Acquisitions Anonymous - #1 for business buying, selling and operating - Small community real estate publication / Anesthesiology service provider - Acquisitions Anonymous e12

Episode Date: December 14, 2020

This week, we discuss two businesses for sale (both user-submitted!):- A small community real estate for sale publication in a resort town- An anesthesiology service provider focused on ambulatory surgery centers(Got a deal? Send it to us!)-----* 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.-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#62 Two Landscaping Businesses for Sale - Mike Loftus CEO of Connor's Landscaping#66 Analyzing Software Businesses for Sale with Steve Divitkos, experienced industry CEO#42 $900k Moving and Storage Company / $500k Rural Mini-Storage#61 Two Manufacturing Businesses for Sale - Brent Beshore - Founder and CEO at Permanent Equity#24 $5mm pool services and lifeguard staffing co / $2mm septic services business -  featuring baller @WilsonCompanies as a special guest!#45 $800k/yr cleaning business in Midland, TX / a $565k/yr window cleaning business in San Antonio, TX #48 Two Landscaping Businesses for Sale - Mike Botkin of Benchmark Group--- Support this podcast: https://anchor.fm/dealtalk/supportSubscribe 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]

All right. We're back. It's time for our little acquisitions Anonymous. It's the podcast where we look at two or three small businesses for sale and analyze them each week. So here with my co-host, Mills and Bill. And we also have a special thing this week. I got both deals. So I will go ahead and talk about them. We have a magazine. And then we have what looks like the world's hardest anesthesia business. So, It should be fun. So the magazine, I'll get started on this one. This is actually a user submitted, so I'm going to read a lot of what the listener did to summarize the business. So what this is is basically it's a glossy color magazine that you see in like a resort town. So this is a coastal town somewhere in the U.S. We don't know which one, and it features properties for sale. So this is kind of like when you go into the local cafe and there's that stack of free magazines showing the

local houses for sale. This is that. So it's published monthly from February to November, and then they do a double issue around the Christmas, December, January, holiday. They make money by selling ad placement to real estate agent, related businesses and stuff like that, and then they give them away for free. Select distribution outlets kind of right. As you walk into a cafe, it's that newsstand on the right where you can pick up the magazine. They have 75 regular advertisers and they run between 130 to 250 pages per issue, and it's the only one of its kind in that town. So they don't have anybody else printing this type of thing. Most of the people are real estate agents, 75% listing properties, and 25% of the advertisers

are banks, architects, and other services. So it is funny, just as an aside, how high the percentages of real estate agents. If you go talk to the real estate agents, they actually say that these listings and these type of free magazines, they aren't actually for potential buyers. They're there to make sure that the sellers feel like everything possible is being done to market their property. These things are generally worthless. But it's interesting that this is like one of those deals where the who you think is the customer isn't the real customer. The real customer is actually the seller. And then they do throw some editorial stuff in there as well. The seller feels like the readers love the magazine for all

the kind of reasons that a publisher thinks that. So I'll skip past that stuff. But they keep most of the So I think this is really important. Churn rate on the advertisers is less than 1% annually. And then they also do a digital version. That website stuff is pretty, well, looks like pretty pathetic in terms of traffic. 70 unique visitors per day, whereas the magazine itself is over 50,000 printed annually. Airport, grocery stores, all those kind of stuff where you see it. They do have an office where they do basically soup to nuts, put the thing together, sales, kind of old school,

basically publication type stuff. Currently, the owner is handling sales, and then he has freelance graphic designers that come in and stuff like that on contract with no FTEs. Basically, it looks like they've automated a good amount of stuff. They send the broker's emails and say, hey, send us your stuff

and we'll put together the layout of the magazine and go from there. Been around since 1985. It's an S-Corp. No competitors have said before, each page of advertising, is about $400. They have not increased rates in over five years. Pretty busy real estate market. It covers an area that looks like it's about three quarters of a billion in total home transactions

each year, which are pretty nice houses. So interestingly enough, they have 15 years of sales totals. So 2006 to 2020. Starting in 2006, the business was selling 450,500,000 in sales, and now is doing a bit over 600 as of 2019, with a gross profit of $338,000, with the owner taking home about $300,000. 2020 has not been very good because of COVID, and they think they're down about 20% compared to 2019 and going from there.

So again, so $600,000 in sales, making about $300,000, and the seller, she with like $1.5 million in cash at closing for the business, she is ready to retire in three to five years, but would take the right offer if it makes sense. So I think that's about it. What else? What do you guys think about this specialized niche publisher of homes for sale?

To me, this is one of those cases where the owner has a price in their mind and it really has no basis on recent performance of the business. And I don't think that's a bad thing, right? I mean, look, this lady's done well. She's been taking home a really nice coupon off the business. And in her mind, she probably has a number and it's $1.5 million. That is about five times 2019 earnings, but it's seven and a half times 2020. So, you know, even if EBITDA is fairly steady in a business, that seems maybe a little bit of a stretch.

But EBITDA is down by 60% year over year. Like I'm going to price that in, right? whether it's the price or the structure, I'm going to find some way to account for that. And so, you know, for the user who submitted this, I totally get the appeal. It's fairly high margins. It's about 50% EBITDA margins. But I would just say you're probably barking up the wrong tree because, one, I wouldn't pay $1.5 million based on 2020 earnings.

And I think that, you know, maybe this is a good long lead because chances are if in 2021 the business did, you know, substantially higher EBITD margins, the price doesn't probably change that much. Yep. I call this the business is worth the mortgage balance on my house for now. And we run it, we run into it all the time. Cellar has a number. It's not at all related to the business. It's, it's some external number. And they go, this is what I need for the business. And I go, that's too bad. That's not what it's worth. And it's honestly, like, this kills, is one of the top five deal killers for us. Um, is seller has totally decouple. old valuation expectations. And you often see it a lot when the price is a perfectly round

number, as it is in this case, $1.5 million. Exactly. So to me, like, I don't hate this business. It scares me a little, but this is a dead tree's business, you know, in a world that's going increasingly digital. I know they say they have no competitors. So I think about, you know, is it possible to start a competitor to this business? I think they probably, there's probably only room for one game in town, right? So I think, I think in theory, you could, but they have all, they're not churning their advertisers, you know, like the, the realtors are probably happy advertising in this magazine. This to me, like, could you make it any bigger? Probably not. I mean, you could maybe try to raise prices a little bit. You could try

to expand to different markets, but like you're going to have the same problem where the reason there's no competitors in this market. There's probably one and one in the other markets, and it's going to be hard to break in. So to me, this, if you wanted to buy this business, this is all about the price you pay. So that's why this is tough because the price you pay is the most important part because this is essentially an annuity. If you're not scared of this becoming digital, if you think this business is going to be around, if you look back at history before 2020, the EBITDA is very consistent for the most part, which you know, you don't see a lot of these like annuity-type businesses. The trouble with this annuity is you have to work for this annuity

because the owner is doing all of the sales currently. So it's not kind of a hands-off annuity. So I don't know about you guys, but if I paid seven times for this, you're looking at like a low-teens return, right? Low to mid-teens return. That's great if it's a passive investment. That's terrible if it's my full-time job also.

Right. So this is the type of thing, like if this business were priced at, you know, substantially lower, or I could hire a salesperson, bake that into the EBITDA, and still pay a price that was still lower than $1.5 million. This might be interesting. But I think the primary concern on this entire deal is price. And it seems as though there's a pretty wide gulf between the price that would get me excited about owning this business and the price that the seller wants.

Yeah, because after you discount your time in there, let's say you're paying yourself a good salary, $120,000 to run this business. That means you're paying $1.5 million for something that in good years, not this year, is going to generate $180K in free cash flow. Sounds pretty risky. A very asymmetric risk, but in the wrong direction. It's all downside, very little opportunity for upside. Well, when you think about, I mean, the user submitted some good kind of growth opportunities, and it's all the things, right? Textbook things. So kudos to him for hitting on these.

But price increase. Realtors pay $400 per page. That hasn't been adjusted in five years. Well, how do you think they're kind of like, I mean, it's like we like you talked about Michael, it maybe is not that value add, right? It's just something that they're kind of having to do to check the box. and if the real estate agent is saying, hey, look, I'm getting a $10,000 or $15,000 commission.

I want as few things drawing on that as possible. Raising prices, I think, is a little bit, it's a little bit risky, especially if you've just got an annuity, you know? Yep. So we like this deal. We hate how much it costs. Yeah, I think things that would make this more compelling would be either a lower price or if I were the seller,

take the next year or two and bring on a salesperson, train them up, right? So then you could be selling more of a hands-off annuity, which you think could command a higher price. But this is a very hands-on business that you have to own. And it's asking kind of a passive investing type valuation. Yep. Well, it's funny. The listener said, risk, sale price too high of a multiple given the growth opportunities.

totally agree. Totally agree. All right, let's move on to this one. I think this will be fun because it is way outside of our collective circle of competence. So I'm excited about this one. So this is a teaser we got. This is also listeners submitted. It is called Project Anesthesia, is the title of it from the brokerage. Anesthesia, the company, is a leading provider of anesthesia services to ambulatory surgery centers.

So based in the southeastern part of the U.S., it has exclusive relationships with these surgery centers and provides these services for orthopedic, E&T, and cataract outpatient surgeries. And they recently were selected to serve a new larger chain of ambulatory centers, and they use leading ed's anesthesiology practices to minimize patient discovery by using general anesthesia and regional anesthesia blocks. So I think the regional anesthesia block is when they give you an epidural and stuff like that. So it makes sense. They have strong relationships with surgeons and they support that by enhancing the surgeon productivity through patient staging and minimizing patient discard delays. They had 3.6 million revenue in 2019 with a four-year average adjusted, capital A adjusted EBITDA. So earnings before interest, taxes, depreciation, amortization of full. point nine million. The owners are seeking a majority buyout of the business and will assist new

ownership with a successful transition. So I'll pause there and we could talk about this business. So they look like they look like the past four years they did 4.3 million in revenue, then 3.1 million in revenue, then 3.6 million in revenue, then 3.7 in revenue. And then they've had adjusted EBIT of about 40%. It looks like each of those years. Ooh, I have a lot of thoughts about this one. I think it's very interesting. So for those that are not aware, ambulatory surgery centers are essentially converted tractor trailers where they can go around and add operating rooms to hospitals or surgery centers. And then these guys come in and do the essentially anesthesia on demand. So I get a sense that they don't really have their own physical location. They're going in to other places and anesthetizing patients. So, Their real customer here is the ambulatory surgery center, not the person being anesthetized, which is important to understand. So the one thing that just puts this way outside of my circle of competence is the fact that,

you know, how do we get paid here? The person who's paying you, the hospital, is probably, there's probably some contractual relationship. They're getting paid by insurance in some way. And then they're passing on whatever they bill insurance for the anesthesia to you. Maybe they're keeping some of it. So I imagine you've got to really understand medical billing and the insurance world to have a handle around how you get paid, which is not something I have the context for. I do know there's a

whole class of investors that love stuff like this, and there's a lot of people who do understand it very thoroughly. So maybe this is a phenomenal business. It just seems a little bit in the too hard pile for me. And the other thing I would think about it is it seems like they've got, so they mentioned practice has been selected for a new larger surgery center coming online in 2021, which is expected to generate 1.5 million in incremental EBITDA on 1.9 million of EBITDA that they already have. So that tells me one surgery center can be 1.5 million in EBITDA, and granted it's a large one. But even let's say their typical one is half that size, that means they have three to four customers like pops, right, to make $1.9 million

dollars in EBITDA. So I would have a lot of questions about relationships with these three to four customers. Are their contracts? You know, can they ditch me overnight? You know, all that type of stuff because it sounds like lucrative, like good margins. You know, they're making two million of EBITDA on 3.7 million of revenue. But one of those customers bails on you. You're going to take it in the teeth. So I'd have a lot of questions about contracts. Which probably happened, right, in 2017 to 2018. Revenue goes from 4.3 to 3.1. But look, I mean, it basically all hits the bottom on.

You know, revenue goes down and EBITDA goes down by almost the exact same amount. Yep. Yep. And that's probably one or two customers leaving. I don't know anything about this business. I don't think I would go anywhere near it. I would want to have somebody that knows this type of health care stuff and anesthesia. I mean, like, I would be looking for an anesthesiologist to go into it with me and just be like somebody I can trust to know and be involved in this kind of stuff. I mean, I think the basics of running a business like this are consistent no matter what.

You still got to hire good people. You've got to price it right. You got to deliver your services. But the specifics of this stuff, I, you know, I think if you're not, if you're not coming from this space, you really need to have somebody that is as a partner or potentially, you know, employee number one type person. Yep. Actually, I think that's a very interesting way to look at this business, is to potentially partner with an anesthesiologist, or if you happen to be an anesthesiologist with some extra free cash flow after 20 years of being an anesthesiologist, this might be a great business for you own. Again, comes back to business owner, business fit, as we've talked about a couple times

on this podcast. Yeah. Well, you can, the point being there that you can manufacture an ownership group that does have business fit if you're missing components of it, right? So, for example, I suck at like Fortune 500 consultative sales if I'm the one doing it. Like, I'm bad at that. So if I was to start a business or buy one in that area, like I'd want to, I want the right partner to be there and deal with that. And same thing here. So Mills, you're about to say something? I mean, I think you guys bring up good points. At the end of the day, if somebody were pursuing this, right, and they're an outsider, they don't know health care, they don't know the kind of payer relationship. You could get in probably, I think, above your head pretty quickly.

But this is one of those cases where it's an obvious advantage to just go ask dumb questions, right? Who is the customer here? It's not the person who's getting their cataract taken out, right? Or their nose operated on or something. At the end of the day, your customer is the ASC. And most ASCs are owned by the physicians who practice there. I've got a family member who fits this category, and there's probably 20 physicians, right, who basically own not quite a mini hospital, but it's basically just a building with a bunch of operating rooms in it.

And all the different physicians kind of have their day and their time where they operate, and they all own, it's fractional ownership of the thing. So I like the sense that if you are providing a good service and you're making the doctor's life easier, that, you know, to get voted out by committee, most likely, right? If you have to get 20 physicians, or let's just say you have to get 11 physicians to vote against you, it's probably a sticky client relationship. So I like some of those ingredients, but it's this whole world is just if you don't know healthcare and if you haven't navigated it, you could get out of your depth pretty quickly.

Also, I would be willing to bet that this company trades for probably eight to 10 times just based on healthcare multiples. I mean, physician practices, ophthalmology, physician practices, can trade for 12 to 15 times. So this is way better margins than that. And, you know, a lot of things that just healthcare in general right now, I would say it's going to be nosebleed tech valuations. Yeah. Somebody will buy this. Somebody is drooling over this business that does exactly this and owns 10 of them and is going to pay up for it. And I didn't look up the advisor, but, you know, know, most investment bankers or brokers start to really kind of ratchet down on specific industries and verticals. And so I'd be willing to bet that these guys, they know what this business is worth,

right? They pitch the owner of it. Hey, we can get you X amount of dollars for it under these terms. And so, you know, it's not kind of, you know, oh, wow, I just landed something that, you know, nobody knows is a pot of gold. It's probably going to be fairly priced and shopped around pretty widely. Yeah, the broker appears to be in Tampa, and they have, their case studies are all over the place. So that's a good sign that it's not necessarily a healthcare-specific broker. It looks like somebody that they trust, you know, the seller is most likely in Tampa and entrusted to market the business. That would be a good sign if you were a buyer. It means that they, you're saying, Michael, they may not totally understand what it's worth if it's not a fully specific

healthcare broker. Absolutely. Yeah, absolutely. Cool. All right. Well, I think unless you guys have anything more on this one, I think we did great this week. Yeah, those were fun ones. All right, guys. We'll catch you next week. Good job by you.