Acquisitions Anonymous - #1 for business buying, selling and operating - Two CPG/Retail Turnarounds - Michael Yarmo - Managing Director at Newpoint Advisors Corporation - ep51

Episode Date: November 11, 2021

Guest is Michael Yarmo, Managing Director at Newpoint Advisors Corporation. Michael is a turnaround specialist. He and his firm work on helping struggling businesses get back on their feet. They work on deals where they are equity holders or ones where they are hired by owners/investors to drop in and right the ship!We discuss two CPG/Retail turnarounds in this episode.Thanks!Mills, Michael and BillTHANKS ALSO to our advertisers this week:The Acquiring Minds Podcast (a great podcast for acquisition entrepreneurs!)TinyAcquisitions.com (a website where you can buy tiny online businesses with just a few clicks!)-----* Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.* Do you enjoy our content? Rate our show!* Follow us on twitter @acquanon Learnings about small business acquisitions and operations.-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#62 Two Landscaping Businesses for Sale - Mike Loftus CEO of Connor's Landscaping#66 Analyzing Software Businesses for Sale with Steve Divitkos, experienced industry CEO#42 $900k Moving and Storage Company / $500k Rural Mini-Storage#61 Two Manufacturing Businesses for Sale - Brent Beshore - Founder and CEO at Permanent Equity#24 $5mm pool services and lifeguard staffing co / $2mm septic services business -  featuring baller @WilsonCompanies as a special guest!#45 $800k/yr cleaning business in Midland, TX / a $565k/yr window cleaning business in San Antonio, TX #48 Two Landscaping Businesses for Sale - Mike Botkin of Benchmark Group--- Support this podcast: https://anchor.fm/dealtalk/supportSubscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm Mill Snell, one of your hosts, joined by Michael Girdley and usually Bill D. Alessandro. Acquisitions Anonymous is the number one podcast on the internet for small business M&A. And we're kind of giggling in the background because if you're on YouTube and watching this, not just the audio, you get to see some amazing swag that Michael Girdley has on today. It's my Halloween costume. I'm a Chili's employee. It's Chili's hat, Chili's shirt, and even Chili's socks. Yeah, I got Chili's socks.

So good times today. We're having fun, and we're joined by a really, really cool guest. I've been really excited about Michael Yarmow joining us. Michael is with New Point Advisors, and he does turnaround work, which I feel like is the kind of red-headed stepchild of the SMB community, because we don't know what we don't know, and that seems really scary. So he's going to come demystify it a little bit today. Michael, really glad you're here, man.

Thanks. And Mike is making me hungry with the, with the chili swag. I think I would have to make a stopover after after this podcast is done. Yarmow gets guests of the week. That's what this is about. Way to go, Yarmou. Well, Michael, give us, give us a little intro on you, kind of a one minute snippet on who you are and kind of what brings you into your current line of work. Yeah, I've been formally in the turnaround restructuring, distrust P.E sector for about five years now, working out of a, as a managing partner with a Chicago-based turnaround restructuring firm called New Point Advisors. I personally do a lot of capital advisory work where we're either completely taking over the companies from a capital stock and management point of view or kind of riding alongside current management to get them out of. of whatever funk they're in at it. It might be a capital input or just straight up us working on a fixed fee basis. We do dozens and dozens of kind of small to medium-sized turnarounds,

anywhere from $100 million down to probably about $5 million in top line, or about 20 million in senior debt or less. So kind of that sweet spot in the middle. Anything smaller than that is probably too small than not for us to crack and can't get turn around quickly enough. Anything larger than that, there's other firms out there who have already established a much stronger niche. So we feel like that, this space is really kind of a sweet spot for us. I got into this, yeah, I got into this industry actually through running my own frozen food logistics company. So I had done that for five years prior to that. A couple of partners

and I found a struggling Italian bakery distribution company who has, had several trucks and, you know, many, many points of distribution, but owners had been running the company for many, many years and really had not put a lot of effort into the company. Kind of came into the office. Yep, the lights were still on. Yep. Here's my check. And thank you.

I'll see you in two weeks from now. And a very super competitive business like food distribution, just can't, you can't be in a situation where you're, you're half-houncing in. So we came in, brought some new, new ideas, did a lot of channel strategy and tech. upgrades and really kind of brought some fresh eyes into business. I was personally running it in the president role for several years, and then we ended up selling it after a successful exit. That's so cool. Well, I have a million questions, but we're going to hold that thought. Michael has a word from one of our sponsors, and then you've brought some really cool deals that

I can't wait to talk about and be able to delve into. Yeah, super cool. Well, the best guests are the ones that bring deal. So thank you, Michael. Makes us better hosts. But yeah, so, you know, for our listeners, we're on a never-ending quest to have this podcast break even. And we have two sponsors this week that are helping with that. So we'll talk about one now and one later. But the first one is our first Mills renewal sponsor who's come back because their sponsoring has been so successful of the podcast. And that's tinyacquisitions.com. I will pull up their website for those of you that are online. If you're looking to buy, a small business or a tiny business. That's what tiny acquisitions.com does. So those folks have been

with us for a while. They're less than 10K, smaller type projects. And it's typically somebody that has built something, maybe got a few customers, but never really had it go beyond that. So techies are selling businesses on that and stuff like that. And you are typically a buyer, like a marketing specialist or somebody that's good at hustling and making a business grow. They have thousands of online businesses that sell for less than $5,000, and there's a click, slick, click one click button to buy those products and start cash flowing immediately. So a great thing if you're looking for a side hustle, especially in the digital space, thank you to TinyacroSixosters.com, because they're a great place for our listeners to consider that if you're wanting to kind

dip your toe in the water to do acquisitions. So over to you, Mills. Awesome. Thanks. Well, I'm going to kick it back to Michael. for the first deal here. And we'll delve into some more kind of nuanced questions once you get into this, Michael. But just briefly, before you start, I want to make sure that I'm framing this correctly. And this may be an oversimplification. A company can be distressed in one of two ways, right? Its balance sheet can be underwater and or its income statement could be underwater, right? Yeah, those are, generally speaking, yeah, those are the two ways. Balance sheet means they're unable to make their loan payments. It all flows back to you being unable to satisfy your creditor claims.

The source of that could be a balance sheet reason. You took on too much debt and you couldn't grow your way out of it, which we see all the time. Or you have lousy business operations and your cash flow ends up being negative. You know, it's either a COVID impact or bad management or a change in your industry. And that relates to you have a reasonable amount of debt on your balance sheet, but your income statement just doesn't generate enough cash for you to satisfy your creditors. And all of a sudden, the bank or the IRS or, you know, pick your, you know, pick your creditor channel comes knocking on your door saying, hey, you didn't pay up and they're going to take some type of action, whether they're secured or unsecured. Yep. All right, cool.

We'll give us the first deal. So, you know, first deal, you know, it was a interesting case. It was a company called up peeled snacks. And, you know, oftentimes we do. tend to keep the deals generalize in terms of the name. But this one actually hit the Wall Street Journal. So I'm able to talk about this one a little more freely. This is a company based out of Rhode Island, had a really nice line of products, all in the CPG industry, dried fruits, a bunch of other kind of snacking products sold through, you know,

the targets and the Walmarts of the world and the Amazon's, a really good e-commerce business, but also airports, hotels, schools. And all of a sudden, when COVID comes around and kids are staying home, people are not traveling, airports and hotels are closed down, all of a sudden, you know, 50% of your revenue is gone. And that was the kind of the start of starting to uncover what was happening with this company. when we were approached by not only the senior creditor on the on the file, but also the PE company that had been owning it, we also discovered that the margins were frankly just terrible.

They were one of the first companies into the organic space many, many years ago, but never priced themselves like an organic business. So, you know, if you go to a grocery store and you, you know, you go to Whole Foods, you know, they have that term, whole paycheck. Well, there's a reason for that, right? A lot of their goods are organic, you know, good for you. Well, these guys had priced themselves like a regular brand that had to incur the cost of an organic grower. And those lousy margins combined with the huge cost of trying to build up a brand led to negative cash year after year after year.

But their well-to-do owners driven by this PE company had funded the losses every single year. And all of a sudden, when COVID comes in and wipes out whatever growth had been going on, they took a step back and said, I don't want to fund the losses anymore. And all of a sudden, the, you know, the secure lender on the file puts up their hands and says, I'm not liking what I see here. I'm not getting my principal and interest payments back on all the money I've forwarded to you guys. And all of a sudden, it shows up on our radar. So that's often how the deal flow works is we're either getting a call from, directly from, you know,

senior creditors or from insolvency attorneys who have all of a sudden been pulled onto the file to say, hey, this company is in trouble. They're going to need some type of legal work. And, you know, insolvency attorneys for all their skills are not turnaround professionals and they're not necessarily business people. They need somebody to come in and actually take a look at how do I fix my ballot sheet? How do I fix my income statement? And it's either one of the two or are often more often the case both. You know, we, we enter the file and again, we, doing more research on the company, we ended up finding fraud on the file where the kind of the management before us had lied

on some loan documentation. And a business that was just way overspending for its size. It wasn't even like, it wasn't even close. It wasn't even like spending for growth and hoping that the investors, would kind of pick up the tab. It was, they were just spending way, way, way outside of what any reasonable startup, and they weren't even really a startup. They were a 20-year-old company or were really willing to do. So we came in and said, okay, we think we can fix a lot of this. So, however. Michael, real fast, how did you know that that, you know, that spending was at a line,

you know, when you first took a look at the deal? Yeah, I have a CPG background myself, whether coming through my own food companies or, you know, earlier in my career, I'd worked in a big, big CPG and big corporate firms. And I kind of knew right off the bat when you're spending 70% of your revenue on marketing. That's probably not a good metric. I think anybody, you know, with half a brain, can probably see that pretty quickly. But if you're spending 70% year after year after year on brand building, and it's not relating to, you know, more brand awareness.

that's a case where it's probably a good time to relook at that and have that flow back into improving the balance sheet and getting your senior creditors paid down. How, I mean, this was owned by private equity with some pretty smart investors. How did they let that keep happening? Great question. Great question. I think it was a case where everybody thought this brand would be a lot bigger than it was going to. And it was growing at a decent clip, but, not a, not a, you know, tech clip, especially when you're spending 70% of your revenue in marketing. It wasn't, it was never growing quickly enough. And they were constantly trying to rejake the

strategy to find, find new ways to get it, get it growing quicker. So Michael, quantify for us, what was their revenue kind of, you know, top tick when, when things were still growing and sales were happening on all channels? What did it, you know, what did it decline to and kind of how did that decline actually manifest itself. Was it one, you know, immediate in one quarter or kind of gradually over time? And then from a net income basis, what was happening cash flow-wise in the business? Yeah, it got up to 25 million, you know, in the good old days of 2019. And then dropped quite quickly to, you know, to about 10 to 12 million after all the, yeah. So it was a, that's, that's probably what gave the, you know, the ownership pause to say, I can't fund this anymore.

It dropped from a slightly break-even company to a $2.5 million loss pretty quickly. It was really, you know, we all know how COVID impacted the world. It was really a quick night cut to the four of them that, you know, over one quarter, the bank takes a look at their falls. It says, oh, my God, what happened to this company? It was, you know, Q3 started rolling into the banks. It was pretty obvious that this company was in serious trouble. And what, like, relative level, you don't have to talk specifics if you can't, but what's kind of a ballpark amount of, you know, debt that they had outstanding as this was happening?

Yeah, it was about $7 million in total debt. So just below where we needed to, you know, to file a subchapter five filing, because that's about $7.5 million and above. So they were just kind of under that threshold that gave us pause to say, hey, you know what, we can actually fix this balance sheet through the court systems. that would be probably the best small, sufficient way. And we can actually get them through pretty quickly with a subchapter five-fab. So what does that mean? And you can talk to me like I'm five years old because I don't totally follow. So just educate me here.

Yeah, absolutely. So, you know, probably everybody is familiar with the terms chapter 11 or chapter seven. Chapter 7 is you're just straight up liquidating the assets. And whatever's left over at the end of the day, you're just driven back to. likely the creditors maybe most likely not the ownership will get you know crumbs

but you're really just you're trying to give pennies on the dollar to your creditors 11 is a more of a restructuring clause where you're trying to stay as a going concern coming out of bankruptcy the creditors are going to have to take a haircut but the ownership

often gives up control of the business and basically hands it back to the creditors and it's not a great situation for the ownership of the company going through an 11. It helps the creditors out and tries to get them as much as they can in terms of their initial investment, but it's not a great situation for everybody. Chapter 5 is actually a bit different. So it's a code under number 11. It's a newer filing.

It was something that was passed by Congress in early 2020, and it gives small businesses a chance to get through the court systems quickly, efficiently, with this minimal cost. you know, to either having to hire somebody like me, an insolvency attorney, you know, auctioneers, you know, somebody like a Gordon Brothers, as low cost as possible, but ownership retains control. So ownership comes out, comes out the other side and they still have control, uh, control over the company. So that's the, that's the, the nuance difference between an 11 and a subchapter five. So typically in that process, the borrower, like you're saying, they retain control and are they getting, you know, a reduction of principle that's owed on the outstanding debt? Are they getting

some kind of, you know, deferred payment schedule? Are they getting, you know, do the terms of the loan change as well as the total outstanding amount? Yeah, and I get a lot of questions about this in terms of, you know, how do I use subchapter five to my benefit when I'm, when I'm buying a business? And, you know, it's often a case where you can come in in one or two ways. You can either snag the company up before they file, go go in with a little bit of hopium into the courts, into diving into the court systems and basically present a plan to a judge to say, this is what I'm going to do from not a non-a-cashful perspective. Here's the costs I'm going to cut. Here are the tactics I'm going to change to improve the profitability of the company

and hope that the judge says, yeah, I like this. We'll move move you through and we'll establish a a payout plan to your creditors. So you as an owner get to retain control, but your creditors are going to have to take some type of payment plan, and they can't deviate that off that. They're no longer able to kind of go back and try to clean their assets

again. It's a bit of a Hail Mary, and it's not something I particularly want to do as an investor, but it is an investment strategy. It's a bit of a hail Mary. The other way you could do it is, which is a little safer, which something I've taken a look at is you can come in as a dip lender,

so a debtor and possession lender with some type of conversion to say, hey, I will come in. The company is already filed. It's already in the court systems. I will come in with some type of debt structure called dip lending, but I'm going to apply a conversion while in the court systems that if we can get out of this mess and get the company back on a cash loan perspective, something along the restructuring line triggers you to actually become a part of ownership.

So big Hail Mary pre-filing, after filing, you've got a little bit more protection, but you're still coming in and trying to turn around a broken company with a debt line. All right. That's cool. That's a helpful survey. All right. So going back to Peel, they're burning about $2.5 million in cash. Revenue's been cut in half.

you get called in, there's a PE group and a group of investors who are saying, hey, we're not going to keep funding losses, basically, right? Yep. And what happened? So, you know, so when we uncovered fraud, we said this company has to go through subchapter five. We actually didn't initially intend to put it through subchapter five. But when you combine management fraud with a bad balance sheet, then we had no choice.

So it's a case where it was pushed into subchapter five, and we basically managed it with the U.S. trustees office, kind of breathing down my neck. So I had emails constantly pop up from the Department of Justice. And I always got a little nervous when I saw them pop up because I thought I was in trouble. But that was never the case. So you have somebody watching you very, very closely. You have to report constantly back to them, which is why it's a tricky situation to be in. but we put, I thought what together was a really good turnaround plan to, that the courts did end up buying off on it and putting us back into a payment plan, which would allow us to kind of get those sales back up to the $25 million that would flow much more cash back to the business than obviously an $11, $12 million business burning $2.5 million in cash every year. What were their debt service obligations on an annual basis kind of prior to this process? And then what did they,

they get changed to? Yeah, it's, you know, so a lot of it was a revolving, revolving alone with short terms. A lot of them were coming due. And then, you know, really what you're kind of hoping for from a from a subchapter five process is a five year spread of that of some type of reduced debt. So it's usually kind of 50 to 70% on the dollar for, for creditors plus over over five years. So that gave me, that gave me pause to say, okay, I'm going to sit there and do a cash flow model. I'm going to see what I can realistically pull off in a short period of time because the courts are not going to sit and let I'll let you figure it out for two years. You have to do it pretty quickly. You have to say I can enact improvement in cash flows and kind of six to nine months.

So again, it's a you're getting a business pretty much at its liquidation value, which is, you know, sounds appealing. but then you've got kind of a clock, you know, you know, counting down every single day where you've got six to nine months to make this work. And we, you know, we knew from, you know, from our industry experience and from our history doing turnarounds that this could be done in 69 months and sold back off to another investor. In this case, it didn't change hands right during the turnaround. The owners brought you in for a fee to come turn it around so that they could get to the point where they were going to exit.

That's right. Exactly. Yeah. Gurdley, what kind of questions do you have? I'm peppering Michael over here. Yeah. Well, we're doing a great job with this one. Do you want to move on to deal number two?

And I definitely have more questions about how I definitely want to dig into how aspiring acquirers can leverage this segment of the market because it's new to all of us. Yep. All right. Gertley, hit us with ad number two and then we'll go to deal number two. All right. Man, I am so excited to be so comfortable. commercial today. So today, our second advertiser is actually another podcast. So pretty cool.

They've been with us for a couple episodes now. And it is acquiring minds.co. So pretty fun podcast. So Mills, I don't know if it's happened on some of the episodes that you've missed, but this was our first advertiser who wrote a script for me to read that actually allows me to make fun. myself. Coked fun at us. Yeah. Yeah. Yeah.

So, yeah, acquiring minds, so for those of you that are friends of Acquisition Anonymous, you know we mostly hate the deals we look at. Acquiring Minds is for deals, the other end of the spectrum. It's for deals that happen. So software businesses and follows the journey of, say, like this guy, Jason here who bought a 45-year-old software business or different people who've bought businesses, what they learned, and bringing those lessons into the podcast.

So Will and his team, I think, have put together a pretty good, fun podcast that has more positivity than ours. So definitely encourage you to take a look at it. It's at acquiringminds.co, and it is available wherever you get your podcast. Acquiring Minds is the name of that one. So on to the next one. All right, Michael. Give us deal number two. And this is one that we're going to keep anonymized as the name of the podcast implies.

Yeah, this one I actually like a lot more. from like an investment perspective, this would be a, this would probably be a little more interesting to, uh, to your listeners where I don't want to deal with court systems. You know, frankly, from, from my, my risk tolerance and how much pain I want to deal with, I'm dealing with, dealing with the court systems and, you know, I learned firsthand with yield is not, not enjoyable. Um, when you get to, um, just simply straight up negotiate with creditors and, um, and kind of current ownership, that's when, you know, you start having a little bit more fun kind of wheeling and dealing and trying to fix businesses. So this one was a 50-year-old Midwest big box retailer, about 10 locations, you know, through the heartlands of the U.S.

And had a string of profitable years, many, many profitable years, but kind of started taking it on the chin, 2017, 2018, when, you know, Amazon and kind of the world started catching up with them. Being in, you know, smaller communities, you know, being kind of having a loyal following, kept them insulated for as long as you possibly could being in retail. But finally, you know, the Home Depot's and the Amazon's and the e-commerce of the world finally caught up to them. And you combine it with an ownership who were very knowledgeable in the industry, but not necessarily passionate on a day-to-day basis because, you know, it was a long-term family business.

They kind of made their money, kind of passed it off to dispassionate, management to run the business. As soon as I walked into the stores, when we got brought on by the senior creditor, was I saw empty shelves. I saw outdated inventory. And then when you start peeling back the onion,

and we saw bad warehouse management practices, kind of broken communication chains between the store and head office. And I thought, this business is fixable. This is a very, very fixable. business where we could do a lot more with it. You know, for example, I saw inventory that I kid you not was sitting on the shelf when

Bill Clinton was in office. So it had been sitting there for so, so long, you know, that had the box had literally discolored sitting under fluorescent lights for, you know, for two decades. So I'm like, there's a lot, there's a lot here that we can do with it. I don't have to put it through the bankruptcies. I've got a senior creditor who's willing to give us some. time and take a pause on foreclosing on the assets. And, you know, I can, I can really make this one work. So that's where we kind of sunk our teeth into it. We had recapitalized the balance sheet

with us, us coming into the capital stack. So Michael, real fast, digging into the we really can make this work. What you let off with talking about the headwinds at this business, which just sounded like kind of a generic home specialty retailer, kind of beating with the home depots and some of the folks like that. You've got these huge headwinds of Amazon and Home Depot and Lowe's and whoever else they're competing with, having massive economies of scale and efficiencies that come from that also. Besides the fact that this was just a horribly run business, what made you comfortable that the headwinds were something you could overcome? One thing I really liked about them was I didn't have to do a lot of CAPEX.

I didn't have to completely redo the stores. I didn't have to redo the signage outside or the website or the distribution centers. Those were pretty good shape. What was really lacking was what people had the opportunity to buy. And when you started taking a look at the metrics of the company, you know, you've got to take a look at what are the key metrics. in any in that particular business. And, you know, with retail, how many people are walking in the door every day

and how much are they walking out of the door in terms of their average order value? And even though they had some of the worst inventory turnover I'd ever seen out of any retailer, they were turning it over kind of once per year, which, you know, if you look at a Home Depot, they're turning it over 12 to 15 times a year. The foot traffic had really not dropped off all that much

in a 10-year period. So 10 years ago versus today, even though sales had dropped off quite a bit, the number of people who were walking in the stores was still pretty steady. They're just buying a whole lot, a whole lot less. And that's because they didn't have the inventory. They just didn't have the, they didn't. Yeah, I mean, what's defensible about that business, right? As you think about it, is it because they own their locations? Is it because they're in markets too small to support some of those?

Like, why even when you fix that thing, are you not scared of Home Depot? a little bit of both of both of those situations. But what I, what really got my eye was they had categories that you would not find into Home Depot. These guys were selling chicken roosts and things directly to, you know, to rural, rural communities that Home Depot would never,

would never touch. They had, they had specific categories and products and relationships of suppliers that, you know, a Home Depot or Amazon just couldn't compete on. And that's, That's what I really liked. They just weren't, you know, updating those relationships.

They weren't, you know, keeping them fresh. It was it was really a fault of the business, not of the supply chain. And that's why I thought we could turn this business around quite quickly. Because again, in any turnaround situation, you're going to, you have a clock running against you. It's a case where you can buy a business for book value to, you know, to an, you know, a discount on intrinsic value. when it's an out-of-court situation. But then that's the upside. But the downside is, you know, in order to keep the predators at bay and keep them sweet,

you have to do this fairly quickly. You have about 12 to 6 to 12 months when you're dealing with that out-of-court situation to show real progress. So, Michael, quantify this one a little bit for us. What kind of was revenue, what did revenue fall? What did it fall to? And then what was happening from an earnings perspective in the business? Yeah, it went from 40 to 30 to 30 million.

and you know they over how long uh it was a much more of a slower burn um didn't have as money as much co-bit impact as you know as our first as our first case did uh i would say that was probably where two two or three year period kind of that that burn burn down uh but you know once you once you start getting into out of stock situations uh it's you know you start getting into a desk bar where um you know you you know your sales drop and then you run out of cap to be able to pay your vendors and then your vendors start short shipping you and then you then you don't have as much inventory to sell then you don't you can't pay your AP then they then they put you on credit hold so you know what what happens you know gradually all of a sudden happens suddenly and that's

what happened happened to these guys so with some fresh capital fresh capital and good you know new inventory i thought we could restock the shelves pretty quickly what was their earnings at 40 million and what was it when you kind of got involved at 30 million in revenue? In the good years, they were pumping out, you know, four to six million in bottom line every year. We thought we could, even if we got it back to half that, you know, we can, that would be a huge swing in the enterprise value of the company. Yeah.

And then what was it when you got involved? What were the earnings when it got down to 30 million in revenue? They were losing about two to two and a half million a year in cat in cap. And in this case, one of the notes you gave us about it is, you know, Family run business, it sounds like no outside capital, working with one lender, you know, in a smaller market. And the lender obviously is kind of tiptoeing around, you know, hey, we have a lot of exposure here, but also we have relationship exposure. We don't want to be the bad guy who foreclosed on, you know, this major employer, you know, that type of situation. What were their debt service obligations like to this one, you know, this one lender?

I'm thinking, good times, right? If you're doing, you know, five, six million dollars in earnings, you know, your debt service obligations are fine. Yeah, you know, they had term loans. So basically what they had done several years prior is to upgrade the stores. They had borrowed against the real estate. So they had taken out kind of longer term loans to do store upgrades and then had a revolvelling line to pay for inventory. So where they got in trouble was, as soon as, you know, revenue drops, they couldn't, you know, fulfill the term loans anymore. And that's what the bank stopped back and said, uh-oh, we're in a bit of trouble.

here. And, you know, if you're, if you're taking a look at it from a creditor perspective, they were a smaller bank. They're probably facing a lot of pressure from other COVID-impacted businesses. Even though this was not a COVID-impacted business, there were other, other borrowers were. And they probably just needed an exit or some type of quick, you know, quick recapitalization of the balance sheet, which is what gives, which is what gets me excited. So when I see, when I see a bank that's desperate, when I see ownership with a lot of personal guarantees, which is what they had on a lot of the loans and a business that I think could be turned around quickly without having to put a lot of additional capital into it above and beyond

just the acquisition of it, then that's what that's what gets me really excited. So what were their debt service obligations? What was it on an annual basis? Just ballpark. Yeah, about about a million, million and a half a year. Okay. And they're burning cash, so they can't, they can't meet those obligations. What's the nature of investing in a deal like this. You're getting involved and the company probably needs an infusion of cash.

They also need, like in your case, you could potentially facilitate an infusion of cash, but also, hey, we're going to, we know how to speak to your creditors to give you some breathing room and maybe, you know, renegotiate the terms of your loan.

But like, what's the nature of investing in something like this? Like this isn't on bizbysell.com. It's probably not listed by a traditional investment bank because those guys want companies that are going to sell relatively quickly and sell for high multiples because they have cash flow.

This is a case where you either know a turnaround specialist, a restructuring form like ours, who can create that deal flow for you, or you have your own kind of built-in network of senior bankers as special asset bankers who will come in and say bring you, bring you on to deals when they're struggling with a file. So in this case, though, if you're investing in something like this, you're, you're writing a check, right, to get some cash on the company's balance sheet, which also makes the lender feel a little bit better about renegotiating terms. Is that kind of how it works? Yeah, it's, you know, it's the bank having a conversation with the current ownership saying,

you're in trouble, you're not fixing it. We can either do one of two things. We can either foreclosing the loan or you find somebody come in and help you. So they've basically done the work for you and put a gun to their head. And, you know, sometimes you get a real pushback. You know, sometimes you have a long-term legacy family business and they don't want to give up any equity, sometimes they have no choice or they're going to, you know, basically, you know, lose the business. In this type of case, does the family retain control? They retain control in this case, yes.

We do not take more of the 51%. So minority investor comes in, help shore up the balance sheet and also say, hey, look, we're going to roll up our sleeves and we're going to help you get from point A to point B. Point A is where you are right now, losing. money, you're in a tight spot with your lenders. Point B is we're cash flowing. Your lenders are satisfied. And structurally, the business has kind of changed and maybe modernized or whatever

the playbook might be. Yeah, that's correct. I want the bank to do the work for me and convince the owner who may or may not be reluctant that it's in your best interest to bring on capital help. You know, sometimes it said they don't do go quite that far. And it's, you know, you're just helping them from an advisory standpoint. but a lot more times it's a I need more capital into the business. Your balance sheet is is not strong enough to support, you know, what's owed to me.

And I'm going to, I'm going to call the loan if, you know, if I don't get that. And that's kind of that sweet spot of what I really like with turnarounds, where you're getting a business somewhere in between kind of that book value and a deep discount on intrinsic value. And then you're, you know, you're coming in with a skill set that they may not have. and capital that they may may not have and then kind of you know finding that that delta by doing doing the turn what's the typical hold period for an investment like this michael i mean is it something where you know you're in this for 12 to 18 months and then the family's taking you out or what's the

typical duration yeah you know it's about a one to two years it's it's we're here for uh you know for a good time not for a long time um so if it's a if it's a really sweet business uh which don't along all that often, we'll stay longer. If they have, you know, some real, you know, growing market with proprietary product, that is, you know, that we can see a lot more runway on. We'll stay sick around longer. But oftentimes it's more just, you know, fixing fundamentals in the business, stirring up the ballot sheet.

We've done that. We've got the business back. And away it goes. I don't know. We'll on to that. Okay. Yeah. What percentage of your business is actually, you know, having some skin in the game by

being on the cap table, bringing some of that capital, or, you know, having, having LPs come in with you, and then what percentage is just doing it as a service? Pretty much every single business needs more capital. I would say about, you know, 25% of the time will join the stack, and 75% of the time will raise it either through, you know, more debt or an equity raise. Got it, but some of that might, but yeah, so it sounds like 75% of the time you're just a fee-based service provider and 25% of the time you show up on the cap tail, put your own capital in or bring you know, it's our own capital. We're not, you know, we're not pulling in outside advisors. Oftentimes it's a, you know, we're just

not comfortable with the situation or we don't like the situation. And it's, it's better, it's better suited for somebody with a more of a longer term structure, timeline in mind or, you know, maybe a different, different skill set or different risk tolerance. So, you know, 25% of time will actually, you know, join the deal and, you know, benefit that way. Yeah. And then how do, if people want, it sounds like there's a benefit to turning yourself into somewhat of a turnaround specialist. If you want to invest in them as well, there's synergy there for your business. And maybe you can argue with that premise.

But my real question is, how do people actually get into the turnaround business? Like, what's the career path that kind of gets you there and how does that work? Yeah. You know, a lot of people are either former business owners like myself or they've come up through, you know, like a Deloitte or an Ernst & Young who already have, you know, turn around, you know, turn around spaces within their, within their firm. We've got a lot of ex-bankers, you know, in this, in this space and a lot of, you know, reform lawyers who, you know, who want to move into this. So, you know, a lot of my colleagues and myself, you know, our former, you know, who have done this in a, whether we liked it or not in a, you know, on our own. business sense. And we, you know, we want to join a bigger capital pool or, you know, get more of a deal flow. So, you know, we join our startup, start our own firms. So do you guys tend to

specialize in stuff? It sounds like you're very much a CPG slash retailer. Do other folks specialize in other categories, financial services firms or tech or that kind of thing? Yeah. It's, you know, so myself is like, you know, I'm very, uh, focus on CPG. Any, any type of consumer product, it doesn't have to be to the consumer. I do B2B as well. Retail. Our firm will is pretty much in industry agnostic though. We'll do a whole bunch of different deals. I've done medical device companies, you know, commercial printers, direct mailing companies, you know, tech firms, like a whole bunch of different verticals we have. If, you know, my advice for, you know, for the listener here is probably stick to something you're familiar with, especially kind of for

your first turnaround. If you have a lot of industry knowledge and can kind of pick up those signals like, hey, 70% marketing spend is too much for this, for a particular firm at this stage of growth and can pick up those KPIs like pretty, pretty quickly. I would say that would be the, you know, kind of the best way of, you know, getting into the turnaround space initially. There's also guys for hire. So if you want to get into the turnaround space, but I need somebody to hold your hand, there are turnaround firms up there in terms. or on specialists to kind of help guide you along the way and you can either compensate them by the hour or bring them on for a commission or a part of the capital stock. And how, so let's say I'm Joe Schmo, right? I know how to go get, if I want to become a real

estate broker, I know how to get my first deal. Like I just start networking everybody and call property owners. How does somebody that wants to say has found that that Sherpa and wants to get into the turnaround space? Like how are you guys finding and creating deal flow? and building a brand for yourself. Is it start cold calling bankers? Is it, how does that all work? Yeah,

that would probably be your best space to say, hey, I'm, you know, this is the industry I specialize in. This is how much capital I have to deploy, keep your, keep your eye out for me.

When, you know, you have a, have a deal come across your desk. I'm interested in taking a lookout. Again, you can also leverage somebody like myself who was already,

you know, built that network with us in our firm. If you're saying, hey, I'm interested in a deal, but I just don't have the time or I'm uncomfortable call in a bank. Chat with us. I send deals to actually Twitter, you know, some of my Twitter followers, you know, pretty consistently.

Actually, later today, I'm talking with a Twitter or Twitter follower who approached me and said, hey, I'm interested in such and such industry. Do you have a deal in mind? And guess what? I have a deal like that, you know, to have him look at like immediately. Yeah. Because it's, you know, it's something we've, we've invested. it in, but we're also like very, very keen on, you know, having that more longer turn capital piece.

We're kind of halfway through the turnaround. But, you know, I need to start finding the capital now to, you know, kind of pass it off. And, you know, I'm bringing him into it. Super cool. I know some guys that did turnarounds in the amusement space. So like when they would be underperforming, like amusement parks and stuff, they would go in and fix them. And after about 12 years, they decided the quality of life was so bad in their 40s. They were like, we're done. Like we can't do this anymore because it was just going from one fire to the next that was never really caused by them. So, you know, is this an industry that you see a lot of 60-year-olds running around or is it a young man's game or a young woman's game? Hopefully it's coming through the camera here that I am a younger guy.

He's still got the hair line going on here. Because you tell me to do your job and I'm not interested. I'm about 15 years older than you, I think. And I'm like, oh, that sounds awful. It's awful to the pain of heart. To be honest, we it's not for the faint of heart. It's not putting money into Apple and hoping, you know, you get a 2x return or Bitcoin or whatever. It's a, it's a, it's a challenge.

There's a lot of pitfalls you got to have to go through and a lot of stick handling. I had to, you know, I've had, I've had, I've had to fire 10 people in a day. There's other days where I've had to, you know, deal with screaming bankers or, you know, vendors who are not getting paid. And so it's not not for the faint of heart. There's definitely some significant upside that can be had with distressed turnarounds, but you have to have that mindset and their patience to be able to kind of see the process through. Let's talk about that just really quick, Michael. So if you think about the universe of investable assets and the risk reward tradeoff and expected rates of return,

so, you know, public market equities trade at, you know, EV to EBITDA of, you know, 20 times, right? And so you invert that and you say, okay, my expected return on this might be five to six percent a year annualized. Real estate might trade a six or seven percent cap rate or whatever it is. Lower middle market, you know, businesses that sell in the SMB space might trade for anywhere from three to five times, you know, cash flow. So unlevered, you can kind of do the math on what the yield is there. What's the expected return profile of something like this, given that it is highly illiquid, right? And a lot of it is contingent on completely changing course in the business. It seems like with all that risk priced in, the expected rates of return, you have to be

compensated for that. Yeah. If I'm not getting a 5 to 10x on these investments, then I'm not interested. It's not worth the headaches and the pains that you're going to be dealing with going through a turnaround. So if I can't 5 to 10x my capital, then I'm moving on a next deal, which is often what we see. and probably one of the main reasons why we just do it as a capital,

you know, as an advisory and not with capital because we don't feel like we can get that 5 to 10x. Interesting. Man, this is, this is so cool. It's really, really fascinating. Gerdley, any other questions you have before we wrap up? No, thank you so much, Michael. This is super cool. And big thanks to our sponsors again.

Give you one more shout out to say thanks. Acquiringmines.com. So podcast about people who have done successful small business, And then the tiny acquisitions.com, the website where you can go to buy small side projects for less than $10,000 and make them your own business. Big thank you to our sponsors. Michael Yarmow, as we kind of fade out, how can our listeners and the folks who tune into this podcast on YouTube, how can they support you?

How can they keep in touch with you and follow what you're doing? Yeah, you can follow me on Twitter at Michael Yarmel. I've also got a substack where I'm posting stuff on the distress industry all the time. I've been a little bit slower lately with the newborn kind of taken up on a lot of my time, but I posted quite a lot of content over there.

And also I do offer a link to the Daily DAC.com, which is a deal flow site for more distressed. I think Michael's AirPods died. I have checked out Michael's. He's got a substack to you and a good Twitter. I have really enjoyed his substack. I really enjoy his newsletter writing.

And it always is kind of cool to see the other side of the, the other side of the coin, so to speak, with distressed investing. Well, we'll get Michael Yarmu back here at some point. But we can wrap up for now. And thanks to everybody. We'll see you again next week. Awesome. Awesome. Go Chili's.

Happy Halloween.