you get put on retainer by you know Boeing or BMW or like the big ones in south

Carolina but because of attorney client privilege you don't have to disclose that you're on retainer and you never do actually any legal work and bill hours for them but you know it's it's implied that you're going to you know look out for them those kind of things Bill looks sick. Holy smokes. Let's talk about CBD, though, because like this business has two major strikes against it to me. It is retail, which we've looked at some retail in the past that we didn't absolutely hate.

Like, we looked at the flower shop that was like moderately interesting as an owner operator. We had an owner operator on to look at it. But retail is a strike against it in my mind. And then the fact that it's CBD is a strike against it in my mind, not because it's CBD, but just because of how crowded that market is. And I feel like it's impossible to differentiate. But people are making money somewhere in the value chain when it comes to CBD and edibles and legalized marijuana. That to me is worth exploring a little bit. Yeah, so CBD, I mean, being consumer products and being, we don't do any CBD or hamper anything,

having considered doing it, doing extensions to our line, probably, you know, right before COVID, this was super, super hot. CBD, the farm bill passed in 2018, which basically made CBD legal. And there was this explosion of CBD everything. And I'm sure all our listeners have seen it. And then it kind of, it's starting to fizzle. right now because there was CBD everywhere. And CBD, I mean, despite the claims that people selling CBD make, like you pop a CBD gummy, you are not going to feel any different in five minutes, right? I mean, this is like if it works at all, it's like a long-term cumulative thing. And I think

the consumer is really, really fried on the claims around CBD. And I think the CBD bubble is popping right now, at least from the folks that I talk to in consumer products. In fact, there are a lot of CBD brands out there that don't even say that CBD is in their product because they think it confuses their messaging and the customer is so exhausted of hearing about it. So this to me would be, like you're not even buying in at the top. Like you're buying in on the decline or the reset or the shakeout of the CBD industry right now. So that would concern me a lot. Yeah, the other thing going on with CBD, unlike vaping, for example, which still has a pretty

big stigma to it. And I think a lot of those standalone stores are doing okay, is that the more mainstream retailers like HEB here in Texas, for example, last I heard they were going to start carrying CBD products because it doesn't have the same. They're okay selling placebos. They're not okay selling Jule, if that makes sense. So, you know, I think that's the other thing going on is why go into a specialty store like this when you can pick it up, you know, at the checkout aisle next to the other placebo stuff that they have sold in the herbs and spices aisle at your local grocery store. So that's the other thing going on here. And then we haven't even talked about Walgreens and CBS carrying this stuff.

Like those guys are happy to make money on low margin placebo or high margin platybos all day long. That's a great point, Michael. So like exactly what you said is why this store exists. Because Farmville gets passed in 2018 and Walgreens, CVS, etc. they can't get their compliance machine in gear fast enough to roll this stuff out for literally several years, right? And so small entrepreneurs like this person and countless others in your town, USA, say, oh, well, I can sign a lease and bring in all the CBD stuff and I don't have a compliance department and we'll just see how it goes. And so that's why there's this huge pop-up

of all these specialty CBD stores. And this will happen anytime something becomes newly legal in the States. You kind of have this proliferation of mom and pops while the big guys compliance departments and the big machine moves into motion and then it rolls out everywhere and like most of those guys die. And you're exactly right, Michael. That's where CBD is right now. Yeah. Bill, what's happened in e-commerce in this space?

Because I feel like it's been like a huge flash in the pan as well. But it seems like it's maybe a better place to sit in the value chain than retail CBD. If you could like, if you have a brand, right? If you have some kind of differentiation other than just we're, you know, we're in the strip center down the road. Yeah. So CBD and ecom occupies this kind of weird corner. And if people will go back and listen to our episodes on firearms businesses, there's actually

a lot of commonalities. Because, you know, despite being legal for four plus years now in the States, the platforms, the Amazon's, the Facebooks, the Googles, you know, all the people that you can pay for advertising. to attract consumers are still not on board with CBD. They do not distinguish it from marijuana, which means that if you own a CBD brand, you cannot advertise on Facebook. You cannot sell the product on Amazon.

You cannot buy Google ads on any CBD-related terms. So you have a real challenge attracting customers unless, as you said, Mills, you've got some kind of differentiation, you got some kind of captive audience, maybe a celebrity, et cetera. You know, at the beginning of CBD and e-com in 2018, 2019, there was this explosion of consumer demand.

So there were all these organic searches, right, on Google that you could just try to rank for. You couldn't pay for clicks, but you could try to rank for. And there was this flood of demand of people looking for CBD content, for CBD products. And that was such a strong tide that it overcame some of the fact that there was no paid acquisition at all. That tide has substantially receded, right? The demand, the search volume on CBD keywords is through the flood. floor. So now you have kind of not a ton of organic consumer demand and also no way to stimulate it because the platforms won't let you and a very crowded market. So like there are some bigger

brands like if you've got enough brand recognition by now, if you if you rode the wave and got big enough and people knew who you were, I think you might be doing okay. But there are a lot of dying D to C CBD brands right now. So one thing, one thing I think worth pointing out here in the first place I would start is understanding how real this seller's discretionary earnings number is. And by that, I mean, this looks like the type of place where the people who have been running it are consumers of these herbs. They are believers. They have gone all in and bought the religion and believe this is the type of stuff that works. Basically, I guess the Catholic equivalent of Wiccans, whatever that is. That's what these guys are. Like, they believe in this stuff.

And you look at that little, the picture that they have and the little cubby, this is the type of place where the seller is, and the operator is there running this store all day long, talking to their customers, pitching them on these different herbs. I bet you that seller's discretionary earnings number includes their time paying themselves nothing to sit there and sell this stuff all day. I would be shocked if they have much payroll at all beyond them being there seven days a week selling this stuff to people. So, you know, at first glance, it's like, oh, this seems pretty reasonable. but I think what you factor in, you not spending 40 hours a week or 70 hours a week at this store is your clubhouse, you're going to see you're making a lot less money than $96,000 on this deal. Other than that, it's great. I mean, so is this business and many like it, right? Small retailers with some inventory, is it transactable at all? Or is this the type of thing where it just needs to, the lease needs to run out and they need to go on clearance for the last six months of the lease and try to sell through the inventory? just close up shop. I definitely think so. I mean, they don't have that much longer left on the lease.

So, you know, because retail was part of their strategy and the physical location that store apparently matters, you know, you're basically best case scenario pre-tax. You might get, you might recoup your investment if you can maintain the cash flow, if you can sell through all the inventory and if you, you know, by the time your lease expires. But, but that's, there's a lot of ifs there. I don't. And then what do you do, right? You've got to renegotiate the lease and the rent is not going down when you, when you renew. And you also have a competitor in the same shopping center now. I think, I think the more likely path of how this transact is these guys talk to somebody that they somewhat trust or one of their customers. They sell our finance, you know, basically an earn out for

that person to come in, take over the store, work there and end up owning it with no money down or very little money down at all. I think that's what happens with this deal. You know, I'd get an SBA loan for this. Like, it's just not, it's not happening. So that's how I guess it ends. Or they end up with a garage full of herbs. Those are the two ways that happens. So this also kind of brings something up. I know this guy says he's retiring for health reasons, but this reminds me of, you know, all of the search funders, all of the people, many of our listeners, you know, one of the things people say is there's such a big opportunity, bigger than ever, to buy businesses because so many of these boomers are getting older and reaching retirement age, and they all,

they employ all these people. You know, I think there's one metric I heard is there's like 2.9 million firms or more, you know, and 57% of all small businesses are owned by baby boomers who are near retirement. And so people go, great time to a search fund. Like all of the, all of this wealth has to transfer right down the chain. But I think this is an example of one of these. businesses, like not all businesses have to sell. Many are not transactable. Well, like the SEPA, the exit planning institute, they have like, you know, a designation.

And if you like rank, you know, the financial advisory designations, like CFA is the most rigorous. It's taking you like five years to get it. It's very marketable. Maybe CFP underneath that certified financial planner takes a couple years, semi-rigorous. And then you have like all the life insurance, you know, health insurance, which is state by state, because it's regulated. And then I would say below that is the certified exit planner. If you see these when you're kind of out there in the market looking for something to buy, it's CEPA, CEPA.

And you like go to class for a week. You pay them money and you get the designation. But they've written a lot of literature on this, you know, the $10 trillion. opportunity that everybody quotes and the silver tsunami and all that stuff. They have done actually, they have some decent studies. I think it's a little bit biased, but they have some decent studies that were, I think, state by state or region by region about, you know, about kind of success metrics around selling, you know, owner-operated businesses and take it with a grain of salt.

But, I mean, their statistics were showing kind of across the board that, 70% of businesses that want to transact don't actually transact for any number of reasons. But, you know, their logical conclusion to that is hire a certified exit planner and they can help you, you know, be among the minority. But it's definitely worth checking out because they'll point you towards, you know, exit planners and those people are actively trying to be, you know, sell-side advisors. But, yeah, I think that, I think it's, it's over. Overblown, I understand the conclusion and I understand the premise, but I think it's overblown

because there's so many people who their businesses just wind down. They shut down. They, you know, they dissolve in some way, shape, or form. It also neglects to factor in what's happening with the institutionalization of rolling up a lot of those things. Like, I read a tweet from JVos on Twitter this morning, and he's like, yeah, in the past week, I've met with three groups trying to roll up HVAC, another one doing plumbing, and another one doing. this like they're all trying to do it and you know all this private equity money's got to go somewhere and they want to buy three million dollar a year like h-fact businesses right and they've done it before with software they've done it before with dental practices like so a lot of these that are transferable

are getting bought by you know vehicles backed by institutions so that's another aspect of it and it's just like okay anyway the other thing when i see people that are like this massive silver tsunami is coming you got to go look at all these deals and there's just so many deals out there and i'm like have you actually looked at any of these deals? There's a lot of crap out there. Like, yeah, I believe the numbers are huge, and maybe there'll be some good stuff in there, but there is a lot of junk, a lot of junk to just go,

okay, thanks, swipe right on that one. Okay, definitely, definitely. That's the girdly rule. If you're going to go buy anything in any market, go look at 100 deals before you pull the trigger on anything. Like, that's my number. And the technical number from the math is you're supposed to go look at 35 deals and then choose the next, the next best one,

the best one that comes along at that point. The math shows that. It's actually, it's a very sexist rule done by mathematicians in the 70s or the 60s called the How to Hire a Secretary problem. Have you guys heard about this? Yeah. Yeah. So that's what it is.

Like how many should you talk to before you just pick one? Yeah. So they went the, the mathematicians like, like they, you know, back then like the men worked in the offices and the women worked in the secretarial and they married whoever they wanted you out of the secretary rule. So the thing was like the hiring a secretary problem. Like how many women should you interview? This is like the most sexist like math thing from the 60s ever. So please I don't support any of this. Anyway, but it was called the hiring a secretary problem or whatever. So they hired a mathematician to come in and look at this. And the answer is like 35 or

36. You should interview 36 secretaries to have 100% certainty that you're going to hire the best one. when you reach that many and then you hire the next one who appears to be the best, right? So it's actually, it's 27 because the math works out to be one over E for whatever reason, that, you know, the irrational number E, and I don't know why it is, but one over E is 27. So you're supposed to meet 27, throw them all out, and then just hire the next best one. Yes, that's the math. I know it sounds insane, but you're right, like mathematically, you end up with the best candidate the most often. Yeah, yeah.

So that's the math. Now, the Girdley rule takes that and understands. By the way, there are lots of Girdley rules so you could just put this one or whatever you want. But the Gertly rules understands if I tell you 27, you're only going to do 10. But if I tell you 100, you're going to do 27. So that's why you need to go look at 100 deals before you pick the next best one. And then that's how you make a deal. Otherwise, like, just keep kissing frogs.

And that's why Michael hasn't hired a secretary yet because he's only interviewed 72. He's got into 100. Yeah, pretty much. Yeah. That does bring up a good point, though, Michael. Looking at 27 deals will feel like 100 is the thing. You know, because you, you know, a lot of them is just kind of like quick, no. But then, you know, out of those 27, there's probably four or five where you really get excited.

You really invest some time and energy. You go sit down with the seller and you absolutely get your heartbroken. You just get gutted because you start to think this really might happen and then reality comes and hits you in the face. And so looking at 27 will feel like looking at 100 in terms of the way that it drains your energy. Yeah. There's been one or two deals where, like, it didn't work out, and I still have the same

level of pain as I did as when I got dumped sophomore year in college. It still feels the same. It turns out those emotions are exactly the same. Yeah. Anyway, okay, let me give you, before we wrap up, let me give you the bull case for this deal. We've been totally pooping on this deal. Let me give you the bull case.

In Texas, marijuana and those type of products, they are not legal yet. They will be legal someday, either based on federal or state stuff. Highly unlikely to be the state stuff because this is the say no state of Texas. But federally, this may happen. If you own a store like this, that seems like the immediate transferal of, oh, okay, I'm going to be a marijuana store. Like one day you close down to your CBD store, the next day you open up and like, here's your marijuana section. Is this potentially an option, like a call option on the day that marijuana becomes

legal and you have a set of, you have this and other retail chains and you're ready to go. And, you know, it's unlikely Walgreens and HGB are going to compete with you there. Potentially, is that an upside to this business? Or do you think that's, it's going to go a different direction? Do you think, I mean, let's say that all happens. How much of a head start do you think you really have by owning this strip mall CBD play. Like, could I not just sign any lease and open up tomorrow as a marijuana dispensary? Or is there, you know, customer base, brand, any equity at all in something this small? Look, Bill, I'm working hard here to try to make this deal work.

I should just give it. But seriously, look, I think that if you were at scale with 10 of these stores, recreating 10 retail locations, that doesn't happen overnight. That's pretty darn difficult. Is it an insurmountable lead? Probably not. I do think the same customers that are buying this crap are going to be the same customers who are going to buy real marijuana because they're looking for that answer,

right? That's what they want. So, yeah, I think you would have at least a bit of a head start. Is it an insurmountable lead? Probably not. Is it going to be an insurmountable lead if you're such a dumb. entrepreneur that you sign a lease that lets a competitor open up directly next door to you? Probably not.

But anyway, if you're the owner of this listing, I don't think you're that dumb. I just think you were dumb at that moment. So anyway. Pass. I pass. Even though I loved it so much initially, I pass. I tried. Okay.

Cool. Great episode. I don't know who our sponsor is today, but they're awesome. Please go shop with them and do us all a favor if you've made it this far and you enjoy this episode. it open up whatever app, open up the Apple Podcast app, search for Acquisitions Anonymous, write us a review that some might rhyme with jive stars, and we'd really appreciate you helping us kind of promote the podcast. We had our busiest week ever for downloads this week, and we want to keep

helping more people who are looking at buying or selling small businesses. So halla.