Acquisitions Anonymous - #1 for business buying, selling and operating - Two Logistics Businesses For Sale - Ep46

Episode Date: October 7, 2021

Joined this week by Aaron Rubin of ShipHero (shiphero.com / https://twitter.com/AaronandML), we talk logistics!= $26mm Third-Party Logistics in Las Vegas-  $1mm in FBA Prep BusinessEnjoy!Bill, Mills and Michael-----* Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.* Do you enjoy our content? Rate our show!* Follow us on twitter @acquanon Learnings about small business acquisitions and operations.-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#62 Two Landscaping Businesses for Sale - Mike Loftus CEO of Connor's Landscaping#66 Analyzing Software Businesses for Sale with Steve Divitkos, experienced industry CEO#42 $900k Moving and Storage Company / $500k Rural Mini-Storage#61 Two Manufacturing Businesses for Sale - Brent Beshore - Founder and CEO at Permanent Equity#24 $5mm pool services and lifeguard staffing co / $2mm septic services business -  featuring baller @WilsonCompanies as a special guest!#45 $800k/yr cleaning business in Midland, TX / a $565k/yr window cleaning business in San Antonio, TX #48 Two Landscaping Businesses for Sale - Mike Botkin of Benchmark Group--- Support this podcast: https://anchor.fm/dealtalk/supportSubscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

All right, welcome to Acquisitions Anonymous. It is another beautiful Friday morning that we are here recording. I am Michael Girdley, one of your three co-hosts, and I guess, guys, I get to list myself as a co-founder of this. So I'm very excited to add that title to my LinkedIn bio. For those of you that don't know, this is the Internet's number one podcast about small businesses for sale each week. Me, Michael Girdley, Millsnell, and Bill DeLessandro and guests,

get together and we talk about two small businesses that are for sale and we riff on them and it turns us some just amazing discussion and opportunities for us all to learn from each other and the audience to learn as well some of the things that just don't come up in textbooks and that's what this podcast is all about today we have an amazing guest and an amazing sponsor but let's start with the guest Aaron Rubin of Shapiro who is now a Twitter star has the second best beard of anybody on the podcast today and we're just excited to have you here so Aaron welcome Hey, so nice to meet you. Thanks for having me on. Yeah, great. Well, let's get started with introducing yourself, Aaron, if you would, tell us about yourself in one minute or less. And I will not play Jeopardy music for you. So it'll be perfect.

More fun with the music. Started an econ business in college way back in 1999, ran that for 14 years, then started a company called Shapiro to serve econ businesses. So there's two pieces of Shiphero. One is software. for people that are shipping. So customers include Glossier, Universal Music Group, Canadian Tire. Bill's business is not a customer, but it sort of fits the profile. And then we have a second side of the business, which is we have five of our own warehouses where we ship for people who don't want to ship for themselves or people who use our software in one part of the country but are looking for a warehouse in another part of the country. So Bill's warehouses on the

East Coast, but he wants someone to ship from the West Coast. He can leverage our software one and our warehouses in the other. So we work with like direct-to-consumer brands like Pretty Litter, Solo Stove, and then also larger companies like Nestle, General Mills. So that's the business. That's great. How many employees do you have total? About 250. Wow. Okay. Super cool. Super cool. And then so you're part of like this three part, third-party logistics category? Like, how would you, that's something I think a lot of the listeners, and even myself until recently didn't know existed as a thing.

Like, how do you define that and then where do you see your business being in that universe of the category? Yeah, so third-party logistics is like a broader term, which actually means any outsortless logistics, which could also mean trucking, et cetera, but usually people in e-com are thinking about the warehousing part. So what a 3PL for most people in e-commerce is, it's just a warehouse that ships for you.

So if you don't want to run your own warehouse, you just outsource it to someone else who will do the receiving the stock, shipping your orders, everything you would do in a warehouse. It's just outsourced instead of doing on your own. And most bigger brands use that route, excluding the super megas like Walmart.

Got it. Super cool. All right. Well, let's jump into some deals. Before we do that, we have a sponsor again. And if you guys are listeners, you've seen that we've taken a huge stuff.

step forward this week. We got professional art done by a guy in Estonia. So I'm pretty stoked with it. It has our faces on it. And hopefully that does not impact the number of listeners that we get. But anyway, this week's sponsor is a cloud booking service called Financial Clarity. It's at finclarity.co. For those of you on YouTube, you can see their website. They are basically a cloud bookkeeping service for small businesses. They have some unique stuff in that the founders themselves are entrepreneurs. They don't. have long-term contracts and they keep everything in a fixed monthly fee. And the idea being that if you are totally hating bookkeeping, which I do, you can partner with a trusted group in terms

of Jason and his team at Financial Clarity and consider getting and outsourcing your bookkeeping. So that's what Fank Clarity is about. And thanks to them today for helping us afford to put our faces on our images for the podcast. So with that, we have the first deal is Bill, right? No. Mills. I think it was Mills. Gosh, I was doing so good. We may only be 10 out of 10 today, guys, just so you know. You're a way better, you're a way better MC than I am. So I'm fine with you, you know, just having a couple blunders in there. Aaron, really glad you're here. I don't really know that much about 3PL, so I'm excited to learn some. So we've got this deal. It's a third-party logistics provider. They do order, fulfillment, and manufacturing support. They're in Las Vegas, Nevada.

The asking price is $26 million on cash flow of just shy of $6 million. Their revenue is a little over $40 million, and they have been around since 2004. Foreign Trade Zone on premises, this third-party logistics business has been well established in Northern California for over 35 years at eight different locations and has around $52 million in committed contractual revenue for 2021. So it looks like, you know, looking back, $40 million in historical revenue, but kind of the run rate looking forward is 2021. For 2021 is $52 million. They provide manufacturing support, warehousing, order fulfillment, transportation management, and customized supply chain solutions.

They have a solid foundation and relationships with government and industry organizations. Have 125 people, highly qualified, experienced personnel, including the leadership team, project managers, general managers, forklift operators, packers, material handlers, warehouse managers. Current owner is retired and lives out of state. There are two funding options with a higher cash, I think they mean at close. So basically, if you're willing to provide more cash at close, then they'll give you a $3.5 million discount. So the broker's kind of already trying to grease the skids on the ways that you can get this deal done. And Michael is already giggling.

It's awesome. It's awesome. We're giving you a cash discount. It's great. Manufacturing support includes raw material, kidding, lean production line manufacturing, sequencing, build, and test processes in vendor managed inventory. Their warehousing capabilities are comprised of customized storage solutions, customized receiving, digital tracking, and temperature stability. They pride themselves on quality order fulfillment by providing product handling expertise, branded packaging, accurate documentation, and they use EDI. electronic data interchange software to ensure accurate order processing and fulfillment. They do have extensive knowledge of packing, creating, and shipping requirements for different

countries. They handle transportation needs, whether it's local, regional, statewide, national, or global. And that's been one of the many ways that the business has built a solid reputation. They meet the needs of well-known high-tech clients and they're in the process of expanding into pharma, pharmaceutical-related industry, which is also highly specialized. Few growth opportunities would be to expand the pharmaceutical accounts and more fully utilize the foreign trade zone on premises so they can cover more client needs. Like we said, Las Vegas-based 125 employees. The owner is planning on support and training for 12 to 18 months.

That's pretty good. That's way longer than some of the ones we poke fun at, which is like you get a week or two weeks. Reason for selling. He's retired and out of state for two years. And that's kind of all the info we have on this one. What do we think? This is a cool one. I'm interested to see what Aaron thinks about this. I was just going to say, if you took everything out of it and you said you're going to get $6 million in cash flow growing top line 30% next year for $26 million. And oh, by the way, you got three and a half million discount. Like it says 22 and a half million. It seems like a new, it seems too good to be true. It sure does. I mean, that is a hell of a price. So this is,

priced without the cash discounted about 4.3 times EBITDA, and with the cash discount below four, which is pretty cheap, especially now in 2021 with all the debt floating around out there. And they've been around since 2004, and they're growing, you know, 40 million to 52 million. I mean, this sounds like a healthy business. Also, the other thing that I loved about it, if this is true, current owner is retired and lives out of state. That is a pretty strong endorsement for the on-site management team, if it is true. I mean, Pratt, you're gurg, are you shaking your head at me? Do you disagree? No, I'm just like, there's this, that's the, why hasn't this sold already look?

I emailed them, by the way, after I saw this, be like, hey, can you give me some more info? But I'm interested. I'm a buyer. What do these businesses trade for typically? I mean, you guys are saying this, that seems cheap. Is that just based on kind of market pricing, right? now and these things getting bit up like crazy? I've done three over the last four months in the space and somewhere eight to ten X and this is four. So yeah, it's cheap. Let's talk about like the nature of these businesses. So how recurring is the revenue, Aaron? It seems like, you know, you get embedded with somebody. Are the switching costs actually that

high or is that? Talk through like the mechanics of customer relationships. You hold somebody's inventory. Is it like you keep the customers unless you screw up? It depends on the type of business and the customer profiles. There are some merchants that will switch pretty frequently and there's others that'll stick. So generally you want to see how long the existing customers are there. They've been there for more than a few years. They'll probably be there for years more. If they're new, they probably won't last. It's more to do with the customer you get than the business. But in general, it's a more sticky business than most, right? It's B2B. And you've got physical products from your customer.

So they have to deal with logistics of pulling stuff out and all that. So it's better than average in terms of stickiness. So you should get a better than average multiple. And this is a lower than average multiple. What about revenue per employee? Does this seem in line? Does it seem high or low? No, that seems pretty reasonable.

Yeah, that seems correct. The one thing that jumps out of me is super weird about this one is, you've said the company's in Vegas, right? But then when you read the, it says that they have eight locations in northern California. So a couple of things that got weird. For that revenue to have eight locations, like, that's a lot. Like that's sort of a 40 million revenue is two locations, you know, a couple hundred thousand square feet in one or two or three locations. Eight is weird.

So I don't know what that's about, right? But then also how come it says both Northern California and. in Vegas. So I don't know what the deal there is. And then the last point is, we have warehouses. We've got seven warehouses in five states. None of those are California because California has been really strict on regulating warehousing with lots of new stuff coming. So if they actually are in Northern California, I would be less excited about it because there is this regulatory risk. There's a couple of things. One was you have to track the trucks. and you're responsible for the emissions of the trucks picking up at your warehouses,

which is super hard to deal with, right? Wow. It's weird, but that's the wall. Just laughing at your reaction. What? Any truck that drops off or picks up at your warehouse, you just have track their emissions and you're responsible for it? Yeah, so you have to track it this year.

And then next year, there's like a trading system based on, like you can offset the emissions with other things. and super complex and yeah. And you typically don't know what truck's picking up. So it's weird. So I will also chime in here from the brand side too. So, you know, Aaron's speaking, you know, if you're operating a warehousing business in California, you know, employing a bunch of warehousing workers and labor in California,

there's a lot of pain in the butt to that, right? From the brand side, for me, I would never, ever, ever use a business. 3PL in California because that creates sales tax and labor nexus for me in California. And so that's why you end up seeing a lot of these 3PLs based in Reno or Vegas, you know, kind of in Nevada, which is a significantly more business friendly state than California. But they park right on the California border so they can ship same day or next day, you know, cheaply into California. So the 3PL clients and, you know, Aaron, you can expand.

on this, but at least from my perspective, I wouldn't even speak to a 3PL who was California-based. Right. But they have, they say they have 52 million in committed contractual revenue for this year. So, I mean, they might be doing more B-to-B. They might be also dealing with more just like national firms that are already in California. Yeah. Yeah. If you're already in California, if you're a California-based firm, like it doesn't matter. Like, this ship's already sailed for you. So you can use a California 3PL. But it can be restrictive to certain customers like me. who don't touch California and don't want to touch California. So you want to talk about that really quick, Bill and Aaron, what nexus means in the way that it has an impact on sales tax?

You want to go, Aaron? You want me to do it. You have to take a deep breath. I'm sorry. I just, I feel like this is something most people don't necessarily know or think about. Okay. So this has been really kind of the hot topic de jour in e-com. Well, the hot topic dejure right now is Facebook, iOS 145, and privacy.

But before that, it was sales tax nexus for several years. and it's still going on, the mess that is sales tax nexus. So in the United States, historically, and as a business, you are only responsible for collecting and remitting sales tax in states where you had nexus, physical nexus. So employees, a warehouse, inventory, you know, some sort of physical presence in the state. And if you did that, like, for example, if you had a warehouse of California,

you're responsible for collecting sales tax, including California sales tax, state sales tax from your California customers and remitting it to the California government. However, if you had no presence in Idaho and someone from Idaho bought something, you did not have to charge that person's sales tax, nor did you have to remit it to the Idaho state government. Well, that was fine pre-internet. But when the internet came out, states started to get a little upset that they were not getting all of the sales tax revenue.

There were all these kind of e-commerce firms just lobbying packages over the state's lines to all of the people who lived in their state and all of those people went from buying things at retail and paying sales tax on all those things to buying those things on the internet and not paying any sales tax on those things. So a lot of states got really upset about this. And over the past kind of two or three years, there has been a wave of what are called economic nexus laws past. and actually Wayfair, the e-commerce furniture company, challenged this and took it all the way to the Supreme Court, saying basically that this was not allowed, was not constitutional. And the Supreme Court actually sided with the states in what's called the Wayfair, the big wafer decision, which was shocking to the e-com industry and kind of a giant bomb that set precedent for near, I think like 40-something states now have economic nexus laws. So economic nexus means that if you are selling above an arbitrary dollar threshold or order threshold into a state, even if you have zero physical nexus, that creates what is called economic nexus and you are now responsible for the same amount of sales tax collecting and remitting.

The shocking thing is that that threshold is very often $100,000 in sales where you're like, okay, so that's maybe $5 million if you got $100,000 sales in each state. Or here's where they really screwed it up, 20 orders. Oh, wow. So you could be like basically an eBay seller, right? Like a very small business, ship 20 orders into a state. And it's not so much that it's hard to charge people from. from Idaho or wherever I'm not really picking on Idaho, I just picked a state.

It's not so much that it's really hard to charge them in incremental 7%. What's especially difficult is that you've now got to file monthly or quarterly sales tax returns in Idaho and remit that money. But it's not just Idaho, most of these states, and I will pick on Colorado, where I used to live. In Colorado, their sales tax differs down to the zip code. So now I need software to charge different amounts of sales tax to different needs. zip codes in Denver, for example, based on where they've built light rail and how they want to

tax people. And now, I as a business every month or quarter have to remit not just to the state of Colorado, but to the county where the person lived and the city. Three different sales tax returns. And, you know, put that to the 50th exponent. So now, just give an idea of Elman's Brands, I will get off my soapbox. We incur $200,000 a year of of compliance cost just for sales tax at elements brands in software and human labor to keep up with all of it. It's supremely small business hostile and now I'm off my sonbugs. I've got to say, this is not the first time Bill's done this because that was such a good

explanation. Like, I feel like it tells this kid's this story at night. Yes. Yeah, it's a mess. I mean, and I don't know. The way to solve it is for some sort of federal clearinghouse. It's not, I'm not arguing not pay tax. What someone needs to do is simplify it so small businesses can collect all this tax and remit it once and let someone else sort out the distribution of the money instead of 50 to 120-ish, depending on the scale and complexity operation.

Sales tax returns every month or quarter. It's just bonkers. So bring it back to what we're talking about. This is why you might want a 3PL in Nevada and not in California so you don't have physical nexus in California, which subjects you to additional. regulation and really we should just saw California off and let it float into the Pacific. But yeah, that's not the year-in-there-tells how you really feel, though. Well, we could still ship them things and take their money, but like, you know. I thought this podcast was just about picking on downtrodden areas like Corpus Christi.

But you're going for the biggest state of the nation, man. We're expanding our tam, Michael. We're expanding our tam to the whole state of California. But anyway, I digress. So that is why I think you might want a 3PL in Nevada. If Bill gets his way, Avalera is going to lose its $16 billion valuation or market gap. That's their entire business. Let me ask another question about this deal.

So physical space obviously is really important, Aaron, to what you do and what these guys do. If they've got eight different locations, you know, it sounds like maybe some of these are smaller, right, based on their total revenue. But do the owners of these businesses typically own or at least the real estate? Because we see a lot of small businesses, right? That it's like, well, they bought the real estate. They're willing to lease it back. It seems like real estate is a major, major component of this business, right? You can't do what you need to do without it.

Is it typically leased? Yeah. So it's like 99% of the time leased. If this is a situation where they own it and that they're including in the 6 million cash flow, no lease payments to themselves, that that would explain why the price is so cheap, right? is, you know, you're losing a couple million dollars in lease payments. But that's not the norm. Normally, you're leasing from like prologis or one of the huge, you know, warehouse owners.

And I mean, you're, you're typically paying like a few dollars a square foot per year. Like, these are, these are not class A office space. Okay. $8.4.4. Yeah. All right. What about, what about this mention of the free trade zone on premises? For those of us who don't really deal with this, That seems like it could be a big deal from a duty standpoint. But does that tell you that they're, I don't know, what does that mean? What does that tell you? Yeah, it's a nice to have. You know, there's a lot of them.

So it's not like they've got some monopoly on that, but it is nice for certain businesses where you can do import the raw goods, not pay tax, consider the manufacturing the U.S. So for a certain customer segment, it's really, really valuable. And I assume that's some of the customers they have. It's a nice to have you. So it sounds like with this one, there's some potential wackiness in terms of the kind of number of locations they have, where they're located. But at first glance, like the multiple sounds pretty exciting. I guess the MO here would be to go in and figure out what they're not telling you from the listing standpoint.

Yeah, exactly. That's the cash flow that you'll see the actual statement. And it'll be like, profit one billion. It'll be like, wait, what? That would be my concern. Like, what were the actual numbers? But yeah, on paper, this looks fantastic. And you're going to get some wackiness with all deals.

So, yeah, I would explore further. What else could potentially be wrong with this? So maybe customer concentration might be an issue. What other things come to mind? Yeah, but they do say they have 52 million contracted. And they were 40 Vescer. So they grew 30%. So they must have added some new customers, right?

Or some business from existing customers. Yeah. So I guess the bigger thing is that it's a, It's a consolidating industry. So there's a bunch of buyers buying these up. So if you think it out 10, 20 years, there's probably more pressure from larger national firms against, like, these smaller regional firms. But I think in the short term, it's good space to be is owning in a consolidating industry, right? Because you'll be able to flip that to someone else who's consolidating soon.

So I think that's probably a positive rather than a negative. Aaron, are there basically just two kind of broad customer types? You have like big, you know, national brands and then the rest of direct-to-consumer e-commerce. Is that, I mean, is that an oversimplification that's just egregious? Yeah, like the 3PL business, I don't remember the number, but it's in the hundreds of billions a year. It's just massive. So everyone's like every product that moves basically goes through a 3PL at some point. So yeah, the mix is massive. Most companies are not doing this stuff in-house. Most companies are using a third-party. So whether it's, you know, your pharma companies are using third parties, your government is using third-parties, even, you know, most big manufacturers who are selling to like Walmart or Target or things like that, they're using third-party. So it's a massive market. What's the ideal customer, though? Like, I'm just thinking, right, if you were wanting to court, you know, either like a Walmart, right, or somebody who's

selling to Walmart full chain across the United States, I would think you'd have to have to have a huge critical mass, right? You're going to have to say, no, look, we are, you know, one to two day delivery to all their distribution centers. Like, so it's going to require some scale more than likely, or they're willing to piece it together. The other end of the spectrum, though, is like, hey, I own one, you know, one skew on Amazon FBA and I don't want to handle it. Like, that's the spectrum, right? Where's the ideal customer? And I know it probably depends right, on your business. But like, what are the positive attributes or the ones that you would go, oh, wow, once you get the detail, I now see who their customers are, what the composition of their

business is like, and this is sweet versus this is a total lemon. Yeah. So most companies are piecing it together. There are national players, but most of the big national buyers are using multiple 3PLs. So actually, it's good to get one of those that have only a piece of their business, because then if you're part of a roll up gives you opportunity to maybe sell in as you, you know, get them in other markets and increasingly international as well, right? Get them in Canada, get them in Europe, if that's where you're going. So it's good to have those big customers. The worst customers, as I'm sure you guys know, are the SMVs because they go under the most.

So you just get, you know, I don't know, 5, 10 percent churn every year just based on, you know, business shuts down. But once you're beyond that level, you know, they're all pretty sticky. And obviously, you know, if you're getting government or you're getting, you know, really large established companies, they don't switch. So you can, you know, keep customers for decades. How do you acquire customers? I know we're just totally going long on this one. But how do you acquire customers in this business? It seems like, I mean, B2B sales is hard in general, right? But like, are you, do you have salespeople at Shapiro who are, you know, scouring the Amazon FBA listings and like pitching people cold? Hey, like, let us handle your 3PL. How do you acquire customers? Yeah, so we don't really sell to anyone doing Amazon FPA. It's not really our thing, but it's a lot of word of mouth and relationship. It's really hard to discern quality in the business, right? So therefore people rely in reputation. And so it's a lot of, hey, I know this guy that did a good job for my business. And that's the big thing. And then larger customers, there's a couple of search firms that put out RFPs and sort of know all the big players. and we'll bid it out and get a competitive price. That's interesting.

That just tells me, right, like if you wanted to grow for 35% a year, year over year consistently over the next five to 10 years, it's going to be really hard to directly impact customer acquisition growth. I mean, I think you're right. You lend yourself to a very sticky customer relationship if you're growing by word of mouth. But if you really wanted to push the gas pedal on growth,

you probably have to have to do it via acquisitions, which is what you're saying you're doing. doing. Yeah, we're doing a bunch of other people are doing. Yeah, it's not a, it's not the sort of business where you're going to put up, you know, triple digit annual growth rates once you have any sort of scale, right? But the stickiness is good and the churn is low. So you generally can't have both of those, right? We're fast growth and sticky. Yeah. So, Aaron, are you telling me that ship bob is losing their ass? The, they're not growing virally like that? I mean, I think shit bob has a hundred salespeople. Um, I have three. So,

You know, crazy. And they're not that. I think they're two times bigger than us. Not that much. Not 30 times, maybe three times. So they're just throwing a lot. I think, yeah, they're just spending a lot on sales and marketing. That I think is a scathing indictment of their sales team or really a gold star for you and your team.

Either way. Let's move on to, let's move on to deal too. Yeah, sorry. I'm going long on this one. No, you did great. You did great. Bill over now. All right.

So I've got the next one. I've got to be a little. toy on this because I did sign an NDA. But this is a, again, related business. This is sort of on the smaller end, but in the same vein. So this is what's called an FBA prep center. So to give you guys an idea what an FBA prep center is, if you run an Amazon brand out of your mom's basement and you're manufacturing in China and, you know, they're sending over a bunch of garlic presses or, you know, cheese graders or whatever that you want to sell on Amazon, and you can't have ship to your mom's house, you know, but because they're coming in big boxes, right, on pallets.

And you've got to open up all these boxes and put individual Amazon stickers on every single one and then turn it around and send it to Amazon's fulfillment centers before you can start selling this product. So you can't do that. So you need someone to do that for you. Someone like Aaron, I'm not putting words your mouth of Aaron, but Aaron might not be as interested in that business because it's really kind of transactional business. Like the stuff comes in, it gets touched and laid.

it gets re-boxed and then it gets sent out. It's kind of in and out, like a whole truck in and out. So it's called FBI Prep. But there is a big market for this stuff because there's a lot of FBI sellers in their mom's basements that don't want to touch their product. So that's what this business does. So it is in the southeastern United States. They're doing like, you know, about 600K in revenue and cash flow about 250K.

and they're asking a little over a million dollars for the business. So it's about 4x valuation on this FBA prep center. They've been in business for about seven or eight years. The owner is absentee, just like the last deal we discussed. It says that they've got, you know, the owner has permanently moved away. He's not coming back. He's got management team on site. It says they've got about, you know, kind of 200 clients of which seven to eight of them are

recurring clients. So I think he's probably only, he's done work for 200 people and but really only does recurring work for kind of seven or eight people. That is a very low retention number. That is a crazy low retention number. Yes. Yes, it is. I will tell you though, their revenue has grown very, very nicely.

It was about 200k in 2018. It's about 500K in 2020. It's tracking for about, you know, almost 600K in 2021, at least. as of when I had spoken with them a couple months ago. So it is growing. You know, Aaron, I'm interested, you know, that's about all I have on this one. Relatively small business, priced about 4x, FBI prep. You know, Aaron, are you familiar at all with this FBI prep industry? Like, do you have opinions? Yeah, yeah, for sure. So a couple things. First of all, how far is it from the nearest major port, do you know? Not that far. It's kind of in the North and South Carolina area.

So the nearest major port would be Charleston. So a couple hours. A couple hours. So that's good. Okay. So that's good, right? You want to be near the port. I would assume real estate is relatively inexpensive there, right?

Yep. Those are really, and then labor, again, is going to be a lot cheaper than, say, northern California, right? So those are really the three ingredients that go into that success, right? Why is the port? Sorry to interrupt, but why is the port proximity so important? Well, the shippers, when they're importing, most of the stuff's coming in on containers. And if they have to truck it more than, you know, a few hours, the fees,

the fees keep going up, right? So that's just one of the costs that go in. So even though it's not a direct cost by you as the FBA prep company, it's a customer cost. So if you're further inland, that's an additional cost that they're going to bear and therefore they're going to go somewhat closer to port. But two hours is good. That's not a problematic amount of time. So that's That's good. So I would have thought also you would want to be in proximity to one of the intake centers. Yeah. You definitely would.

Is that important? Because I think Texas only has one and it's in Dallas, I believe. Yeah, I assume there's one there, but Bill, do you know if there's intake facility in another? So there is one about an hour and a half away from where they are. So that's not terrible. Yeah, because near the ports, that's what Amazon tends to have centers near each port. So, yeah, so location is good. I mean, basically the business is, so the bad part of the business is there's no moat.

Right. So it's purely a cost and quality decision. And the cost factors are the distance, which we covered, the cost of the storage. Because the way the business typically works is you're not sending necessarily everything out the same day. So you might get, because Amazon is really strict limits on how much you can send in. So you might get a container in, but Amazon's only going to let you send in. a quarter of that, right? And then you got to wait a couple of weeks and let you send another quarter. So you need to store that product and you will charge a super competitive,

right? If you're charging more than, you know, $12 to $15 a pallet on that business, you're going to start to become uncompetitive, right? And if you get, if you're paying for California real estate, you have to charge more than that. And now you start losing money, right? Versus if you're somewhere where real estate is cheap, you can actually make a few dollars at $12 or $15 a balance. So that's good. And then it's a super manual process. Like it is a zero tech, basically just full human labor, open it up, put a sticker, put a sticker on each product, put it back in the box, close the box, but you're on the truck. Often these containers are floor loaded, so you're literally taking out one box at a time instead of pulling out pallets if your vendor in

China is not nice to you. So tons of manual labor. So you need the access to that labor pool that's willing to do the work and it's going to be cheap because, again, that's how you're arbitrage in your business. So it sounds like it's good from those sort of checks, all those. The biggest issue with the business is it's not a recurring business, right? So you got to constantly be getting new customers and there's nothing really inherently sticky about it. So if, you know, you buy this company and then the next day someone opens up next door that's like 50 cents cheaper, there's really no reason to use you instead of using them, right, other than, you know, relationship, those things. So that'll be the downside. Do you think there's a little bit of

it's sticky because, okay, well, I got to explain to this new guy now. you know, how to box and label, you know, my, my garlic presses and send them back in. And, you know, there's, there's a little bit of just like pain in the ass switching cost. You know, and if you're trying to run a brand from your mom's basement, right, like, you were trying to, like, you know, not think about this business too much. So, like, if you're FBI prep guy, like, the price is fair and, you know, he turns it on time and he doesn't screw up, like, you know, are these guys so price sensitive that they switch for a couple bucks or is it more, you know, as long as you hit this, and the SLA is in the prices market, you're okay.

Yeah, I mean, I don't think there's the teaching is probably just like a one-page PDF that you just got to sort of send to the new center. Like usually it's pretty simple because it's going back in the same box that went in, right? Unless, I don't know. I mean, there's some that are doing more assembly. This is fascinating because you guys, I'm sorry, Aaron, I don't want to interrupt you, but you guys sit on either end of this, right?

And Bill is like, you know, he's used to probably getting his rear-inchued, you know, on, hey, this label wasn't exactly right and we're sending something back or it didn't meet some kind of compliance. And Aaron, you're like, this is just something you can, like, from a process standpoint and a system standpoint, like, make sure it's done correctly. But like, you're on either side of the transaction right now. I love, like, it's, you know, hey, this is like, switching costs to me feels real. And Aaron, you're like, no, no big deal. Yeah. Yeah. Well, I'm not, I am in general less of a price sensitive person and more of a processed labor time sensitive person. So like I would rather invest my energies to grow my business rather than save a penny on sticker application.

Right. But I know everyone is not like that. And Aaron, you probably have a lot of customers who are on the other side of that coin. Yeah, it's just, you know, you look at the numbers and how unsticky the business is. And that seems to me like that's one of the problems. The other problem with hitting your SLAs is it's a very inconsistent business. So containers show up when they show up. There is no way to schedule it.

So especially a business this size. I don't know how many employees they have? Seven. Seven. Yeah, seven employees. Yeah, seven. So there's going to be days where three containers show up and like you're not going to be able to offload them, box them, you know, sticker box and back, put them back on a truck.

You just can't do it, right? And then there's going to be other days where you did all the work and there's nothing to do, right? Because it's just a, dealing with 40-foot containers typically. It's a lot of work per unit and you just don't get that many units in a week. So you probably have a mix of, hey, sometimes of like paying people to sit around and do nothing. And other times I'm paying OT and getting yelled out by my customers, why you're not doing it faster. It's like hard to deal. Yeah.

It strikes me that this is a business where scale really matters. You know, if you're only doing three containers a week and you don't know what days they're going to show up, you know, that's pretty tough. And you get the dynamic you discussed. If you're doing 300 containers a week, you know, it kind of, it might tend to average. out. So I could see. So actually the reason I looked at this business is because we have some excess capacity. So I was thinking, you know, is this something we could bolt on? You know, so then when we have some downtime, we can spread that labor over all the stuff we already do plus this, you know, like a lot, like a product line or service line really expansion. So like do three, would a three PL look at

this as attack on Aaron or would three PL just say, eh, we'll launch this. Like we don't need to buy this. I think most of the big 3PLs actually just don't do this at all for as a standalone business. So they'll do it for existing merchants just because you need to solve the whole business case. But as a standalone business, it's one of the lower margin components. So they tend to shy away from it. And that's why there are no, I can't think of any mega business in this line. Right. Like can you think of anyone who's really doing this at scale?

Not really. But there's a thousand little ones. Yeah, there's a lot of little ones. So I wonder if this is one of those things where it's a good, small business, but not a great big business. Because the weird thing is, you know, we're taking biz by sell a little bit, you know, here at their face. But he says his margins are, his EBITDA margins are like, or his cash flow margin. He doesn't say EBITs. He says his cash flow margins are 40%, which is pretty crazy.

So he's cash flow in a quarter million dollars and a little over a million in revenue. Or sorry, so 25%. Wait, wait, no, I'm wrong. a little over half a million in revenue, 250 a cash flow. And he's asking a little over a million bucks. So, you know, that, it just, it doesn't track, right, Aaron? Because, like, typically these businesses are a lower margin than 50, 40, 50%. Well, the one dealt out throw in there is if the owner is the guy doing the sales, right?

And he's got these relationships where he's got the business from sort of his network. And he's, you know, not considering himself as a cost. I could see that, right? it's always hard to tell with these really small businesses the owner can do so much yeah that's true what risk is

what risk is there for big chunks of this individual business being done you know on the China side I mean that's what we that's what we did for our our fireworks business when we were importing

we tried to push so much of the stuff to the Chinese and have it just show up in the container ready to go right and it seems like stickers and some of the other things and in the packaging or things that, you know, I wonder why it's being done by high-priced U.S. labor,

or is that just such a small part of what these guys do that it's really inconsequential? It's a good point. And everyone's trying to push it that way, so for sure. The one advantage you have in the U.S. is Amazon has these really strict limits, so you can send them the full container, so you need someone in the U.S. who can sit on. What's that? Like buffer it, right?

Because the Chinese just want to send a whole container seal. later. Yeah, yeah, and it's much cheaper, right? You don't want to deal with like LCL. So, yeah, so that's the one thing, but that could go away that really has gotten very strict with COVID. They used to be much looser on the limit. So if they go back to a looser number of restrictions, then yeah, that's a legit risk where you could then just start going straight from China to Amazon and this business doesn't serve a purpose. Yeah. Well, I mean, the way the fireworks business evolved is we would get a container in of 80 different items and it's 20 different cases of them and the next one shows up with the same 80,

all that logistics got pushed to the Chinese side. And again, like, these are explosives that are sold on the side of the road. It's a totally different business than this stuff. But it was something that came to mind in terms of how this stuff works. Yeah. And Bill, do you get your vendors doing the stickering and all that stuff? We try. Yeah. So at Elements Brands, we do almost everything domestic manufacturing. So in that case, obviously, it's not going to get, we're not going to ship it to China, get stickered and ship it back, right? So. So anybody that's domestic manufacturing, you know, still might have a need for this. Although we try to push as much as possible of this type of prep, you know, we do it in our

facility. We're already doing this for all of our brands, right? Captive, right? So that's why, you know, I originally looked at it. We're already doing all of this captive. Could we just do this for third parties? But still, we try to push it back on our manufacturers. Because, I mean, why would I want to do it if they could do it?

If it could just show up stickered. A lot of them don't want it because it's not their business. They're manufacturing laundry detergent. They're not FBA preppers. A lot of them don't want it. The other thing that I will mention, this is maybe a side point. But I bet there is a non-zero amount of customers who really want to do this in the United States because it allows you to print made in the USA on the package. Because if you bring it into the United States and like touch it enough, you know, in the states, it suddenly becomes made in the USA.

There are occasionally depending on what you're importing can be some super. super weird but super consequential duties differences based on whether you're bringing in like finished product or raw material. So if you could bring in what looks like raw material, then kit it into finished product, you might be able to save a bunch on duties. It's very specific to what your harmonized tariff codes are. But there's weird quirks to importing that might be applied. Yeah. So what I would think for you as a tack on business, you would have to look at if they actually have a sales element that's helpful because you don't need to, the labor. You don't really need the understanding of how to do the business. What you need is the

customers. And if those customers are not sticky and the sales is done by the guy who's leaving or gal who's leaving, then probably just might as well invest that money and hire your own sales team and just do it yourself. Yep, exactly. Our whole thesis here was to close the facility and just bring it all to Charlotte. Like we didn't need any of their labor or their building or per process or anything. It was purely just, can we buy the customers, the cash flow and the sales organization. for $250K is the offer. Yep, pretty much. What if they're really good customers, though?

Well, I mean, what if they're large and contractually sticky? I mean, maybe, right? Yeah, yeah. And it's not a crazy high price, right? Right. Right. So I thought this was an interesting one. Thanks for helping me to break it down, Aaron.

It's a great example, Bill, of your, you know, buyer business fit because I would never touch something like this, you know? And, like, Aaron also, right, is in something that's very tangential to me as an outsider. and he's like, I would have no need for this. But to you, it's like a, it could be a slam dunk. So it just reinforces that point. Yeah, I could take a ton of cost out of this. And it can be basically a gross margin flow through.

But well, I mean, there's a lot of this labor is in gross margin. So, you know, I could take a lot of the rent out, you know, on some of the overhead. It's really just the power of not only buyer business fit, but add-on acquisitions that are, that you can leverage your cost base, you know, to make more money. All right. Cool. I think that's it for this one. We'll let Girdley wrap it up with our sponsor. Yeah, and then definitely want to give Aaron a chance to talk a bit.

But yeah, so financial clarity is sponsored for today. And thanks to them. So reach out if you're in the market for cloud bookkeeping services. As a small business searcher or anybody like that. So they're good people and not just because they paid us to say that for sure. So talk to them. Cool. So Aaron, thanks for being here, man.

You were super awesome. You're a great follow on Twitter. know, in terms of the audience of acquisitions and artists, which is growing nearly exponentially, and it's not because of our faces on the art. But what could we do for you? What's the best way that the group of us could support you or follow along in a majority? What can we do? Yeah. So anyone who's in the e-com space, we help you guys. So shephero.com. And if you want to reach me, I'm Aaron at shephero.com. That's super cool. All right. Well, great job today, guys. What was Is that like an 11 out of 10 or did it?

Well, a 10 because of, you know, your horrible misstep at the beginning. Oh, come on. The rest is so good. After 40 of these, I'm getting okay at it. Aaron is really cool having you on, man. Thanks for doing this. It's really cool to kind of peek behind the curtain, so to speak. Yeah.

Thanks for having me. It was fun. Pretty magical. Pretty magical. All right, guys. Thanks a bunch. Good job by everybody. We'll talk to you.

Talk to you soon as I click the stop button.