Acquisitions Anonymous - #1 for business buying, selling and operating - Someone makes $5mm/yr printing CD sleeves - Acquisitions Anonymous 175

Episode Date: March 14, 2023

Michael Girdley (@Girdley), Bill D’Alessandro (@BillDA), and Mills Snell (@thegeneralmills) review a company that prints CD-ROM sleeves as well as some other stuff too.Also, check our Girdley's dramatic lighting as he's trying out to be a member of the Backstreet Boys and/or a Twitch streamer.-----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.-----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 another episode of Acquisitions Anonymous. Today, me, Bill, and Mills went into a printing company that prints CD sleeves, or used to, located in the Northeast, doing $5 million a year in revenue. And it was really interesting. And I also told some stories about owning a Delorean. So hopefully you enjoy the episode. Really a fun one for us to think about this type of business, who should buy it,

how you should structure it, and all that kind of stuff. So here is the episode. I hope you enjoy it. 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. at Bookkeeping.com as the sponsor for today's episode. All right, guys, we've got the gang all here. We're wearing the same clothes as last episode. Do you think anybody will notice? If you keep bringing it up, everyone's going to notice. Only every time you bring it up. Be cool, man.

That'd be cool, man. Oh, wait, I can make a different. I'll change the color behind me. Yeah, nobody will notice. I'm loving this about you, Gertley. I love your moon lighting. It's fantastic. All right, well, we got us a deal here for Friday.

Anybody want to read it or you want me to read it? I'll read it. This is a cool one. So it's a highly profitable, they're always highly profitable on the show. A highly profitable specialty packaging company. Founded in 1985, the company is a leading United States specialty packaging company focused on packaging envelope products and located in upstate New York. Their goal is to create high quality products for customers using the best materials,

print and manufacturing methods, and providing cost effective and environmentally friendly options, blah, blah, blah. They were a leading manufacturer of sleeves and envelopes for various computer data storage products such as CDs or decades and have since transitioned to producing sleeves and envelopes for other markets. These other markets include protecting RFID chip enabled identification cards, bank cards, and passport cards. Packaging for hotel key cards, gift cards, retail receipts, medical instructions,

and archiving films and photos are also significant products. The company serves the hospitality, medical, financial services, retail and entertainment industries, and they are a GSA contract holder selling to the United States government. Probably want to come back to that. The company employees a 92% enjoys a 92% rate of repeat business through its exceptional product quality, timeliness, service, and intention to detail. This drives word of mouth and long-tenured relationships. Their customer mix is about 46% hospitality and retail, about 21% government and financial service. These are really not helpful combinations. Government, which requires the GSA contract and then financial services in the same part of the pie, really not helpful.

14% medical testing and healthcare. And the rest, they have got about 20% legacy optical disc manufacturers and other. And they're pretty well diversified between Tyvec and RFID blocking sleeves at 29%. Paper card sleeves at 22%. Paper envelope packaging at 18% or 19%. Paper board sleeve packaging at 19%. Their financial performance looks pretty good, semi-recently. So they had about 3.5 million sales in 2019, another about 3.5 million in 2020, and

4.5 million in 2021. They're projecting 5.1 million in 2022 and 5.5 million in 2023. Not insane projections, about 10% annual topside growth. Their EBITDA was 160,000 in 2019, 270,000 in 2020, 860,000 in 2020. they project $1 million in 2022 and $1.1 million in 2023. Got to hand it to the broker in this case, not hockey sticking the projections. So it says the company has generated considerable earnings growth. They hold two U.S.

trademarks and have applied for a third trademark. And it's one of the only three companies in this industry who is authorized to purchase Tyvec directly from DuPont for the envelope market segment, potentially interesting. And it says they've got diversified industries. They've got a team of 25 people. 20 of them are in manufacturing. Two of them are in office in accounting and three of them are in sales. They got 160 active accounts.

92% of their businesses repeat, as I mentioned, and their customer concentration, they've got one customer A who's 10%, customer B is 10%, customer C is 7%. Customer D is 6%. It falls off from there. So what do you guys think? So this has to be small run stuff, right? It doesn't like, like I look.

look at just the way their teams built, right? It's 20 people who are doing manufacturing, two in office, three in sales. They're only doing five million a year in sales as manufacturer. And then they describe all these different things they're doing. And I look at them and most of these are just like, we're going to do 10 or 20,000 of these things, right? It's nothing that's really big enough that you would go take it and say, oh, I need four million of these things.

I'm going to go produce them in a lower wage cost market, like rhymes with China. So anyway, is that the way you guys are kind of guessing this business works? Their niche is actually they do these small run things so they don't have to worry about it, kind of getting offshored. Either that or it's just in time. Ah. Either that or it's like, it has to, they need it quick. And so it's not necessarily small batch, but it has to be domestic because people need it like in a week.

Well, I mean, the U.S. government piece of the business has to be domestic, I'm sure, with that GSA contract. I would be really, really curious to see like the 10. year revenue, 15, 20 year revenue, because if these people made CD sleeves and they've pivoted to this, like, that is so impressive. I mean, truly, like, mad respect and props to this company for navigating. Like, if you were the people who made CD sleeves, I'm thinking of, like, the paper CD sleeves that had, like, the film in the front, you know, where you could see what was inside, like the cheap, just paper ones. If you were the, like, 800-pound gorilla in that business and you

migrated to anything, that's just super impressive. Because, I mean, there were millions, probably billions of those made on an annual basis. And now, I mean, it's got to be, you know, a tenth, maybe. Have you guys looked at this kind of business formation pattern where you watch a technology that's migrating away very quickly? So it's like, let's say CDs or floppy disks is a great example. And you just basically let everybody else leave the market because they think it's going to die and you just stay there and dominate it.

So like a great example is there's this guy who, he's one of the two or three in the US and he basically is the person who deals in like floppy disk drives. And so if you're like trying to get a floppy disk drive for like some old ass computer, like you call him up and he sells you one that's used and that he recovered, right? And so he's kind of like our, I guess Bill, you and I did that the telecom recovery thing where they're taking phone systems from these corporations and then reselling him. The guy just does that, but he just said, well, okay, if you guys don't want to do floppy disks anymore, that's fine. I'll just stay here and become the world leader in floppy disks.

And, like, it's a cool thing. And then also, did you guys ever hear about what happened with the Delorean Corporation? You know the Delorean cars? Yeah, the cars, yeah. So, coolest thing about Delorean, right? So Delorean was this car brand. By the way, I owned a Dolorian, so I read up on this. But, like, if you wanted to get parts for Delorean, there's actually a guy who did this.

Like, he went, and when Delorean went bankrupt, he said, you know what? I bet all these people that own DeLoreans are going to want to get DeLorean parts. So he was in Houston and he went to the bankruptcy court and he bought all their old parts. So he's been sitting there like selling like if you want to get a custom, you want to get an original door handle for a Delorean, you got to call him and he sells you whatever he wants to charge. So it's just this interesting thing where you can find this cool niche to build a business around when the rest of the world just moves on and says this thing's dead. And you say, no, no, it's not dead. I'm going to make a living on it. Super fun.

I love how Michael just admitted that he is Marty McFly. And that is he's from the future, and that's how he knows so much. I would say he's going to waiting for the back to the future, Marty McFly. Dude, owning a Delorean, there's two things that surprise me about owning a Delorean. One I should have known, the other one that was a huge surprise. Number one is they are some unreliable cars. Like it would break all the time. and like when I bought the car,

I got it from a guy and my buddy actually went up there to do the inspection. And when the car showed up, the door panels were off and the car came with a two foot long screwdriver. And I was like, why did the car come with a two foot long? It was clearly had been

added. And so the first day, it's like 100 degrees in San Antonio. I'm like, I'm going to go get some coffee of my Delorient. So I drove down to the coffee shop in the Delorean, park in the parking lot. It's 100 degrees outside, sun shining on me. By the way, These things were built in order on Ireland. So the air conditioning was shite.

Like, it didn't work. And so, like, I'm in there cooking in this car, and I'm, like, trapped. Like, I can't get out. Only then did I figure out what the screwdriver was for. The screwdriver was included to help you get out of the car. So you weren't trapped in it and baked to death like a muffin. So that was- How did you use it? Do you shatter the window?

I mean, do you, like, lever out the door? Oh, no. So you would take the two-foot-long screwdriver and you, like, there was a part where you put it in and you would use it to twist the door assembly. Because remember, it had goldling doors, right? So you twist the door assembly and that's how you got out of the car. So that was issue number one, like super unreliable. But the other thing is, like, I eventually got annoyed driving it around because everywhere you go.

The flux capacitors are dog shit as well. Yeah, they don't work for crap. But no, you go around and like the whole time there's like 45-year-old nerds who want to just talk to you about the car. Like I was like, dude, I don't want to talk to you about the car. I want to go get a, I'm just here to get some baby. formula. Like, let's not talk about the cars. So you couldn't take it anywhere, which is the problem if you're an infant.

I guess you're an extrovert. You thought it was great. But like, it was a middle-aged nerd attractor everywhere I went. Anyway, so back to the regular schedule program. And all male as well. No women are like, hey, I want to talk to that guy. He's got a Delorean, like zero. Sweet Delorian.

No. Nobody cares. I also have a funny story. I have a funny story about. dominating niche as well. So my wife used to work for a large multi-billion dollar filter manufacturer. And they ran SAP. They had an on-premise installation of SAP, which is an ERP business software system. And it hadn't been, like many on-premise ERP software systems had not been touched in like 30 years. Right. And each administration essentially kicks a can down the road, right?

oh, the next guy will deal with the next CTO deal with it, whatever, right? And it got to the point where, like, one of the drives broke and their ERP went down. And it was just, it was not worked. Like, it stopped the whole company. Like, it was just over. They couldn't kick the can anymore. Like, it was done. They paid like $100,000 for a used, because they're not making new ones anymore, like from some guy, like on eBay, who was the guy of these old custom SAP drives or whatever that, like, vacuums them up in estate sales or whatever. And he was like, yeah, that'll be a hundred grand. This drive was like $100. You know, like new. And he sold to him for a hundred grand and air freighted it to him because they needed it. And he was the only one that had it. Good margins

in that case. It's good. It's good to corner a market. That's what I have to say. All right. So anyway, back to our deal. So I think we've determined this is some sort of specialty kind of situation. This is a special situations, kind of printing. Low run, just in time, very highly customized. That's the other thing they have here, which is really interesting, as they say that, where is it? Attention to detail, exceptional product.

Anyway, just a lot of, like, creative, oh, here, the company's creative and knowledgeable sales team works directly with customers and diverse markets, develop solutions for custom packaging requirements. So to me, that smells like exactly what we're talking about. And you got three salespeople for $5 million in sales. Yeah, it's probably custom. But that being said, it seems to work. They got 92% repeat business.

I mean, you look at like, we've talked about subscale manufacturers before. Like, this is a pretty good little business. Like, definitely packaging and this sort of stuff isn't going anywhere. Like, they're very diversified in terms of their customer base. Like, they have this exclusive ability to sell time. Tyvex stuff. There's some interesting assets here, right? You have 20

manufacturing people in the Northeast. Good luck, replacing those if you want to go and compete with these guys. You probably have some equipment. And I guess that's where Red Zeller would come in and tell us like, okay, well, you've got to see what kind of equipment you're dealing with here because the D of depreciation in your EBIT

may be killing you in terms of what these people are having to spend. And it is interesting here, and you can tell it's a manufacturing business because they quote profits not in owner-free cash flow. They quoted EBDA. So I'm very curious what the actual D is in this whole thing in terms of depreciation. Sometimes you see these businesses, though, and like it's the same machines that they've been running on for 20 years, and they're fully depreciated. You know, and on one hand, that's good.

It means they're not needing to be replaced every five years. On the other hand, eventually they're going to die, and you might not want to be holding the bag because sometimes you can't even replace them. Like, you know, maybe they don't make these machines anymore, and that's their niche. and that's why there's no competitors. I like that this business is packaging and not printing. You know, it's, I think, less commoditized than printing. Like, you know, there's tons of screen printers and people who print vehicle wraps. And then, you know, those businesses are just, I think, more kind of,

it's more of a commoditized service. Whereas with packaging, you know, they're doing something that they could easily also print. You know, if they're, you know, printing sleeves for hotel, you know, know, room keys, cards. If they're making the sleeves, which really you're just talking about taking, you know, a piece of paper, cutting it, folding it, maybe gluing parts of it together, you could easily add printing to the mix. And it wouldn't be that hard to go that direction. The printers, though, it's harder for them to move upmarket because they're used to receiving, you know, the fabricated thing, whether it's paper or an envelope or a binder or whatever and printing

on it. So I like that they're kind of slightly higher up the, the food chain in terms of what they have to actually touch and produce and the byproduct. The issue I have with it, it does pencil, okay? But in 2020, they were hardly making any money. And in 2019, they were making even less. So this jump in EBITDA is really nice. And I think it's obviously kind of convenient. Now is the time they want to sell. If you have a million dollars in even da. And let's just say that, you know, everything's fully depreciated and there's not a lot of, there's a lot of, you know, earnings. There's not a lot of DA in this case. You could finance this business. It's probably going to cost about $400,000 to $500,000 a year in debt service, but there's

some margin of safety if the earnings can continue at this level. But I would not bank on, you know, rapid growth, and I would really, really want to figure out historically what is this business done when they shed customers, because they are diversified now. But how long is that sales cycle? You got to think the people who make paper card sleeves and envelope packaging, like, those are really hard relationships to disrupt. I would think that picking up new customers is much, much more difficult. And it's a long sales cycle. I have a question for you guys because this says that they are a government GSA contract holder selling to the U.S. government and some of the 46% of their revenue government and financial services is clearly dependent on that GSA contract.

I'm going to assume for a second this is transferable. Assuming it is transferable, is this a weapon? Like, can you sell, like once you have a GSA, can you sell anything to the government or can you only sell paper card sleeves to the government? Like, can you use this to go bid on other stuff that you might be able to, like, is this the gross lever for this business? No, I don't think so. I mean, let's just assume it is transferable. And when I read that, though, I immediately think it's got to be a stock sale. It has to be a stock purchase for those credentials to usually transfer.

Because if you all of a sudden have a new EIN number, the government's going to be like, who are you? You know, we don't care, we don't care that you have the same name and you have the same customers. selling us the same stuff and the same employees, it doesn't matter. Different EIA number. It's not, in a way, it's worth something. But if you know how to bid to the federal government, that's really where the value is. Because if you know how to bid to the federal government, these are all, you know, there's very, very complicated contract mechanisms for the United States government, but they are all public. It's all accessible information and you can bid it. If you know how to access the information and if you know how to actually be a qualified bidder to GSA.

So I would say it's worth something, but it's not like a silver bullet. Is it combined, though, they seem to have some sort of contract with Tyvec, which is a specific thing, right, with DuPont, is the combination of the fact that they can source and manipulate Tyvec, which I imagine has myriad uses throughout the government with the GSA contract. I wonder if putting those two together, the exclusive access to Tyvec and the GSA contract and the know-how I'm bidding on these things, then you just go, where does the government you need to use Tyvec? I'm bidding on all those things. I'm going to win some of them. I think, though, what they're saying is they have exclusive distributorship with Tyvec for like envelopes or something that they specify. I can't imagine that DuPont's like, hey, you know what, you have unlimited license and also you and two people are the only ones who have and limited license. I think it's super specific to maybe a tieback envelope or a tieback, you know, card holder or something like that. I don't, I don't think that, you know, you just can take that and run with it. I mean, Tybex used in a ton of things, right? It's house wrap.

It's, you know, it's a waterproofing and a vapor barrier and all those things. But that's why it makes for a good card holder because it won't like melt if it gets wet like paper. I mean, at the same time, like you have heard these stories, right? Are these like small businesses that get bought and the guy who buys it realizes that it's just a conduit and they pump like everything through the conduit. They're like, oh, we can sell. We may not be exclusive, but we know how to buy Tyvec. We know how to get it from DuPont. DuPont will sell it to us, you know, even if we're not exclusive. So like government uses a crappload of Tyvec. I'm going to bid on all of it and win five percent of it. And here we go. You know, and then they win some huge contract. And 20 years later,

they're lining the inside of all the Humvees with Tyvec. And you're like, this started as a cardholder, business. It depends on the nature of the contract, too. The best government contracts are what's called ID IQ, indefinite delivery, indefinite quantity. And it just says, hey, for this period of time, when we need this thing, you are one of a few people that we call. It's not a fixed price to say, hey, look, we will spend up to a million dollars with you in the next three years or we won't, or we won't spend any money, but there's a cap or a ceiling in place. ID IQ is the best because it's just at, you know, within the defined contract period, which might be three, five or seven years, typically in the government world, you know, whenever we need this stuff, you're on the list,

and there's only a few people we can actually buy it from. And there's no financial cap. There's no ceiling in place. Those are the real good, you know, those are the ones that are actually worth something because then, you know, there's some predictability. Like the government is going to need fill in the blank, and we are one of a few people who can actually sell it to them. And those are the types of things that you can ram, you know, an entire economy through the garden hose, like into the government. In some cases, but not always, because in some cases it's so limited, right? Of, you know, let's just say it's something like, you know, computer chairs or something like that. There's pretty good historical data to say the federal government is going to buy X number of computer chairs a year.

The contracts are written in such a way that just because you're selling them computer chairs doesn't mean you can sell them computer. That's a different, that's a different, you know, like J-Soc task order, right, in the way that the government puts it out. It's a whole different kind of code and line item that they procure under. And these procurement, I mean, we deal with it a little bit in the roofing business just when we do roofing work for the federal government. But the guys who know this stuff are so nerdy in the best way. It is just attention to detail and death by pushing paper. which is what you have to do in order to do business with the government. You have to be great at pushing paper and dotting all the eyes and crossing all the T's

and not foot faulting and waiting two years to win the contract and then you're in. But there's like, it's all public. You can go to like beta. I think it's beta. It's beta.sam. Or beta sam.gov. It recently migrated. But you can just go and look like what are the open government contracts and what can

you bid on? The benefit in a lot of cases is, you know, if you have the contract, it's worth something for a certain amount of time, but it's not open-ended. It's not like you have unique distribution or unique product or you need a unique intellectual property necessarily. But these things get bid on schedule and on a regular and reoccurring basis, but it's public information and you can just go out there and see what's available at Fort Jackson or Fort Gordon or the FBI or whatever,

and you can search in different ways like that. Interesting. So we like this one. I think it's intriguing. So where do we think it would trade for? How much would it sell for? What do you think, Mills? I mean, I think the math works at four times,

assuming that the EBITDA is actual, you know, is actually real, that there's some earnings there. I also, you know, am assuming it's not super owner-centric. If the owner is one of the salespeople, like they're not really on the org chart, but if the owner does 80% of the sales, that nukes the valuation. So it's really difficult. I have a friend who just recently bought a business

and his lead sales guy lives on a boat. And I was like, oh my gosh, like this could be the world's worst, you know, situation that you're stepping into. Like he has a cell phone, his phone rings. It's a very, very specific service. But he's like, this guy's so happy.

He's on a salary. He has the most flexible, you know, situation. He just lives on a boat and his phone rings and he sells our product. You just never know, right? Where are like those nexus points of risk? And it seems like the sales aspect of this is a big one because they've opened up some doors that you may have just a rainmaker in there.

And I hope it's not the owner or if it is the owner, I hope there's some way to transfer some of that. It is interesting how small the office and accounting team is, which leads me to believe the owner is probably doing more than we think or more than they let on. So I would definitely dig into that. Always, right. always the case yeah

always that's for dang sure this is SBA eligible there's probably some fixed assets they don't talk about any real estate here as far as I saw

so you're probably looking at a leased premises but like definitely in the size in which you could do an SBA loan if you're a first time borrower you know some of our former sponsors

like former and current sponsors like Pioneer Capital Advisory I would say you could probably structure it with little money down if you did a seller note on full standby. So those all seem like things that make this attractive for your typical searcher type that wants to live somewhere in the Northeast.

I guess we decided that's where this is, it says. Yeah. I think this is definitely a case where you advocate for like a three-year average EBITDA, you know, not the last 12 months just because of, you know, the earnings have, you know, gone up 10x in the last three years. Yeah, a million percent. Bill, any closing thoughts? Otherwise, I think we can put a pin in this one and call it a good episode.

I like it. Let's call it. That was falling. Good stories in this one. I hope somebody gets the NDA on this. Not us. I hope a listener gets the NDA and tells us some cool story about it because I feel like there's something to this.

Here's what I bet it happens. Somebody gets the NDA and then I get a DM that they're like, Gerdley, that publish it, that envelope thing, it's X-rated envelopes. That's what it is. It's all X-rated envelopes. That's what I believe it is. Super cool. All right.

Well, hey, do us a favor if you made it this far. Leave us a review. Hopefully it rhymes with five stars. And we would really appreciate it. It helps us with getting the word out about what we're doing. And we'll go from there. All right. See all next week.