Acquisitions Anonymous - #1 for business buying, selling and operating - Would You Pay 7x EBITDA for a Background Check Business?

Episode Date: December 6, 2024

In this episode, Michael and Heather analyze a 25-year-old background search provider in California with a $7 million asking price and $1.1 million cash flow. They discuss the business model, the technology and operations behind criminal background checks, and the challenges of evaluating a market-leading "data wholesaler." The team debates its potential as a strong acquisition or a risky proposition amidst tech disruptions and high cash demands.Thanks to this weeks sponsors!Acquisition Lab: Serious about buying a business? Join Acquisition Lab’s proven framework and support community. Learn more at AcquisitionLab.com or email Chelsea Wood at [e-mail] Conference: Learn from top HoldCo owners! Join us in Utah next spring for HoldCo Conference 2025. Save 10% with code AAPod at HoldCoConference.com.Episode Key Highlights:Background Checks Unpacked: The process and customer base for this business.Financial Overview: $3.8M revenue, $1.1M cash flow, $7M asking price.Offshore Operations: A 15-year document processing facility included in the sale.Competitive Edge: Unique state-wide coverage and proprietary systems.Tech Disruption: Concerns about AI and automation reshaping the industry.High Barrier to Entry?: Evaluating claims of market dominance.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]

No financing whatsoever, just come with cash. That seems kind of crazy. Come on, what is the reason? Be willing and able to pay all cash? Maybe this is a killer business. Maybe it's growing 30% year every year. Maybe it's got huge tailwinds. Hello, another episode of Acquisitions Anonymous.

Hello, another episode of Acquisitions Anonymous. We don't have 100% here. Welcome to Acquisitions Anonymous, the internet's number one podcast about buying and selling small businesses today. Myself, Michael, and your co-host, Heather Anderson, looked at a, a deal out of Southern California, which is coincidental for two reasons. One is Heather lives there and two, I'm going there this weekend. So it should be a good trip all told. So it is a deal that does basically criminal background checks and is a wholesaler of that information to other people. So very interesting listing, very interesting price. And I think you'll be curious what we ended up

thinking about it. So here's the episode. This episode of Acquisitions Anonymous is sponsored by Acquisition Lab and their team. They've been longtime supporters of the pod and they provide a really great service for people who are looking to acquire a business. So it's created by Walker Divell, who's become a friend, the author of Buy, Then Build, How to Outsmart the Startup Game. So Acquisition Labs is an accelerator with a highly vetted, cohort-based, educational, and support community for people who are serious about buying a business. So a lot of our listeners like you, you tune in every week to our deal reviews, you want to get in on buying a business. You know, you're on this podcast because you're trying to learn how to buy a business.

But if you're not quite sure where to start, acquisition lab is a great place to start. So they exist to help people buy a business and to navigate all those complexities of the process, everything you hear us talk about on the show. They provide a proven framework, tools and resources that support you all the way from search to close. They do it. There's a whole bunch of educational material and support. So if you're serious about buying a business, check out AcquisitionLab.com. Or you can actually email the program director, Chelsea Wood, directly.

her email is Chelsea at buy then build.com. Heather, how are you doing? I am good. You know, it's fourth quarter. That is peak loan season. So we are getting ready to peak. It has been interesting to kind of watch the banking climate these days. You know, what I saw happen when they started to raise interest rates,

I started to see the, like, there was some message that was sent around the government, like, slow down the economy. And like, like, I don't know if you noticed, but a lot of those, like, free COVID money programs, like ERC and stuff like that that they owed money to, like, suddenly those got suspended. Like, or they went under review. Like, it was, and they're now starting to pay them again. Interest rates went up. And, like, regulators really started going hard after the banks, right?

getting in there and trying to curtail the amount of money to being deployed. So I'm trying to think about where else I saw it, but there's kind of this amazing thing that American bureaucracy does, which is, it really is so good in anticipating which way the wind is blowing and then going, going in that direction. Or causing it. I've been in banking long enough to tell you that there's times that the bureaucracy actually kind of caused or extremely exacerbated a small problem. by going after it too hard.

So it is really fascinating. I will say on the business acquisition SBA loan side, though, not much has changed. The market, you know, the banks are still very eager to lend and pretty flexible. I got some pay-to-the-ass businesses and they should come by. Oh, well, depends, right? Well, it's one of the things about owning multiple businesses. And like, you know, I'm coming up on my 10 years in my. CEO peer group. I'm the first one to make it to 10 years with the guy who runs mine.

And he's watched me where like year three, I'll be in there complaining about one of my businesses. Like, oh, this is horrible. Like, this is nightmare. I'm never doing this again. And then three years later, it's killing it. Like, doing super well. And I'm like, this is the best business ever. I never want to sell it. And then three years later, I'm like, this business sucks. Why do I own this business? So you just want to not have the, this business sucks. All happen at the same time. I can imagine. You have a lot of different moving parts going on with a hold co. It's fun. I wouldn't choose any other life except for any other life. Anyway, that's a joke. So you brought a deal today. Yes. It is a California deal, of course. I have to represent. Yeah. Would you like me to read it?

Yeah, yeah. Go for it. All right. Okay, I found this one on Biz Buy Sell. It is a 25-year number one background search provider in California, Los Angeles County, asking price $7 million, cash flow $1,100,000, gross revenue $3.8 million. The 25-year background search provider is number one market share in California. That's how it reads. Grammar is poor here. Owners retiring. Owners retiring.

That's a sentence too. This business is a direct information wholesaler. It prepares background reports that are mainly used. used for pre-employment screening. No SBA loans accepted. Key highlights include the only provider with all California coverage. Most competitors only cover several counties. Semi-absentee owner, proprietary-based system manages the workflow thousands of reports a day, many Fortune 500 customers, sinks with customer systems to provide seamless electronic document flow, 15-year wholly owned offshore document processing facility

provides high profit margins. There's another typo. And pricing flexibility. It is included in the sale. So this is a facility included in the sale. Proprietary computer systems and offshore facility form costly barriers to entry.

Proprietary system, no costly canned software fees. Scalable, unique value proposition can increase market share from competitors, unable to match the one-stop shop service and pricing flexibility. Scaling infrastructure can be expanded to other states. This unique business is one of one. There is no similar business in California.

It is offered for full 100% acquisition, NDA required, etc. That was the end. And it is listed by Hokka Naga-Hori of Select Business Sales. So what do you think, Michael? Well, there's so much to unpack in this one. Did you read the part? And I was taking a swig of my. carbon A beverage.

Did you read the part where it said potential buyers must show proof of funds for the entire purchase price, no SBA loans accepted, no search funds, professional buyers and private equity preferred. Did you see that part? I don't know why I skipped that part. I guess that was pretty important. I should have read that part of all people. My goodness. Sorry about that. Yes.

Pretty interesting. I love how the listing. Bring all cash, $7 million. Okay. I love how the listing has a stock photo of the, like a tool bag for some reason for this business. And it says sample photo only. You know,

and screwdrivers, which doesn't make any sense. What does it have to do with this business? Yeah, and I don't know. So, okay, so let's start with the fundamentals here. So they're asking $7 million for a business that generates $1.1 million in cash flow. So I. Hefty.

First of all, can't blame them for asking. So what do they do? So it's a background search provider. and it looks like their customers are Fortune 500 and smaller customers who do criminal background checks. Is that what we think is going on here? You know, they never said what kinds of databases they're searching, you know, but they did make a very strong point of saying they're the only one that has access to the data from every county in California.

So it's probably something along those lines, criminal background. And, you know, basically this is a data company. the way I look at it. Yeah. So, okay, so when I think about how this business works, a company who is hiring people calls up and says, here's an application and a social security number and an address and a name and the person's address and previous addresses and all that kind of stuff and driver's license number and gives it to these guys.

And then they go and look at a database of all of the criminal records for LA County, you know, where you live in Orange County, that hotbed of criminal activity. Yes, yes. You know what I'm saying? And then it goes and look all those up and then returns a report to these people that said, we've done a search across all the local databases. And this person has no outstanding warrants. They never been convicted of a crime.

They've never had a DUI, all that kind of stuff. And they get paid for providing that report on a per report basis, we think. Right. Right. And it seems to connect to the HR system, the hiring system of, you know, their clients. So it says there's a 15-year, wholly owned offshore document processing facility that provides high profit margins, pricing, depricing flexibility. It is included in the sale.

So it sounds like there is some sort of facility in the Philippines or something like that, where they are shipping. Is it paper documents, we think, that they're getting from L.A. County and Orange County and Riverside County and shipping this to the Philippines to be put into a database somewhere? Is that what's going on? That part confuses me, but it sort of sounds like it must involve paper that it's maybe scanned or something over there and then they're searching it from there. I don't know. That part's very interesting. I'm not sure what that is. Man, this is a market thing I just know nothing about. You know, I've had businesses that are customers of these and still customers where you pay

$25 for a criminal background check on an applicant, right? Kind of like you do for a credit report. and it's super valuable. Because it turns out people that have had DUIs in the past are very likely to have DUIs in the future. I'm not an expert, but it turns out that that's how it works. Seems fair. Yeah, but I think this is probably very high volume and low ticket cost.

So they're talking about thousands of reports a day. And it is quite a bit of revenue. I mean, 3.8 million, I guess let's guess at how many, background checks is that a year? I don't know what these costs. What do you think? $200, $500? $500? For a criminal background check? Yeah. Per? Oh, I mean, I got to look at what we're paying at some of the businesses, but it's $25. $50. Oh, way cheaper. Okay, see, I don't know. Yeah, super cheap. Okay. So then what you, it's what you pay for like a pool of, is how many background checks a year? Let's say 50, let's say, let's say, let's say 50,

bucks. So 380000 0000 divided by 50. They do 76,000. That's not crazy. Okay. Right. I mean, if you look at some of these companies with 30,000, let's say you're, you know, a local trucking company, right? That is, you know, down in, you know, down in L.A.

and has a thousand kind of drivers and warehouse staff, you're easily. easily going to do five or six or seven hundred background checks a year, especially if you're turning over people or let's, let's not even get started with fast food and those sort of things, right, where you have your entire staff turns over two or three times a year in some of those fast food places. Yeah. So at 50 bucks, that's not out of line for 76,000, you know, I believe it. So that's 6,300 a year, sorry, a month, 6,300 per month that on average we think that they're doing. So they've got a, you know, they've got 15 people in the, like I said, like you said, the Philippines probably can do it very, very cheaply. And really,

what's the barrier to entry, though? They really seem to think there is one. And it's their system. I would imagine it's the fact that their system is integrated with their customers hiring systems. Correct. You know, that's the only thing I can think of that would make this software special is the integration. Yeah. Well, I would assume if they're selling into Fortune 500s, a lot of these people have, what do they call, applicant management systems, like recruiting management, RMS's, applicant managers. I'm now showing my total ignorance of this niche, but I assume that they're using some of the high-end kind of recruiting software management systems that are being used in these

big enterprises. And those tend, from what I've seen, tend to come with either, hey, you can buy our background check or you can plug into a third party one. There is a pretty famous startup, and I'll Google it here. It's called Checker that came out of Silicon Valley that does background checks. And it's basically just an online, like they basically like took normal background checks. and like put an API around them to make it really easy to do it programmatically. Hey, Michael here. I want to let you know that I'm hosting a conference,

first time I've ever done it. And it's called Holdco Conference 2025. If you want to learn how to manage multiple businesses at once, how to incubate new companies, or how other Wholeco owners and operators run their fleet of companies, then should come to Utah next spring. We've got a ton of great speakers, including Walker Dybul, who wrote Buy Than Build and founded Acquisition Lab. Plus, we're hosting it at an all-inclusive mountain resort so you can hit the slopes at the end of the day. So please go to holdcodeconference.com for your tickets and get 10% off with your discount AAPod.

That's holdcodeconference.com and use code AAPod for 10% off. Now, back to the show. And so that's what makes me wonder why there's barriers to entry. It feels like technology could easily replace this and you can just go direct or kind of the way the new AI systems work or automations work, you could just plug one of these into your hiring system and replace, you know, I feel like this may be connected to sort of old school technology. And we're right on the cusp of everybody kind of buying into the new type of software for automations. What do you think about that? For sure. Well, I think that's one of

things I would want to know about this business. Like, okay, you're semi-absentee and like, what's going on? Like, is Checker eating your lunch and stuff like that? And, you know, is getting more modernized? while you're still dealing with paper and stuff like that. Like, do you have somebody driving around to all these counties and pulling the public records every day of people who've, you know, been criminally done whatever while Checker is doing it some other way? So, yeah, that's something I would learn about this.

And maybe certain records you have to still get on paper. I mean, I've definitely learned that that is true with real estate. I don't know that we'll ever get real estate fully digitized the way that it, the way that our system is set up across the country. And so I'm wondering if the criminal record system is kind of the same way. stuck in paper in a lot of places. Yeah. I mean, it's interesting with like the,

with like the title and county records and all that stuff. Like here in San Antonio, like all of the county records are available digitally. You just log on and get them. Same with all the court filings. But there's some of these like West Texas counties. Like, have you been to West Texas? No. Like, what's there?

Well, so Texas is super weird, right? because there's this basically like there's a line that follows i 35 basically from fort worth down to laredo right it goes fort worth waco georgetown austin san antonio and then you work your way down to loreto but like if you go west of that like sea texas just basically becomes like very vacant like really empty we have counties like these enormous counties the size of connecticut with like 300 people in them. But you go out there and there's just nothing. There's no, there's nothing to do out there. You can't even, you're not raising cheap. Yeah. So, so, so, but like if you go out to a county in West Texas, pretty good chance there's, uh, there's no automation,

no internet, none of that stuff. You're asking, uh, a guy named Jim for a piece paper. And if Jim was sick that day, then you come back the next day. And California is huge. So this is talking about every county in California. That's a lot. You know, it's a lot of places. And I am sure in a state this large, every one of those criminal record systems is not digitized. So if you're relying maybe on a checker, I don't know. I have to look into this. Are they only getting the counties and the records that have been digitized?

Or are they sending someone out just like this company is and getting the paper and searching it as well? That, I guess, would be the main thing. you know, how thorough is this business versus a checker in terms of that. They didn't say anything about it in the teaser. Like we have, you know, they just say we have every county, but they don't compare themselves to any of the new school kind of methods like a checker. So I would be concerned, as I am with almost every business these days, what are the possible technology disruptions coming at this one?

And they are asking a really hefty price. And let's get to the cash, the all cash part. Go ahead. Yeah, I mean. What will trigger you more, all of the typos in the listing or the all cash part? The typos did really get me. I was having a hard time getting over it. But yeah, no financing whatsoever, just come with cash.

That seems kind of crazy. Come on. there are people and even businesses that I see looking at small companies where they could pay cash. They have enough in reserves that they could do that, but no one's doing that. You know, they all want a little bit of leverage. Maybe, you know, the degrees of leverage will differ depending on what they're trying to do with the company. But no one is buying businesses or very few times is anyone out there buying a business of a million one EBITDA paying $7 million cash with no financing whatsoever. I'm just curious why list it that way.

What is the reason? They think this is such a hot property that that's going to be a breeze. There's going to be so many buyers that surely some of them will be willing and able to pay all cash. I don't get the strategy. Well, let's see what, let's see what Hokie here has in mind. We can go look at his website. Yeah, let's go. Oh, his website doesn't work.

Oh, good job. Sorry. Well, there's that. Anyway, it was good to know. Oh, he's in Manhattan Beach. You're headed that way. Yeah, I'll be down that way this weekend. Yeah, kind of S-B-S-B, and their website does not work, so not a good sign.

Yeah, not a good sign. Yeah, I don't know what they're doing by kind of scaring away buyers that way. But look, maybe this is a killer business. Maybe it's growing 30% year every year. It's got huge tailwinds, and they just know the price they're going to hold out for and the type of buyer they want to have. And look, are there businesses that cash flow last year, $1.1 million that are low cap-x and are growing quickly or even growing at a reasonable pace with big tailwinds that you should pay $7 million

for? Absolutely. Do I know if this is one of those businesses? I do not know yet. I also have to take an issue with the actual term. no search funds. Like I'm going to exclude a particular type of buyer, which by the way, doesn't really, in most cases, have like a firm definition.

This guy just doesn't like them and I'm putting it in the listing that no search funds. I don't think that that does the client, the seller, a good service, you know, to say, I just don't like a certain type of buyer, so I'm going to say that in the listing. Don't come if you call yourself this. Yeah. It is a bizarre. I mean, if you're going to do this as a broker, there's nothing wrong with it. You know, come as you are.

Just word, Gen X, you and I are very accepting of all types. As long as they act like Gen X, everything's fine. Right. As long as they have our world. And they agree that we're the best generation. Right before they forget us. So there's nothing wrong, I think, with listing the business this way and being very specific about who you're going to talk to.

You just need to be really, really confident that you're going to get somebody who wants to spend $6.5 to $7 million on a business generating $1.1 million of cash flow. And you have a good reason to do that. But it's not that crazy of a price. Like I've seen this, this is kind of like a good software business. There are tons of software businesses that trade for 6.3 times cash flow. Like, absolutely. It happens all the time.

And some with even higher multiples than that. So you just, if you're going to list it this way, you just better make damn sure somebody's got to pay you that for it. Otherwise, you're going to spend a lot of time. It's not getting many phone calls. Yeah. And if it's a software business, and if that's the driver, I would love to see some of those software metrics in this listing, like something about customer churn or, you know, just something to kind of tell us, are these subscription clients, you know, what kind of cash model, what kind of cash flow model are we talking about here? I'd love to know a little bit more about it to make me want

to pay a seven times multiple or almost seven. It does make me wonder, they use this phrase here, this business is a direct information wholesaler. So it makes me wonder in the grand scheme of things here, are they, they have the information in the database, and they're one of multiple databases that folks like Checker have assembled into a single thing.

One thing I noticed in the Checker website, which was very interesting. So let me pull this up again. and it was just barely, like, visible when they talked about their prices. So they basically checker was interesting. They quoted about what I said I thought a background check should cost, 50 bucks, 55 bucks a check. So, yay, me, like I was paying attention. You're smart.

But here they have this interesting thing. Additional third-party fees may apply. Learn about pass-through fees. So that makes me suspicious that they are going to some, third parties to pull stuff up. And here it looks like they have county and state fees. Yep. That you pay directly, state police, but here it looks like they're actually going through

some industry databases and creating a single thing around them. So it makes me wonder if this particular wholesaler is one of these databases, which is pretty interesting because that means you're the system of record for that stuff. Right. Then they're part of the new technology that's coming along. maybe I do think, you know, that price is maybe pretty fair because they're always going to be the source to feed into these other systems. And I guess Checker is effectively a platform that sits on top of all these other systems and makes it easier to use. Correct.

Yeah. I think Checker reached unicorn status. Like they grew quickly enough to do that. Yeah. They basically like they grew really quickly. I haven't heard much about them lately. but they got valued really highly. And look, criminal background checks, not going anywhere.

Yep, we got to know. What else do we think about this deal? I don't hate it. I think it's, man, this is like one of the least crappy deals brought forth. So, kudos to you. I found it on Biz by Sell too. So someone check it out and let us know what you find out. And if you pay all cash, if you can.

Would it be interesting for a for a staffing business or a recruiting business to look at this? I mean, does that make sense? Maybe. I don't, I mean, the thing with recruiting businesses, like I could see it being part of recruiting

a hold co, like our friend Jesse Tensley, where he has multiple recruiting businesses that, you know, collaborate and cooperate, but they're independent businesses, kind of a Berkshow model. Like, I like that for this. If I was the CEO of a staff or a retained search firm or something like that or a search firm,

I don't know that I would want to own this. It feels like two really radically different businesses, different cultures, all that kind of stuff. But I think it's part of a hiring or staffing hold co. It could be very interesting for sure. So are we, yeah, I donate it either. I like it. I found it.

I found something good. Cudos to you. Well, somebody should go look at this. We'll put the link in the notes. And if somebody takes a look at it and gets Hokka, Nagahori. Do we think that's Japanese descent, that name? I believe so.

I would think so, yes. He looks like a nice guy. He looks like of southern Japanese descent. So pretty interesting guy, ethnically. So, very cool. All right, if somebody looks at it, they should definitely let us now. But other than that, good find. This is a pretty cool business.

Oh, by the way, Hokke has sold a spectrum of businesses, retailers, wholesalers, manufacturers, restaurants, bars, and nightclays. Clubs. Super cool. All right. Well, we'll stop there. Far afield from software. Yeah. So thumbs up or thumbs down for you? I say thumbs up. I'm not a searcher, so I guess it's okay. But I'm not sure I'm paying cash. Do you have $7 million? No, I'm going to have to call my friends.

Michael. You look at the wrong idiot. I like it. I like it. If there's a lot of questions I have about it to understand, is a good deal or not, but it could be a good deal at $7 million. It really could. But a lot of it depends on the dynamics, the market position, what is, what's the growth rate look like, what's the future look like for this business? But if you think it's going to keep growing at 30% a year, $7 million would be a bargain.

So let us know. Or it could be shrinking, in which case they're just crazy. We don't know. All right. We'll see you next week. Good job, Heather.