Acquisitions Anonymous - #1 for business buying, selling and operating - The guys get excited by a $20mm/yr lubricant exporter in Houston - Acquisitions Anonymous episode 170

Episode Date: February 24, 2023

Michael Girdley (@Girdley), Bill D’Alessandro (@BillDA), and Mills Snell (@thegeneralmills) review a $20mm/year lubricant exporter in Houston. Good times were had by all! -----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.-----Additional episodes you might enjoy:#166 - A legal tech business doing $7mm a year#165 - Should we buy this airplane ad business?#164 - Annual Report Filing Software#163 - Make $2.3M/yr owning a Flight School#162 - Cleaning up crime scenes for big money!#161 - How to spot red flags in eCommerce listings?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.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]

Welcome to Acquisitions Anonymous, the internet's number one podcast about small business buying, selling, and operating. Today, me, Mill and Bills, and I'm Michael, went through a cool case study of a deal for sale that is a bigger company doing, I think, 20 million in revenue and three million in profits, and they export and sell lubricants all over Latin America. So we figured out we think they're in Houston, and we talk about who should buy this deal, how to structure it, and how to make at work, and also just had a good time kind of talking about different types of brokerages and the way to think about those. So here's the episode, and I hope you enjoy it as much as we enjoyed making 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, and cloudbookkeeping.com as the sponsor for today's episode. Welcome to Exodus is Anonymous. This is Gurdley. I have a report for you.

I will be on my best behavior, which means I'm supposed to wait at least 10 minutes into the episode for starting to complain about the deal. So yeah. Okay. guys, we have a deal today. Who's going to read it? And I will be quiet until I start pooping on it later. No, you don't, you just got to hold your poops. You can be positive. Hold your poops.

Tighten it up over there. All right. Mills, you going to read this one or what are you thinking? Yeah, I'm trying to pull it up. We're not doing the fluid control, right? We're doing the no, I got it, Mills. I got it. Thanks for bailing me out. All right. So today we've got a, this is another big deal. So thanks to everybody that's sending us the big deals. We wanted to do ones with more EBITDA. So this is a global exporter of specialty lubricants, specialty lub, doing $40 million of revenue and $3 million of EBITDA.

Right, can I interrupt? I lobbied for this deal just because I wanted to say the word lubricant as many times as possible in 30 minutes, so I'm very excited that we're doing this. This is gonna be a great one. This is gonna be a great episode. It's that kind of Friday. So the company is a leading global exporter

specialty lubricants and petrochemicals. In operation for over 24 years, the company has developed a broad set of capabilities and has completed work on a variety of projects. The company has strong relationships with key customers in a variety of markets, including the agriculture, pharmaceutical, cosmetic, food, veterinarian, textile, plastic manufacturing, automotive, construction, oil gas, electrical, and mining industries. So basically everything. They have a, the investment appeal, according to the broker, is that it has a superior name and reputation. The company enjoys a long-standing reputation for supplying quality products and superior customer support. The reflection of their reputation within the region is its approximate

80% rate of repeat customers. Interesting. Strong client relationships. They have an extensive customer list and good relationships since inception. The customer base is loyal, and they save on marketing costs that competitors must foot, both in acquiring new customers and obtaining repeat business. Management will remain through a transition. Ownership is interested and willing to remain with the company after a transaction, which is great, and a rising gross profit trend throughout the historical period gross profit has increased from 11.4% of sales in 2019 to 15.7% of sales during the interim 2021. So this teaser a little bit old. Hit me right there for a second. Those gross margins, I feel like are you both from a SaaS

perspective or a tech perspective and an e-commerce perspective, are you puking right now? I'm sorry, I'm not trying to poop on the deal, but I just, I'm kidding. Catching myself, that's crazy, right, to you? Yes, I have found in my travels that the definition of gross margin varies widely. A lot of people will run like a fully loaded gross margin, you know, and they'll have like a 80% product margin, and then they'll layer in all these different things, and gross margin is basically contribution margin. So I have learned to reserve judgment on low gross margins until I figure out how they calculate it.

All right. Sorry for the interruption. But yes, definitely something to ask about. out. So it says they've been efficiently able to control its cost of sales after high growth, demonstrating its ability and maximized profitability. It's been around since 1997. They have 200 active clients. They have 25 full-time employees. They have international operations as one of the bullets. And of course, the growth opportunities are to increase sales and marketing, just like every deal we ever look at. To expand the products and services, also like every other deal we look at.

But this last one is interesting to increase tank capacity. And this business is located in the southwestern United States. So what do you guys know about specially Loub? Michael, I heard you were an expert. Yeah, thank you. You're letting me revert back to my core nature, which is like I'm a 12-year-old boy. It's like this idea that every man stops growing around 12 and they just like, yeah, like the same jokes are hilarious. Thank goodness my wife likes fart jokes.

Like, that's all I know. Otherwise, that's, you know. Anyway, I'm just kidding. She's a wonderful, classy lady. Anyway, so, like, I'm confused a little bit. So they talk about where they export to. So it's 58% Mexico, Colombia, 12%, Brazil, 14%, and others 16%.

So it looks like solely an exporter into Latin America. So that's something I think for us to put a pen into that this is a dynamic going on here. But, like, did I, am I reading this right or wrong? Do they own the factory? Are they just a brokerage of specialty lubricants? I read it as somewhere in between. So I don't think they own the factory, but I also don't think they're a broker. I think they're taking possession of the lubricants because it refers to things like, you know, expand tank capacity, right?

I think they actually have inventory of lubricants, which they are then selling. So I think they look more like a distributor. It's a distributor. Yeah. The manufacturer, if they were a main manufacturer, if they were a main. Their margins would be way higher and their employee count would be way. Only 25 employees and they're doing 40 million in revenue. It's because they have a big warehouse and this stuff comes in huge tanks and it doesn't

have to be like, it's not like picking an e-com order where you have to like, you know, run and grab a bunch of different skews. This is stuff that's probably getting sold in bulk, bulk batch. So it's, they're doing 60% of their export volume to Mexico. I got to assume that is either by truck or by rail, right? So they're located in the southwestern United States, which is potentially western Texas or, you know, Arizona, New Mexico, like probably darn close to the Mexican border, I would think. But they probably also got a port if they're going to Brazil and Colombia and other places. So this kind of means they must have access to Gulf of Mexico or they're going down south around Panama Canal by a boat, right?

$500 or whatever, or two Chili's gifts cards bets you this business is in Houston. That's where this has got to be. Petro and the broker is located in Dallas. That's pretty different. That's a good giveaway. Okay. And like you sure is heck don't want to do this business in California. And there ain't no oil anywhere near Florida.

So that pretty much rules out everything there. So this business got to be in Houston. Yep. That great call. So basically they're buying specialty lose. and petrochemicals, and most lobe is made from oil, right, at the end of the day. Well, maybe not most. This kind of lobe is made from oil.

Well, as an expert, let me tell you how this works, Bill. It doesn't matter what it's made of. So this is either going to be the best or the worst episode we've ever made. I'm pretty sure the best. Let's keep going. So, yeah, I agree, Houston. probably sending it either by boat, you know, brokering transit, or by rail or by truck even into Mexico or these other places. So my question is, you know, what type of lube are they

selling that you cannot buy in Mexico or Brazil or Colombia? You know, one of my first diligence questions here would be, why does this company exist? You know, what is the reason for being that this company is here? So you, like, and I asked that for any distributor, right? So whoever's manufacturing these petrochemicals and lubricants, right, clearly does not want to serve this market, right? Has not vertically integrated to serve this market directly. You know, maybe I would be asking do they export to other places? Because if the, whoever makes this stuff is exporting to a whole bunch of other South American countries, but not these three, I'd want to understand why. I'd also want to understand if they might start

doing that, you know, shortly and crowd me out entirely. Look, the reason this business is in Houston and the reason there isn't a competitor in some of these other places is the refining capacity that happens, right? So this stuff is getting made. You're doing refining, which the global center for that, or at least in North America, is right there in Houston. Have you guys ever been to East Houston?

Have you ever driven through there? No. Literally, it's like if you drive through at night, it kind of feels like you're driving through Mordor. Like, it's really odd. The west side of Houston looks like normal America. The east side of Houston is just shipping and like petrochemical production. You'll just go out and there's just like all of these refineries just like all over the place.

Which makes me not want to live there, by the way. I don't know if you've ever looked at the cancer numbers for East Houston. Like you do not want to live there. And it's where the not so nice side of town is. But anyway, like all this stuff comes out of these. Yeah, there you go. There's my sales pitch for East Houston. I recommend against it.

So like there's just like you'll you'll drive into East Houston and you're like, what's that smell? And you realize it's just petroleum in the air like everywhere. But I think that's why this business is there, right? You're probably in the east side of Houston. You're near these refiners. You're going and you're buying bulk from them of, you know, whatever distillate comes out of the refining process that you need. And I think most people also don't know that oil isn't this like uniform commodity. Are you guys familiar with kind of how this works?

Yes, it works in a lot of very complicated ways. Yeah. Yeah, people are like, oil is oil. It's like, no, it actually turns out it's a really, it's a, you know, a byproduct of organic processes. And you get this stuff that's like anything from like sludge to like basically it looks like, you know, maple syrup. And so all of that comes out in a very messy kind of thing. And by the way, can I tell you an aside about the oil business? Would you guys like to hear once?

Yes, I would. Fellow Texan, tell us. So one of my buddies, one of my buddies needed to earn some extra money. So he took a job working out on an oil rig in West Texas. And he was there for four weeks. And he came back and we had coffee the other day. And he goes, currently, we need to ban petroleum. That's what he said to me.

I was like, what do you mean? And he's like, dude, like people have no idea how bad for the environment petroleum production is. And he's like, do you know what we used to clean things? And I'm like, no. He's like, we go by dozens of. 50 gallon drums of diesel. And then we put it into a sprayer and we spray down things to get the oil

off. That's the only way we can do it. We just spray diesel all over the place. And I'm like, well, then what happens to the water or the diesel when you're done spraying off the sludge? He's like, it just goes into a puddle over in the corner. And I'm like, then what happens? And he's like, before we leave, we cover it up with dirt.

That's how this works. And I, but like, so you've got that where it's like, like oil production is this disgusting thing. But at the same time, you talk to people and you're like, do you understand how much petroleum is involved in everything in front of you, like within three feet? And people have no clue. No clue. Like you'll see these people are like, we need to ban petroleum. And they're like dressed in polyester and like wearing plastic glasses and throwing away stuff in plastic sacks. And it's like there's this huge disconnect where people have no idea how bad it is, but also they have no idea how bad life would be without petroleum. Like it's really fascinating. That was my story. The sludge part of that, Michael, like the stuff that you're talking about that is like the leftover, you know, the bottom of the barrel, it is like what most roofing products are made out of. So you're welcome. It all gets used.

So you wouldn't have roofs or plastic or polyester. But it all gets used. It's kind of the amazing thing. Like I think obviously what we're talking about for this business is a much more kind of purified high end. It's a like the actual customer to me on this matters a lot. because there may be zero switching cost, and this is an absolute commodity product, and that's why they're selling it in Mexico and not in the United States, because it may be that the manufacturer is like, no, we are selling it in North America where it's easy.

Somebody else can go sell it somewhere where it's more difficult. Or, right, it could be something that's highly, highly specialized, and maybe there aren't really like high switching costs, but in a very tightly controlled manufacturing process, people just don't want to change things if they don't have to. And so if you're used to making, you know, I don't know, like they list all these different things, but if you're used to making, you know, FDA approved drugs and you have to have small, very, very small quantities of lubricant in your manufacturing process, you try not to change those things

if you don't absolutely have to because you can make bad batches of pills, you know, just because you switched to your loob. Yep. Yep. So the other thing, too, that could be the huge mode on this business is whoever manufactures the lubes, maybe they've got an exclusive territory. You know, depending on their contract, and this could be this could be the greatest risk or the biggest moat or both in this business, right? If they have one supplier of lubs and they've got like

a protected territory or like that contract is really hard to get or there's 10 years left on it or, you know, there could be a real strong moat in that contract or there could be no moat at all and just a bunch of risk if, you know, they'll sell to anybody off the street and can cancel a contract at any time. So that, you know, sourcing these loops for any distributor, sourcing, sourcing things that you distribute and understanding where they come from and how secure that supply is would be critical. Yeah. All right. I have another wager for you since we've already bet two Chili's gifts cards. I will double or nothing. Double or nothing. Double or nothing that at least half of the people in this company speak Spanish fluently and at least half of them understand Latin American

culture very well. Like this is not owned by there's not because look at, I mean, here's very interesting. The largest economy in South America is Brazil. That's only, and they speak Portuguese. That's only 14% of their market. Mexico, Colombia, and all these others, they all speak Spanish. Some better than others, right, Mirko? Yeah. By the way, I'm terrified of ever going to Chile because have you ever heard they're Spanish?

It's not Spanish. No. The Colombians are these wonderful people, are the Mexicans. They basically have basically American accents, but they speak Spanish. It's really wonderful. It's super easy to understand. But then you go to Chile. and like it is, it just sounds like gibberish.

Like, it is amazing. Like, very difficult. So I'm terrified together, but I totally want to just because I look forward to opportunities to feel like an idiot. Anyway, like, so I think buyer business fit is really important with this. And we talk about this idea. Like, if I was to own this company, either me or somebody that's a partner with me needs to understand Latin America, like the back of their hand, speak Spanish, do all that very well.

Because all these people win their customers, they want to speak their native language. That's how you're going to win these people over. otherwise you're going to be in trouble. So I think that's a huge thing. The good news is Houston is full of people that speak Spanish. That's a good thing for you. Yeah, I mean, it's tough, right? If you're selling this to a whole bunch of Mexican, Brazilian, Colombian guys,

and you walked in, you know, Gringo guy, don't speak Spanish. Hi, I'm the new owner of the business, you know, who supplies the lube. You know, you don't think there's three other competitors who could probably supply the same lube, you know, that's a business risk. You know, if they suddenly don't like you or don't think you fit or you're perceived as a downgrade. I think that comes into what we talk about a lot of times, like when you're buying a business like this,

what are you actually buying? And Mills was talking about that. Like are you, and you guys were like, are you buying some sort of economies of scale that make it difficult to compete with this business or are you buying the relationships that this owner potentially has, which I bet you are a big chunk of the moat of the business here. When you dig into this, I bet you discover like, oh, like they all like working with Tito. And if Tito leaves, like, we have some real issues here to make sure the customers

keep with us. We'll see. Have you guys ever gotten Sims from this broker? I know we've talked about them some in the past, but... This is your favorite broker, isn't it? I do love choosing generational group for our episodes with you because it always turns into something where you're just using code words to be like... It's true.

It's true. That's true. That's basically what it is. Trigger warning. It's like trigger warning. I mean, the one thing I'll say today, because I don't think I've said this in a while, is that every single one of their Sims is the exact same. Like, it's...

In what way? It's a very, very rigid. template and they copy and paste the pertinent details that the seller provides. It's not a very, like, we've looked at some Sims where we're like, this thing is awesome. Like I kind of, like you want to frame it. You want to save it because it's so unique or it's informative or like it's just captures the nuance of the business. This particular broker Sims, they are just copy and paste in the exact same template and the

seller provides all the info. So there's, you just have to know when you. get a SIM from this broker or a broker like this, that it hasn't necessarily been managed by a sell-side advisor. It's just like, there'll be typos in it. And it's just things that the seller has said that don't really make any sense. But it's just because, you know, they have a bunch of, you know, entry-level folks who are just scraping stuff from, you know, a form document with a seller and putting it into the Sims. It means, it's really interesting when you look at the broker market, at one of the spectrum you have the guys like the Caldery eyes who are

running like basically an investment bank for Main Street businesses. And you have generational group who's just basically running a machine that looks like biz buy sell with like some emails. And like the couple conversations I've had with their brokers, it felt like high pressure sales. They're like, turn and burn, turn and burn, turn and burn. And I was like, no, like, do you think I could actually see the SIM first before I make an offer? And they're like, no, you need to throw in an LOI and then we'll talk to you. I was like, what the hell is going? And then there were people in the background, like trying to sell me penny stocks. That's what it sounded like. I hate this when brokers do this because it totally misaligned incentives, right?

And actually, I've thought for a long time that incentives are misaligned, right? Because when you think about a broker, right, you hire them entirely in contingency, usually, right? So if the business does not sell, they make zero. If the business does sell, let's say they stand to make, you know, half a million dollars, right? If the business sells for 10 or even 20% less, they make $400,000 instead of half a million dollars. But if it doesn't sell at all, they make zero. Right? So they really have very little incentive,

even if you've aligned with their fee with a percent of deal value, et cetera, they would much rather close a deal at a bad price than not close a deal at all. So you have to be really, really aware of that. So in economics, this is called the principal agent problem. And the proof of the principal agent problem is they went and did a study.

So the principal agent problem is like, you have a real estate agent, their marketing or house for you. They went and did a study, and how much, let's guess, how much more do you think houses on average sold for when the broker owned the house, so they were selling their own house, or they were selling somebody else's house? How much more do you think they would get for the house on average when they sold their own house? Double digit. 10% plus or more. Is exactly 10%. Like, it's okay. Guys, look, let's talk about a little podcast. When I ask a question

like that to make me look good, you're supposed to say like, 3% are $12,000. But you're not supposed to guess the right answer. Okay, if you guess the right answer, I look like a moron. Like I'm saying something. So anyway, I don't need any help looking like a moron. I'm doing a great job. But yeah, so they get 10% more. So let's say it's a $500,000 house, like the average agents selling their own

house will get $50,000 more for it because of this problem, which is, you know, they're better off to do three deals at a 90% maximum price than to do one deal at 100%. So it creates this whole misaligned incentive mess. It's called a principal agent problem. If you're bored, you can totally, like me, go watch YouTube videos about economic concepts. And it's everywhere, too, because the basic concept, and it's in the name, which is in the principal and the agent, the principal being the person who benefits primarily from any transaction, right, or any interaction at all.

And the agent being someone representing the principle, right? And so the misalignment or the slippage between the incentives of the agent and the incentives of the principal, which happens all the time is the principal agent problem. And it's not just in selling businesses or real estate. 100%. So one of the things about their model that I think I have talked about more recently is that they fee off of, like, the generational group, they are phenomenal at customer acquisition. They go do these seminars for free in different cities where they're like, hey, do you want to know more about the value of your business? and this is the biggest transaction of your lifetime. And, you know, we have the largest network of, you know, qualified buyers.

And they, like, drop all these nuggets. They get business owners in the room and they do a free, you know, two-hour thing. And then they're like, well, you know, if you, basically the dilemma they leave you with is, it's a massive question, what's your business worth? And then they'll sell you a business valuation for, you know, more than what a business valuation should actually cost if you, like, went to a CVA or a CPA. And then you love the number. Like, surprise, surprise, right?

The number they tell you is fantastic. And you're like doing the math in your head and cashing the check. And you're like, well, I mean, there's no risk. There's no obligation. But do you want us to take you to market? And like, if we could get you that number, would you be happy? And you're like, oh, yeah, that would be great. And then they charge you like exorbitantly high fees.

And you sign, I've been, I've interacted with tons of sellers who've done this, but you sign documents that are, you know, they're not necessarily two-sided. They're more one-sided. And they take you to market, and it's a huge flash in the pan. There's a lot of interest, but the numbers don't end up meeting your expectations, like 99% of the time. And a lot of their fee model, which I don't think is wrong, it's just not incredibly transparent, is not on success fees. It's not based on actually selling businesses. It's on, you know, generating all this kind of effort on the front end. Well, I mean, right there, Mills, if your broker tries to charge you anything more, anything up front or anything

even nominally that is not tied directly to the transaction of the business, it's a huge red flag. In this market, I will say historically, though, most investment banks will charge some type of retainer, and they'll credit it against the success fee. So it's like, okay, you know, we're going to do a bunch of legwork because the broker, when you think about their model, They can do all this work and have all this sunk costs and work just tons and tons of hours and then get you to the finish line. And if you're like, ah, you know what? I changed my mind. I don't want to sell.

So those agreements, I mean, they can be incredibly complicated. But some brokers, especially in different market conditions than today, the broker will say, look, if we're getting you X price at least over this floor and you don't sell and we have an offer or we have LOIs or whatever it may be and you don't sell, you're still paying. us something. If you just choose to walk away, you know, for some other reason, then we can't bring you a qualified buyer. But I agree. Yeah, I agree. That fee, so I'll give you an example. I give people a real numbers example. So I was a shareholder in a business that was expected to sell for a number that would have netted the intermediary a $2 million fee if everything went well. Their retainer was $50,000. Yes. Yes. Right. So like that's the magnitude here that we should be talking about. Like if they walk away with, the retainer should be a number such that if they walk

away with only the retainer, they are pretty disappointed. Yeah. Right. It should not be a number that if they walk away with only the retainer, they feel like they got a good return on the time invested, right? It should be a bummer for them and like a small, you know, sweetener, but not something that makes it worth their time. So let's bring this one to a close. I think we get asked a lot, like, okay, who should do this deal and how would you structure? it. So who wants to take a stab at that? Maybe I'll do who, let me do who should do this deal and why you guys think about who should structure it. Does that work? Okay. So the person I think should do this deal, you should want to live in Houston. You should be comfortable traveling a lot to Latin

America. Your superpower between you and possibly some of your team should be Latin American culture, possibly already in the lubricant and like exporting. Like you should have been in petroleum at some point because like me, I don't know anything about this other than all the crap. I just told you here in this podcast. And you should be wanting to go like marketing and selling and whining and dining, guys who are doing manufacturing in Bolivia or wherever seems like a ton of fun to you. Like that's great times and you want to spend that time on the road because you're probably going to be on the road a third of the year.

I mean, easily, you're going to get to love United Airlines. So I think that's the buyer here. and are open to argument about that, but then throw it over to you guys, like what would you pay and how would you structure it? Really quick before we go there, Michael, that brings up a really good point. In due diligence on a business like this,

you absolutely need to understand from start to finish what is their sales process like? Because in this type of business development, you know, kind of relationship and scheme, there are crazy things that come out in due diligence about, you know, what owners will allow, or even explicitly ask their sales people to do.

And not all of it is totally above board. And there's some things that may be morally gray, but there's also things that are clearly morally black and white. And in this type of business, you'd want to really understand the sales process in the due diligence phase, not post-close when you're like, oh, you know what? We just outright bribe people, you know.

I need to send this guy a booker every month to get the deal done. Yeah, exactly. So just especially in this type of business, I've seen some horror stories, first-hand and second. So as far as kind of price, so generational equity, you got to hand it to them. They do not list an asking price. So you just kind of have to bid. So I'm going to make some assumptions here, assuming that there's not like a giant

flaw in the, you know, on the supply side where the Loub manufacturer can cut them off at any time or, you know, assuming there's some moat here and there's a reason this business exists, right? There's a reason their customers buy from them. there's a reason their supplier uses them to go to, to reach these markets. Assuming there's a reason this business exists, it's $3 million at EBITDA. It's a distributor. The margins aren't great.

I would not be surprised to see this sell for six times, just given size. I think if it's a strategic. I think if it's a strategic, I could see it going for six times. But I think their margins are so thin that I don't really see a lot of, like, margin of safety, especially because my guess is that they have like pretty, obviously they have low gross margin and they have probably like pretty rigid fixed cost, like the facility and, you know, these 25 employees, I don't think they could get like much leaner. I think if like outside investor is underwriting this and it has to cash flow, I would think

it would go for less. But I think if it's a strategic and they have some synergies that they're baking in, I could totally see somebody paying six times. I mean, I could see more if it's a strategic. So, for example, they got 40 million in sales and a 15% gross margin. That gives you $6 million to play with. And I'm going to assume it's a pretty loaded gross margin here. They're projecting $3 million of EBITDA.

So that means they got $3 million at SG&A, essentially, right? So if you can take that out, now it's $6 million of EBITDA, you know, to a strategic, which is de facto, which is pro forma three times if you pay six times. Right. So, I mean, I can easily see it. When I worked in investment banking in 2008, now, granted, that's a long time ago now, and I'm dating myself, but we would sell distributors for eight times. You know, mid-mark, you know, $5 million EBITDA distributors would go for eight times.

Now, and so private equity groups, which I kind of thought was crazy because the margins are so bad. But, you know, that's how it can get sometimes. Let's say, though, you're an individual buyer here. You're not private equity. You're not, you know, chasing a highly levered return. Yeah, I think five times. four to five times. The thing is, guys, like, once you get above that $2 million of EBITDA, though, a lot of the rules start to change. You know, like the private equity and like real private equity

with a committed fund starts to get involved. And I've seen stuff go for big numbers. Once you crack that, it used to be kind of like two, now it's closer to three, but once you crack three million in EBITDA, you know, stuff can get weird. You got to get. And this is actually where a good intermediary can really make a difference, which is why it really surprises me when businesses, is this big, which this is not a big business in the grand scheme of the world. But when you start to get to $3 million at EBITDA, I'm a little surprised to see somebody hire a generational equity, you know, like a churn and burn shop like that versus like a lower middle market investment bank that will write like a real SIM and go out to 200 private equity groups, you know, et cetera,

who are all going to be thinking five to seven times versus, you know, a bunch of idiots like us who start off thinking three to five times, right? And I think part of the reason this gets hard, like for me as I try and think about penciling it is, you know, based on sales price, you're probably, you probably have between like a million and a half and maybe like just under $2 million a year in debt service, depending on the terms of your debt. So like, you know, I just think it's so difficult to think about paying up for a business that doesn't have like some incredible X factor that is either growth, right, or incredibly sticky and predictable revenue in demand. And, you know, like, we didn't talk about, like, geopolitical risk and a bunch of things, right, that could, you know, we could have a new, you know, a new president or, you know, a new Congress and all of a sudden just, you may get legislation that prohibits you from doing doing business the way you have been.

So I don't know. I just, I think this is, if you're looking for a business to buy, this has a lot of the trappings that you definitely get the SIM. You do your due diligence. You have a conversation with the broker and try and have a conversation. with a seller and figure out, is there actually something there? If, like Gurley, you said, if it checks enough of those general boxes just categorically. This is one of those ones that people are going to look at

that are in our audience and are going to be like, well, sounds pretty good because it does sound pretty good. And then we're going to get DMs like, you won't believe what I found when I looked into this one. This is one of those deals. So whatever you find, definitely DM us because we love the laughs. It's hilarious. Yeah.

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