Acquisitions Anonymous - #1 for business buying, selling and operating - Should we buy this skiing technology company? - Acquisitions Anonymous Episode 134

Episode Date: October 21, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://www.getrevue.co/profile/acquanon-----Michael Girdley (@Girdley) and Mills Snell (@thegeneralmills), discuss a Fitness Equipment Manufacturer. We’ll find out what this business does and offers to people.Moreover, we’ll be clarifying why we hate most of the deals we are talking about and how come we really need to hate every single one.Also, we will get to understand the importance of educating your kids in business.-----Thanks to our sponsor!Live Oak Bank - Whether you’re looking to build, buy or expand your business, let the team at Live Oak Bank be your financial guide. With Live Oak, you get a partner who believes in your success and is willing to take the journey alongside you. We provide small business loans tailored to your goals.Fuel the growth of small businesses across the country; bank with Live Oak Bank.You can contact Heather Endresen, Director & Founder at [e-mail]. Mention this podcast in the subject line and ask her about office hours to get in touch.*Live Oak Bank is the #1 SBA 7(A) Lender. The data supplied by the SBA reflects 7(a) highest dollar volume during FY 2021.-----Show Notes:(00:00) - Introduction(00:32) - Our Sponsor is Live Oak Bank(01:39) - Deal & financials: Fitness Equipment Manufacturer (06:50) - How does this company work? What are they selling?(10:26) - How does this relate to Girdley’s experience as a young swimmer? (12:34) - What is the TAM? How much potential does this business have? What’s the moat here?(15:43) - Why are we supposed to hate every deal?(17:00) - How should you think about the competition on the supply side?(20:30) - Is this relocatable? Who’d be a great fit to buy this?(22:00) - What is the bullshit KPIs theory?(24:54) - What is this business’s role in the world?(25:27) - What is the importance of educating your kids in business? -----Additional episodes you might enjoy:#133 - How to value and underwrite commercial Real Estate? With special Guest Chris Powers#132 - Let's get rich pumping poop!#131 - People are getting rich with Med Spas. Will we?#130 - Should we buy this Vegas Wedding Chapel Chain?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]

Hey, Michael here. Welcome to Acquisitions Anonymous, the internet's number one podcast about small business investing. Today, Mills and I talked about a deal that was super fun and exciting to me, and I'll explain why, mostly because I have ski fever. And this is a niche equipment manufacturer located in Salt Lake City. And I think you will enjoy taking a gander at it just as we did. Super interesting deal and lots to dig in and unpack in this one. So here is the episode after a quick word from our sponsor. This episode is sponsored by Live Oak Bank, the number one SBA lender in the country by dollar amount. But they're more than the top SBA lender.

They also provide USDA and conventional financing, tailoring each loan to their customers' unique needs. Whether you're looking to buy or expand a business, let Live Oak be your financial guide. With Live Oak, you get a partner who believes in your success and is willing to take the journey alongside of you. Live Oak's M&A financing experts lend across many industries nationwide. They also have over 30 industry-specific teams whose lenders are experts in industry-specific small business loans.

Some of these include health care, seniors housing, and service contractors as well. With their dedication to efficiency, collaboration, and in-depth knowledge of M&A financing, they'll take you where you need to go. Visit live oakbank.com slash a AA and make sure that's a lowercase a and another lowercase a to connect with a lender today. So again, that's live oak bank.com slash. A with two lowercase A's to find out more about LiveOak and to connect with the lender there and tell them that the acquisitions anonymous folks sent you along. Thanks a bunch. Mills, you're not on a roof today. Is that a good thing or a bad thing? I've already been on the roof. I'm off now and I'm going back when we finish. You say it with such with such jest and they're

like it's a negative connotation. Well, first of all, you get paid money to be on roofs. So like I'm super cool with that. But also, it's just a stark reminder to me that you do real work and I don't. So it's super cool. So I totally think it's great. Cool. Well, so we got a deal today. And here's why this deal is special. I'm starting to get ski fever. So normally I do two or maybe three ski weeks, either working from ski slopes or just going down ski slopes as fast as possible. And I'm starting to get ski fever because September's coming around. My path. is like all set up. I'm ready to go. I got new skis. And I'm going to try to make it through another season without killing myself. So can we do this ski deal? You're ready to go?

I'm so excited. It is 20 degrees cooler today in Columbia, South Carolina than it was yesterday. So this is as much ski fever as I get, but I'm in. It's quite the personal share. All right. Okay. Here, you want to read this one? Yep. All right. So this is a niche manufacturing company in the fitness equipment industry in Salt Lake City. They say it's relocatable. Three million dollar asking price. There is no cash flow listed, no revenue, no EBITDA. This is on biz by sell for those of you watching on YouTube. This is a great opportunity for an existing fitness equipment manufacturer that has an organization that could easily integrate into the in the company's products into

their existing mix, sales and marketing, supply chain and distribution network. Company has historically sold and marketed to fitness enthusiasts. Rehabilitation. centers and professional athletes in skiing, hockey, baseball, basketball, football, tennis, golf, soccer, there's a long list. Athletes. The business and products have the following attributes. Extremely high profit margins, averaging 63% wholesale and 72% retail. Currently upgraded models sell at a price point of $4,000 to $6,000.

Interesting. Strong intellectual property. In your face, Peloton. Yeah, yeah, no kidding. They have patents, trademarks, and industry goodwill, longstanding professional endorsements with people who I think, you know, sound important in this space. You can expand globally for distribution network by opening up distribution centers in Asia, Europe, and Australia. They have product dominance. What a great tagline.

They produce the highest quality machines in the market. And they've been in business for 37 years. That's a really good litmus test. They've sold 49,000 units since 1994, and they've generated $68 million of revenue since 1994. I love those kind of stats. They don't mean anything, but it's, I mean, maybe it means something. Maybe it means a little bit of something. But, you know, they could have done 60 million in sales in the 90s, and now they're peering out.

So a couple things that are interesting. They, in 2016, they were forced to change their Taiwanese-based manufacturer. They've implemented new manufacturing, all new tooling, large amount of capital and time spent on this. The long delay in production left the company with limited products to sell. That seems like a red flag. Shortly thereafter, COVID-related supply problems slowed manufacturing and significantly delayed the shipment of containers. This resulted in a temporary retraction of sales. These challenges are turning to the positive with one container just received in July.

and an additional container expected in September of 2022. The current order has been completely pre-sold, and marketing has begun on the second order, which will also be pre-sold. So year-to-date, 2022 revenue is $145,000, they say in parentheses accessories, plus deferred revenue of $364,000. So the deferred revenue is the pre-sold stuff.

They've collected 50% of that up front. Some people have also already paid the other 50%, the full amount. And then there's plus an additional $238,000 to be collected as shipped should be completed in August. This is very convoluted. So it sounds like best case scenario, they are still going to be under a million bucks in revenue this year. Total expected revenue of 747 plus orders being presold from the next container. Customer stickiness is a testament to the loyalty. You can sign a confidentiality agreement and contact Ron Schwab.

there's info here. It's a lease facility, 5,000 square feet. They have four employees. Patents for the product are valid through 2040. That's pretty interesting and important. Maybe included in the sale of the company. There's a scenario, I think, where they imagine you buying the business, but you don't get the patents. That would be something to talk about a lot.

So what, I mean, Michael, what is this? So I was just Googling it. I think this is part of the fun of looking at businesses for sale is you're kind of trying like a little Sherlock's homes thing to like figure out like what the heck is going on with this thing and like what are these people thinking? And then it's also to me like super fun to like just see the different ways that people manage to screw up listing a business. Like that's just like it's kind of like when you go to a hockey match, right?

You know, why do you go watch hockey? I don't. I don't watch hockey. Yeah. If you were to go to hockey, the people who go to hockey, I'm convinced most of them are there for the fights. Just the same way, people go to NASCAR, they most of them are there for the crashes. And so that's kind of the fun thing going on here. But, yeah, so what this is, so I Googled it, and we have a listing, it's this thing called a skier's edge.

And it just, they have a picture of a guy in deep powder. And it is a product that will dramatically improve your skiing with the number one technical ski conditioner in the world. So if you're not a skier, skiing uses a very weird set of muscles, all told, and it's a seasonal sport. So like, you have to figure out how to get in ski shape in order to do it all season. And especially if you're like, let's say an instructor who's going to be skiing 250 days a year or 200 days a year, like you have to figure out how not to come in and get yourself hurt just through that spin-up process every single year. So it looks like what they have is basically like a Nordic track. Do you remember the Nordic track? Do you remember those infomercials? Oh yeah. By the way, do they still have

infomercials? I don't have cables. I don't know. Couldn't tell you. Probably. Anyway, so for those of you listening, basically I pulled up a picture of it. What it is is it's like this thing where you kind of slide side to side and you put your like weight in and you slide up and down these little ramps. So you kind of simulate carving down a ski mountain. And of course, they have a pop-up. And they have it listed. You can buy it here on the website. There's everything from the platinum package, which is $6,400. There's a hockey version of it because it can simulate skating. And then you can customize it with a QS7 or TM7. And they show pictures here. Here you can see the picture of where your boots actually fit into the thing. Fit in the thing,

else. Oh, and you can pay an extra $95, have some wheels so you can move it around. So that's what it is. It's just like you get on it and you go side to side and it trains you to go from edge to edge as to go down a mountain. So I'm just thinking like most people don't have this in their house, this four or five or $6,000 thing. Do you think so it's definitely athlete, I mean, they said this, but it's definitely athlete targeted. This is not the kind of thing that, you know, like a hotel, not every hotel is buying like an elliptical machine or a treadmill. This is in a different category. Yeah, this is for somebody either doing therapy to recover or to is going to one of the

mini kind of performance athletic gyms type places. And I used to, have you ever been to one of those or like a client as a competitive athlete? Nope. They're super fun. Like you go in there and like some crusty old person like gives you your workout of how you're going to stabilize this particular thing. And then the funny thing is they all have like their own crazy methodology. Like every single one of them is like, okay, are theorists, you're going to harmonize with the magnetic field of the earth. And here's how we're going to do it. You're going to do a lot of curls in front of the mirror. And I'm exaggerating a little bit, but it's not that far off.

The one I used to go to had assimilar machines like this. So I was like a 19 year old collegiate swimmer. And actually the thing they really, their belief was if they could train us to perform, at basically efficient levels at 98% heart rate, they could make us faster swimmers. So what they would actually do is, listen to this, I'm a 19 year old kid and I go to this place and they basically put you on a thing that was like this skiing, but instead of skiing, it was for climbing.

So it was a thing called a Versa climber. Have you ever seen that? It's like a step thing and you hold on to it. And basically what we had to do was sprint on it until we got to 98% maximum heart rate. And then we had to hold our maximum heart rate there for an entire minute and then you could get off. But that was their methodology.

They decided that was going to work. So these kind of places will have a machine like this is basically Pilates for athletes, right? Or you come in and you like do that crazy stuff. So yeah, this is a, this is not bought by your person putting it in their house unless they're just like the gym that needs everything. So I don't, I don't see this being a big tam. I looked at this business one time that reminded me of this. They had a different price point.

they made a really specific type of equipment for mining and like demolition. But it was like a high sticker price, only like a very, very small number of people in the world ever bought them, but they completely controlled the market. And then they had some, you know, ancillary and kind of incidental, basically anytime something broke on one of these trucks, just like anytime something breaks on one of these machines, you kind of have to go to them. There's probably not like the regular appliance repair guy or fit. equipment repair guy who's going to work on these.

And so you have this long tail. You're never going to, like this company, it was so specialized. Like they were never going to sell more than, there were only a few thousand of these trucks in the world. And they were never going to double, right? If anything, it's going to be in kind of a secular decline or something. Kind of like this. I mean, there's no scenario where if they've sold 49,000 of these, you know, some of those

are replacement of the ones they've already sold. the total addressable market is so small. I'm just trying to figure out what do you do with a business like this? The listing does say, and I read this after I scanned it, but the owner has a serious medical issue. And so this is the founder, the CEO, the guy who probably owns all the intellectual property is selling because he has to sell. And this business probably doesn't survive without him and his four employees probably don't take over the reins. You hate to see a situation like this, but it also, you know, it probably further accentuates the fact that what, what in the world could you do with this business? Who could possibly buy this thing?

And what is the highest and best use of it? Yeah. Yeah. It's really interesting. Well, first of all, I think there are lunatics to ask for $3 million for this. Yeah. Three times revenue. Let's just get that.

Let's just get that lunacy out of the way. But look, I think there's a world in which there's a right buy. for this. And it's probably the seller doesn't want to hear it, but it's most likely an 80 to 90% earn out type situation or a work to own kind of situation. I mean, the business, they're asking $3 million for it. And they think they might do $750,000 this year, right? That's kind of what I read. I mean, it's a tiny business and it does pretty well in terms of gross farmers, but he's got four, four employees. So the owner is probably taken home six. figures a year. Like, there's no way this should sell for 30 times that. So, you know, I think it's

going to have to be a buyer that, or the seller is going to have to get realistic about their sales price because there's no way, I mean, there's no way to make that price work unless there's a strategic buyer. And if I'm a strategic buyer, like, I'm just going to make one of these. Like, there's nothing special about this thing. Like, if there was a real market, somebody would care. But I think that also, because there's not much of a market, it actually makes for an interesting situation. And one of the things like we talk about is, you know, there's these ideas of moats around businesses, right? Like you can have a brand as a moat. You can have scale as a moat. These are ways that make it hard for somebody else to compete with you. Being in a small niche market

in, in my opinion, is also a moat that people don't talk about. It's the other end of the economies of scale. Like, there's economies of disk scale, whatever that is. And we see it a lot where it's like, okay, we're the only vendor that handles this $10 million a year niche. nobody's going to come in and compete with you. It's not big enough. Yeah, it's not big enough to justify getting involved. Yeah. So that's a moat, also a ceiling on your business.

And that's exactly what's going on here. I bet this guy has 90% of the market for ski trainers. Unfortunately, not very few people ski and even fewer care enough to buy a ski trainer. So I think this is a work to own or maybe, you know, big time, big time seller financing. And this is maybe a situation where you can make that happen. is a guy. It's a for sale because they're sick. And this is maybe a time to go buy yourself a job. I like, I mean, I like some elements of this. We also, our most common piece of feedback is that we hate every deal. So I'm going to try and be more positive. I really do like the fact that you're, hold, hold, hold, hold. You're supposed to hate every deal. Like, if you like more than like 1% of the deals when you're doing businesses or investments, you're doing it totally wrong. Yeah. You're doing it totally wrong. Right. You are doing it wrong. You're supposed to hate every deal. So go and go in pleasantly

surprised if you actually like something. And I think we've like two deals out of 130. That's, that's like very accurate. That's completely accurate. That's the way it's supposed to be. And if you think, if you want us to just come on here and BS you, Mr. Lister and tell you that this is a fantastic deal when it's not like, yeah, there's some other podcast out there. Go try the all in podcast. Those guys seem like nice. I guess. But not, I mean, we're going to tell you how it is, which is most of these deals are supposed to suck. Anyway, go back to your point. There are some things that are likable about this one. It would be hard to do this deal if the seller was not terminally ill because it sounds like they're ascribing way too high of a monetary value on the intellectual property.

The way I read this right now is they think the businesses worth $3 million and you might have to license the intellectual property from them for a long time until 2040 until it's in the public domain. I would be willing to bet, though, that their revenue was probably a million and a half to two million, right? Historically, pre-COVID, pre-supply chain issues. But in this case, you can't get credit for that because will you ever rebound to those levels? Maybe, arguably, but it's going to be the buyer who's doing all the work to build it back. They have migrated their manufacturing. That's great. But it also now makes the buyer. aware, hey, there's huge vendor risk here because this piece of equipment is so specialized that I can't just contract manufacture this thing and bounce between suppliers on a dime.

This is very, very tenuous. And you're the worst kind of overseas manufacturer too, which is you're tiny, right? And what happens with buying stuff overseas is manufacturers naturally will gravitate to the most profitable orders and the easiest to produce orders. And guess who does those? The big guys. And if you're you're competing with Nordic track to try to get your, you know, your order into the factory, good luck. It doesn't surprise me. These guys had trouble getting anything, considering the big guys couldn't get anything during the period of time. And it's going to be earliest. It'll be quickest for it to be worse on the small guys and longest for it to get fixed on

the small guys. So, I mean, to switch gears a little bit, like I do think that, This is potentially a business that most people are going to pass on. Like anybody like us who wants, isn't interested in bigger stuff, not going to do it. Anybody who doesn't want to buy themselves a job is not going to do it. Then you're limited to people that probably are just going to be the type of person, that their most joyous thing would be driving around in a van with a couple of these

going to every physical therapy place within two miles of a ski resort and selling these door to door. Like I think that, like if that's fun to you like by all means go do this um that's a tough life right who who wants to do that through us life but if you're if you're wanting to do kind of this hand-to-hand combat and you want to hang around ski resorts and you know ski therapists and you know i don't know if you've ever have you been have you been skiing a snowboard snowboard yeah perfect so so i think you've seen it too like every time you go sneaking and scowboarding like you're at the end of a long day and then you see the ski patrol like pulling somebody down the hill on a stretcher. I mean, you know where they go,

right? They go straight over to the like, there's a clinic at the bottom of the mountain where there's like four like four surgeons ready to put people's knees back together, right? And they do that. And then they have whole kits. Like I have a friend that he tore his ACL on the very last run of a seven day trip. I would rather do that than the first run. My mom tore her ACL on the very first run of a ski trip when I was a teenager. major and that sucked. It was not fun. Anyway, but he told me, like, when he tore his ACL, like, they packaged him up, like, they had their routine down. They're like, okay, well, like, here you go over here. All right, here's this drug. Okay, here's the orthopedic surgeon.

It's going to talk to you. He's going to, he's going to examine you. Like, and here's your price tag. Like, do this, do this. Do this. So it's one of the best places to get your, your ACL or your knee blown, you know, it's like right there because they're ready. that's all those guys do. That's all those guys do. So like, yeah, this is, and then if you're a local and you have something like that, there's a local physical therapy place that specializes in ski injuries and they're going to have one of these things as part of your rehab. But yeah, that just ties into who you're supposed to be to own a business like this. You know, it's very much like lifestyle 100%.

This is 100% lifestyle business. So relocatable is a little bit of a stretch. I mean, it's relocatable to you and a van. driving from Park City to ski resorts in Washington to ski resorts in Colorado and occasionally working your way up to Banff and Whistler and selling a door to door when you go kiss the butts at the physical therapy place. But you cannot move this business from, you know, Salt Lake City, Utah to, you know, Kansas. It doesn't work.

But it's you moving, well, if it's moving to your van. Yeah. This is the other thing. If you do the math on this, Michael, you're talking about maybe selling 150 units. a year. You know, at a $4,000 price point, assuming there's very little, and they do a decent amount of accessories, but like you're talking about very, very few units of actual sales that have to occur. And so I think that does substantiate the point you're making, which is you could totally do this, you know, as a guy on the road, you have some staff in a location who help with ancillary

functions. But I mean, you could you could just be a ski bomb basically and and subsidize your lifestyle and you have to be semi-professional parts of the year. So it is interesting. You know, we talked about listings and business in general having what I call bullshit KPIs. And there's this thing's chock full of bullshit KPIs. And the two that are interesting, um, or the last two bullets here, they've sold 68 million in revenue since 1994 and sold 49,000 units, which are interesting like bullshit numbers.

Like who really cares what's happened over the past 38 years? I really don't care. Or 28 years, sorry. It's also kind of like our, you know, like our podcast growth charts. Sometimes I click on the cumulative button just to make myself feel better because it's always up into the right. But this is the same thing. Like, who really cares? Show us the last three years revenue number.

But it's also interesting to see that these guys have sold a lot of stuff. Like this used to be a really popular thing. And something has happened recently to where they're, you know, they're barely cranking through. $750,000 in one year. Like if you do the math, $68 million and then adjust it for inflation over the last 37 years, you know, they historically have been doing close to $2 million a year in revenue on these things. And something has happened recently, and it's most likely this guy got sick.

So that presents an interesting opportunity where if this was doing $2 million a year, $3 million in a price point, isn't that crazy. So that would be one of the things where by putting bullshit metrics here, they've actually given me a little more hope that the right. person, like, you could get a value here. You could get a deal. I just can't really figure out who the strategic would be. It's not like, it's not like a ski products manufacturer is going to mess with this, you know, like the U.S. Olympic ski team isn't going to, you know what I mean? Like, who is the most, who's the highest and best use buyer of this? I still don't know.

It's a strategic, uh, strategic, uh, strategic skis company. Yeah, they're headquartered in fantasy land. But yeah, I mean, and what you're seeing here is a very typical thing, right? When somebody makes their whole life a particular business and then they see themselves in decline physically from an energy perspective, cognitively potentially, you know, and they've based their whole self-worth around creating this business and help. And this is also a great business that helps people. Like this is a rehab device that helps them get better. you know, it's, it's totally normal for them to have delusions of grandeur in terms of how much it's worth to a potential buyer or what could possibly happen just if they had more energy or

just if they had a few more years to be able to be out on the road making this stuff happen. But it's usually just not there. If it was doable, they would have done it. Yeah. Yeah. I feel for this guy. Yeah, I think you'll find somebody. I mean, and, you know, I think this is also one of those businesses where if you can, you know, if you can choose,

type of business you want to be in, you know, choose something that actually makes people's lives better, like, and almost every business does. But, like, I think some businesses like this one, like, it's really something that's, like, good for the world. Like, if you are in a rehab place or trying to strengthen it up and be ready for ski season, which, like, some of my best memories are, like, skiing with my kids. Like, it's just the best. And, like, you're enabling people to do that more and longer in their life. Like, it's, like, it's kind of beautiful. So I got to appreciate that about it totally. Good luck to this guy, man. I hate these kind of situations because it's just like, I mean, you look at it and you're like, there's no way. I mean, I don't want to take advantage of this guy and like you kind of think about it empathetically. And also, you know, you know, you know, how hard it is to sell a business even if you're not ill. But I just feel like the vultures come out on something like this. And unfortunately, you know, people do try and take advantage of situations like this. And it's hard enough to do without all this.

Well, and that's, yeah, and that's where, like, it's important to have your children clude in on what's going on. And, you know, at some extent for me, like, why I spend so much time talking about business with my kids and talking about, you know, family wealth strategies and stuff like that. And, you know, it's because at some point I will be incapacitated. And hopefully I'll have enough money that my kids don't have to, like, take care of me, like, change diapers and stuff. but also like, you know, as your parents get older, or as you get older, like you start to go through cognitive decline and you need to have somebody around that, you know, potentially your kid can step in and make some good decisions for you. And hopefully this guy has, you know, built up, you know, and invested in having a great family and been lucky enough for, you know, to have a living spouse and

kids and all that kind of stuff. So, you know, that would be, that would be my hope. Cool. All right. Well, man, I think that. This was a cool one to dig into and definitely highlighted some things, you know, that we haven't talked about before in terms of seller dynamics and stuff like that. So, and do us a favor. Please open up your podcast app. Go write or review for us in our never-ending now quest to not only break even, but become the number one entrepreneurship podcast. Your reviews would be greatly helpful in terms of us and our growth hacking. So thank you very much.

Anna Mills and Mirko, we'll see you next week.