Acquisitions Anonymous - #1 for business buying, selling and operating - Should we buy this warehouse software business? - Acquisitions Anonymous episode 135

Episode Date: October 26, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://www.getrevue.co/profile/acquanon-----Michael Girdley (@Girdley) and Bill D’Alessandro (@BillDA) discuss a 40-year-old computer company in Richmond, Texas. We will examine some factors to consider when purchasing small software companies like this and investigate how this business operates. Moreover, we'll learn if the company is as intriguing as it seems and discover why Michael fears the seller. Finally, we'll talk about how important it is to work with brokers, hire brokers, and how to close the best deals. -----Thanks to our sponsors!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.----- Show Notes:(00:00) - Introduction(00:34) - Our Sponsor is Cloudbookkeeping(02:09) - Deal & financials: 40-Year-Old Computer Company (03:11) - How does this deal work?(06:17) - Okay, what makes us believe this man doesn’t have a broker?(07:23) - What do we think of the code due diligence?(10:25) - What are some considerations for buying a small software company?(12:14) - What is so special about buying niche software businesses?(14:59) - How is the business so interesting?(16:22) - Why is Michael scared about the seller?(18:25) - The bull case for this deal is…(19:23) - Seller Advice: Why should you hire a broker for this deal?(20:49) - Michael’s advice on dealing with brokers?(21:58) - Key advice to close the best deals(23:16) - Bill’s hack to hire an intermediary the right way, as a seller----- 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, welcome to Acquisitions Anonymous. It is another week and another amazing episode. Bill and I today went through a case in point software company in Southwest Houston that explains exactly why you should not go it alone in most business transactions like this, especially if you are a first-time seller of your business and don't know what you're doing. So definitely interesting business, a couple million dollar a year of software company and a fun one that we enjoyed. We will get right into it after this quick word from our sponsor. 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. 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, 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. All right, welcome to Acquisition's Anatomis. What's my name again, Michael? Okay, good.

Today we got another deal, Bill. This one is a computer company from a 73-old baby boomer who needs to get out because he wants to retire. Here you go, calling all search funds. Calling all search funds. Let's go. So this one's in, I'll read it because I'm a masquist. So it's in Richmond, Texas.

Are you familiar with where Richmond? Texas is? I'm not. Where's Richmond? So if you are in Houston and you drive southwest about 45 minutes, before it turns into fields and farms, that's where Richmond is. So it's like southwest southwest from Houston, which is called Fort Bend County, which has been like one of the fastest growing counties nationwide for like a period of years. Like they always pop up. It's like it's like sugar land and all that kind of stuff. Because Houston's basically moving as quickly as possible. All the, you know, all the refineries in Houston are on the east side of town, which is not growing. But everybody else is just moving as quickly north and west away from those refineries as they possibly can for good reason.

So, so this deal here I got to pull up if you're on YouTube. It has a $2 million asking price, cash flow of $850,000. It was founded in 1982. And we don't know much more about gross revenue, EBIT or any of that kind of stuff. But the description is a base. banger. So we're excited to read this one. All lowercase computer software description or computer software systems under the business description. This is an over 40 years old computer company with three market proven products that address the needs of the largest industries in the country. Number one, it's an ERP system, so an enterprise resource planning system for the wholesale distribution and retail industries plus accounting. This system helps manage inventory with

pictures and barcoding, processed customer orders, quotations, requisitions, purchase orders, receivables with credit card processing, payables, general legual, and all necessary accounting. It competes with things like Microsoft Dynamics, Oracle NetSuite, Sage Eclipse, SAP Business, Facts, and on and on, and many others. But guess what, Bill? It is superior to all of them. Of course it is. Number two, but wait, there's more. This system also does freight forwarding, export, creating warehousing, shipping and logistics industries, tracks all purchase orders at the item and project levels from time to PO all the way to the destination. It just keeps going on.

They have customers in Houston that do warehouse logistics and shipping for companies like GE, Exxon, Chevron, National Oil, BJ services, Siemens, and much more. And so I'll just pause there. That is one of those sentences where you have to pay attention to do it very quickly. It's a typical name drop sentence where you realize, oh, these people, he's talking about his customers have those brand name companies as real customers. This is the best system existing on the surface of the earth for these industries, comma. Then number three, we just hop straight forward a freight forwarding industry, and it just keeps

going on. They help international freight forwarding companies process their ocean and air shipments for the customers, and it also produces all the necessary documents, giving them an advantage over traditional processing methods. The systems have a unique all-cap cellular technology, not apps, and the system can be operated from anywhere in the world without installing any special software in the cellular. Same is true for pads, tablets, and any devices that have any standard browser. There's a very high-tech company and requires a computer company or a very well-qualified programmer

or a very well-experienced IT individual or company to run it. It is a no-risk investment and can make a quick large profit for the right outfit with high return on the investment. And by the way, he says, I will not sell you my company if you are not such a qualified entity or you can arrange for it. I am selling due to retirement, and I am flexible price-wise, as far as you put a reasonable offer. There is office and building and land that's not included. There's some competition, but it says we'll discuss with the potential buyer. And here's some great stuff about growth and expansion.

I marketed my computer systems only in Houston and made a fortune. So if the potential buyer can't take the products national and internationally, then millions of dollars on sale can be easily generated. This system addresses the needs of the largest industries in the country. No seller financing, and the reason for selling is, I am 73 years old and I want to retire. Oh, and they'll throw in the office, let you use it for free for a year. I don't know. Okay, Bill, Phil, this is great. Do you have your checkbook out?

Let's go. I don't even know where to start. I mean, so this is the best system existing on the surface of the earth for these industries. It is a no-risk investment and can make a quick, large profit for the right outfit. So the one thing I will tell you, first and foremost, is this guy does not have a broker very clearly, right? Because it ends with, I will sell you my company, or I will not sell you my company, if you are not a qualified person or can arrange for it. I also am not sure English is his first language. His name is Dr. Eli Nasar, who you're already Googling.

So that means the company is worldwide software systems, all caps. It's so it's an ERP, I guess, like Microsoft Dynamics, Oracle NetSuite, Sage, Eclipse. It's superior to all of them. Michael, you invest in software companies. How do you think the code due diligence would go on this one? What do you think the code base looks like? I mean, so he started the company in 1982, according to the listing. And now it's 1970.

he claims to have started it in 1979. It is 100% likely this is built in some antiquated technology that is still out there and usable, but it's definitely going to be one of the red flags in this. This is like, okay, how do I find somebody that knows how to use quick base or like whatever thing that doesn't even exist anymore? It would not surprise me if this is built in some sort of like offshoot of like some of the there used to be these old programming languages like

power shell and stuff like that that would like you'd write them on top of databases and create these like standalone apps it wouldn't surprise me if this is built in something like that was a technology from 1985 so i so i'm a customer of oracle net suite right we've been we've been on net suite for five four five years now it is complicated as hell and i have believed for a long time that ERP is kind of the biggest, most grisly bite of software dev you can ever bite off because everybody's business is a little bit different. Everybody's business is a little bit custom. And it's so complicated because you've got to build before you know it. You're building accounting. You're building fulfillment. You're building a CRM. You're building all of this stuff because it

needs to be this like mono piece of software. And so you've got to be better at everything. then all of the individual point solutions. You know, you got companies that only build shipping software, only build invoicing software, and your invoicing's got to be as good as that, while you're also trying to maintain accounting and all the other stuff. ERP companies scare the crap out of me.

They're sticky as hell, though, I would think. Yeah. I mean, does any corner of software have a lower MPS, like a customer, like everybody I know hates their ERP? Nobody's like, you know what I love? my ERP. Nobody, even the vertical ones that are like specific to government contractors or like, you know, there's one for construction. There's, there's different ones that people have built there. Like everybody, every one of my CEO friends hates their ERP. They're just like the worst.

Well, they're all like barely good enough. And because as I alluded to before, actually their invoicing software is not even close to best in class. But the only reason you use it is because it's integrated in your ERP and you have to. So you're. basically using sub-besting class software for everything. But the only reason you're using it is because it's really tightly integrated, which actually shows you the value of integration in software and tight integration is that people accept way worse functionality just because it's all perfectly synced integrated in in one system. So bringing us back to this guy, like this, there's one thing when you look and buy a small software company and it does one thing really well.

and you're like, okay, well, I can understand how that lives in a niche, right? Or it does one thing really well for an industry. This guy's got a situation where he's basically one dude, best we can tell. Maybe there's a few other programmer consulting types running around, trying to build software that just does an immense number of things. Like, how many people do you think actually work on Oracle NetSuite? I mean, there's got to be a thousand people at Oracle working on that programmers and product managers and sales and stuff.

And like this guy has, in theory, because he's a super genius and has been doing it for 43 years, he's claiming to have built software that is better than theirs by himself in a distant exurb of Houston. This is part of this. It's like, what? So, all right, that's obviously, it's easy to poop on this listing. But let me say this.

Let's say you get in here, you get the book. So it's cash flowing $850,000. and he wants to sell up for $2 million, right? Let's just take these numbers at face value, assume it's not highly adjusting. This is like two and a half times cash flow for a business that's been around since 1982 for 40-year-old business. I got to believe something about it is somewhat sticky, right? I mean, if he is actually making $850,000 a year and the software is as terrible as it seems

like it probably is, and yet people aren't ripping it out. like is there a moat there? Is that possible? You're definitely, I mean, that's the genius, I think, of buying software businesses. And I like that aspect of it, right? You're what you see in software businesses, and I think you know this bill, but I'll say it for the audience in case they don't, like when you get like a piece of software in there, let's say even if it's a $100,000 a year piece of software that does ERP, or let's say Oracle NetSuite, right?

Let's say you're a small business that's become a Nutsuite customer. And you paid $150,000 for the license to get the stuff in and pay a consultant to bring it in. And then it's $40,000 a year for you to continue. Like, if you go through and do the math, and once that stuff is installed, you do the math of what it's going to cost you not only in terms of direct cost, but also the disruption to your business to pull out NETSuite and replace it with something that's, let's say, 10% cheaper. It's a 15 to 20 year timeframe in which it's going to take you to recoup that. you know, what it's going to cost you in terms of your business. So what, that's the beauty of software. It's very lindy to use my least favorite Twitter follow,

Naseeb Tilebe's, by the way, are you blocked by Naseeb Tilebe as well, or is it just me? I haven't booked it there yet. I'm sure I can cheat. It's kind of one of those things. So, you know, this author, Naseeb Tili, if you don't know it,

but basically it's a write-of-passage on Twitter to reply to Naseeb Tilibe, and even do anything but just rah, raw, whatever he says. And he blocks you on Twitter. So it's just a meme where it happens. But anyway, so he has this idea called Lindiness, which is this idea that if you have to guess on average

how long something's going to last from here on out. So let's say a piece of software. And basically he says, okay, if this thing's been in business for 20 years, your best guess is that this software is going to be a business for the next 20 years, right? That's basically Lindy. That's what Lindy says.

And it's kind of a simple idea. But if you question it, you get blocked. But also it's pretty good. It explains a lot of why you go look in like USAA, which is, which is here in San Antonio. Bill, are you familiar with USAA? Yeah. Yeah, yeah. So one of the biggest employers are San Antonio.

And like the, I don't know if it's true or not, but the rumor I heard like five years ago is they still have 500 programmers working on mainframes doing COBOL. That's a technology from like the 50s and 60s. And like they run their whole business on it. Like just nuts. What's going on of that? So, you know, bringing all that back, you know, that's why people put these high valuations on software companies because they know once

the stuff gets in and you really want to start to generate cash and raise prices. Like you can do both of those things for a long time. So I answer your question like, yeah, I like that aspect of this. I would be very curious how good this guy's customers are. Like are they people that I really want or not? I mean, it says that his customers have customers that are a large Fortune 50 companies, right? And I would think the Fortune 50 companies probably vet their suppliers to some degree. So, like, so for everything to tear about this listing, you go, it's been around for 40 years.

It's cashowing nearly a million dollars. It's possible this is the cobal of freight forwarding or whatever they've got here. And it's absolutely got awful, but they can't rip it out. And it's, you know, there's no real direct competitor because the market's too small. I mean, there's no way it's a real ERP, right? It probably does, like, embedded spreadsheets or something for most of this functionality. But it's possible here. You have this just thing that is very, very sticky.

It's terrible software. And, I mean, Michael, have you ever looked at businesses like that? I mean, to some degree, that's sort of what you look for at Dura, right? Is businesses not this terrible software, but that are just sticky as well. Yeah. Yeah, and so the pattern here, and you can see it in the listing, is I've seen it over and over again where there's a guy of this age, especially one who's very savvy and technologically sound, comes from that background. They are extremely prideful and therefore of their software and their knowledge and therefore extremely challenging to work with. If I can choose whether to work with somebody who sounds like this guy or not, I choose not to because life is too short.

This guy will wear you out because he knows everything. He's seen it all. He's 73 years old and you are just some whippersnaver that doesn't know squat. So yeah, is this a great, is finding something like this that somewhat neglected and, you know, needs some love? Absolutely. This seller context based on what this guy's written scares the hell out of me. So I googled him and I found an interview with a website called Voyage Houston with Dr. Eli Desar here.

And just to give you an idea of probably the how this guy's view on the world and also how advanced his software is, all our systems have unique cellular technology, which enables if you're on vacation in the Riviera in Paris or a coffee shop in China or in Brazil, simply use your cellular to log into any of our systems and operate them without installing any special software. software on your cellular. This is contrary to apps in all caps, which you have to download to your cellular and install it. And then it is limited in functionality. So this is one of those guys who's like, doesn't think apps should be the future and is like anti- iPhone apps. So like, that's the type of business you're getting into here. So it's interesting what he means by that because I was like, okay, well, how is, how is there going to be a user interface? And apparently

what he says here, if you read this, these systems have unique cellular technology, not apps. The systems can be operated from anywhere in the world without installing any special software in the cellular. Same is true for pads, tablets, and any advises that have a standard browser. So, like, from a technical, like, literal reading of what he wrote there, it's just he's got a web app. Like, literally, like, you open up the web browser. If you have Google Chrome, you can access his web app. And that's not really that differentiated at all. Like, who cares?

Look, I think the reason to, I'll give you my bull case for this, I think is exactly what you're talking about, Bill. Like, I like that this dude, there's like, the whole listing is just one big bucket of red flags. And I still think that when you find opportunities, it's because you've had an insight that other people have kind of walked away from. And this is a situation. I think 99.9% of people are going to look at this guy and go,

oh, this is a tiny business. It's in southwest Houston. I'm dealing with a crazy person. It appears he's in a very complex red ocean market where he's going to get crushed by these big guys and walk away. Like, I would not double click on this. I'm not going to fill out the form. I can do anything else because it's just, it just looks too hard. But I think 10% of those deals, 5% of those.

deals when it just looks too hard, it looks totally broken. When you dig into it, like, you can find something. You can find maybe an opportunity. That's what you're talking about. Yeah. I mean, if you're a seller here, right, this listing is sort of the case for why you should hire a broker. People go, why am I going to hire a broker?

I'm going to give him, you know, five plus percent, 10 percent of the value that have everything I worked hard for. Well, it's because your broker is going to prevent you from doing shit, like writing a listing that makes people like Michael go, nope, and close the tab. Right? The broker is going to polish this all. put together a nice book, you know, tell you that you're not allowed to talk to the buyers because they're going to realize that you're a crazy person and we're all crazy, sellers, right?

And the broker is going to put the lipstick on your pick. So this kind of shows you why, and you're going to get more for your businesses, and that shows you why, in general, you should hire a broker because they pay for themselves, the good ones too. Yeah. Well, it's, you know, I had a friend call me the other day and she, he is working on, And by the way, speaking of hilarious pronouns, I asked my kid the other day what his pronouns were, and he said attack helicopter. I was like, I was like, he said I didn't make that joke up.

I got it from the internet, dad, but, you know, because we're a very open household. You know, my wife and I are like, well, hey, you know, do you want to be, what do you, how do you want to do your life? Like, just, just be a good person. That's good core values. And then, you know, jokingly, I was like, oh, hey, like, you know, what are your, what are your pronouns? And he goes to attack helicopter. I was like, oh, that's great. Anyway, so my friend calls me.

the day and starts trying to think about engaging an investment banker for a deal she he is working on. And, you know, I think me 10 years ago would have been right with my friend and being like, how do we minimize the fees that the broker's going to get? And me now is like, wait, I know how these guys can look. They're all going to, they have limited time frame of where they can spend their time and who they can talk to and all that kind of stuff. And I want to be the most attractive deal for them. And that's what Chris Powers does with Fort Capital, which I think is just super genius. It's just like, hey, I'm going to double your commission, but bring me all your best deals.

And it's just amazing. And so 10 years ago, me would have been like, how do we cut these fees in half and keep up cheaper? And 10 years now me is like, how do we gain this thing so that the broker spends all their time working on making a great deal for us, even if it costs us double the fees? and maybe I'm enlightened now or maybe I've just been beat down by broker so much that I'm desperate for deals. Well, in some ways, right, you know, if you think about the deals you've invested in that have gone the best, you would have invested in them at any price, right? If you had paid 20, 25% more, 30% more, it still would have worked out fine, right?

The best deals, the price doesn't matter so much as it does getting it done. And so if the broker is, you know, you said the broker, you said the broker, you said the broker, I'm going to double your commission, right? You don't have to buy any deals. You just work that into your analysis. And then if you still want to buy it, that's a pretty good deal. And you probably got to first look at it. Yeah.

Yeah, another anecdote on that. I have a friend that runs a buy-side investment bank, and he's got like 15 or 20 clients that are regulars that are on subscription. It's a great model. And he said, oh, yeah, Gurley, I had to standardize all my fees. because the way he has it sets up is all the bankers that work for him get paid directly based on fee generation. So one of the very smart clients went in and said, I'm going to pay double for all my deals.

And then he looked up six months later and the entire investment bank was working 100% on one client. He's like, how currently the law of unintended consequences. It's like, no, I had to standardize it. Everybody charges, and we get the same fee no matter. what. Well, this is an important thing when you're hiring an intermediary that I have learned to do, right? Because in this scenario, we've got a buyer hat on, right? Because you're trying to get an advantage. This is not good for the seller, right? Because your intermediary is bringing your deal to basically one buyer and not running a market clearing process. So as a seller, when you hire an

intermediary, your agreement with that intermediary needs to say that any fee they receive from anyone else nets down the amount of fee that you have to pay them. So basically, you know, if you owe them 5% and they get 3% for someone else, you only pay them 2%. Just say any fee you get, you know, you must disclose to me and is netted against what I, you cannot make more than our negotiated fee, 5% in this case, on the transaction. And then you will figure out the integrity level of the broker you're working with extremely quickly. Put that in the first turn of the engagement letter.

and you will very quickly figure out the integrity level with the broker you're working with. All right. Well, cool. I think we're running out of time. Anything else on this one? Man, I think for the right buyer who, it's a narrow universe,

but I think somebody could make this work. I think the guy's crazy if he thinks he's going to get $2 million for it. But whatever. I think that every week. If the right buyer is not Dura Software, I don't know who the right buyer is. Dura Software is passing. So I think this guy's got a problem.

we would run from this guy yeah yeah we've just we've got enough scars uh the guy different guy with a broker a little bit more polished you would get the book potentially potentially yeah it's also small i mean i think people don't realize about software businesses is they're kind of a unique beast around they are uh the opposite of uh dis-economies of scale like basically they actually get easier to run as they get bigger. And this one is down in the like, this is such a pain in the butt level. Like sub two million in revenue,

like it is just so hard to own that business unless you're going to work in it. It's just a mess. Yeah. Anywho, all right. Bill, thank you for being here. Mirko, great job. Held down the fort.

Very nice. We'll see everybody next week.