Acquisitions Anonymous - #1 for business buying, selling and operating - Two Manufacturing Businesses for Sale - Brent Beshore - Founder and CEO at Permanent Equity - ep61

Episode Date: January 20, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://landing-newsletter.acquanon.com/----Joined this week by Brent Beshore (Founder and CEO at Permanent Equity), we talk about two businesses for sale in the manufacturing space.----Thanks to our sponsors this week:MoreNow.co: We help owners build a high functioning, experienced team by leveraging the top manager/director talent in the Phillippines. Go to morenow.co and fill out the form. Or email [e-mail]. Mention this pod for 20% of your first hire.CloudBookkeeping.com: With over 100 years of combined experience, the team at CloudBookkeeping provides dedicated financial management services and valuable insights so you can grow your business! Give CloudBookkeeping a call or visit their website at CloudBookkeeping.com to learn more about their custom solutions to strengthen your business.-----* 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#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 Bill Snell, one of your co-host. Have a fun and exciting episode for you today. Join by co-host Michael Gurdley and Bill D. Alessandro. And then we have a special guest today. A good friend of mine, Brent, be sure. Brent, thanks for joining us, man. Hey, thanks for having me all.

Appreciate it. We have a couple fun deals to talk about. But before we get into those, Brent, a lot of people, I think, who listen to our podcast, know you and no permanent equity or new adventures and now permanent equity. Will you give us just kind of the brief kind of thumbnail sketch of who you are and what permanent equity does? Yeah. It's never done for, Brett.

Yeah, the thumbnail definitely gives a different overview than probably reality on the ground. I mean, I was an entrepreneur at a law and NBA. That was in 2007. And then accidentally bought a business after starting a couple businesses and then bought some more and then raised outside capital. And we have 11 businesses now on the portfolio. We have operations, I think, in gosh, it's like 20 some states now. And yeah, almost 1,000 employees. So it's scaled up a decent amount.

So other than that, we're just kind of bumbling and stumbling down the path, trying to learn, trying to be humble and keep doing more of what we're doing. it's awesome man well i'm really really glad you're here i've always enjoyed uh bret and i used to work together and brentz got uh i don't know what the adage is you know like a 30 second mind or a 60 second mind that uh buffett munger talk about but brent's got a really great really great lens at looking at companies that are for sale and being able to i've seen it because we've disagreed in the past and i've been like no no this is going to be good and brent's like i'd be willing to bet you that this specific thing is going to be the problem and it ends up up being the problem. So Brent's got a really good gut when it comes to these things. Before we get into

our two deals, Michael, you have a word from one of our sponsors? Yes. Our first sponsor today is cloud bookkeeping. And this, this Brent is an interesting sponsor because it's actually my neighbor that I met because of this show. He lives three blocks away, but I didn't know him before. Always be closing, Michael. Always be closing. Well, he even bought me lunch. And he's like, okay, well, I'm mailing you a check to be on the sponsor. So his name's Charlie Perrin. They run a cloud bookkeeping service called Cloud Bookkeeping that he does with all U.S.-based talent.

And basically, it's just the idea of you're a small business owner. You need to do your books right. I think Brent and Bill, we've all looked at businesses where the books were just a total disaster. And it costs in terms of the amount of value you can get when you go to sell the company. And so, you know, cloud bookkeeping has a staff of a bookkeeping. Bookkeeper is all sponsored by, or supervised by Charlie and his people, and they're a sponsor today. So if you're in the market for services where you want to get bookkeeping and so off your

plate so you can start to focus on your business, Cloud Bookkeeping is one of our sponsors today and definitely one that I can tell you their bookkeeping is great and also their company at lunch is fantastic. So thanks to Cloud Bookkeeping for sponsoring part of the episode today. All right. Thanks, Michael. Appreciate that. And if you're considering selling your business, you should hire cloud bookkeeping before you sell your business so it is easier for someone to buy it. So our first deal today is a commercial roofing services contractor with over 13 million in sales and 70 plus employees. They're very proud of that. They put it in the title.

They have 13.6 million in revenue, $1.5 million in cash flow, and they are asking $6.6 million for it, which is a 4.4x multiple of cash flow. They service the areas of Western Connecticut, the lower Hudson Valley, five boroughs of New York City and Long Island. So can't wait to do roofing in New York City and Long Island. They have 71 employees of which 11 are office staff and 60 are full time in the field. They have about $800,000 of equipment. And the reason they're selling is that the owner wants to retire. So they say they do commercial roofing and sheet metal company, which has considerable repeat

business with general contractors, construction managers, and owners. They've got a diverse client base that includes national retail, hospitals, pharmaceuticals, military universities, private schools, government, and New York City government agencies. With over 13.5 million of sales in 2020, they get 70 employees. They specialize in commercial roofing in the western half of Connecticut, the lower house and value in five boroughs of New York and Long Island. They do new roofing and also replace existing roofs. The breakdown varies from each year, but in 2020, they did 75% of sales from new construction, and 25% was re-roofing. And they've got expertise in membrane roofing, metal roofing, custom sheet metal work,

shingle slate and tile steep slope roofing, below-grade waterproofing, plaza pavers, and an ornamental sheet metal work. I can't wait for mills to tell me what all of that means. So they got 70 people, as they said, the roofing and sheet metal division, this is important, is 100% union. And they started a solar division in 2020, which is 100% non-union. The business landed a national account servicing approximately 200 stores, strip malls, and shopping centers in Buffalo, New York to Baltimore, Maryland. The solar division was started to be more competitive for that account.

It seems like it's complementary with their roofing business, but solar panels on the roofs that they install. The solar business did half a million dollars in sales with about 50%, 45% margins in 2020. So this national account that just signed, they're really excited about, has about 20 million square feet of roof. and their plan is to use their non-union solar division to put re-roof about 10 to 12% of that and put solar on there, sounds like. So they expect to triple 2020 sales in their solar division. They also just landed a $2.7 million private job in the solar division. It's weird because they kind of are mixing roofing with solar in the solar division.

I think they're probably just trying to put work in that business because it's non-union, calling it the solar division when it also does roofing. So they basically say it's priced at 6.6 million, poised for large growth. They grew by 20% in 2020, and they say they're going to do that again in 2021. They got a well-trained workforce and the owner wants to retire. They've got 16,000 square feet out of which they run their operation. The seller's willing to stick around for a year or two and train you. Looks like they've got a director of operations in place. And, you know, so other high-level people, director of biz dev, chief estimator, accounting, appliance officer, safety manager. you know, foreman in each of the states, et cetera. So it does seem like a relatively well-built-out organization. So I don't know much about roofing, but I'm excited to learn. What do you guys know about roofing or what piques your interest about this deal? Yeah, I mean, so we've looked at quite a few different roofing organizations. What I would say is we put these in the category of building envelope. So building envelope being kind of everything that encloses a building in.

And I think that they all kind of tie together. This is certainly what we call a subspecialty of the of the building envelope business. Other sub-specialties would be maybe some, you know, wall structure, waterproofing would be one, foundation would be kind of another thing to think about. But this is definitely kind of in that category. You know, one of the things you've got to be careful of with building envelope is they are probably the highest liability businesses. So one of the things I'd want to go back on this business and really dive into is what is the history of lawsuits or threatened lawsuits? And this is something. something that is incredibly prevalent in this industry. And so typically what happens is something

leaks and they can't figure out where the leak is or they can't figure out what caused the leak and everyone gets sued. So the architect gets sued, the people who put the roof on get sued, the construction firm that built the walls get sued, the foundation people get sued, the waterproofing company gets sued, everyone gets sued. And then basically they negotiate and and try to get, you know, chunks of flesh from everyone. So insurance is incredibly high in this business and escalating quickly. So in terms of when I always, when I look at a business maybe to take a step back, I always think about, you know, what are the things that could cause this business

to look more attractive on the surface than it really is? Or potentially what could cause this business to look less attractive than it really is? And I would say, you know, it sounds like a long-time owner who's run this thing for the long, for a long time in a certain way. So probably somebody else is not going to come. come in and run it better in the short term, would be my guess. This is a business that's heavily relying upon

people and systems. This is not a technology business by any means. And so probably there's not going to be a tremendous amount of upside on the improving of the actual roofing itself. And the person you're bringing in to replace the

CEO is probably not going to do a better job of actually running the business towards the core value that they offer. And so I would be concerned about the sort of the legal side, I'd be concerned about the, the, how they do their whip accounting. So whip accounting is, you can make a construction business look as profitable as you want in any sort of given year, maybe even a two-year period, to be on the length of the, length of the contract and length of the work. So I'd really want to dive into that. Obviously, union is,

it can be wonderful or it can be difficult. I think that it's easy sometimes to say that non-union businesses are better than union. I think they just have different pluses and minuses. I would say, you know, if given the choice, we'd probably go non-union, which is add the layer of complexity. But we've seen some union businesses that are fantastic and the union provides a really good value. I think it's like anything else, a union's not a union's not a union. Like they're very different how they operate and the value that they actually really add. Some are incredibly extractive and others are not. So, you know, I would say we'd want to really dive into that.

Geography for both taxation and regulations rough. Northeast is tax-heavy and regulation-heavy, and it's definitely difficult to run labor-intensive businesses. Actually, it's difficult to run labor-intensive businesses everywhere. It's more difficult to run them in the Northeast. And so I'd also want to look into sort of what past labor issues that they had, where are they getting access to labor? Obviously, their union, so they're coming up through the union shops. How are the union? Almost have to do a back diligence on the unions there and understand kind of what's the union pipeline for keeping talent full. What is the inflationary pressures from the union look like in terms on wages?

And kind of, you know, what are the set aside requirements for union in those areas that really constitutes your, I guess, potential revenue base would be the way to look at it. Outside of that, I mean, the new stuff they're doing, to me, I put a zero on that. So everything new is difficult, even if it sounds promising. I don't think it's a negative and I don't think it's a positive. I think if they grow the way that they say they're going to grow, it's going to be brutally difficult and they probably have the opportunity to lose a tremendous amount of money or make a bunch of money. So I think it could be good or it could be bad.

I think it's going to be how and all it's managed. But that doesn't excite me too much. I mean, it just adds another layer of complexity, which makes the leadership transition that much more difficult. So if you look at what would be the real pivot point around this is what leadership really can step into place. Usually in these types of businesses with this size, there's not a bench of talent there that's really top notch. So what you typically find in these situations is an owner who's really great. I mean, obviously built a business that's doing quite well and he's done it for a long time. To have somebody step into those shoes is difficult to start.

To have somebody step into those shoes and manage a legacy business and manage a basically, a startup, completely new growth business, is like unheard of. So my guess is one of those two is going to suffer and suffer pretty badly. And that's kind of why I zero it out as it could be great. But my guess is if we were interested, it's a little too small for us. But if we were interested, let's say it was a bigger organization, we'd almost say to the owner, why don't you go run that other thing for two years while being in concert with us? And if it goes great, then we'll buy it from you. We'll sign a contract to buy it from you. It's sort of pre-agreapon price, but we're going to buy the legacy business and let's work on transitioning that and set

up incentives there. And then why don't you go do your thing over there and sprinkle the same magic on that new business that you have on your current business? Because we don't think that we're going to be capable within a short period of time to transition successfully the existing legacy business and basically create a startup that's bolted together. Yeah. It's interesting whenever I see these kind of two businesses in one, somebody in a core business line and they're expanding into something, it's usually one of three things. Either A, the core business is terrible, and they need to move into a higher margin line of service or whatever it is, or B, shiny object syndrome on the part of the owner,

which is very real and have fallen victim to myself a lot of times. Or sometimes growth has capped out in the core business and they need to go somewhere else to keep growing. Very rarely is it that, oh, there's just money lying on the floor and we're just going to start this whole other division to pick it up. The focus thing, as you said, Brant, would worry me here. So it looks like this business runs at like 12% SDE. Is that kind of typical for a roofing contractor like this?

Is that high, low? What should you expect? Yeah, I mean, I would say that that's probably about what you'd expect for a business like this. Specialty construction, you're typically here to run between sort of 9, 10% on the low end, maybe up to 15% depending on how well managed and sort of how margin works out. I mean, when you get larger, it typically levels out. You'll have some great projects that you have high margin on. You'll have a couple every year that you don't make a bunch of money on.

When you're smaller like this, it's more volatile. So it wouldn't surprise me if you look at the history of this organization for it to go from, you know, almost a break-even up to $2.5 million down to $1.2. You know, it's going to bounce around a lot just based on the sort of the lack of anchoring with size. And you mentioned that, you know, say for permanent, this. is too small, right? You have your investment mandate, I'm sure, but it sounds like you were also talking about and maybe you drill in. What changes when, say, somebody gets to 25 or 30 million in revenue as an attractiveness of the level of business versus where this guy or this business is, right? It feels like you're talking about the bigger the business gets, the more stable it is.

What other things kind of shift? Yeah, well, I mean, so the way we think about this is basically every time you double in size, you're going to break all your systems. So you just got to prepare for that. And so a business that has that has double or tripled maybe from here is going to have to gone through that rebirth multiple times, which makes it a more durable organization. So they're going to typically take the best of what they'd had before, and they're going to jettison the worst of it. They're going to rebuild their systems around sort of the new needs. They're going to demonstrate an ability to recruit and retain talent at a far higher level, and they're going to just sort of by necessity, have a more robust leadership team and systems. And so the issue is just,

Do you want to spend the time and money and heartache to build those things or do you want to buy them? And so that's why businesses that are smaller typically go for a lower price is because if you want to grow them, which I think everyone does, I mean, there are the exceptions, but I like to say small businesses, don't say small on purpose. You know, you want to grow them. And so you're neither going to have to go through the pain and suffering to help them grow and break all the systems through it or you're going to be able to buy it. And so what I would say is I'd be worried from going from, you know, sort of the cash flow that's here to double, I think would be a major transformation for this business, which for us, adding another million and a half dollars to our, you know, sort of system-wide free cash flow just probably wouldn't be worth the pain and suffering that we'd have to go through to help them through that process. So that's why for us, it would be buying something that they had already, if they were doubled in size from there and they were at $3 million in cash flow, that'd kind of be on the lower end. We'd love to really see them more like $5 or $6 million in cash flow. and having gone through that sort of doubling twice, that would lead them to break all their systems again and again and come out hopefully a lot stronger.

Is there another kind of part of risk that I smell here is kind of that key man owner risk? It seems like this guy has done a good job of hiring below him, at least it lists in the SIM that they've got director of ops, they got, you know, foreman in all the states. I would worry sometimes a little bit, though, especially in the Northeast where this business can be so, you know, the construction business is so union,

It's so kind of who do you know, it's so relationship driven. You know, I would want to really understand is this guy winning jobs because of who he is. He's been in the business forever, probably knows a ton of people, lives in the area. A lot of repeat clients, he said, I would really want to understand, make sure that if I buy this business, I don't come in on day one and all of my customers are not interested in buying roofs from me anymore because I'm some guy from out of town that's not the owner. Yeah, Bill, I would definitely say that's something concern. I would say it's less a concern in kind of a way, though, that you framed it.

I don't think he's probably winning based on relationships. He's probably winning based on the ability to get things done and the reputation to get things done. So I don't think that probably it's like, oh, hey, you know, I really like Bob. And Bob and I go play golf every, you know, every week. And, you know, I know his kids, right? It's probably not that level of relationship where I think you can get into some other B2-B type relationships that have that level of sort of personal connectivity. I think it's probably just more of a matter of like the unions trust that they're going to give them good work.

It's worked for a long time. So you've got it, you sort of got a client on the union side, right, which it makes this more complicated. And then you've got clients that are basically reputation based. I mean, at the end of the day, especially in the environment that we're in right now, if you can get good work done, no one cares. I mean, everyone's going to put up with a lot of garbage, to be honest, if you can just do good work. It's not going to come down to did you play golf together or have dinner together or not. But I think that it is a valid concern. to be concerned about the reputational risk that would come with a transition, especially depending on who bought this business. If it was honestly, this is one that would be better for like an individual buyer, I think, to step in. Kind of similar how Mills has done it with his business, I think it would be a really good example of that, you know, and slowly transitioning over time and sort of having that, what we call trust transfer occur, whereas versus like a firm that came in,

I think there would be a lot of skepticism if even a like a quote unquote, small private equity firm came in to buy this thing. Yep. How do we feel about the, it looks like they're playing union games and like they're like when the union side gets busy, they're giving the solar business some of the stuff. That just feels weird to be.

Or is that, is that just normal that this type of stuff happens in specialty contracting? It's a dangerous game. I mean, I would say it happens a decent amount. It's a game that we don't want to play. It's a game. It's a game that's fraught with risk,

kind of on both sides. and you end up, you know, alienating everyone, I would say that there's definitely risk there. I'd say the thing that's most risky, if they'd been doing, if they've been walking that tightrope for two decades, I'd be less concerned about it. They'd figure it out a way to make, kind of make it work harmonize it. The fact that they are just getting that division off the ground. And it's like, you know, I can see where the thought process. Okay, look, solar goes on roofs. We know roofs. We're on roofs all the time. Like, people know us as the roof people. Like, let's go and get into solar. Hey, we don't want to, you know, we have bottlenecks with our existing union. And it's more expensive. It's more costly.

Hey, I got an idea. Why don't we go non-union? This will work out great. And by the way, projections are to the moon and rocket, rocket, rocket, rocket, you know, that type of thing. I mean, I think there's, if you haven't done anything, excuse me, if you haven't done, if you haven't done anything. If you haven't done something, it always appears to be far easier and more straight, straightforward than it actually is. And so, you know, the first question I would ask is fantastic. This really, you know, excellent projections. I mean, if this goes great, you know, good work. when in the past have you done something like this? And they might say, oh, well, you know, we tried something seven years ago and typically it didn't work out, but let me tell you why.

And what you're going to find is typically a pattern of repeated failure outside the core business, or you're going to find that they've never really done anything outside the core business and they're setting themselves up for, you know, an expensive lesson. They're listing the solar stuff as being attractive. Is that, is that true? Like, do we think that like solar installations are really going to boom in the Northeast and Hudson Valley and stuff? Or does that feel like a pipe dream? I would say if a company had a deep expertise in solar and had some sort of durable, competitive advantage, and, you know, I'm not anti-Solar. I just don't think that, you know, you saying, hey, one day we popped up our head and said,

solar panels go on roofs and we know roofs, so we're going to get into the solar business. That doesn't demonstrate to me any sort of sustainable competitive advantage. I think at best, if you're going to use a financial term, they're going to be exposed to some beta of the solar market. But there's no sort of core expertise or core systems or technology that they've developed. I mean, we've looked at probably, I don't know, 80 to 100 solar businesses. And all of them that we found, I mean, maybe there was one or two in there that had a little something unusual. But most of them are just pure beta plays, their commodity businesses. they're going to go up when there's government incentives and, you know, there's a lot of demand and sort of green field in that space, and then they're going to slow down or go under as soon as there's not. And they're pretty levered in terms of operating. So, you know, if they go down 20% in revenue, their profits are going to go down 80%, things like that.

That's an interesting market because it seems like, at least on the me being more of the marketing, lead gen guy, on the lead gen side, all of these solar companies have popped up. up that are like sending people door to door. They're doing all this digital marketing. They're running TV ads. You know, put solar on your roofs. And I think the average consumer, you know, doesn't really see it. But to me, it smells like, oh, well, they're just going to then, you know, they're either asset light or they're going to hire an actual solar contractor to do the work.

There's clearly some sort of government incentive here. They're going to securitize the loan they're going to offer you and sell that off. It's just the explosion of that has been nuts. I actually think we should do one of those businesses on the show later. Brent, I'm just curious, if you've looked at so many solar businesses, where is the value being extracted in the solar supply chain? Is it on that side, the lead gen, and not so much on the installation side? Well, I mean, I think that when you have a tremendous amount of government incentives and you're sort of distorting the natural demand in the marketplace. I mean, in essence, if you want to think

about it, it's just a government transfer between, you know, the government and people who want to get solar figured out, right? Whatever that is, like, you know, wherever you are in the value chain, I think you can be extractive all the way down. I haven't seen so many solar companies that are durably profitable beyond like, hey, there's a bunch of demand because in this geography, maybe there's local, there's regional. The amount of layering of incentives for solar has been so crazy. I mean, there's some markets where you have like special like districts that are set up that have incentives. And then there's incentives that are layered on top of that citywide. And then beyond that, there's state incentives. And beyond that, there are federal incentives. So you're like

quadruple dipping all the way down the chain there. And then there's incentives. And then beyond that, you're like, quadruple dipping. And so when you look at stacking all those things together, it has an incredibly distortive effect on what actual demand is. I mean, I don't know how many people wake up on a daily basis and say, you know what I want to do is focus my life today on trying to figure out how I put solar panels on my house. Like that just, it doesn't seem like something that is going to be like a big demand. Now, if you say, hey, look, like, it'd be nice if we could be, you know, if the government's

going to pay for us to lower our electricity bill by 80%. That sounds pretty good, depending on how tight money is. and depending on how you think about the environmental impact, which I think is far less clear than maybe people expected to be. But depending on how you look at those things, I think that's where you start getting incentives. If you pull all the incentives away, I doubt the solar industry looks the same. And so in essence, you're making a bet on, you know,

kind of who's going to be in political power at varying different levels, depending on the incentive programs. You're making a bet on technology. And, you know, one of the actual, probably the pluses of the solar business is if you get people to install what I'm going to call gen 1 solar power and gen 2 comes out, and then you get to go and re-roof all those houses with gen 2 solar power, and then you get gen 3 that comes out that has to be like sort of magnitude order better. I mean, I think that that's actually a bet you could make that I'm not in position to make that bet,

but I think that's something that you could probably say is, hey, I know, I've done my research on the solar business and I think that it's going to follow sort of the same computing laws and we're going to have an exponential over the next 20 years, exponential growth in the efficacy of solar panels as being a technology. And so we want to get into this business because basically we can create, you know, triple or quadruple dipped customers over the next 15, 20 years and go back to the same ones over and over again and say, hey, by the way, we installed your solar panels on your house two owners ago.

And this new gen has come out. If we just pop these things on, you're going to pay us 10 grand a day. But if we pop these things on the existing chassis that's on your roof, it's going to save you, you know, $15,000 over the next three years or something like that. I think that's actually a pretty powerful business model. It's kind of like one of the best business models I ever heard of is just slapping the stickers on the HVAC units at houses is like the highest returning investment you can make. And in fact, I heard about a business one time that their entire sales and marketing strategy was doing free in-home audits of the HVAC units. and what they would do is it was very surreptitious,

but they would actually take their stickers and slap them on top of the old stickers. So the owner never knew. Even if they didn't get the business, the owner would then call them back and they would even get the business later. Yep. I had a guy out to fix my garage door

and they did the exact same thing. They slapped a sticker right there next to my opener with their phone number on it. Yep. And guess what? I called him back two years later. It works. It works.

It works. It works. Yep. All right. Let's maybe move on. to our next deal. But first, Michael, will you do our sponsor? Yes. Yes. So this is a new sponsor for us. It is called Moore. And it's run by Greg and his team. And they are a business that helps people build Philippines-based teams. So basically, they are looking at how they can help

U.S.-based businesses who have jobs that can be done remotely. And I think we're all familiar with how hard it is to hire right now in the U.S. And so what they do is you can not only hire basic, you know, virtual assistance, which I think a lot of people are familiar with in the Philippines, but also kind of business process outsourcing to folks that you have there. Actually, this morning I was talking to an entrepreneur. He only has two people in the U.S. and everybody else is in the Philippines.

And you wouldn't even know it, you know. And he was talking about how he has started to not just, hire kind of virtual assistance overseas, but people have higher caliber as well. So like marketing coordinators, biz dev, all of that is starting to get done. So Greg and his team are first time sponsored today and businesses more now.co. So take a look at them. They have different models where they work with folks. And then if you mention acquisitions anonymous as a new customer, you get 20% off your first hire.

So they have offered that discount to our folks. So go to more now.com or email hire. at more now.com to pursue that. Yeah, I just want to add here in my industry in e-commerce, Filipino outsourcing especially is very popular. I know whole e-commerce businesses, my friend has an office in Cebu in the Philippines with 25 people. He has a lease.

He's built his whole business over there and just raves about the work ethic of the folks in the Philippines. It's something about their culture is just embedding. great work ethic, you know, high integrity. You know, if you kind of sniff around as far as kind of like work cultures you'd like to hire into, Philippines, you know, continually kind of comes out towards the top. So for whatever reason, I hear of a lot of people outsourcing Philippines. We have a couple there too, so you should.

Speaking of the Philippines, have you guys ever been to Jolly Bee? Are you familiar with this? No, what is Jollybee? I've heard of this. So you got to, it will change your life. Jollybee is a Philippines-based. fast food restaurant. And they just do,

if you have a moment, go find the... Brett leans in immediately. Tell me more. Go find the Anthony Bourdain visit where he goes and sings the praises of Jollybee. And it is basically take

everything that could be composed in an unhealthy manner and make it even unhealthier. And they have all of these just fascinating flavor combinations like peanut butter spaghetti. Like I'm just, that may not be a real thing, but that's what it reminds me of.

Like, jelly on hamburgers. Like, they do all this crazy stuff that together just turns into kind of this magical thing. And we have a Jolly Bee here in San Antonio, believe it or not. They've started to open these in the U.S. And if you're ever, like, visiting with a Filipino, like, ask them about Jollybee. And, like, I was on a cruise once. And the Filipino, like, steward was like, yeah, whenever I go ashore, I just buy seven days worth of Jollybee and it's all I eat.

It's just a fascinating thing. So if you ever have a chance, watch the Anthony Bourdain video of Jollybee. It'll blow your mind. And you will relate to your Filipino employees that much better. Or you could seem really out of touch. I don't know. Maybe. Either way, it's fine.

Okay, so sorry for that digression. Deal number two. All right. This is you, right, Michael? Yeah, this is it. Cool. So this is one from generational equity, which is a brokerage that we've come to respect for, well, having some interesting stuff. So it's a business out of New England.

It's a precision custom optical component manufacturer. The business size is six and a half million, and they do 650K in EBAA, and that looks like 2021 projection. They grew a little bit over 2020. They did 6.3 million in 2020 revenue and 450K in EBIDA in 2020. So the business is six decades old. It's based in New England, and it's headquartered there. It is a leading manufacturer and reliable supplier of custom precision optical components servicing the semiconductor, biomedical, high-energy, laser, aerospace defense, and many more diversified industries. And the company offers state-of-the-art glass policing, glass machining, optical assembly,

and full metrology services on a variety of materials in different sizes. They sell to various industries in the U.S. and Canada, Europe, and they have an active base of over 100 customers with 75% coming from repeat business. They claim that the customer base is stable and diverse and a key asset for the business going forward. Great reputation, high quality services, good employee team, yada, yada, yada, typical stuff that you see in a SIM. They use a variety of equipment such as service grinders, vertical milling machines, CNC machines, interferometers, CO2 laser engraving, mechanical inspection equipment, and much more in addition to designing and building their own custom machinery and

tools to fulfill the needs of customers and reduce lead time. Business is about 80% U.S., 20% international, 75% customer retention rate, and most of their customers' top three categories are semiconductor, commercial, and high energy user. They claim to have some benefits here to owning this business, moats around brand name and reputation. It looks like they have a number of international certifications, ISO 2001, stuff like that. Like any teaser, they claim to have significant growth opportunities, international reach, and they have over $4 million worth of equipment and custom build equipment to enable future

expansion, expanding number of shifts and stuff like that. And feel, the broker feels like they have high barriers to entry. Getting into this type of stuff would be difficult for somebody else to come in, especially considering this thing's been around for 60 years and the customer relationships that they have. Team-wise, they have 17 people working. in what they call optical, eight in production, 10 in quality control, two in maintenance,

seven in design, and one owner. So this looks like, this looks like a hub and spoke management situation where the owner, I don't see a lot of layers of management here,

but team-wise, that's 25, 35, looks like about 42 people. So that's it. So we have this precision custom optical component manufacturer, six and a half million revenue, 10% profit,

even of margins. What do we think? I hate this business. Wow. I hate this business. So first of all, if after six decades, you're making a half million dollars, there's going to be some challenge that is at least one, if not two or three, they're going to be really abundantly obvious.

Once you get to know the business, major defects, I would say the return on assets is super concerning, right? $4 million of net assets is what they're claiming. They probably have a lot higher level of gross assets. they're probably using some form of leverage on their balance sheet, which means at best their return on assets is around 10%. That's a really challenging position to be in. I mean, look, that's the gravity of any business as you return on assets.

So if you're going to grow this business, there may be some operating leverage. I mean, the fact that they added $200,000 of revenue between 2020 and 2021, and they're claiming $200,000 of EBITDA means that it's 100% operating leverage there, which I would strongly, I'd be shocked have actually held under scrutiny. But just even, even it's, you know, $650,000 of EBITDA on $4 million of assets. I mean, let's talk about the actual sort of post-close or post-tax post-reinvestment return, assuming there's not a huge working capital change is like probably three or four percent to the owner.

So, you know, every time you want to grow this business, if you want to add another, you know, if you want to say double in size, in order to add. another half million dollars of revenue, you're going to have to add sort of five million dollars of capital to the business in one form or another. I mean, that's just the makings of a terrible business. And God help you if you got to replace your four million dollars of machines. Right. Well, that's what my question would be is, I mean, if you've got four million dollars of assets, unless you're gearing up for something major that hasn't hit yet, I mean, it's not obvious from this that that's the case. I mean, this is actually a business that might

actually not make money and may have been been popping along for six decades with actually not making much money because I think the owner's probably got into this weird like it's too big and too important not you know to shut it down but it's also like it doesn't really do anything so you just get stuck in the treadmill so I would be very skeptical I don't understand also actually what they do based on the description here so I would have to get you know much more deeply into the actual like where they are in the value chain and who's going to them for what services because it seems like, I mean, this is always the catch-22 of a sims. Some sims say, we do everything. It's like, well, great, you do everything. That means you do nothing, right? It looks like it's such a wide,

you know, amount of things. I mean, they're doing glass polishing, but they're also doing optical assemblies. Like, I don't know how, you know, those things kind of fit together. And so what I would say is it could be one of these sort of commodity relationship type businesses, Bill, on the last one that we talked about, you said, hey, I'm concerned about the relationships. This is actually one where I'm actually concerned about the relationships. because if you're doing a lot of different things and they seem to be kind of disconnected or only loose connected,

what that typically means is you have a really good relationship with a couple of people and they say, hey, can you do this thing for us? And they say, sure, yeah, yeah, we'll do that thing. And so over time, over six decades, you sort of add to a hodgepodge of things. And what that ends up doing is, you end up being mediocre at everything

and there's really no expertise there to scale. So again, I would drop this thing in a heartbeat. I probably wouldn't pursue it just based on kind of what I read there and the return. estimates, but I'm happy to hear you guys if you disagree. I don't like the return on assets either. The thing that if I wanted to find reasons to like this, right,

you could charitably look at this and say, okay, they got 75% repeat customers. Is it possible you've got, you know, they make some special thing and maybe it's a little nichey and maybe nobody else is interested in doing it? So, you know, you have to get really comfortable about the quality of those assets and make sure that you didn't need a ton of capax to keep your little annuity going. But is it maybe possible they've got some sort of niche here. It's never going to be huge, but they've got repeat customers forever. Maybe. I don't know.

What's also kind of jumped off the page of me that was interesting is on the list of certifications, they have this one called International Traffic and Arms registered, which I had not seen before. And I googled it and it's for export of firearms and military equipment. So now I'm now I just want the book to see what it is, right? So I don't know, you know, they mentioned I they didn't like mention that government was a huge end market for them, but I wonder if this 20% of revenue is coming from exporting some sort of rifle scope or some sort of optical something. So there's maybe some interesting stuff there. I also look at,

you know, certifications like that that are probably not very easy to get at all. You know, and then I sort of wonder, A, is it transferable? But if it is, can you leverage that to export other things or sell, you know, maybe that's the moat. You could leverage that certification as a moat if you wanted to get psyched about this business for some reason. You know, those are kind of the things to jump off the page for me. Yeah, I totally agree as is. It looks like a big turd. I think the interesting thesis that I had when I first read it was, you know, and showing it, I showed it to Red Zeller, who's rolling up non-farist foundries, which we made. agree or disagree is a good business or a bad business. The way he talks about it seems like a good

business. And it felt like there were some parallels to what he's doing there. And I showed this to him and it was interesting because I think the only way this gets, this deal gets interesting at all is if you go in with a thesis that it's underperforming significantly. And Reg talked about their output per employee seems very low. It smells like they're probably pricing poorly and taking on Brent. Like you're talking about some business that might not even be good. at all. So, you know, I saw this and kind of liked it from the perspective of, okay, it sucks as is, but like, is there some unlockable value here in terms of being able to go in, like, start pricing stuff the right way? I mean, one of the things Reg does when he rolls up these non-fares foundries,

like he goes in and, like, they do like a, you know, per customer P&L. Like, should we keep doing this, harmonized prices and stuff like that? And especially, you know, with a business 60 years old, you've got to imagine there's some non-profitable customers in here. Totally. So I see this more as a, like, value add from a real estate perspective. So I think that's the one reason to get excited about it. Could you take that $4 million in equipment costs that they have sunk in and turn this into a million and a half to $2 million like profitable business?

I don't know. I don't know. That's, I think, the one way to look at it. Yeah, no, actually, I mean, maybe we could talk about the six-decade thing. I mean, I said after six decades, if you're, you know, if you're at the size, that means there's sort of major deficiencies. But after six decades, if you're still in business period, it means there's typically something there.

So what I would say is, you know, if I were the, you know, son or daughter or nephew of this business owner and was like gifted this business, I'm sure there's something to work there on. I think the question is for any acquirer of all the places you could spend your time and attention of all the uses of your expertise, is this the place that you really want to, like, rescue and go deep in? and getting involved in, you know, a quagmire, which this thing looks like to be a quagmire,

you know, you could lose 10 years of your life pretty quickly in something like this. So I think that's, you know, I would not be, I mean, look, it's clearly it's making money and it's making good living for the owner and kudos to them. I don't want to be derogatory about that at all. And, you know, it sounds like it's probably a second generation or third generation business. I would just say as an acquirer, I'm not sure that's the, that's the hill I want to die on. Yeah.

Yeah, this falls into the category of businesses where you're like, as you kind of said, man, if I got this for free, maybe, right? But there's just, it doesn't underwrite. Like, there's no way for you to buy this business for any meaningful amount of money. And you just know that, you know, at least half or all those $4 million of assets need to be refreshed over the next five years also. Well, and let's just talk about price here for a second, right? Because we got to talk about price, right?

I mean, are you really going to sell your $4 million of assets at a discount? I mean, how much of a discount? So if the business is making, let's call it, really normalized earnings of $200,000 or $300,000, which is what it sounds like maybe at best we could expect from something like this, are you really going to pay 20 times for this business? Right. What are you going to pay?

Are you going to pay four times that? You're going to pay $700 or $800,000 for a business with $4 million of assets? I mean, the only way that you make money potentially in this business over the long term is you buy it for $500,000, $800,000, and then you go and liquidate all the assets, right? I mean, basically, that's just a liquidation shop. I mean, I don't think that's something that a normal acquireer wants to buy and grow something. So I think that's where it's just these businesses get in these weird cycles where, again, the momentum takes them.

They need to reinvest in order to stay in business. There's never really enough cash. And I have no idea what the debt on this business looks like. I'd imagine they're using, you know, debt of some type to be able to buy those assets. So again, just a, it's a quagmire. Yeah, totally hear you. Well, I do think it, you know, I've been, I've been talking. talking on this thing, I call it the Girdley thesis, is that the only deals we're going to be doing

in this cycle of the market are ones that at first glance look like total crap. And you could go, because, you know, like, we did a deal this year and it's like everybody passed on it because it looked terrible. But like once you kind of got underneath the hood, like, it was really good. So it does pass at least the first part of the Girdley test. The problem is a lot of times the second half with the Grid League test is, yes, when it looks like crap, it is actually crap. So this may be one of those. I love it. I love it. Yeah, I mean, you make a good point, Michael.

I mean, and that's, I hope what people are getting out of this podcast a little bit is how to look for what the gems that might be hiding under the surface. Because in this market, it used to be that you could go into private equity and you could create alpha just by being disciplined, right, and only buying good businesses. because lots of people just bought any businesses that came across their desk, you know, were weren't as smart as you, right? So you could just create alpha by being a good chooser of businesses. Now, the good businesses go for crazy prices, you know, in this, maybe it's cyclical,

you know, maybe it's maturity level of private equity. I don't know. But these days, it's pretty hard to get a good price on a good business. So at least, you know, my experience is these days you've got to develop a differentiated thesis on an asset, something that's got some hair on it and you think you've got the right razor to shave the hair off of it. So when I see stuff like this, I find myself looking at a lot of things that I go, yeah, this is probably terrible, but there is maybe a 10% chance, you know, there's something here. And if there is, that's where the alpha is, right? But then

you've got to be smart enough to walk away from 98% of them, I guess. Really true. I'll be curious to see what this business, if it transacts at all, right? I think Brent, you make a really good point and what it would trade for. You may have an owner that just looks up and says, like, oh, I think my equipment's worth $4 million and you're only got to give me two times pro forma EBITA for this thing or, you know, the best offers they get look like that. You know, then what do they do? I don't know.

Yep. These sale processes kind of end in stalemate a lot. I do not envy the broker who's got a seller that says, I want $10 million to this business. It's my life's work and the buyers that go, I'll take it for free. Or how much you're going to pay me to take this off your hands? Right. Right. I do wonder what happens to all these businesses, because there's a lot of them out there.

Yeah. I don't know. You find a cousin or something willing to come in and got nothing better to do. Goat out of the bus station, find somebody. I don't know. Or a desperate searcher, right? I've seen some of those recently. Yeah.

Yep. All right. I guess we can wrap it up. Michael, you want to play us out? Yeah, yeah. Well, so thanks again to our two sponsors today. So more, so Greg Carey and his team at morenow.com, build your team overseas in the Philippines. And then Charlie Perrin's cloudbookkeeping.com.

So for your outsourcing your bookkeeping services, especially run QuickBooks for your small business. So Brent, one of the things we really want to do, and you've done a great job today, talking a bunch, and it was fantastic. you know, we have a pretty steady and good, good loyal audience for the podcast. What can we as a host or as an audience do to support you? What would be the best thing that comes to mind? I hadn't seen Mills's Beard in a long time. So I would just ask that maybe we could, we could have a naming campaign for Mills's Beard. It looks like it should have its own name at this point. And so maybe we could as a community come together, you know, put forth some names that would be honoring of the, the, as soon it seems like the small, furry animal that has attached itself to Mills's space and really just give some encouragement to it. So that would be my ask of the community. That's amazing. Reply to us on Twitter when we release this episode in the thread with names, proposed names

for Mills's beer. And if, you know, one of the things I'll say about Brent, you know, this is our second time getting on a call together. There are people that are great and super nice people on Twitter and social media and then you talk to them and they're jerks. And then there are people that are jerks on social media and great and great vice versa. Brent is one of the special people that is just a wonderful, loving, nice human being and a pleasure to be around in both. So definitely recommend his social media and Twitter. It's an inspiration for me and I know Bill as well. So definitely check him out there and follow their business permanent equity.

Lots of cool stuff going on. absolutely thanks for being here on guys awesome appreciate