Acquisitions Anonymous - #1 for business buying, selling and operating - Wall panels for fun and profit. 2300% growth?! - Acquisitions Anonymous 208

Episode Date: July 7, 2023

Mills Snell (@thegeneralmills),  and Heather Endresen (@EndresenHeather) breakdown a wall panel shopify store doing some serious growth.  Check out the listing: https://quietlight.com/listings/13802068/-----Thanks to our sponsor!This episode is sponsored by HoldCoConference, the conference exclusively focused on HoldCo Entrepreneurs and Executives. This conference is where Holding Companies meet, learn, scale and grow. From tech to Home Services, Holdco Entrepreneurs from around the globe will be meeting in Cleveland this September 18-20th in Cleveland Ohio.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Welcome to another episode of Acquisitions Anonymous. I'm Heather Anderson, and today we have a really interesting deal that we talked about, Mills and I. It is experiencing a rapid growth rate. It's a really interesting product that people use to decorate inside homes and commercial properties. And there's some really unique features about the seller you're going to want to hear. So stick around and tell us what you think about this episode. This episode is sponsored by the Holdco Conference.

This is a conference exclusively focused on holding company entrepreneurs and their executives. It is where holding companies meet, learn, and scale and grow. From tech to home services, Holdco entrepreneurs from around the globe, will be meeting in Cleveland this September 18th to the 20th, 20203. And it will be there in Cleveland, Ohio, which has me super excited, also because I will be one of the speakers and attendees of the conference as well. So I encourage you to check out their website and consider joining us there. The website is holdcoconf.com.com. That's H-O-L-D-C-O-C-O-N-F.com. And get more details there and sign up to join us. See you soon.

Well, welcome back, everybody, to another episode of Acquisition's Anonymous, Mill Snell, joined by Heather and Driesen. How are you doing, Heather? I'm doing great. It's a beautiful week. The sun has finally come out in Southern California. We were getting kind of sad, but it came out. So, doing great. It's rained all week in South Carolina, which is really good for roofing on one hand because everybody who's like, maybe my roof will get better on its own. They never do. It continues to leak. And they're like, hey, that quote that you gave me, I think it's time for me to replace my roof. But also, my family's at the beach all week this week. And somehow, three hours away, they've had amazing weather.

But then here in Columbia, it's been raining nonstop. But that's the way it goes sometimes. Crazy. And roofs do not heal themselves. That's good to know. I did not know that. They don't. It only gets worse.

And then it gets catastrophically worse in the building floods. And people are like, well, you know, I could have spent $100,000 on my roof, but now I have to spend $100,000 on my roof and I have to, you know, repaint and put carpet and mold remediation and all that kind of stuff. Crazy. Yeah. Good, good times. Well, we have a fun deal today. We say they're all fun. But this one actually, I think, is kind of fun.

So I'm going to read it. I'm going to share my screen. And for those who are on, for those who are on YouTube. And this one is kind of interesting. So it's a quiet light, which is we look at a handful of their deals. And this is a Shopify site, premium wall paneling products, multi-channel, trailing six months, year over year, 496% revenue and 2,282% SDE growth. I mean, they just put it all out there right away. They are really proud of how quickly this thing is growing.

The revenue, which I'm guessing this is maybe, I don't know if this is trailing six month or if this is last 12, but the revenue that they're stating is $1.1 million and $434,000 on income, which I'm guessing is net income. Maybe we'll see if that's like an SDE number. And they're asking it two and a half times multiple. So the asking price is just over a million dollars, a million eighty seven dollars plus inventory. So it's about one times revenue, two and a half times net income or SDE. It says, created in October of 2021, this Shopify business imports semi-customize, privately branded wall paneling products and sells them through their website to a healthy mix of individual end users, which is 60%, commercial customers 23%, which is like interior

designers, contractors, and developers, and then businesses directly, 17%. That's like hotels, restaurants, and clinics. They've experienced massive growth from day one with the last six months year-over-year revenue and SDE growth at those 496 and 2200%. Business is 100% automated. Product is shipped to their 3PLs in both Canada and the U.S. They're a leader in the marketplace and enjoy a higher domain rank, 49, than the two largest players in the U.S. So maybe they are based in Canada. They have some key differentiators from their competitors, namely that their pre-finished products utilize real, natural walnut and oak veneers, and they're available in up to

nine-foot links. So this is kind of a logistically challenged e-commerce drop ship type business. They require no post-purchase finishing or maintenance by the consumer, whereas their competitors mostly use unfinished wood or foam materials like laminate, vinyl PVC, or engineered wood. The seller's products are considered to be premium and appeal to the high-end clientele. There are multiple pathways for growth, which include one, increasing the focus of demand generated, paid advertising. The seller currently only runs Google ads. And then two, launching adjacent products in the home renovation and acoustic panel niches. And then three,

focusing on B2B sales. While it sounds unconventional for an e-commerce business, they've had regular orders of over $25,000 and it fielded increase to supply commercial projects with wall paneling budgets over $500,000. That would be 50% of their current sales. The seller is highly organized, and beyond the typical training and transition,

he's created a comprehensive notion database for the new owner with all standard operating procedures, FAQs, response templates for common questions, testing reports, diagrams, reference videos, and other helpful resources. This has been revised consistently over the past nine months to use training new employees, and the seller's only 25 years old and ready to cash out and travel the world. I love this. This is awesome. And then here's the advisor, Chris Wozniak, which I think we've had some of his listings before.

Wow. I just gave you all that at once. Heather, what do you think about this? Do you want to go into the wood paneling business? It sounds really intriguing. especially the ending where he's 25 years old and wants to exit already. That's a great story. I think that the rapid growth is something that you just don't know whether it's sustainable.

And I'm really curious about what this product is because it's obviously very popular. And when something's very popular, I wonder, especially with consumers, being heavily in the mix of customers, I wonder, is it a trend? you know, is it a trend that could die out? But there's obviously something very unique about whatever this looks like. I would really want to know what it is exactly. I like the fact that it's a young founder because he has automated everything. You know, if you look at businesses that were founded by folks my age or older, and you find that they're on paper still and there's all those kinds of problems.

So I think it's kind of cool that this one has kind of done everything. everything in a digitized way from day one. And you'd imagine a 25-year-old running and starting a business that way. That's pretty efficient. But I really don't know if this is sustainable. And even at a two and a half multiple, well, plus inventory kind of concerns me. You know, what inventory? How much inventory?

That's always a question. Especially when it, you know, it says that, you know, this material, we don't necessarily know where they're sourcing things from, but that they are, you know, they're getting them ships. They're never taking possession, you know, in their own warehouse.

They're going to a 3PL provider. And if these are, you know, what I think they are, which I'll pull up, I'll pull up a screen share of this, because these wall panels are kind of interesting. They, you know, you think about like green walls,

you know, where people will put plants and stuff like that on a wall. This, there's a couple different configurations of this, but I think this might actually be the, business because there's walnut or oak is kind of the way that they talk about it on, you know, on this particular website. But even if it's not this specifically, these go up to

nine feet in length. So I'm wondering if this could be it. But these are, you know, aesthetics that are not necessarily going away. It's not like, you know, I don't know, something that's new and novel. I think this is kind of definitely higher in. This is different than just putting wallpaper up and it's different than, you know, a mural that may kind of be like more of a fad. I think one of the issues on the B to C side is, you know, this is something somebody does maybe once in their house and in one room. They don't do it in every room and they don't do it like, you know, every quarter or every year. It's intriguing to me from a few different angles. One of them is that, you know, these panels are not, it's a really nice price point, the average order value,

and I think there's probably gross margin there. It's also, because it's a big, like a large format item, and they're, you know, between seven and nine feet in length, people aren't clamoring to get into the space because the freight associated with it. And I think that that kind of helps, you know, be somewhat of a moat to them. Interesting. Well, now, I think you're probably right. That's probably the product, if not the company itself. To me, and maybe this is just because I'm older, that does still feel like that could be trendy. That does still feel like something that can go out of fashion.

You know, there's sort of that natural aesthetic is really in. You know, anything with natural wood is really popular, but it changes, you know, I don't know. So, and the fact that it's so much direct-to-consumer, are there people just remodeling themselves with this? And then is that discretionary spending, right? Right. So that's the next thing I think of is do we really need to put in a wood panel room if, you know, times are tight and we're spending more on interest and, you know, food? So I think it's maybe a little bit of discretionary. I think that this seller probably has some really great marketing skills, you know? And then I think also can the buyer needs to be able to replace that and maybe enhance that and add to it. And so the right kind of buyer is probably pretty important here. I'd also want to know. How many skews? How many different products do we have here?

I get concerned as a, you know, when I think about putting financing on a deal, I get concerned about not enough skews, not enough diversity. So again, then, oh, could that one type be not popular again? Or could someone else come in with a cheaper price point? And then they've got nothing to sell here. So like, where's the franchise value in a business this young, you know? It's tough to say. Yeah, and I think like what we've seen and heard and talked about some in the past with this type of business is, you know, if you doesn't seem like they're selling on Amazon.

So they maybe have a slightly, you know, unique distribution model. And I think a slightly differentiated product, it sounds like they're talking about, you know, them being, you know, in the top maybe three, but but somewhat differentiated from their competitors, then it's only a matter of time until, you know, somebody's knocking, you know, knocking you off. they are, you know, they're not manufacturing this themselves. So somebody is making it. They're acting as a middleman and they've got, you know, 50%, you know, call it roughly 45%, you know, net margin. That margin is somebody else's opportunity. And they may say, well, you know, my opportunity costs is lower and I'll do it for 30% margins. And instead of selling it for $149, I'll sell it for, you know, $119. And then all of a sudden, you know, unless you have some kind of unique, you know, vendor relationship, with those folks. I guess I do, one thing I like about this type of product is that it is kind of DIY. You know, these wall panels are typically unitized. And so instead of going to a lumber mill and buying, you know, the walnut or the oak and milling it down and then putting it on a panel and then putting it on the wall,

you're just, you know, one transaction and the wall panels come in and you just measure your wall and say, it's this wide and I need this many panels. and it's kind of a little bit more turnkey, but also, you know, people who do this, they feel, you know, you feel really accomplished because you did it. And it was kind of an efficient way to do it. There's some other, like, similar products that I've seen. I'm a woodworker, like, by hobby. And so another one of these products that I've seen a lot is these like hairpin legs. It's like a metal, a really simple kind of sleek metal leg that you could like build a coffee table or build a dining room table. and you buy the legs, and they're very inexpensive.

They might be $100 or $200, and then you can put whatever tabletop kind of on top of them you want. And you go, look at me, I'm really crafty and I made a table when literally people will just take a big chunk of wood and screw these legs on it. And you've kind of quote made a table. I think there's an interesting appeal to things like this where you're empowering people and you know, you're making them feel good about themselves. But you're kind of extracting a nice little margin. And there's a value exchange that happens for making it easier for them and still making them feel really capable and handy. Wow, what a great perspective that is. And you're right.

Anytime someone can sort of make something themselves, it's a totally different type of product or do something in their home and feel handy and show their friends that they did that. I think that's a really, really great point. I have friends that are in a similar business. They've been in that business for many years where it's columns, balustrades, handrails. And a lot of it is this kind of ready-made product that we put some rails up on one of our kids' rooms that came from their business. They grew really quickly doing sort of e-commerce back when it was really new. And they've grown and they've done really well. But I think about a company like them and how big they are now, and they could easily get into this if they're not already in it.

In fact, I'll probably go to their website after we get off and check and see if they are. selling those kind of wood panels because that's what would worry me is just a bigger competitor could kind of wipe this business out. Yeah, they find your vendor. They already have a website. They already have, you know, the eyeballs coming to their own website. I, you know, I like one of the things they talk about is acoustical panels and sound panels are really, really interesting. They are ridiculously high. Have you ever, have you ever run into these? Like you go into a restaurant and, you know, you see these kind of things floating from the ceiling. And they look like, you know, basically a box or a really thin box with carpet wrapped around them.

It's one of those things that is technically very simple. You take a rigid foam board and you wrap carpet and you staple it or glue it to it. And it's incredibly high margin. The people who do it, you know, because it's it's a little bit finicky. You have to hang them the right way. Hang them on the wall. Hang them in the ceiling. But the kind of return on investment for it in the instances that I've been familiar

with is really dramatic. I mean, I've been in spaces with landlords or property owners where they're like, you know, I really want to rent out the space in my venue, but the acoustics are so bad that people walk in here and, you know, it's basically worth nothing. I have to give it away for people to use it. And then they put sound panels on the walls or they hang them on the ceiling and all a sudden it can be kind of an Hoover Flow space or, you know, functional space. And you think about that as a, as kind of a relative value transaction. If all of a sudden somebody can rent a room out for $1,000 a day or $1,000 a night, they may not, you know, they may not be too scared to spend $20,000 putting acoustical panels up that you can make them yourself, but it's a lot easier if you

just say, hey, I need, you know, I need 50 panels that are two foot by four foot and they come to you kind of pre, you know, preassembled to a certain extent. So it's interesting that that's on their kind of list of ways to grow because I could see that it's very similar. You're shipping something this very similar. It's kind of semi-preassembled and probably to a very similar user base. These might be people who are putting in kind of on the B to C side, people who are putting in kind of their own home office, right, or their own Zoom setup or a podcast studio or whatnot. But like we talked about with the demand, one question for you, Heather, when you look at this from an underwriting perspective, especially when it's grown this much, usually when you see a business

with this much growth, they're pricing in on the valuation, pay me, you know, pay me for the growth trajectory that I'm on. In this case, I don't feel like they're overreaching. They're just saying, you know, pay me for the growth that I have right now, the growth that I've achieved at a two and a half times valuation on net. They're not saying, in a way, in a roundabout way, they're not saying, I'm going to continue at this growth rate. They're acknowledging that. I would agree with you because it's kind of a weird time to exit. Not only, we ask a lot of questions about the seller why they're exiting, and sometimes age does come into that question. I don't think I've ever heard of a seller that was 25.

And that's growing and doing well. So it is kind of strange. And I think you're right. They're sort of acknowledging that, okay, you know, I got this thing going. You can buy it for a reasonable price and do what you can with it. know, but it's not probably going to stay like that. Well, certainly nothing goes at 2,000 percent or whatever the number was. And as far as financeability, it's probably really not financeable because of the short history.

You know, anything under two years old is just kind of not bankable, period, regardless of what they're trying to do. And, you know, I think, so that's the other side of it. This needs to be a cash buyer or a strategic buyer. it's not a lot of potential folks that could do this one because they can't get financing. And I don't think the 25-year-old wants to carry paper on his world travels. I thought the same thing, honestly. There may be a scenario where this person's saying, you know, okay, I realize I'm asking somebody to pick this thing up.

And it could either be a rocket ship or it could be a falling knife. And maybe they've been prepped or maybe they, you know, in some way, shape, or form are ready to, you know, say, all right, give me half a million dollars down and I'll carry a short duration note on the remainder. You would hope so just to acknowledge the fact that, you know, this thing, there is a lot of risk and uncertainty that has to be priced in. You said that anything with less than two years of history is that, do you see that just on the SBA side or do you find if a lender's going to do a deal and they're going to keep the loan on their balance sheet? Is there the chance for some more flexibility? or is it a hard and fast less than two years? It actually gets harder when we get outside of SBA.

I mean, in some ways, SBA is very rigid. We have these rules that sometimes don't make sense. And you think, oh, gosh, it would be nice to go conventional outside of those rules. Well, that is nice. But outside of SBA, the credit guidelines get a lot more tight. You know, the bank's credit criteria and credit appetite is much, much lower. So they want, you know, they want more things.

And usually time in business is a big one, just because we need at least three years to have a trend, you know, and two years just to sort of show that you can stay alive. So it's very hard to get debt for anything that young. Especially when you look at something like this that is, I mean, COVID has existed longer than this business. And so you can't even kind of contemplate what would this business do in a pre-COVID and maybe now kind of theoretically post-COVID environment.

You don't have enough, you know, enough reference points to. trend off of, like you said. Right. We just don't know enough. And so, yeah, cash and seller, seller note, that's it. Mm-hmm. I don't know that we've talked about it a ton in the past, but I think it's helpful to kind of talk about when what we're referencing, you know, SBA versus, you know, a bank financing

something themselves. Maybe double-click on that a little bit, Heather. And let's talk about, you know, kind of how that changes the risk for a lender and who's bearing that risk and why it would change the way that they underwrite it. Right. So it starts out with, there's a number of things that make an SBA loan a lot safer and better and more profitable for a bank because it's the profitability as well. So the SBA guarantees 75% of the loan. So if there's a loss, SBA, the government's eating 75% of it, the bank's only got 25%. Great. Number two, they don't have to hold capital against that 75% piece because they won't ever take a loss on it. Number three, they don't have to have deposits, the same liquidity requirements. aren't there, they can actually sell that 75% piece, and most banks do in a secondary market. It's not even on their balance sheet, and they still get a point servicing for that. So all in all, it makes the loan much more profitable, much safer.

And when you think about all that's happened in the deposit world with banks lately, something that you don't have to have deposits against and sort of self-liquidate, that 75% piece goes right off. That's extremely attractive to banks. So they would much rather be in that spot than lending without any protection and having to hold all the deposits. So the decision process is very different. There's a lot easier to get an approval with an SBA loan. The DSCRs might be lower.

They'll accept certain risks. Maybe the personal guaranteeing doesn't have to have a really strong personal financial statement. But when you go over to the other side, conventional, all of that changes. They want a more stable company. They want a lot more equity, a lot more equity. And it's not even good enough to have a lot of equity sometimes. It's where does the equity come from? Who are the sponsors?

If the bank doesn't know those sponsors and they don't have a great track record with that bank or with other banks, that might not even be good enough. Just cash alone isn't always enough. And just on and on, you know, it's really tough. And honestly, in the last nine months to a year, the credit markets for the conventional loans have tightened significantly. It is very hard. Everybody's, you know, facing a lot of challenges, even with what otherwise look like really good deals. The banks are kind of being super picky. So they'd much rather be in an SBA loan. That's a much safer place for a bank. Are you seeing that kind of across the size range spectrum? Is that true of, is that more true of half a million to a million

dollar EBITDA deals? Or as you move up market, you know, does that maybe change a little bit? Well, here's the difficult part. Anything below two and a half million EBITDA, there really is no conventional lending at all going on, not to speak of. It would be just one-offs. So two and a half million and up is all, that's the only realm of conventional lending. That's where it begins. And they'd much rather really be at three and a half. So that's why we talk about that, you know, deals that are too big for SBA, but too small for the conventional.

That's really a tough space. you know, an SBA can only lend five million. So, you know, there is sort of a lot of folks and myself included would like to see the SBA increase that $5 million to $10. So we could cover that middle space a little bit better. But right now, if you have a need to borrow on a cash flow basis of, you know, for a company that's less than $3 million, EBITDA, it needs to be SBA or you're probably not going to get it. Yeah, yeah. it's an interesting kind of conundrum for people to, you know, to try and solve for. And I think, you know, with this particular business, it's almost like the buyer, like you said, the buyer has to

have liquidity, you know, ready to put down in the form of equity. Or they probably have to have, you know, in addition to that, they have to have some kind of strategic interest where they go, oh, I'm already, you know, I'm already, you know, selling something that's kind of adjacent or similar. and this is not that much of a stretch. And, you know, I think anybody who's underwriting this is probably underwriting it to, you know, can it maintain? Can it maybe grow nominally? But, you know, maybe single digit or low double digit growth, not, you know, not the 496% top line growth that has happened.

It does kind of beg the question in scenarios like this where, you know, this person, part of the question I would want to ask them, the seller, is, why not just keep doing what you're doing? If you're not having to touch product, if you already have all these SOPs in place, if you have somewhat of a team, why not travel and work remote? And maybe you add a $100,000 worth of additional cost

associated with you kind of being more hands off and you still are netting, you know, $350,000, $400,000. And you, you know, you just kind of clip the coupon and you received the benefit stream for a couple years. and you're not in a bad spot that way, if you can't find a buyer for this. It seems like it could kind of continue on. Yeah, that's what I was thinking too.

The way this is set up, he can still be traveling the world. So they're, yeah, it's kind of curious as to why they're listing it at all. I agree with you. It's fascinating to me. There are people, and when I was in the private equity space,

we saw this a lot. There are people who are really good at going, you know, taking something like this from, idea to, you know, some scale. And I mean, I saw some that were, it was flabbergasting. It was 30 million worth of, you know, hearing aids. And they did it in like, you know, 20 months, like crazy kind of things, but they're really, really good at going from zero to something. And for a while there,

especially in the e-commerce space, there were a lot of people who would just buy anything, any business with something, you know, some scale there, even subscale. And so what you would see a lot of, I think, and Bill could comment more on this, is there were a lot of people who were just repeat, you know, sellers of these little things. You know, they spend 18 months and maybe they're doing a couple of them concurrently and, you know, just are constantly kind of churning out when there's buyers for those and not a lot of people who know how to take it from, you know, nothing to something. Kind of an interesting, you know, environment and ecosystem. Definitely doesn't last forever, though. Yeah, and that's what I'm kind of imagining with this seller. is maybe he knows that's what he loves to do.

He doesn't love the rest of it. And he'd rather just get some money and go, go enjoy some travels and come back and probably start something else up. And that would be interesting. Is there going to be a non-compete? Is he going to start something completely different? Because you'd kind of have to. But that's what I'm imagining this person is like.

But it's an interesting scenario. And, you know, I think it's unique enough that I bet he gets a bunch of, a bunch of, you know, interest, at least a bunch of inbound interest. And the valuation is, you know, I think reasonable enough that, you know, people aren't just dismissing it at face value saying it's not a unique product. You know, it's an Amazon FBA, you know, shower back scrubber that there's a million of or phone cases, you know, or something like that.

There's a uniqueness that I bet he gets a fair amount of interest. I just wonder, you know, who could get it across the finish line and do they and under what terms. Yeah, right. agree. Interesting one. All right. Well, this is a fun one. Any other comments on it? No. I would actually, I'm going to talk to my friends, though, and tell them to look at this listing and tell me what they think. I will say, I want to give them, like, massive brownie points for the fact that they reference this notion database. I mean, I am envious. Like, part of me wants to say, can I pay you, you know, $500 just to just to see this notion database because I love, there's some folks on Twitter who talk about, you know, and kind of,

broadcast some of their SOPs openly. And I keep looking at it and going, how many hours would it take me to do that for my business? And I know I need to, and I know I need to have folks on my team. We have 100 employees. Like, we're beyond the point of needing something like that. But it seems like it would be, you know,

a full-time job for a couple months to really do it and do it right. But yeah, that, that alone made me want to, you know, learn more. Yeah. Like I said, great that this person started the business this way from day one. Really, really great. Yeah. All right, well, good. Well, thanks, everybody. And thanks, Heather. This was a fun one.

Tune in next week and we'll have another fun deal for you to review.