Acquisitions Anonymous - #1 for business buying, selling and operating - Will Bill go vegan for $3mm/yr? - Acquisitions Anonymous 206

Episode Date: June 27, 2023

Mills Snell (@thegeneralmills), Bill D’Alessandro (@BillDA),  and Heather Endresen (@EndresenHeather) review a Manufacturer and Distributer of Vegan Cosmetics and Skincare Brand. Today's deal comes from Axial.  Axial is a trusted deal sourcing platform serving professional acquirers in the American lower middle market.Axial partners with over 2,000 boutique investment bankers and business brokers who use the Axial platform to market their deals to lower middle market acquirers. Sweetspot on Axial in terms of deal size is from $5M to $75M in enterprise value, located solely within the US and Canada. Deal activity occurs in five industry verticals: manufacturing, tech / IT services, healthcare, B2B services, and consumer. 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]

Hey, everybody. Welcome back to another episode of Acquisitions Anonymous. I'm Mills Snell, joined today by Bill Di Alessandro and Heather Indreason. We talk about a really interesting, what we think is a contract manufacturing skincare provider. I think they probably white label stuff and maybe make it for themselves and make it for other people, but it's quite large. A little over $3 million in EBITDA. We talk about some of the nuances with that segment of the market, who you'd be up against. How do you even finance and buy a business like that? and what are their dynamics? And then we talk about the strengths of this type of provider relative to people who sit lower

in the value chain and people who sit maybe higher in the value chain, like the brands that are selling these things that are being made by this company. It's super interesting. Bill and Heather have really interesting insight. And it's a fun conversation. We riff a little bit on a few different topics. But hope you enjoy and big thanks to our sponsors this week. Thanks for tuning in.

Welcome back, everybody. Another episode of Acquisitions Anonymous, Mills, Snell. Bill Snell joined by Bill D. Alessandro and Heather and Driesen. Hey, guys, how's it going? Very good. Doing great. It's like to be here. I was off last week, so I feel like I hadn't seen you guys in forever. I know. You look just as chipper, Bill. And we have an amazing deal. We have an amazing deal. Anytime I see something that is e-commerce related or, as you call it, lotions and potions. I'm like, I can't wait to see what buildings about this. And we have a,

we have a good kind of upmarket deal today on one of those. All right. You want me get into it? Yeah, yeah. Take us away. Cool. So fun thing about this deal is I found this one on Axial. It's axiol. It's acciel. Everybody in kind of Smb land knows about bizby sell and everybody goes biz by sell. But Axial, if you think it's sort of like a more professional, like bigger version of biz by sell. So I really like Axial for kind of more professional larger deals. Just, you know, we've talked on this, I like this podcast about how a smaller deals are hard, but it can be hard to find bigger deals. We've been trying to do bigger deals on the pod.

And I find a good bit of them on Axial. So this one is from Axial. So it is a manufacturer. I'll just say one thing about that, Bill, really quick. Like if you think about it when I was in the private equity space, biz by sell is where brokers list deals. And if you want to look at kind of slightly higher end of the lower middle market, most business brokers list stuff on their website or on bizby-sell. Most investment bankers don't list stuff. But if they do and they want to put it out in any kind of database,

it's usually axial, at least from what I saw. Yep. Yeah, that's true. And it works a little different too. And I think I guess why investment bankers feel comfortable with it is that it's sort of like opt-in. you have to like apply to get the information released to you. And there's sort of a higher bar like they've at you a little bit. So I think that's why they feel comfortable. Cool. So this one's fine because as you said, lotions and potions.

So this is a manufacturer and distributor of vegan cosmetics and skincare brand. Founded in 1994, the company is a market leading international vegan cosmetics and skincare brand. They develop, manufacture, and distribute all products from their state the art facility in the southeastern United States. So this is lotion and potion and it's in my backyard. How exciting. The company specializes in the highlighter and liquid lipstick segment of the beauty catalog. They have managed to stand out from competitors due to their unique production process and their self-reliant manufacturing ecosystems set up over the years.

The company's mission has helped bolster its reputation amongst consumers and influencers internationally. Several product collections are curated in partnership with top influencers who help showcase products, maintain brand image, and interact with customers for feedback. Oh, there's so much here. The company has a solid track record and a great operating team in place. The owner is looking for a partner to help take the business through its next level of growth. Financials, we have three years of financials here, actually four years of financials. 2023 revenue and EBITDA are 12.2 million on the top line and 3 million of EBITDA

on the bottom line. So 20% EBITDA margin. And the company has grown at about 11% grown revenue at about 11% year over year, every year, each of the past two years. But it looks like they had a weird COVID bump or something because they went from in 2020, they did 17.5 million revenue. And then they dropped back to 12. $12.2 million in revenue in 2021.

And it looks like to stay there. I wonder if this is a typo. But it looks like they just stayed at exactly $12.2 million every single year for three years in a row. And yet the SIM lists 11% year-over-year growth. So I have a year-over-year growth. Yeah. I think it's that revenue line item that must be wrong because then there's 11% growth in

2023 also. Yeah. Something's wrong with the revenue line. And it still says 12.2. But it looks like, so they go from 3.4. of EBITDA in 2020 to 3.3 in 2021 to 2.9 in 2022 to 3.0 in 2020 estimated. So I definitely there's some sort of COVID bump going on that seems to now have normalized, which is at least thank goodness is 2023.

I was really getting tired of being like, what's going to happen post-COVID? At least we can actually see what's happened. I agree. As a lender, as a lender, we've all been sort of, it was so difficult to sort of project out what was going to happen. And now it's very easy. Did it normalize or did it not normalize? You know, and did we keep the bump or did we lose some of it?

It's so much easier now to look at deals. Yes. I mean, I can't. For like years, we were, every episode, we were like, what's going to happen? But it looks like this one has roughly stable eyes around $3 million. They're in the South Atlantic and their industries are brushes, blushes, rather, face and manufacturing, cosmetic creams, lotions, and oils manufacturing. I make up foundations, lipsticks. manufacturing,

uh, cosmetics and beauty product e-commerce, and then cosmetics, distributors, wholesalers. So Heather and Mills, what do you all think about this one?

I, I like it. First of all, I like the, I like the category. I do recognize that you know more about it than, than I do as far as e-com and, um,

and skin care and cosmetics. I think it's a very competitive space. And it might be, it might be a little tricky to maintain the, the level of sales and the margins because of that. But I otherwise like the, the business, it's got, you know, I guess it seems to have some scale to me based on the numbers that we're looking at. You're at $3 million of EBITDA, you know, decent margins. I wish I understood

a little bit better what was going on with the sales with the top line there. I wonder, too, this is one of those cases where you really want to see 2019 because, like, I wonder if 2018 and 2019 were in this like $15, $16, $17 million range. And then they just had a step function change in, you know, loss, deceleration, not growth. And the business just contracted top line, you know, like we've said, in COVID, everybody's like, I don't know, people aren't buying makeup. And, you know, will they ever buy makeup again? Will people ever fly on airplanes again? Or, you know, eat at Golden Corral and use the chocolate fondue fountain. But I was at Golden Corral the other day, telling on myself, and people are still using the chocolate fondue fountain. So everything

has bounced back that you thought never would. God bless America. American Mills. Yes. And Golden Corral is busy at like 3 p.m. on Wednesday. So I don't, they're doing something, right? But chocolate fondue is obviously what it is. That's what they're doing, right? Yeah, yeah.

But you want to know what was happening in this business because, you know, maybe typos aside, you know, some, either they had a booming 2020, which wouldn't make a ton of sense because of their category or, you know, maybe they've had just kind of a loss. Maybe they've lost a category or lost a big customer or something like that. You don't know until you put back the layers. The business is 30 years old, though. You know, I mean, it's impressive. I think I probably misspoke.

I don't get the sense that they're actually doing any e-commerce. Maybe they are. We don't really know. They say manufacture and distributor, which bill from the little bit that I've seen, but a lot more that I've heard and learned from you, most people are not manufacturing this stuff. Most people are contract manufacturing and putting their own labels on it. So I would have a lot of questions around like, are they, do they run a manufacturing

plan? I believe they do. Yes, I believe they do. I believe this is a contract manufacturer. And there's something that's worth knowing about their product categories, uh, the highlighter and the liquid lipstick. So this, these types of products are what's called hot fill. So, you know, it has to be at room temperature, it's solid, right? Think of a tube of lipstick, right? So you have to fill it hot while it's warm. And as it runs through all the tubes and machines, the tubes have jackets on them that keep them warm so it doesn't gunk up, right? And what's interesting is, because of that, there's a real pain in the butt to doing a small

run because the cleanup, the setup and tear down, right, to get all the now cooled off lipstick out of the inside of the tubes, all that stuff, right? The setup tear down is crappy. And I know this because I've done hot felt products and they still do to do some hotfell products. And we, when we were getting started, had to manufacture them in-house because almost no contract manufacturers want to do small runs. So it is almost impossible to start small with a hot-fill product. So you have to cannonball into, you know, 100,000 ounces or something, you know, right away. And typically these products are one-ounce sizes. So it's like 100,000 pieces,

initial inventory run. There's capital requirements there, right? So I'm being, that since these guys have been around a while, they are a contract manufacturer who has then leveraged that hot fill capability into starting their own brand, if I had to guess. Because really the only way you can start a hot fill brand

without a bunch of capital is to already own the hot fill manufacturing, right? Or pony up for the big initial order. And it seems like they would have the distribution then, you know, through, they talk about like influencers and stuff, which obviously is a relatively new phenomenon, but an awesome distribution channel,

if you have all the infrastructure and you go to some influencers and say, hey, would you like your own brand of, you know, blushes and creams and lotions and eye makeup, that is like a match made in heaven because they're like, we don't want to maintain the social media. We don't want to maintain the e-commerce.

We'll sell you these batches. And, along the way. So if it's a mix maybe of contract manufacturing, maybe they're making other brands as well as their own brand, you know, you kind of probably have two different margins going on here, and it would be interesting to know then what's the mix? You know, is it 50-50? Probably not, right? I would guess like if your hunch is correct, Bill, it's probably mostly the manufacturing. That's most of the revenue. And maybe, you know, the skincare brand has higher margins, but it's maybe only I'm just going to make up a number 30% of the revenue.

And so it would be interesting to sort of break it out by margin and revenue and kind of see it's almost like maybe two businesses in one. That's exactly. I'm sure it's two businesses in one. And what would be interesting is whether they insist on selling them together. Because there are a ton of buyers who have no interest in running a hot fill plant, right? They just want the brand and they want a contract manufacturer, you know, product. There are also separate people who want to run hot fill.

and don't know Jack about the internet. We tried to buy a business, a pet supplement's business, and it was very hard for us because they ran their own manufacturing facility in Tennessee. And I didn't want to do that, right? We just wanted the brand. So we were saying to the owner, we just want to buy the brand, you keep the facility and become our contract manufacturer, and he didn't want to do that. And so we ultimately were not able to get a deal done with him.

So I imagine you might find a similar situation in this one. And different skill sets of a buyer, I always worry a little bit about manufacturing businesses. I have to really think about the buyer a little bit more. Have they done manufacturing before? Do they have an engineering type background? That's very different to me than someone who might be wanting to run the skincare brand and needs the marketing know-how and maybe some e-commerce we don't know here,

but it seems like two different people. you know, so you'd either need a team to buy this, to, you know, to really transition and operate it well. Or like you said, Bill, you know, maybe it would be more valuable sold as two separate businesses. Yeah, it might be. I do like that it says the company has a great operating team in place. The other thing is worth calling out. And I'm sure, Heather, you especially love this as a lender too. The owner is looking for a partner to take the business through its next level of growth.

to me, that implies that the guy might stick around or the very least he wants to roll substantial equity, right? Sell most or not all the business. That's what they're saying basically there, that they would like, the seller would like to roll some equity. But that's a tricky thing, isn't it? You know, I mean, you've got a, it has to be the right compatibility with that owner. And you really have to understand what is the owner's role going to transition into? Are they just going to be on the board? that might be easier.

I've seen deals where they stayed in the business and sort of kept the part of the role that they liked, maybe more the technical side and gave the administrative side to the new buyer. And those don't often work out as well as people hope. They just don't. People don't get along in those kinds of situations. So that can be tricky.

It's hard to go from being the boss to be an employee, isn't it? It is. And they have, they disagree on changes and how to run the business. And I cringe whenever I hear someone wanting to kind of take a deal and do something like that with it, it could go well, but it usually doesn't. Well, Mel, you have lived this, have you not? I am in the middle of living it.

On a similar note, I talked to a seller of a business the other day, and he was saying, you know, this is the beginning of the end. And I was like, well, I mean, I don't know that I would think about it that way. They're like, this isn't your death, you know, like this isn't your funeral. And they were like, no, this, I mean, this is a slow, this is a long slow death for me. And that's, I mean, that's legitimately how most sellers, right, most founders who have been doing something several decades, the identity and the business are all wrapped into one. And then you're going to say, hey, I have some bright ideas. Let me come in and, you know, tell you how you should interact with your customers and, you know, collect your receivables differently.

I mean, you are, you know, you're striking at the very core of, you know, their, uh, their human, human nature and angst there. Especially if they've got 20% of the equity still and money on the line. Yeah. I have a question for you all on this one that I feel like it may be material or it may just be a little bit of a kind of buzzword. But how significant isn't that this says vegan? Uh, not really. I mean But it's marketed as meaning something, right?

Yeah, well, it's not, it's important in marketing. Vegan is not like kosher. So like kosher, you have to have your facility inspected and maintain different tanks and all that stuff, right? Vegan is not that. It's vegan is just assuming, like, don't put an animal products in the product. Your product is vegan. So, I mean, they could run boiled animal fat on the next run in the same tanks. And that's not vegan, obviously, but the prior and subsequent products can be vegan.

But wouldn't most cosmetics actually be vegan? Maybe I'm wrong about that. You would think, Heather. You would. This is where I wanted to go. This is where I was. Oh, I mean, yeah. Explain this.

Most are vegan, right? You with what's not vegan? Like, there's not, you know, beef tallow in my, you know, in my lipstick. I've been wondering right now. But you know what is? Well, only one of us is wearing. up right now that I know of. So this is really good. I want to know what's on my face, actually. This is apologies to our vegan readers or listeners, but this is the thing about vegans.

Bees are animals and thus bees wax is not vegan. Okay. So there are tons of, I mean, beeswax is a major ingredient in all kinds of things. But if your product has bees wax in it, your product is not vegan. Even though it doesn't kill the bees, the bees wax comes. from the hive. It's not, you know, if you don't murder the bees to get their wax, they make the wax, it is a animal byproduct and it is not vegan. So what this means they don't use bees wax in their skincare stuff. Gotcha. There are plenty of other options. If you're just not going to use that formula anyway, it's easy to just throw in the word vegan because you happen to be vegan. Correct. You get vegan almost for free in most skincare unless it's beeswax based. I have a question more on

the marketing side of the brand, the skincare brand. Did the iOS privacy change? Didn't that come along in 2020, was it where you couldn't sort of do the targeted marketing? It really kicked in late 2021 or early 2020 was when it really ramped. Okay. So I don't know. Do you think it would have affected this? This feels you would have seen it drop off. I mean, maybe, but I think this is more of a contract manufacturer anyway. I'm betting on something COVID. I still find it strange, though, because the things that dropped off a cliff right away on COVID was makeup, lipstick and all this stuff. I mean, I don't know, maybe face makeup didn't because people saw on Zoom.

I think that's true. I think people actually wore more face makeup because, yeah, I was working from home prior to COVID. Nobody used teams or Zoom. In fact, it would have felt a little weird to say, let's do a video chat. People would have thought, what are you doing? And all of a sudden, you know, so here I was, I had to wear more makeup because of COVID, because I had to suddenly be seen all the time when I really wasn't before that. So there you have it.

So I've actually seen, you know, that's also had an impact on med spas as well. Same concept that people started using more med spa treatments as well because of Zoom, because of seeing their face every day. Wow. Well, I hadn't thought about that because you're right. Pre-COVID, it was all telephone. And then all of a time, everybody has to do video. We're doing a freaking video podcast right now.

You go on YouTube and look at our faces, right? Here we are. Yeah. That was real smooth because I know that you're a med spa affectionato. I am. I'm really into med spas. Yes. Not really as a patient, but as a banker, which is a weird thing, right?

That's strange. We should do another med spa. Michael and I did one and spoke not intelligently about it. We should do another one with Heather. That would be fun. Okay. We should do one at a med spa location, like while you're getting a treatment on your face. I want to see all of us medspa live on the air.

That would be like cucumbers on our eyeballs. Yes, totally. That would be awesome. Another thing that's, I think, worth mentioning here on the role, this is the type of thing you will find more on Axial. And I think you'll find it more on Axial because you tend to see it more in upmarket deals. because a lot of, you know, if you're a private equity firm buying a business, it's a real vote of confidence that the owner wants to not sell out entirely, right? The private equity firms get really spooked.

Like, what does this guy know that I don't know? You know, he must want to stay around because we're going to sell it again in five years, right? I get that proverbial second bite of the apple is what they always call it. So I think what you'll see if you're a seller is once you, you know, if you want to sell to private equity. Once you get into the three, four, five plus million of EBITDA, your buyers are going to start asking for it. I think that's, it's no coincidence that we're looking on Axial today. And we see the owner is not stupid, right? He's probably been advised. Remember, also he has an investment banker because Axiol platform for intermediaries, right? So his banker has advised him, hey, look,

your buyers are going to expect you to roll. And so he's coming out trying to get in front of it. Just interesting. I noticed something about Axial lately, too. In my new role at Vizzo, I've got now two deals working that they were found on Vizzo. I mean, sorry, not on Vizzo, on Axial. Excuse me. And one is big, you know, one is over two million EBITDA or on the bigger side. And one is small.

So kind of interesting, just that I'm noticing it more that people are finding good deals there. Sweet. Yeah. I think they really come on lately. Let's talk about this size range. So when you're at this kind of, let's just call it $3 million kind of steady state ebada, if these numbers are accurate. From a financing perspective, I mean, this is big enough that a private equity firm would look at it,

certainly as a bolt on, but also as a platform investment, if they have kind of a thesis around this. So kind of have to know who you're competing against if you're not a private equity firm and you're trying to buy something like this. if somebody is, you know, looking for maybe their first or second business to buy and they don't have, you know, it's not a strategic investment. They're not doing this to, you know, expand geography or product bonds. This is kind of a dead zone in a lot of ways, right, for financing at $3 million in EBITDA. Yeah, I call it a tweener. It's too big for SBA and it's too small for a lot of conventional lending.

So it really is. And it affects valuation because obviously, anytime they're not. there's less liquidity in an end of the market or an industry or whatever it might be, it has to have a depresses valuation to some degree. Then it also sort of says maybe the seller only sells to a strategic or, you know, because they can only get their value if they do that. If the single standalone buyer that has to use some financing just won't get this deal maybe. Yeah, which which is why you start to see the break point when you get to, you know,

a couple million of EBITDA. You start to see that transition from business broker with an email list, who you can blast out and anybody on the email list could conceivably do the deal with an SBA loan to invest in banker intermediary, which is what we've got here on Axiol, where you've got to find the right acquire. Like this person's got to think. They can't just blast it out to a list. They've got to approach a targeted set. They've got to market the business in a way that appeals to that targeted set. So they get it. It's a higher touch process because it's not a blast and.

anybody can get an SBA loan. That's right. Exactly. There's kind of two polar opposite dynamics to, you know, if you talk to people who look at businesses from business brokers, they're kind of repeated, you know, gripe is I signed the NDA. I didn't hear from them. I had to follow up. I never got a response. You know, a month later. Like, it's just very stagnant. And you feel like as the buyer, you're really having to pull to get information. And, you know, maybe coaching the broker, coaching the seller, saying, hey, you know, look, here's my, you know, pre-approval letter, here's my, you know, whatever, you're kind of having to push the process along. When you move up market and when you work with an investment banker as a buyer, it's completely flipped.

There is, it's usually, they have a mandate, they're going to take this business to market. They've already coached and prepped the seller for realistic valuation expectations because the investment banker has sunk cost that's significantly higher than the broker. They're paying their people a lot more. They have a big team of analysts and associates and all this stuff. And they're sending this deal out to, you know, at least several hundred, sometimes thousands of potential buyers, a lot of them professional buyers. And then they are going to build this very tight funnel that you're going to be subjected

to. I got a sim for a roofing contractor the other day. and I get like every other day updates from the investment banker about I.O.I. Deadlines, LOI process letters, data room updates. And they are pushing me along and they're wanting, you know, they have a really good idea of how many emails they sent, how many people open the SIM, how many people had management calls, how many people are submitting IOWIs, how many people, you know, are going to subscribe to this process. And so it's not a sit back and kind of, you know, see if you can play, time to your advantage and build a relationship with the seller and maybe go do a site

visit impromptu. I mean, it is very rigid, not a lot of flexibility, hyper-competitive, and that works to the investment bankers credit. It works to the seller's credit if they're trying to maximize certainty around the sale process because everybody either gets in line or they get out of the process altogether. It does not necessarily work to the advantage of the buyer or the business post-close. Because the guy who gets a lot of the guy who gets to the finish line is the guy who can run to the finish line the fastest. So you just have to be aware if and when you move up market and look at deals like this, you're kind of on a little bit different learning curve and a little bit different process overall. It's very interesting. It's very, you know,

eye-opening in a lot of ways because you see how these deals go down, but just be aware. Yeah, and they're going to give you way more information. They're going to expect you to ask good questions. You know, you just, you better be ready to go because you're bidding against private equity firms. Yeah. I noticed as a lender as well, we had to move much faster to closing. So when you do a conventional loan, you don't do term sheet, underwriting, closing. Underwriting and closing are concurrent. You do term sheet and finish your underwriting and you're closing all at the same time so you can close in three weeks. Yeah. Yeah. So the other thing is worth mentioning, so we're assuming this is mostly a contract manufacturer of skincare. I have seen these be incredible businesses.

And I have seen it because I have been a customer of, I've spent easily eight figures with contract skincare manufacturers, in mid eight figures at least. And the guys, so the one that I've been working with for eight years now, it got sent around our office. He bought like the second biggest house in Miami, you know, like last year or something. Like, the boat is bigger than my house. like it is bananas, like how much money this makes. And you go and you tour it and it's just, it goes on forever and they're making all kinds of stuff and their margins are great. And they still like make us put 30% down.

They give us net 60 on the last 70%, but they still make us 30% down. And we do it because they're a key partner for us. And I know their margins are good on us, but our margins are good on the product they sell to us. It can be such a good business. And in some ways, it's an easier business because you don't have to ship each individual order. You don't have to deal with the branding. You don't have to deal with the go-to-market, all that stuff. It is very much a B-to-B business.

On the flip side, though, you lose clients in chunks. Like, you can have a lot of customer concentration. And if you lose people, you lose them. So give a take. And I think it's cool to see where this type of business sits in the value chain. you know, Bill, like we talk about, I'm so scared of e-commerce because the role brand plays. And it just, it scares me because it's like, hey, the business could go away overnight. And you're like, yeah, but look at my margins.

You know, as you move kind of down the value chain and as you move down the spectrum in terms of margin and kind of, you know, actual value extraction, I think about the service providers in this space, like 3PL providers that are like a little bit more commoditized. Yeah, there's switching costs and it's a pain. But if, you know, there's a lot of entrance in the 3PL space. People can open up a warehouse. They can get dialed in with some software. And I think, right, I mean, I know I'm oversimplifying this, but the initial capital outlay for 3PL is much lower than this.

Contract manufacturing, you've got the building. But you also have all the stuff that goes inside the building like these, you know, hotlines and stuff that are significantly more expensive. So I like the barriers to entry. And my thought would be, yeah, these probably aren't the only people in the country that can do this. But the actual switching costs for you as their customer is not insignificant and maybe very limited pool. So yeah, what's interesting too is these guys know that. And they try to put higher switching costs in place.

So typically what happens is you go to them. You say, I want to make a, in this case, a lipstick, I want these ingredients, et cetera. They make it for you. And then they own the formula. So you can't leave them. I mean, you can, but the funny thing is then it's just like an escalating war. All of the contract manufacturers then have reverse formulators. So if you want to leave them, you just go to a new contract manufacturer and they go,

oh, we'll reverse engineer it and they do. So they're constantly reverse engineering, each other's own formulas to get around the same way they lock in their customers. But of course, they've reversed engineer it and they go, now we own the new formula and you can't leave us unless you do this whole process again. Mills, to your point about 3PLs, this is where. way harder than a 3PL as far as moat, not only because of the CAPEX required, but because of the human capital required.

I can start a 3PL. I can hire both of you guys and you can come in and be putting stuff in boxes today, right? And there's a million people who have worked in warehouses and can manage that and all that stuff. But if I open a contract skincare manufacturer, I can't hire Heather as head of quality assurance and Mills as head of machine maintenance, you know, on day one. Maybe Mills,

you could do the machine maintenance. I don't know. But, I mean, you need like a chemist, right? I mean, that's what I'm a formulator. And you, and you,

I mean, I just got back from one of our manufacturers. And like one guy is like head of maintenance. And he like understands how all the machines work and like the parts. And the QA is insane. Like the temperature of the building matters. You know, the way you disinfect the tanks matters.

I mean, it's the, the SOP process book on a one of these is no joke. You know, so there's a real financial capital, but there's a real human capital, you know, startup costs of these things as well. Is this FDA regulated? It isn't skin care? Yes. Yes, FDA.

And so, yeah, like you probably have to be an FDA registered facility. I didn't even get into the, you know, regulatory. Yeah, this is way harder than 3PL. That's what I love about looking at things like this is you go, wow, this is hard, this is hard, this is hard. And yes, those things are true. But no matter what you do, it's going to be hard. I'm a firm believer in that. But all those things that make it hard, the seller, they're doing $3 million in EBITDA.

They've already figured out how to navigate those hard things. It's really hard for somebody else who wants to get into this space, who isn't doing it yet. And that's a fantastic premise to build, you know, a defensible business position on. That's why. I like this one a lot. Yeah, I like it, especially if it's more contract manufacturing. You know, there, this, the contract manufacturing space is consolidating. There are a bunch of little ones.

There are a number of private equity firms out there that have mandates to roll these up, because a lot of them are very similar and, you know, you can close facilities and get that human capital back out, et cetera. And there's new brands starting all the time. So this is very much a sell the picks to the miners type of business, you know, in the kind of the e-com, new brand. I mean, in today's economy, it's easier to start a brand. than it ever has been.

And a huge part of it is because of this huge increase in available contract manufacturing, which did not exist. I mean, I would say in 1994, when these guys started as a contract manufacturer, the amount of that their industry has grown since then is crazy. What do you guys think that this sells for?

I'll let Heather go first. I don't know. I don't know. That's hard because three million EBITDA, I don't know, 8x, 10x, not too high? I was going to go a little lower.

I was going to say at least 15 to 18 million. Yeah, I was going to go around 6x, 5 to 7 or 8 somewhere in there. So anywhere from kind of 12 to 15 million, I think. Oh no, 12 would be 4x, so probably higher than 15. If that's the case, right, even at 15 to 18 million dollars in purchase price

with a nominal amount down. you know, 25% or something like that in equity. And let's say they just have, you know, I mean, how far out would the AM go on something like this, Heather? No more than 10 years, right? Yeah, no more than 10, probably seven. And so you're talking about, I mean, just rough math. I mean, you're talking about probably what, a million and a half to $2 million a year in debt

service? Well, it depends if it is an amortizing loan. You see a lot of these done as interest only or partial amort. We had a loan, a sizable loan from a debt fund because this is coming from a debt fund. And the amortization was too, it was a, what was it? I think it was a seven year loan, but the amortization was two and a half percent a year. So it was not a fully amortized loan. So there was going to be a big bullet.

But the point is this loan never gets repaid. It gets refinanced. Right. Right. Yep. So it's, I could see, because you're right, Mills, if you had to amortize this thing down over seven years, it would crush you. That's kind of what I'm trying to trying to get to is if you're trying to buy this business to operate it, you know, and, you know, exit it, you almost have to be an institutional buyer. You almost have to be a professional buyer to be able to get the zero to three or four percent amortization deal.

You just can't get it otherwise. Right. And back to what I said earlier, I guess I sort of contradicted. myself. I think you're right. It's like six max eight X because it is in that tweener space and it can't really qualify for the type of financing that people would, you know, an individual buyer would want to use. So it's got a limited, you know, number of buyers that can really pull this off and finance it. So that depresses the value. So now you're back down to maybe six, six, seven. Yeah. And the reason those longs structure that way, they either get refinanced, right,

or the business gets sold typically. Right. Right. They almost always, getting sold and they're like, look, we, we grew the EBITDA to, you know, $5.8 million and we got multiple expansion. And so the debt that we're paying off, that principal amount that we didn't pay down at all, it's not quite a rounding error, but it's going to feel like it when you are getting, you know, eight times $6 million in EBITDA versus, you know, paying, you know, having $15 million of principal outstanding. Yeah. Any other closing thoughts on this one? I think it'd be interesting to get a book on. I mean, these contract manufacturers of skincare,

I almost like it better as a contract manufacturer than I do as a brand because there's a million vegan lipsticks in the world. And you would rather not care which one wins because you're manufacturing all. Yeah. I love it. All right. Let's wrap it out. All right, guys.

Well, thanks. That was fun. And we'll tune in next time. And we should have another good one. We found a couple of sources for some of these larger kind of upmarket deals. And some of these things are fascinating. It's very different than the typical biz by still, biz by cell stuff we're looking at.

Some of these headlines, I was just like, I cannot wait to talk about, you know, the manufacturer of collectible statues and stuff like that.