Acquisitions Anonymous - #1 for business buying, selling and operating - We Found a $3.8M Elite Real Estate Network for sale - Acquisitions Anonymous 306

Episode Date: June 14, 2024

In this episode of Acquisitions Anonymous, we reviewed a fast-growing real estate coaching business with $4 million in yearly revenue and $1 million in profit. This company is growing at 20% annually and the asking price is $3 million. Should you buy it? Join us to hear our thoughts on whether this is a good investment.Thanks to this week's sponsor:CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.Learn how to buy a business.If you are interested in buying a business but unsure how to start, you should check Michael's Buy a Business Course:You will learn:• Build a thesis for the type of business that's right for you‍• Learn how to stand out in a sea of buyers• Create a working, scalable Deal Engine getting you leads• Maximize your chances of finding great dealsSubscribe 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]

And so what was interesting about this deal and to bring it full circle is in due diligence, we realize this company is giving legal advice. Yeah, right. I can see a staff maybe taking up a million dollars of cost here. Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm Mills Snell, one of your co-host. Me and Heather talk about a really interesting deal today from Axiol. It is a peer-to-peer real estate network.

for investors. And it is surprisingly large and surprisingly high margins, 6.8 million in revenue, 3.8 million in EBITDA. And we talk through what in the world does this business actually do? How do they convey that much value and get paid so much? And we talk about a lot of the kind of nuances of a membership model, especially one that's peer to peer, the moat maybe that's around that and also the fragility of it. We talk about is this business kind of follow the cycle or is it countercyclical when times are good? Are people spending money on this? Or do they wait until things are bad? then they were like trying to figure out best practices and how to drum up business. But it's a really interesting deal. We have a lot of fun talking about it, and I hope you enjoy the episode. Hey, Michael here, want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and can attest that he's a real human being and a good person.

And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner. So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your QuickBooks online set up in the right way and a number of things around payroll as well. So definitely know them and recommend them.

If you want to find out more about cloud bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie. I know many of you have and see if he can help you, make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast. It would help us. help Charlie know that we're supporting him as well. So thanks a bunch and cloudbookkeeping.com as the sponsor for today's episode.

Hells, how's it going? Heather, good morning. How are you? I'm good. I'm freezing. It's almost summertime in Southern California and I'm cold, you know. Yeah, it's inevitable. I just came down off of a roof not too long ago.

So I am not that way. It's pushing 90 degrees today. Oh, man. Yeah, we're just so strange here. It's very cold in the spring here. But I'm doing good. It's almost it's loan closing season. So loans are closing everywhere, which is great.

And people are getting new deals signed up. So yeah. For our listeners, we're recording at 10.30 Eastern Time. And Heather gets the award because she shows up at 7.30 Pacific time. Yes. And I can't even tell. I can't even tell that you just rolled out of bed. Well, I have a really good espresso machine.

So this is how I do it. That's awesome. Well, we have a fun deal to talk about today. I'll pull it up and share the screen and then I can read it. Let's see. This is an axial deal. And we've been doing these with a little bit more regularity. And they sometimes are like dated, but they're usually pretty unique and also a pretty good size,

slightly bigger than what we typically see on Bizby Cell or other. you know, other brokers, but this is a subscription-based real estate peer network with 56% EBITDA margins. It says the first peer-to-peer mastermind group tailored exclusively for high-caliber real estate investors. This innovative organization fosters collaborative relationships among its clients facilitating business scaling, wealth creation, and community engagement within the real estate sector. The key highlights are they had a pioneering concept.

It was the first of its kind. This peer-to-peer Mastermind Group revolutionizes the real estate investment landscape by fostering a collaborative ecosystem where clients pool resources, fund deals, and undertake joint ventures. So this is more than just, you know, like bigger pockets or, you know, a blog or something like that. By leveraging collective expertise and resources, clients achieve greater success and amplify their impact in the industry. They also say that they have a value-driven approach rooted in a commitment to value creation. the organization offers comprehensive coaching and training programs designed to support clients throughout their entrepreneurial journey from strategic planning to execution, clients receive personalized guidance and support tailored to their specific needs and objectives. Financial performance

with clients collectively closing billions of dollars in real estate deals annually, the organization demonstrates a proven track record of success and profitability. The existing owner has deployed capital effectively generating substantial profit in addition to the subscription EBITDA. market growth potential. The U.S. residential real estate market is projected to grow at a compound annual growth rate, a Kager of 5.7% between 2021 and 26, providing a favorable environment for continued expansion and success. They have high subscription retention.

They boast an impressive 90% subscription retention rate among premium tier members reflecting the value of satisfaction, value and satisfaction derived from its offerings. And then membership growth with an average annual membership growth rate of 20% The organization demonstrates strong momentum and a growing presence in the market. We got three years worth of high-level financials. 20-21, they did $3.2 million in revenue with $1.6 million in EBITDA. In 2022, they did $4.6 million with $2.2 million in EBITDA. And then in 2020, $6.8 million in revenue and $3.8 million in EBITDA.

And they say that they're looking for a sale, change of control, and they're in the U.S. based in the Mid-Atlantic. Heather, what do you think about this one? This is really interesting. First of all, I had no idea that these mastermind groups made money like this. Yeah. That's an eye-opener for me right there. And I love, of course, the margin, and of course it makes sense.

I'm a little, you know, I have a few questions. They're talking about obviously the real estate market. And it seems like it's focused on residential because they quote the K-G of the residential real estate market from 21 to 26. But I mean, aren't we kind of in a tough time for residential real estate transactions because of what has happened with interest rates? You know,

I feel like transaction numbers are way, way down, at least on the residential side for sure. Marshall has its own unique problems. But that would be my first, you know, thing I'm thinking. And I'm surprised then that the 23 growth rate was still there. You know, so they've got to be doing something right. Perhaps in bad times, you still, you need something like this even more than you do during good times. That's kind of what I was wondering.

Like, is it maybe counter, you know, cyclical? Like if you're super busy, you know, you don't have a ton of time for something like this. But when things are slow, you're like, I wonder what's working for everybody else. I really kind of need to dial into it. And it sounds like, I feel like there's a little bit of kind of wordsmithing going on here when they talk about their churn, you know, they're saying retention is 90%, which means their annual churn is 10%, which seems maybe a little bit higher than I would expect, but they say that that's for their premium tier. So, you know, good on them for having multiple tiers of this kind of

subscription model. But, you know, if the premium tier is, I don't know, $10,000 a year or something like that, maybe the basic is $500 a year and there's a lot more churn there. So I'd be, I'd be really curious about that. Yeah, good catch. So there's probably lower tiers that have a lot of churn and you try to build up your membership base to pull the folks that get good value there up into the premium. That would make a lot of sense. But again, I'm stunned at how much revenue there is here. Because even let's just say, are you guessing 10,000 a year for the high end folks? I mean, how many people must be in this network to generate 6.8 million? So I'm wondering a little bit, Is it that many people are in the network, maybe?

Or, you know, they mentioned somewhere in here about pooling resources and investing together. So like right away, I kind of went, okay, there's a little flag there. How, what kind of investments, you know, are they doing together? And is, and this owner is making investments as well. So is some of that revenue tied to investments or is it all 100% just the membership fees? At these margins, you know, it could be either one. But that's a question I have. Yeah.

I mean, you know, it seems like obviously the, the subs, they lead with subscription base. And there's a recurring, you know, annual or monthly fee. And my guess is, right, that that's probably, you know, 80 plus percent of their revenue. But they, they do allude to some other things. I would be very curious, you know, these things kind of get a little bit murky and maybe a little bit suspect. to me, just because I think it can be a slippery slope, you know, are they, are they piggybacking on these deals? They probably are not, you know, generating fees off of, you know, a finder fee because it's a network. Like, people are kind of paying for that benefit anyways. My guess is they're probably

not, you know, getting like, you know, deal referral fees if they, you know, refer somebody to a lender or something like that. But it kind of makes you wonder. right? Okay, what are the different ways that they're, that they are generating revenue beyond the subscription? They mentioned coaching and training programs, which if these are like premium top tier real estate folks, you know, maybe maybe they're really interested in that. But, you know, is it sales coaching? Like, it seems like they're kind of, you know, all kinds of different stuff, strategic planning and, you know, personalized professional guidance. I mean, it could be a lot of different things. One thing that comes to mind with a business like this is sometimes that they can be,

they don't allude to it, but they can be very, very founder kind of personality-centric. You know, a lot of these kind of coaching kind of guru-type businesses build an audience and like great job, you know, kudos to them for the audience and the subscription base that they've built. But I wonder, is it if you pull this guy out of the equation or this gal out of the equation, does it, you know, is it a house of cards? That's a really good point. Yeah, is this, is this, it really had to have probably started from someone's network and then kind of grew organically from there. So yes, there could be the question of, is this really transferable? You know, and again, I'm just astounded at the, at the revenue level because this can't, that's got to be

something. I'm convinced it's a lot more than subscriptions, you know, and membership fees. And so it's quite a large organization. And I'm sure some of our real estate Twitter folks probably can guess which one this is, you know, just by what has been said here so far in the teaser. Who is a good buyer for this? This is my next question. I mean, at 3.8 million EBITDA is not an SBA size deal. This is too big for that.

Yeah. I don't know. I mean, I think this is an inherently difficult business for a kind of typical private equity sponsor. I think for a few different reasons. One is that, you know, it is probably hard to sell upmarket as you grow. You know, there's a lot of businesses that may be great as they are right now. But if a private equity firm doesn't have a clear path towards an exit, then it, it fundamentally just doesn't work for them. And if this business is, you know, kind of in that camp of, okay, yeah, it could get bigger. But think about like, is Zillow going to buy this business?

Probably not, right? So who are the big fish that could be kind of an acquire up market? And that a lot of times determines a private equity firm's interest. My guess is, like, the person who does this deal is probably like a very kind of creative, savvy family office who made money in real estate and goes, oh, yeah, like, we know the market. We know the, you know, I'm really surprised it's residential focus. As I was reading it, I was kind of picturing it more and more. as a commercial, you know, sourcing money for deals, like that seems kind of rare that it would be, you know, on the residential side. But, you know, hard money lenders and things like that could, you know, could be in these groups. And this is something that is really attractive for them. Maybe it's multifamily, maybe it's multifamily, which we would normally classify as commercial, but they talked about the residential growth. I don't know. Yeah, there is, that is a, it is a puzzle there. I think residential is sort of a question mark on this.

one. And I would think, you know, it's this network of investors, right? And people are making money by being in this. I would think the buyer comes from within the network. And then that would say you don't need to list it. You would have found your buyer in your network already. So that's kind of puzzling to me also. Why didn't they just sell it to one of their high end, high net worth members? Yeah. Yeah. That's a great point. Yeah. I think that, you know, this, the 800 pound gorilla in kind of the real estate space is, I mentioned it before, bigger pockets. You know, they, it's a community. It's blog driven. I think they, you know, are kind of the mecca in a lot of ways of, you know, hey, I'm thinking about getting into real estate and you end up on bigger pockets at some point.

Because there's a lot of advice out there. And I think they have, you know, obviously kind of integrated into a model where they generate revenue and generate more revenue and in diverse ways. I don't think I think this would probably be too small to be bigger pockets. And, you know, they're saying they cater to investors and not necessarily like brokers. You know, there's a whole world of, you know, things that you can sell to residential real estate agents, whether it's kind of coaching or best practices or, you know, just all the paraphernalia that goes along with, with residential real estate. But yeah, this is this is kind of intriguing in that, you know, wow, they've built something substantial.

And is it transferable? Yeah. I'm almost wondering if we know who this is from real estate Twitter somehow. If it's somebody that's already on there that holds events and, you know, does training and whatnot. But yeah, because it's because of the investor focus, it does seem pretty unique. And it does seem like a valuable network, especially if this is the kind of revenue that it's kicking off. I like the business. I have a lot of questions once I would dive into something like this. I'd be curious, given their revenue growth, you know, I can't imagine that this business is 20 years old.

You know, I'm thinking that this is probably plus or minus five years old. We have three years worth of financials, you know, and if they've doubled in two years, you know, makes me think that, you know, they, this is a relatively new business. And, you know, like any deal we look at, you kind of go, okay, why is this person selling? Like, this is, if, if this business kind of is, you know, fairly manageable in terms of generating content and the membership, the nice thing about peer to peer networks is a lot of the content kind of comes from the group instead of all, you know, all of it having to be kind of passed down. from, you know, from the, the, on high, from the leader or the personality. So I'm, I'm just wondering about why this person wants to sell. Like, you know, they could clip a coupon, in essence, for, you know, $3 million a year. But, but maybe, who knows, right? Yeah. Well, what I think is kind of ironic is this might be a better way to make money in real estate right now than actual real estate

deals. Yeah. Yeah, absolutely. You're into real estate. Maybe don't buy real estate, do this instead. And, you know, I mean, real estate folks, it's a very competitive market and they go be part of leads groups and, you know, all kinds of different kind of things to try and establish themselves. On the investor side, you know, the scarce resource for most investors is deal flow. You know, where's that next deal coming from, whether it's, you know, residential or commercial or industrial or, you know, Timberland, like that is kind of the real nexus of value. And so if this is a place where these investors can come together and say, you know, hey, I had this deal fall into my lap and it's not really my cup of tea. I don't do multifamily, but I'm interested and then all of a sudden

they can kind of source and put deals together. I'd be a little bit worried about, you know, solicitation of investment. And, you know, is there a compliance risk or kind of a risk for the owner if this is happening on the platform? and, you know, are they in some kind of gray area in terms of, you know, investment and security regulation? You know, if people are posting, hey, you know, I'm trying to raise $10 million, you know, you can get in trouble kind of quickly that way. Yes. And I thought about that. And I'm glad you brought that up because that is, that is a risk in this kind of business. Is everybody doing things disclosed properly? Do they have the proper licenses?

you know, if you asked a lawyer, you know, what should be done for these investments, you know, you, it's a lot of work, you know, and you may have to get certain licenses in place. And in these peer to peer networks, that's often not happening. You know, so that side of it does feel like there would be some compliance risk. And especially if it's a younger business, if you're right about that, you know, there's a tail on that liability, right? You know, that can come back to bite us later on. So that would be concerning us.

especially if there's a chunk of this revenue that is associated with the fundraising investment capital, then I'm even more worried about it. If that's a big chunk there, then I really have to do a legal deep dive on the compliance side of that. And, you know, there's this kind of phenomenon where the founder, the current owner, has probably gotten comfortable enough with it, you know, and they've navigated it along the way. maybe they kind of have in the back of their mind, yeah, okay, I have this kind of contingent liability. And yeah, I could get my wrist slapped. That's very different than a buyer coming in and,

you know, paying $15 million for this business and realizing, okay, maybe the business doesn't go to zero. But, you know, if I get in trouble here, I could, I could lose a significant amount of revenue. There's a looked at a business years ago that was, it got pretty far down the road with it, but they were involved in negotiating, helping people get out of timeshare contracts and agreements. And it was really surprising. I mean, I was like, do people still buy timeshares? Like, I thought everybody knew, like, not to do that, you know, all the horror stories. And it was, it was startling.

I mean, the number of timeshares are still growing and they still get sold all the time. And I was like, oh, so it must be, you know, 65 plus year old people, you know, and like that phase of life. And they were like, no, statistically, most people are, you know, under 35 signing up for these things. But what was fascinating about it is that they were, they kind of knew they had an intake form, you know, because the issue with timeshare contracts is there is no cap on the amount of like, I think, deferred maintenance and like, you know, management fees and things like that that can be passed through. And so you get in and it's maybe not that bad, but there's, you know, no ceiling to the amount of fees that can be layered on. And these timeshare contracts are usually very, very difficult to get out of. Yes. This company, what they got really good at was knowing which, you know, which timeshare kind of folks, which a lot of these are like hotel groups, like Hilton, you know.

And they kind of knew, hey, if we asked these questions and you were part of this group and they did or didn't say certain things and, you know, you may not have like been fully read your rights. There's ways to get out of them. And the timeshare companies actually don't fight it that much if you know how to argue with them because they take that kind of unit of ownership and they just go resell it to somebody else. Yeah. How sad. And so what was interesting about this deal and to bring it full circle is in due diligence,

we realize this company is giving legal advice. and they're giving legal advice in like 50 states. And they are not lawyers. And they're practicing, you know, like, and so there was. They're lawyering without being lawyers. Yes. Yeah, exactly. And so there was kind of no scenario where, you know, a buyer could really get comfortable

with, you know, buying this business. And I mean, literally like the entire business could stop overnight, probably state by state, if, you know, somebody really went after you. And there's a couple like big companies in this sector who do this. And they all kind of, you know, play in this gray area. But it almost makes them non-transferable. And you kind of wonder right about about that risk dynamic of it's not super risky or the seller has gotten comfortable with the risk, but the buyer may not ever be able to because of the kind of go to zero risk. Right.

Right. And the fact that you have to make this investment, which is years of EBITDA. Yeah. You know, that's very different from a founder who this business was probably not very expensive to start up. Let's face it. It was probably nothing next to nothing. Let's, you know, you could start something like this just to see if it ever got traction. It wouldn't really cost you much in terms of dollars.

And that's probably what happened here. So you're right. When you're in that position as a founder, it's very different to take those kinds of risks. Either way, you're still up millions of dollars if it shrinks back down. But when you're a buyer, very, very different. you know, to take the, you want to, you want something where, uh, you just don't have those glaring risks facing you. Yeah. You just made me think of something, Heather, with saying that, you know, this business probably didn't cost that much to start up. I'm also wondering, what do they spend

$3 million a year on? You know, I mean, their margins are great, but what are they spending $3 million a year on, you know, and operating expenses? Right. Maybe it's customer acquisition. I mean, I would not be surprised if growing at 20% annually, you know, there's probably a lot of paid, you know, kind of customer acquisition. But other than marketing, I mean, it doesn't seem like they would have a ton of staff kind of overhead employees, maybe some content creation, maybe paying the coaches, you know, if there's coaching going on. But I wonder what they're actually spending money on. Yeah, right. I can see as staff maybe taking up a million dollars of cost here. But yeah, the $3 million is perplexing. And you're right, it could be

customer acquisition, which then is, you know, then I would question that whole retention rate, right? You know, maybe it's driving the growth, but, you know, that 10% churn is probably higher at those lower tiers. And that's something to look into, you know, what, you know, what your lifetime customer value is and all of that. So, but still an incredibly good business from what we're looking at in terms of the numbers here. What they've accomplished in these years is incredible. And, you know, kind of back to what we said in the beginning, we are in a tougher real estate environment.

If this is, you know, multifamily investors or whatever exactly they are into, there's no sector of real estate that's booming at the moment. It's all going through some, you know, variety of stress. And so that is interesting that a business like this grows potentially during. tough times. And I'm sure it also can grow during good times. You know, oh, look at all the money we're making and you join then. Oh, look, you need help finding how to make money. You join then. So I like that a lot. Any kind of business that has that, you know, up when it's, things are good, up when things are bad. That's incredible. But, you know, I have so many questions. I would love

to get the book on this one. This is one I would definitely ask for. Yeah. Yeah. I'm a thumbs up on this one, I think for the same reason, just kind of more out of curiosity, you know, than anything. I think the kind of membership model, right, can look a lot of different ways. You know, you can be a member to like Dollar Shave Club, right? And they're going to send you, you know, a recurring, you know, pack of razors every month. This, this membership model is kind of interesting because I think that it is probably, you know, you're paying for access. You're paying for maybe it's tiered and, you know, hey, if you're not the premium tier, then you can't get in this specific group, you know, on our, on our kind of forum and you don't get access to, you know,

capital raising, but maybe you can read, you know, best practices about property management and, you know, the basic tier, whatever it is. What you think about with this business is kind of a double edge sword, it's probably very, very fragile. If you buy this thing and the mood or the kind of tone or the like the messaging and the brand changes, you could have like a mass exodus very, you know, very quickly. Because these people, I mean, let's just say like we assume the best. And this is really high value content. And they are really doing kind of unique value creation. They probably have raving, raving fans, you know, inside the screen. group. And they're probably happy to pay the money in exchange for the value they get for it.

But, you know, the flip side of that is if any of that starts to kind of shift and all of a sudden, they're like, oh, you know, I've been here since the beginning and this isn't, you know, this isn't as good as it used to be. I think you could have like a real, you know, a real snowball of people leaving. The flip side of that, though, is could you, like, think about the Buffett analogy, right? I can't remember the number he used, but, you know, give me $250 million and I can't compete with Coca-Cola, right? There's a certain number where you just say, okay, you know, they have enough brand. They have enough value. You know, if you took $5 million, could you create this business?

Probably, but not overnight. You know, it would take time to build, you know, the peer-to-peer aspect of it. It almost acts as a moat if there really is value there. Yeah, good point. because people are fickle. And yeah, and for it to be generating this kind of revenue, yes, it has attracted the right people in the sector that it is serving. I have no doubt. And that group of people could have a few conversations that go the wrong way and they're all over to something else.

And yes, you're right. That is a fragile and kind of a risky business to be in. And then maybe back to like who the founder is and, you know, how do you step in as the new buyer and say, you're just as good, that that's, that's probably pretty scary. Yeah. Yeah. Yeah. I think that's a, I think it's a, it's a plus and a minus, right? You'd have to figure out how you get comfortable navigating this because it could definitely work to your advantage, but it could also come back to bite you really quickly. And then next thing you know, your whole, you know, your whole base is is leaving and walking out of the front door. Yeah, absolutely. Well, this was a good one,

Heather. Yeah. I'm definitely thumbs up. I'd be curious to to know more and get more. info and, you know, it's a little bit dated in the sense that we don't have, you know, year-to-date 20-24 numbers. I wonder a lot of times when we go to double-click on some of these axial deals, they have transacted and we're like, shoot, you know. So this one, I wonder if it's sold or what the status of it is. Yeah, someone in real estate Twitter tell us about this one. But I'm a thumbs up too. Very, very good business. Very interesting. Well, thanks, everybody for sticking with us. And I hope you enjoyed the episode. If you did enjoy it, maybe send it to one of your real estate friends or somebody who you think

would find this episode particularly interesting. And we'll see you next week.