Acquisitions Anonymous - #1 for business buying, selling and operating - Should we do construction management in Cleveland? (Spoiler: No but maybe you should.) - Acquisitions Anonymous 262

Episode Date: January 12, 2024

In this episode, Bill, Michael, and Mills dive headfirst into a mysterious construction consulting company without any prior knowledge of the business. As they explore the company's listing, they uncover intriguing details about its growth, profitability, and unique niche. The trio raises critical questions about customer concentration, the founder's role, and the impact of market dynamics on the business. Check out the listing: https://www.bizbuysell.com/Business-Opportunity/construction-consulting-company/2156051/Thanks to this week's sponsors.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.-------- Check out Girdley's new course, How to find a great business to buy. It's chock-full of insights and is perfect for listeners of AA who are looking to start their own search!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]

Michael here, Acquisitions Anonymous. You know what it's about. We today went through a business in Cleveland, and we did two things in this episode. One is we dug into what potentially made this business really interesting and also what made it not that interesting. And number two, we managed to alienate every single one of our listeners in the Cleveland and Northeastern Ohio area. So kind of a magical episode for that reason, and I think you'll have a ton of fun listening to it. Here it is. Hey, Michael here.

Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner. So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your

quickbooks online set up in the right way, and a number of things around payroll as well. So definitely know them and recommend them. If you want to find out more about cloud bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie. I know many of you have and see if he can help you make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions.

And when you call, mention this podcast. It would help us and help Charlie know that we're supporting him as well. So thanks a bunch. Bookkeeping.com as the sponsor for today's episode. Right before we start recording, Mills goes, wait, what does this company do? And Gurdley goes, you're about to find out and press this record. So here we go.

Look, Mills. Look, Mills. If you want to know what the deals are ahead of time, bring some deals. It's never been a prerequisite to understand what the company does before we hit record. Let's go. This one says construction consulting company at the top. I assume they could, I don't know, do they consult about construction? Well, you're going to teach us, right, Michael?

I guess let's go here. All right. In case you doubted this show is live, it is live. We have so many friends. All right, construction consulting company. They have a listing here on biz by sell. Asking price is $4.5 million. Cash flow is $1.5 million plus or minus.

They do not give us gross revenue numbers, EBIT numbers, FF&E, inventory, rent, established, date. None of that stuff shows up here. the business is an established and very profitable consulting business with 28 employees. Empire Business Consultant, a business associates, a merger and acquisition firm represents a construction consulting company. Through a growing team of seasoned industry experts and an expanding network of skilled sub-consultant partners, the company continues to build the capabilities to manage the full spectrum of construction demands. They offer clients the attentive support of a local farm who are personally involved in each project,

combined with the savvy leadership of a national organization with a depth of experience. They offer a wide range of services, including project planning, budget and cost management, scheduling, contractor, and subcontractor management, risk management, communication, quality control, health and safety, documentation reporting, change management, and project close out. So I'll pause there. It sounds like they just, if you want to outsource managing your construction project, say you're a big corporation or whatever, you call these guys. Is that how you guys read this?

Is that called a general contractor? I'm confused. It's different. It's different. General contractors are what's called CM at risk, construction managers at risk. So these folks, a lot of times you have a CM, you have a construction manager who helps hire the G.C. They help you kind of adhere to the budget. The thought behind it is, hey, I'm a construction manager.

I work with GCs 365 days out of the year. You, you know, are renovating your church. and you work with GCs once every 10 years. So let us help define the scope, make sure that all the bids are apples to apples, keep the project on schedule, hold everybody to the same account, and we will hold your hand through the process.

And much like an architect, they charge a fee on the, typically on the whole project. Okay, so that sounds super valuable to me, actually, as someone who has done a couple of construction projects and even managed the GC, and it was a great GC,

but man, it was a lot of work for me, the CEO, to manage the GC. And, like, well, I'm not going to hire a construction manager on my payroll. So I could actually see this. Okay, now I understand what this does. Very valuable. All right. Moving on through listing here, investment considerations. There are numerous benefits for the buyer who purchases established benefit,

a business, including the company has been business for over a decade and blah, blah, blah. We love our customers. Good relationships, extremely profitable and never had to carry any debt. and they've earned a reputation for their excellent customer services within their industry. So they have good brand according to the broker here. The current owner is willing to assist in an early transition. A dedicated employment recruitment effort is all that we needed to double the revenue of this business. Oh, just that easy.

I had no idea. Easy. It's funny when brokers write that, and I'm like, why are you in the broker business if doing that to another business would be that easy? It just doesn't make sense. Anyway, cognitive dissonance. I was like, oh, there's actually some financials. They didn't have it in the top, but they have it here.

Yeah. Year ending 2020, they did $2.6 million in sales with sellers discretionary earnings of $742,000. In 2021, they did $4 million in sales with sellers discretionary earning of $1.3 million. And in 2022, they did 4.7 with 1.6 in SDE. So big jumps. I mean, if you look at that growth year over year, at least 20 to 21, they had totally, totally killed it. Those were COVID years, so I assume that it has some impact on it, but then it continued on through 2022. Reason for sale.

The owners have reached a point where they are happy with the progress they have made with the company and are ready to retire and spend time with family and friends. I've heard they're also going to start a podcast. No, just joking. All right, sorry. It's been a long week. Price. The purchase price for the business is $4.475 million. No working capital included.

The information is blah, blah, blah, is a guide. They have least real estate, 28 employees, and it's listed by Ben Sutherland. I think we've seen Ben before from Empire Business Associates. Bill, do you recognize him or no? I like his photo. I don't recognize him, but he looks serious. He's wearing a button-up shirt, no hat, not touching his face.

Tasteful facial shirt. I mean, there's a lot to like here with Ben. Yeah. 440 area code, so I can Google where that is. We can figure out where this business is located. Ohio. Oof. Okay.

Ohio, oof. I don't need to know anything more. Pass. Well, it's pretty much like, that's Cleveland. Oh, God. I think we just lost all four of our Cleveland listeners. Sorry, guys. Sorry to Kelsey Lerick and the whole Cleveland crew. My bad. Okay, but hang, so hang on, though. This seems reasonable, right? Go back to the financials. This business has grown from 2.6 million in sales to 4.7.

million in sales in two years. It appears to be dropping to the bottom line. They've got 1.45 million of cash flow, or 1.6 million of SDE. But so 1.6 million of SDE, they want 4.5 million for it. It's three times. They want three times for it. It's growing.

The margins are solid. 1.6 of EVIDA or of SDE on 4.7 is 35% net margins. I think part of this too, there was like a clue in here where they say they subcontract, I think, some of their consultants and something about partnering with like a national, you know, like somebody who has a national footprint, a savvy leadership of a national organization. So sometimes these are like really interesting because if they have some kind of edge when it comes to customer relationship, you get certain national tenants, like it could be Sherwin Williams, right?

They're like, we have 3,000 stores, and we need to spruce up all 3,000 of them at about the same time. And we need a general contractor or maybe two general contractors who can do it nationwide, full chain, and we don't want to manage 3,000 projects. These guys could say, hey, look, we have 28 people, you know, across the country, or maybe we have a handful across the southeast or whatever it is, and we will help manage these projects for you. And Sherwin Williams is like, great. Just make our life easy.

Sometimes what these construction managers will do is they will run all the revenue and all the costs through them. And they basically just act as a middleman. Based on the revenue and the margins on this one, I don't think that's happening. They're probably like, hey, look, Mr. Owner, I will connect you with the general contractor and you pay them directly. and I'm just going to invoice you a fee that's separate and distinct from all of that. That's the better scenario.

Otherwise, you're operating at even thinner margins than the general contractor. And you've got a bunch of credit risk too, right? Because you're taking on all the expenses and hoping you get paid. Yes. Yep. And by the way, I don't want to just blow by that point. I have seen so many businesses that are predi-to-one. So what I just saw is an aggregator of cloud computing spend.

So basically what they did is you got a sub-account of their cloud, of their AWS account, And then they aggregated all the spend and went to AWS and got volume discounts. And like, great. But what they don't realize is all the embedded credit risk. And that why is AWS willing to let you exist, right? Because you're taking on all of this collections and credit and account management risk that ADWS normally has to price in and now they don't. So they're happy to give you a discount to handle all that.

When you're operating on thin margins, one default wipes out two years of your 5% margins. right? So people just don't realize how much embedded credit risk there is when you are buying stuff on your account and expecting to get repaid. Every staffing company is basically that way, right? If you're running the payroll through, I mean, I looked at several and they got huge. But the problem is, is that one customer goes bankrupt, you know, or just says, hey, look, we can't pay. And the credit risk associated with that is astronomical when you're operating. for such thin margins. That's the reason why a lot of them end up on like net 15 or net zero. Yeah. Speaking as a co-owner of one. It's like, okay, guys.

You're like a lot of them. Wink, wink. Well, the other thing, the other thing happens in staffing, which also I suspect happens in a business like this, is you end up a lot of this growth when you look under the hood comes from one or two clients. And they like, like you have a lot of, I would be willing to bet when you look into this company, there's 15 or 20 little clients that compose about 40, 50% of revenue, and then there's one or two clients, and they're 50 to 60% of it. And those guys have been growing like crazy,

doing big things. And like, you know, at the event that you and I both went to, Bill, in the fall, I was talking to one of the guys there. And, you know, he was telling that story. He's like, okay, big national chain called and my business doubled in 45 days. And I hope big national chain keeps paying. and it was like, oh, because the guy was in construction. That's why I brought it up. Great time to sell the business, right? Yeah.

Well, I think he was, I think the whole thing was telling us if he was debating if he was going to buy a jet. And I was like, I need to go to Chili's. That's how I'll turn to thing. But I bet when you look into this and the fact they didn't really talk about customer concentration here leads me to believe like these guys may have gotten in with some big national chain. And when you dig into it, you're like totally to.

depending upon Dutch brothers or somebody that's been thrown around stupid zero interest rate money and you were there, you were their guy. And, oh, by the way, Dutch brothers is not building anymore. Like, they've pulled back on all their building now. So, like, that's like, like, the thing to watch out for it. And wouldn't surprise me, that's how this grew so quickly. It doesn't even have to be macro, though, to emphasize your point, Michael. Like, let's say Chili's is the big client and Chili's decided to spruce up all, all, however many, hundred or thousand chilies there are. Like at some point they're going to be finished. Right. Like they'll just all be spruced up and they'll be like, thanks for your service, five stars, see you in 15 years.

You know, so it's even if it's not macro, like if it is just one client who has a multi-year, because this is only, we only got three years of financials here, you know, a big chain. It could be a five-year deal. So yeah, you'd really want to understand what's driven this. Is it one client and what's the future of that client? Are you looking for a small business to acquire? Well, this book right here is the Bible for people in your shoes. It's the Harvard Business Review Guide to Buying a Small Business. It's the go-to book. But here's the problem.

You see this whole book and this little bit? This is the only part that talks about the hardest part of buying a business, finding the right one to buy. And the bad news is it's full of outdated advice and stuff that doesn't work anymore. I'm Michael Gurdley. I own 12 companies, including a couple that go out and buy more companies themselves. And I have a podcast where we look at... new businesses to buy each and every week. I've looked at thousands of businesses for sale, and I've bought and sold nearly 20 of them. And I'm telling you the old ways, they don't work

anymore. So I made a course with the latest and the greatest, and it's called How to Find a great business to Buy. It's laser focused on the new way to run a business search with what works today. So you can play smarter than the sea of buyers who are out there competing against you to try to buy these businesses. And you can get the deal that was meant for you. In the course, you'll learn three things. One, how to narrow your search with a tight thesis. We're hunting with a rifle here, not shotguns. Two, how to scale your outreach to get the most possible leads. This is a numbers game after all. And three, how to run your funnel like a pro so you can boil down thousands of leads to find your one great deal. Plus, you'll get a couple of exclusive Chili's jokes that I've never

published before. So what's not to love? Go to gurdly.com slash great business to take the course today. So Mills, how is macro affecting? I mean, it doesn't affect your space so much because you do a lot of repair that's unavoidable, but it seems like some of the voluntary stuff has to be slowing down with interest rates being higher. I mean, some of these deals just don't pencil anymore. Yeah, yeah, you see it on a lot of like spec.

If it's, you know, ground up, speculative, just depends on what part of the country, though. I mean, things that don't work, you know, in certain markets are still working in others. but the big box industrial, you know, where people are specking 500,000 square foot buildings and then just, you know, assuming that they're going to lease up, a lot of that has slowed, although there's still a shortage of large, you know, large bay industrial. Multi-family seems like it really has taken it on the chin just because people were penciling deals with rising rent, right?

At the end of the day, the buck has to stop somewhere and you can only charge so much for a one-bedroom, one-bath, you know, apartment. And as interest rates go up, it just, you get squeezed. And so a lot of those deals, things that were happening, you know, that were tight or just not happening now. I think it just depends on what their focus is. If they're like, I looked at this business years ago, I still just really, I think about like a lot that they were really, really good at helping banks install ATM kiosks. Could be like a drive-thru ATM. It could be, you know, like out in the parking lot or it could be in the branch. And they could do it all across the country.

they had a really large network. And it was an awesome business, really, really cool because they're like, hey, look, it's not just a carpenter. It's a carpenter and an electrician and maybe a concrete guy and, you know, and like a low voltage, you know, telecom, internet, Ethernet kind of guy. And they could hurdle, you know, all those things together and just get in and get out and make it minimally invasive for the bank. If these guys have like some kind of niche like that where they're just like, we focus on,

you know, home improvement stores. or something just quirky and specific. But you don't know until you actually peel back the layers to say, you know, is most of their exposure to new construction or is most of their exposure to upfit? Because to your point, Bill, yeah, those things do kind of cycle.

But a lot of times by the time, like for these ATMs, by the time they kind of finished upgrading everybody to like chip technology, you know, the next thing is coming out. And they're like, oh, now it has to be, big one was ADA compliant ATMs. You know, it was like, okay, we got to redo all our ATMs to make them handicap compliant. And then by the time that was done, it has to be upgraded again for CHIP.

It may be something like that because most of the style things that are related to interior outfit are so fickle. You know, Lowe's redos their customer service kiosk or Walmart redos their checkout lanes. You know, they don't wait 15 years to do that. They have to do it more frequently, but it just depends on what their focus is. I would like that a lot more than, hey, we help churches with new construction, you know, new ground up construction or something that is a little bit maybe more discretionary. And they go, construction costs are up 25%.

We're going to wait and just live with what we've got. One thing I'd also want to dig in here is this is an SOP-based business, right? This is construction management. This is, you know, you've got to know how to run a construction project. What would not be great is if the owner here has been in, has been running it for 30 years and he's basically the one delivering all the value and you don't have like a deep bench of project managers that are loyal and have stuck around. You don't have documented processes. All of the knowledge on how to run the bid and manage a GC and what to happen, what to do when this exception happens.

You know, because I mean, that's what these guys are in the business of, right? Is handling exceptions and things that don't go according to plan and kind of like judgment. and making problems go away. And I bet they're very good at it. They are making $1.6 million a year net doing it. But if the founder is the guy that's doing that and there's nothing below him in the org, this is not a saleable business.

So you'd want to really understand, like, I'd want to go to a sales call and multiple meetings with clients that the owner does not attend. You know, like you'd want to see that the business working without him, you know, not just take his word for it that he doesn't spend much time in the business.

Yeah. And there's so much of this that's like very nuanced and rule of thumb, you know, like a lot of what you're relying on this type of consultant to do is to tell you, hey, I got a quote from the sheetrock guy and it was a dollar per square foot to hang and mud sheetrock. Is that a real price? Is that a, you know, a competitive price? But you have to know that for dozens of trades and dozens of different, you know, disciplines. And so if if they have some kind of documentation or, you know, if it's just like, oh, well, Becky, you know, really knows this in her market and Joe knows it in another market and they never communicate because it's just this remote, you know, dispersed network, then you're just kind of hurting cats at that point. And the value goes way down if everybody's just doing their own thing and you're just like the organizer and the order taker and the person who helps collect money and expensive. I just remember my buddy actually does exactly this business. It's right to do the third. They never. We'll be like, we'll be like, we have a guy who cleans out toilets for airplanes.

And Michael's like, I know a guy. But back to your point, Bill, like, what market you're serving with this is a huge impact. Like, if you're doing this for schools or you're doing this for like electrical grids, like, that is a great business to be in. If you're doing it for apartment buildings or ATM machines, like in the banks just decide not to build any more branches, which is what they all decided about a decade again. go, like we don't need more branches. Like, that's not good. So, yeah, I think I'd be super curious what niche this is tied into, for sure. I learned about a new niche the other day that I was very

intrigued by, but I also just instantly got scared away. And I was like, no, we will not come do that work for you. It's property managers for fraternity and sorority houses on university campuses. And they, it is, you know, you think, like student rental pro, like some of those folks, you think they have high demand, the sorority house is the tip of the spear because if, you know, the thermostat isn't working quickly enough, you know, you have 80 angry, you know, men or females who are blowing up all their parents and then you have 160 parents who are, you know, calling you nonstop saying, you know, the HVAC didn't kick on fast enough. Yeah. And it's not like the fraternity house where the guys are like willing to live like slabs for a couple days. Because they live like slabs

all the days. Like, the ladies' sorority house has a much higher standard of cleanliness and suitability for living standards. Yes. One thing that occurred to me is we were talking about all these different markets and then, you know, our previous episode that we recorded had a real estate private equity guy selling a business. You know, like, I was just thinking about it's such a barometer on Twitter as to how

vocal the people who are real estate private equity in each one of these categories tends to be. Like, I remember people used to talk. crazy about multifamily and office. And I don't hear it. Those guys have all disappeared. Like anybody who was a real estate private equity guy that had that had any of those categories, like, you don't know. But meanwhile, the light industrial guys are like, let's go. You know, hey, you know, here are my 10 life lessons for you to know because I'm still killing it in light industrial. So anyway, just the absence of a discussion is often a message

itself. So anyway, I just was thinking about that. Which reminds me, we all have a buddy who's like was real estate private equity for a multifamily. I wonder what he's doing now. He's okay. I haven't heard it for like nine months. We should totally check out with him. Actually, I heard he's running a longevity clinic in Colorado. He moved from Austin and Colorado.

I don't know if you guys know who I'm talking about, but I got a, maybe I should message him and see how he's doing. I bet the longevity clinic's probably going to have a lot of ex-multifamily guys in it. Most likely. It was likely. Well, that, you know, Robin, who you guys have met, my chief of staff and I, that's the business we want to start next year.

Like there's, we've, we've realized like, middle age and longevity is like super early, but there's not like, there's not like any trusted source for it. That's not like super weird. Like Brian Johnson, that guy, like he's, he seems like he's talking about a lot of stuff, but it's like, it's way at the end of the spectrum of like, okay, I don't know. I'm not, I'm not measuring my spermatility. Like, thank you very much. And then the Huberman stuff is just like way too dense.

Nobody's got time for a four-hour podcast. So, like, there's got to be something in the middle. So I think we're going to do something around that next year, which it's totally off topic for the podcast, but I thought I would share with you guys since you're my butts. Oh, all right. So we're going from girly course on how to buy a business to girly course on how to live forever. All you need to know to live forever, but not too much.

So the idea is not to live forever. That's what I think is really interesting. Like modern medicine wants you to try to live as long as possible, but doesn't give a crap about how good your quality of life is. longevity is this idea like you're going to die but like how do you live a really incredible life for as long as possible and i think that's like a much more healthy approach to it and a cool frontier to go into right like i've heard described as health span rather than lifespan that's really good yeah you know i should start a whole company that starts using terms like

that you should this is a great idea so we'll see so don't i have a question in mills maybe you know but don't businesses back to this listing, don't they usually just, like, end up selling to the employees? Like, isn't that the typical way something like this happens? I mean, professional services definitely airs on that side. If you have like an engineering or, you know, consulting firm or environmental consulting firm, you know, the founder usually at some point stops being the top producer

if they're smart. And then they have a handful of people, maybe three or four or five men and women who, you know, control the majority. of the book of business and they say, I'm going to start transitioning the business to you. You see it with, you know, this, with CPA practices. You see it with, you know, any engineering, environmental consulting.

Law firms typically change hands this way, you know, through the partnership model. But who knows? I mean, if these are all subcontractors and they're loosely affiliated and they just kind of come to him for leads and the owner of this business, you know, kind of divvies out like, hey, here's your allotment of, you know, of work for the month. It may be just kind of more of an independent model. Yeah, this may turn out to be one of those ones that's just per bill's suspicion on one man show or a one woman show and then you dig into it.

And it's like a friend of mine owns a business that they, they manage court reporters. And their phone rings because when you, when you're a lawyer and you have a deposition or you're going to be in court, you have to have a court reporter. and you don't just call one court reporter and go, hey, you're my person because they may have scheduling conflicts or whatever. And so you call a court reporting firm because they say, well, we have 200 people and we know you really like using Janus. But if you don't have Janus, then Alan is, you know, the plan B because you guys work well together. And we'll handle the scheduling. And then 1099, all of the court reporters, but they get paid as kind of a almost like an old school

marketplace, right? Like, it wasn't called a marketplace back then, but it's somewhere between a middleman and a marketplace. So who should do this deal, if anybody? The top producing employee. Or like a guy that has been a GC for his whole career. Yeah. There's a guy that I know in town who retired from owning a large GC firm, and then he kind of took a couple guys under his wing and just let them benefit from, you know, the kind of halo effect of his name and reputation. There may be a guy who's like, hey, I've been doing something really similar to this, and I have two sons who are in the business and we're going to, you know, throw all our hats together and kind of do something like this. But we don't necessarily want to go, you know, start bidding

competitively for general contracting jobs, you know, renovating ice cream shops or something random. Well, it's a tough thing about the way these brokers sometimes price a deal like this. So it's at $4.5 million. The cash flow is $1.5 million. But the cash flow really requires you to go do this as a job and build up relationships and woo people over. Like, it's not like, it's not like this is an owner-independent business from what I can tell. And so at first glance, you're like, oh, cool, like three times cash flow. But then you're like, oh, like, I have a huge opportunity cost with something like this.

So, yeah, that's, to me, it doesn't feel like it's priced right. I mean, maybe they get it, but it just feels way too expensive again. The one nice thing about this type of business is you really detach yourself from a lot of the risk. If you're the architect and you design the building wrong, like, you have errors in emission insurance because everybody's going to come to you and say, hey, you miss something. And we all bid based on a set of plans. And now you have to make it right. You have to make a toll. Or if you are like a, you know, if you're a mechanical engineer and you design HVAC systems and you design it wrong and it doesn't work, everybody comes back to you and says, hey, pony up,

you owe us. In this, you don't take on design liability. You're just saying, hey, we got the plans from an architect. We helped hire the G.C. or the subs. And it's up to everybody else to perform. We're just going to hold them to account. I like that from a risk standpoint. I like the business, just the things I don't like. It's going to suck.

All right, say your catchphrase. I love it, just not for me. Go ahead. I like this deal just for somebody else. This is a great deal for somebody else. Man, somebody else is going to really do good with this one. All right, we'll wrap it up there. Happy Friday to you guys.

The holidays are coming up. It's my favorite time of the year. So happy holidays to both of you. And we'll see everybody next week. If you enjoyed this episode, I think the earlier episode we recorded today had four of us, and this one was three of us. The good news is the fourth one of us had to go close in business.

So good for her. But yeah, it's been great getting the whole band back together as the holidays have come around. So we'll keep doing it more and more.