Acquisitions Anonymous - #1 for business buying, selling and operating - Stage Setup Company: Inside a $28M Theater Business Deal

Episode Date: September 17, 2024

We found an interesting deal in episode 332—a theatrical supply and construction company based in Wisconsin that’s been around since 1981. It’s a niche player in stage setup and lighting for venues like theaters, casinos, and schools. The company is projected to hit $28M in revenue for 2024 with $1.3M in EBITDA. The two brothers running it are looking to exit, though one may stay on for a transition.Thanks to this week's sponsor:Acquisition Lab and their team have been longtime supporters of the pod.Acquisition Lab exists to help people buy a business and navigate all the complexities of the process, as well as provide a trusted framework, tools, and resources to support you from search to close.If you are serious about buying a business, check out acquisitionlab.com or email the Lab's director Chelsea Wood, [e-mail] and mention us ;) At A GlanceBusiness Type: Theatrical supply and constructionLocation: WisconsinRevenue: $28M (2024 projected)EBITDA: $1.3M (2024 projected)Employees: 74Established: 1981Customer Base: Theaters, casinos, schools, TV studios, and theme parksOwners: Two brothers, one ready to fully retireWhat We Thought:Red FlagsInconsistent EBITDA over the years—especially the 2020 peak during COVID.Margins are razor thin for a business with $28M revenue.Large employee headcount could be a drag on profitability.Owners possibly running personal expenses through the business.Inventory management could be difficult with old or obsolete equipment.Green FlagsStrong, diversified customer base, from casinos to schools and theme parks.The business is rebounding after COVID, with steady revenue projections.Potential for growth with AV companies needing high-end lighting and rigging.One owner is open to staying on for a smooth transition.The VerdictMichael likes the business and thinks it’s the right type of specialty contracting company, but there’s likely something odd under the hood. The inconsistencies in EBITDA and odd financial behavior raise red flags. Heather gives it a thumbs down, particularly from a lender's perspective, as the unpredictable margins and unclear financials would make financing a nightmare.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]

I'm almost dizzy from the margins. They have bounced all over the place. You think you're saving on your taxes, but there's this huge expense you're creating in your business where all of your employees see you doing crazy stuff. Well, set Acquisition Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100% here.

Welcome to Acquisitions Anonymous, the internet's number one podcast about buying and selling and investing in small businesses. I'm your co-host, Michael Gurdley. today's episode is the one for theater kids. Yes, if you were a theater kid, this is the episode for you. Heather and I went through and looked at a deal from Rejig, which is one of our sponsors, and we went through and looked at one of their deals. It's a theater company up in Wisconsin. So I liked it. Heather hated it. See what you think. Here's the episode.

This episode of Acquisitions Anonymous is sponsored by Acquisition Lab. Acquisition Lab and their team. They've been longtime supporters of the pod, and they provide a really great service for people who are looking to acquire a business. So it's created by Walker Divell, who's become a friend, the author of Buy, Then Build, How to Outsmart the Startup Game. So Acquisition Labs is an accelerator with a highly vetted, cohort-based, educational and support community for people who are serious about buying a business. So a lot of our listeners like you, you tune in every week to our deal reviews, you want to get in on buying a business. You're on this podcast because you're trying to learn how to buy a business. But if you're not quite sure where to start, Acquisition Lab is a great place to start.

So they exist to help people buy a business and to navigate all those complexities of the process, everything you hear us talk about on the show. They provide a proven framework, tools and resources that support you all the way from search to close. They do it. There's a whole bunch of educational material and support. So if you're serious about buying a business, check out AcquisitionLab.com or you can actually email the program director Chelsea Wood directly. Her email is Chelsea at buy then build.com. Heather, how are you doing? I am doing great.

We are at the beginning of the busy loan season because, you know, it's about four months until year end. And so I'm ready. I'm ready for it. That is good. That is good. Busy is good. The thing you don't want to have happen right now is not be busy.

That's the bad one. That's true. That's right. All right. So I brought a deal for you because I have a sneaking suspicion you were not a theater kid in high school. Is that correct? That is 100% correct.

Let's go. Let's go. Well, you can kind of tell theater kids. Yeah, that's true. That's true. I was not a theater kid either. But this deal we found via our sponsor, Rejig, and it is a theatrical supply and construction company.

So if you're on YouTube, I have it pulled up here. So they may have some photos, but I don't know. They're great out. You can't see it here. So this is a theatrical supply and construction company for sale. And so what they do is they build and set up stages for various uses. So their customers are theater, schools, places of worship, museums, theme parks, TV studios, casinos, and auditoriums. And the revenue is generated on a per project basis.

And the owners started it 43 years ago in 1981. So numbers-wise, revenue is $24 million. Eibada is $804,000. And so they give us here the history of the company's financial progress, so 2024, which this must be projected, because right now you and I are recording this September of 2024. Yes. So unless they've also invented a time machine, that means that this is a rejection. So they're rejecting 28 million in revenue this year and 1.3 million in EBDA. 2022, they did $24 million in revenue and $800,000 in EBITA.

2022, they did $26 million in revenue and lost $400,000. $21, they did $25 million in revenue and $200,000 in EBITA, and in 2020, they did $26 million in revenue and did $2.1 million in EBITA back before. Well, I guess that was during COVID. Crazy. Right. Interesting. Okay.

The company was founded by the owners in 1981, and they are looking at, to retire, and the two owners are brothers. One brother would like to fully retire, and the other is open to staying on a contractual rule to oversee the transition. They are looking for a full exit, and they believe an AV company that is lacking high-end lighting, curtains, and rigging would be a great strategic acquirer. The owners have kept EBITA lower than it could be for tax purposes. The business suffered during COVID when no live events occurred, but they have been continuing to recover. They are number four in the U.S. for sales in their industry. Their electronic theater controls business is lucrative.

They have 74 employees, and they are located in Wisconsin. And that's what we know about this one. Well, I'm almost dizzy from the margins. They have bounced all over the place. I'm very perplexed about the 2020 margin, and I'm kind of guessing because that's the year they make the most money, which was COVID, which makes me think that it was either they're counting some of the subsidies that they got maybe PPP and they're not taking it out or for some reason people were, you know, renting this for outdoor stuff. It could be either one, but it's very, well, though they said they suffered during COVID. So I am very confused about what's going on with these margins. Very confused. Yeah. This runs. I mean, if you do the math, 2024, they're doing $1.3 million in EBDA and $28 million in revenue. So one, one,

3 divided by 28, they are running at 4.6% profit margins on a business this size. And like, that is not a lot for a project-based business. Now, I take that back. Like, I know people that are in the, I've been in the general contracting spaces. I'm interested in your perspective on them, but a lot of those run at like 60 or 70 million in revenue as general contractors and net margin for the year is like $2 million. Just absolutely bare bottom margins when they're running those businesses. I mean, is that how I should think about this business? Yeah, I mean, I think so a little bit.

It's kind of like a little bit of like equipment rental too. It's a little bit, it seems like it's maybe a mix of equipment rental and maybe set up. There's probably a little bit of, you know, people costs in there for the actual setup. I went to a, there's a big trade show in that comes to Amazon. And I went to it. One of my clients gave me passes. I'm going to forget the name now. Forgive me everybody. But it's a music trade show, a very big one in Anaheim. And these kinds of vendors have like a whole aisle where they set up, you know, the curtains and the scaffolding and everything and the lighting for in that case it was, you know, highlighting concerts like music concerts. But I think it's the same kind of thing. So I did I did look at, you know, those kinds of businesses, at least at that trade show. And it felt a lot to me like. equipment rental and setup, you know, set up, tear down, and rent for as long as the show is running. I would think you could have a little more consistent margin. You know, I don't think you would have, it's got to be somewhat geographic based, right?

So you're sort of the go-to for a certain area, I would guess. Maybe I'm wrong about that. And it just feels like there would be a way to have a little more consistency. And I'm wondering if this is a problem with how they bid the jobs or something. else, but they don't give us any explanation. They don't sort of say anything about it. And I'm really confused why 2020 would have been the highest margin year. Right. Yeah. Yeah. So let me ask you about this line. The owners have kept EBITA lower than it could have been for tax purposes. How do you do that? Well, that means, I think it's a little way of

signaling that they are running a lot of non-business expenses through the business, which, you know, in my world sort of translates to, oh, this is going to be tons of adbacks. Now, normally, though, the broker or the list, you know, when they go to list it, they're going to show you the EBITDA, that's the adjusted EBITDA after the adbacks, or they'll call it SDE. That's why we hear that term a lot, because they've already added it back. this sort of says, oh yeah, don't worry about those years that we're losing money because really we were just, you know, you don't see the ad backs yet. It's kind of what I think that's what that means. What do you think it means? I mean, it means there's probably some boats in here and stuff like that. Like in the expenses. Some great cars and some great trips maybe. Yeah. So, and that's always, you know, that's always a challenge because how do you prove some of these things weren't really business expenses? You know, there's a little bit of verification. But, you know, there's a little bit of verification. there's also a little bit of trust me, especially when it comes to things like travel. Okay, well, this is a business where you can imagine you might have some legitimate travel

expenses. And if a seller tells you, well, X amount of the travel is really just my personal vacations, how you have to trust them to believe that. You don't really know whether they needed to go on all those trips or not. So it's always challenging, I think, for a buyer to look at a deal that has a lot of personal adbacks. Yeah, and I mean, I've always, I know people do it and they love using their business as a way to save on their tax bill. But to me, I always thought that it was kind of a mirage of what you're actually getting, meaning that like you think you're saving on your taxes, but there's this huge expense you're creating in your business where all of your employees see you doing crazy stuff that's shady.

and not only is there a hit there in terms of how people think about your character. The second part is they start to get sloppy because they see you being sloppy. And I think that's just I always hated it. And that's why whenever I'm involved in a business, I'm just like, no, we're not doing any of that put my boat or vacation home on the P&L type thing. Just because I didn't want to. Yeah, the culture. It just seemed like it was going to.

It creates a culture. It costs me more than I would bet that. Yeah, even for those sellers or those owners that maybe don't realize it, it probably is creating a culture that is not the kind that they necessarily want. But also, I just look at it in terms of what we're doing here. We're looking at a business that they want to sell. I always think to myself, why not clean it up, clean up your act at least two years, for at least two years before you're planning to sell so that you can prove that I can run the business at this margin

when I'm only, you know, spending what I really need to spend through the business. And unfortunately, we see most of the deals that I see. They didn't do that. And they're, you know, it affects their value. They are not going to get paid as much for the business. And a buyer, I think another good point to what you just said is a buyer's going to step in into that culture that the seller created and may need to fix it once they get in. Yeah.

So they have 74 employees. This is a big business. Yeah, that's a lot more. Okay, so this is a lot more people cost than I imagined with equipment rental. So there's a lot of setting up and tearing down, I guess. Or are they running the light shows? Maybe they're actually running the lights for the productions. Well, they describe it as a construction company that builds and sets up stages for various uses.

So that's it. You set it up and then you tear it down. Yeah, so I think this is a straight up construction. I think they talked about the types of customers here. Theater, schools, places of worship, museums, theme parks, TV studios, casinos, and auditoriums. Those are almost all permanent or semi-permanent situations. Right. Where the local casino needs to have a stage created for their cabaret show and goes from there,

auditoriums, TV studios. I mean, the cool thing I like about this is just how diverse the customer bases. Like there are just so many folks that have a theater and have a stage, right, that they want to have set up. And it's not like you're just selling

into one use case, right? Yeah. You're actually going to look at all these. So I love that aspect of it. Like if one of these starts to hurt, like theme parks start to die, you know, or struggle due to the economy, well, then you have churches, right?

Places worship. And a lot of them are building types of types of theaters. Yeah, they have huge stages there. You're right. It's a lot of, and that makes me think even more that it sort of serves a geography, because everything that uses a stage in that geography, this is maybe one of the go-to vendors.

But I would think, like you said, these are sort of permanent. Do they just rent the stage equipment indefinitely when they have a production like that? I would have thought they bought it, but maybe they just rent it. I am willing to bet, like, let's take churches, right? Like, they will put together a pile of money that they raised from the congregation, and they'll go and install, like, this whole place of worship and all the different types of stuff, and they buy all that stuff because they use it every weekend. Right.

So it would not surprise me if these guys are resellers of this equipment. Ah, which would explain the revenue and the margin percentages being kind of all over the point. place. Right. Yeah. Right, right, right. But they describe themselves as a construction company that builds, but you're right. Maybe there's a huge part of the revenues channel that is just buying and selling the stuff. Yeah. It's tough to tell from this because we don't know how much of the EBIT does really mirage. But there's a lot to like about this business, right? Like, yeah. You know, in-person events continue to write a massive wave, you know, because everybody's getting over being cooped up during COVID.

You're still seeing people doing that. The economy sucks here in San Antonio. And like our airport is absolutely packed. Everybody's trying to have experiences. 100%. And like all of this like the swing back. And then I think generationally like you're seeing the younger people like, you know, my kids are happy to spend time on computers.

But they are also interested in getting out and doing experiences. things just because the internet has become such a toxic place. You know, they're just not interested in participating in the broader internet. But they're happy to go experience different stuff. So I think there's a lot of tailwinds for this business. Hi, Heather here. When I'm not breaking down deals with these guys, I'm helping people get the right SBA loans for their business acquisitions. Because when you're buying a business, the best financing isn't one size fits all. There's the best rate, fastest to close, the specific loan structure that you need, or a little of all of those thanks. That's why my company, Vizzo Business Capital, works with over 30 different lenders to find

you the best funding in less time and with less friction so you can focus on the deal. Sign up for a free live Q&A session on SBA loans at Vizocat.net. Then click Zoom signup in the top right corner. That's V-I-S-O-C-A-P.net and click Zoom sign up. Yeah, absolutely. If you can get your arms around how they make money, I think that would be the big question I have. is how do they make money? Maybe there's different revenue streams in here that you'd want to as a buyer sort of separate out if you can and then sort of look at what are the margins in each one. And then maybe what's going on in these numbers here would make a little more sense

what was up and what was down in the different years. It would be a little tough to finance when you have margins like this, though. Or you're going to have to make big adjustments to smooth them out because a lender is going to be skeptical that it's not just a, you know, all over the place kind of business and we can't predict it. You know, a lender wants something they can predict. You know, I'm going to make you a five year or a 10 year loan. And I want to feel as a lender like I can predict what your cash flow is going to look like. And I look at this and say, I have no idea what's going to happen next. Yeah, we've got, you've got 74 employees here. And you're, let's say,

2024, they're looking at doing $1.3 million in EBIDA. So that's not free cash flow. Because there's a bunch of potentially taxes and interests on stuff depending upon how much inventory they're carrying and stuff like that. And equipment and all that kind of stuff.

So, you know, you have 74 employees. Like that is a lot of employees for a business of this size. I wonder if they're all full time or like it's a network of part-time or that they bring in. Yeah, that would be my guess, but that's because that just seems like way too many employees to have sitting around all the time for this kind of stuff. Yeah. Yeah. And the inventory,

the inventory, this would be a little bit of a diligence nightmare, I think, on the inventory piece because, you know, what's the useful life of this stuff? It's probably pretty long, right? I would guess that they've got a whole bunch of different stuff and some of it may be obsolete. you as a buyer may not necessarily know which of it is obsolete. You know, is it, was it depreciated on an accelerated basis, but it really still has a long, useful life? This would actually be really kind of hard to get your arms around what you're getting and how much you are going to have to spend for what we call maintenance capex.

You know, what's sort of the average, if I add back depreciation expense, what am I going to deduct in its place for like the average maintenance cost? cost of keeping up my inventory, fixing my inventory, replacing my inventory. Yeah. I feel like that's a challenge. How much inventory do we think they're holding? Because the giveaway for me here is revenue is generated on a per project basis. And when that, that to me smells like, you know, architect calls and says, hey, we're

building a stage for so and show. And then the general contractor calls you and says, give us, you know, here's the design for one, or submit a design, and your bid. And then once your bid gets selected, then I would imagine you're ordering the lighting and rinking and all that kind of stuff. If you're a contracting business, then you're right. You're right. But I guess I'm imagining a little bit of both here, that they, you know, again, for 71

employees or whatever it is. I'm imagining that you have, you know, some brand new builds that you're coming in and you're only buying it to put into that new project. But I'm imagining that they've also got other lighting and other stuff that they're bringing in on an as-needed basis. Those are the questions I have. They didn't tell us enough. Is this listed by a broker?

Did a broker actually list this? So this is rejig. And rejig has been one of our sponsors. The way I understand rejig works is that they actually go and do outreach on their own to business owners. And then they put together these profiles anonymously with the business owners, and then they present those to a pool of buyers.

So you as a buyer show up and hire rejig, and they basically function as your outreach service for acquiring something. All right. So this is just what the seller really has kind of pieced together for them to put out here. But it probably just brings up more questions than it does. And they're also saying that the owners are brothers, and one brother wants to fully retire or the other wants to stay on in some kind of role. So that's always challenging too. When you have multiple founders, one wants out, one might want to stay in.

Are you going to do, you know, how would you structure around that person that wants to stay in? Do you want to partner with them long term? That's also a big question. So lots of interesting little things to dig in. on here. Look, I think this is one of those listings that it's like, I would ask myself, do I want to be in this business? And it's not a bad business. It really isn't bad. But then I think the second part of a business like this, when I see a listing that's got this much kind of questionable aspects to it and kind of weird things is, there's probably a good

reason why this business hasn't transacted, right? I pulled this out of my list of ones that I I find on occasion and kind of sit on to be able to talk about in an episode. And it's like there's something going on with this business. I think it was the episode we recorded on Friday kind of the same vibe I got. I was like, there's something horribly wrong with this business. We just haven't figured out what it is yet.

Yeah, and I guess this sort of goes, like, rejig how they find the deals is very similar to what we would call proprietary outreach. And that's just where you, as someone who wants to buy a business, do your own outreach. Well, when you do, that, you do come across some businesses that aren't transactable. You know, that's why a broker hasn't listed them.

That's why it hasn't gone anywhere. Because when you, they've already asked those questions and figured it out and you've got to then invest your time and go figure it out. So I think that's, there's good and bad to proprietary. You could find a great deal or you could waste a lot of time on something that's just not doable. Yeah. Do you, I wonder if anybody's put together statistics of what the closing rate is for,

proprietary outreach versus broker. I would give you my from the gut. Yeah, yeah. What is it? What is it, banker lady? It's low and flow. I'll say both. The close rate is low and the deals move at at least half the pace of a broker deal.

Because they don't have anybody in their corner telling them what to expect, what to do, what's normal, what's not. And I have seen a lot of people waste six, nine months on these deals. and just have to walk away from them because they can't get the seller. And the seller really hasn't signaled, I really want to sell if they haven't hired a broker. I mean, that's the other side of it. They're just kind of dabbling in, well, what would you pay for it? Or how would this work? And they may not really be serious when it comes right down to it about exiting.

Well, if these guys founded it in 1981, that means they are straight up baby boomers. That's what that is. Let's say they were 25 and 28 when they started it. What would that be? That would be like born in the 1950s? These guys are not quite there from totally checking out yet in terms of the two brothers. Yeah. But yeah.

And speaking from experience, I've gone through what you're talking about, about how the broker really facilitates a deal happening. And the number one thing, you know, we used Clint Fiore to sell a business recently. Number one thing he did was come back to us and be like, okay, let me set some expectations about what your business is worth. And it was like, okay, well, that's a bummer. And then we decided that, you know, we went with what he recommended. And eventually it trains act.

So, but, you know, people, it frustrates me because everybody's like, do real estate agents deserve commissions or 5% or whatever it is or 6%? Or do business brokers deserve commissions? I think everybody who says that they, those people do not earn their money needs to go out and actually do that job for a while and look at how hard they have to work to get a few deals across the finish line. Like it is unbelievable how much everybody from iBankers down to business brokers have to do just to get a few deals to close in a year. Oh, business brokers. Well, I'm going to say this. Maybe I'll make people mad. But business brokers work a lot harder than a residential realtor on the whole.

It's just so complex. You know, it's not a property. It's a business with all these interesting questions. And, you know, there's all the stuff that's in the details. but then there's sort of the macro environment that this business exists in and the geographic environment that exists in. A business broker has a really hard job. And they also face the same thing. All of us who work in this space face, even searchers, deals that they put time in on that never close.

Yeah. All the time that they put in, that the deal is never going to happen. And so it's a hard job. And yeah, absolutely. We say, we say, you know, bankers get picked on too, so I can say this. You know, we bemoan the brokers that do weird listings and don't do it. It doesn't seem to be doing a great job. But on the whole, it is a really hard job.

It's a really hard job to do well. And when you see a good business broker, I mean, it's a thing of beauty because it is, it is not easy to be a good business broker for small deals. Bill and I kind of joke about this. Like, if everything always went wrong, I think Bill has a line. He's like, if everything always goes wrong, I could go out and become like a top 5% business broker. and I could always feed my family. That's what he said.

And when he told me that, I said, you know, man, I appreciate that. But I can also think of about 15 easier ways to make a living that I would do before I chose that job, Bill. So the goal is never to have to go do that job. But I always know that it's there if I needed it. I think people see the one big check, you know, the wire go out to the broker at the end of the deal and think, wow, I'm going to do that. but you have no idea how many months, maybe years went into working on that deal before that wire went out a lot. We're working on a non-public development, and I've been doing it for five years, trying to make something happen to find the right location for it.

And the broker we've been working with has been working tirelessly to try to make that happen. And they're not working. It's 1% of their time. But every few months, they're back and they're doing work. and there's a chance they never get paid anything. But there's also a chance they make half a million dollars. And, you know, I think it's like, that's just the name of the game and why you've got to hustle to make it work in that market.

Right. And they have to pick their clients wisely. I mean, that's really in any kind of job like that. I mean, that is something we do at Vizzo as well. We have to make sure that it's a good match, that, you know, that they're the right client for us and we're going to be able to deliver what it is that they want so that you don't end up in those situations where you've spent a lot of time and nothing comes of it. It's just you can't run a business that way.

Well, unless I was your client, then you know you're definitely not getting paid. It's a joke. It's a joke. There's people on the internet that can't take jokes. That's true. Man, they definitely can't take jokes lately on the internet. My goodness, what has happened to the internet? I feel like things have called that a little bit in the last month, but yeah. Yeah. It's like it's not good. It's not good. All right, so back to this deal. What do we think? Like, where are you?

Thumbs down, thumbs up. I'll tell you, I'm interested in where you are. I have a nuanced answer to my thumbs up. I'm thumbsed up with some nuance. Okay. And you want me to answer before you give me the nuance? I'll go first. I'm sorry.

Okay, okay. Okay. So thumbs up, but I guarantee when you go look at this deal, there's some crazy stuff. Like, there's just some stuff where that just totally makes it untransactable. They've been dealing drugs out of the office. like weird somebody's boat is on the P&L. Yeah. What's that group?

As it's groupies? Maybe they're groupies. I don't know. Yeah. I mean, any of the above. Well, and the showing a loss three years ago is going to make it very hard.

It may be in kind of that messy metal where it's too big to SBA finance and, you know, but it's too small to be anything bankable. Like I think there's going to be some fatal flaw to this for why it's not a real deal or not even possible to transact on the thing. But yeah, I'm thumbs up. I think this is a business I would.

like to be in. I would love to own this business. Like, if you're going to own a contracting business, this is the type of specialty contractor I'd like to own, but there's something wrong with this one. I guarantee. Yeah, and, you know, the lender and me has to test a thumbs down it. I'm sorry, everybody, but it is what's happening with those margins. The top line's actually pretty consistent, even during COVID, which completely confuses me. Maybe that was the drug dealing year. I don't know. Or they were selling some COVID remedy. No, I'm making that up. Sorry. the numbers make zero sense, at least on the bottom line. And, you know, like you said, if the top line could be that consistent,

why can't we have a more consistent bottom line? So I'm thumbs down. Something weird going on here. Somebody should go find out what it is and get back to us and let us know. All right, everybody, if you enjoyed this episode, number one, you should go to rejig and try to buy this business and then let us know what you find because we're definitely curious about it. And number two, consider telling a friend about this podcast.

because we keep growing and we're excited for being a niche podcast. We love doing what we're doing. So tell your friends and we'll see you next week.