8M Aerospace Deal… 95% Customer Concentration. Buy or Run?

0:00Welcome to Acquisitions Anonymous, the internet's number one podcast for business buyers and business nerds. I am one of your co-hosts, Michael Gridley. Thanks for being here. Today, Heather and I welcomed back Brian, who is a searcher as a guest to the pod. He actually has an aerospace background. So we did an aerospace deal and he liked it enough that he decided to take some action on it. So stick around for the entire episode to find out what we thought about it at the end. Otherwise, here it is. Hope you enjoy it. We'll start Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous.

0:33We don't have 100 % beers anymore. And thumbs downing on just the plus inventory line. Big thanks to High Level for sponsoring this video and helping us pay for our editors. High Level is the all-in-one CRM that handles your emails, texts, funnels, and more all in one place. Think of it like the Swiss Army knife for small businesses and you can try it for free for 30 days at gohighlevel.com slash Michael Girdley. Brian, welcome back. Do you want to give us a quick overview of yourself? And you're going to talk to us today about, well, this deal that I brought. Yes. All right. So I'm back again.

1:07Excited to be here just as much as I was last episode. I am a searcher looking to acquire a company. I spend most of my time talking to owners, looking at sims. So I thought it would be a natural fit to come in here and do good out with you guys. Yeah. So tell us more about being in New Orleans. So you're working with a financial sponsor. We're not using the search fund word. We'll call it search fund. No D. So how did, you know, why do that? How did that all come together? Yeah. So I was definitely looking to partner with a financial sponsor in doing this, given that I have more of an operations background, not much M &A.

1:40And so I looked at the different options. For a while, I was going down the traditional path. I actually ran into Timothy Bovard, who's sort of the managing partner of the fund backing me at a conference somewhere. And he just kind of was talking about all the ways that it really behooves someone like me to have like one sorts of like conversations, learning, like a clear like methodology of what the investors are looking for and constant communication in order to get up the learning curve fast when the market is as crowded as it is right now. So that resonated with me. I went through their process and it ended up working out.

2:16So how does that work? Like, is there a predetermined, let's say you get a deal put together or you find a deal, are the terms already set of how they're going to invest and who's doing what? How's all that working for you? Yeah, so it's essentially, there are some like guidelines of like how much debt they'd usually like to put in. And we do do commercial debt and not SBA. So that's kind of a guideline. It's a guideline on wanting to get at least some portion of seller note in there. But in terms of the valuation, in terms of my modeling, structure and those kinds of things, I basically put it together deal by deal and just have ongoing discussions with them.

2:49Every week we have a conversation to talk about my pipeline, to talk about anything I think is interesting. And then we have sort of checkpoints of, okay, we want to have this meeting like pre-IOI. This is what the IOI is going to be. Why do anybody have questions, risks, or anything like that? Similarly, when we get further along to the LOI. So it's not really like a committee. It's kind of just a conversation. Yeah, but so let's say you get close to the finish line. how do you know if you're going to own 10 % of the business or 40 % of the business or is there ratcheting equity? Is that all set up beforehand or is it set up deal by deal?

3:22No, it's all set up beforehand. So it's similar to if anyone's familiar with the traditional search model where you can get up to 25 % ownership once you do three hurdles. So one at close, you get eight and a third after you've ran the company for four years. Or if you exit before that, you get another eight and a third. and then if you hit that 30%, 35 % IRR hurdle for the company, you get another eight and a third. That gets you to 25%. Got it. Okay. And how big could it go? How big of a deal could you do? It kind of depends. I mean, there's flexibility. They're raising a bigger fund than they have in the past.

3:59So typically we would try to stick between$1.5 million and adjust at EBITDA up to$3.5 million at$4 million. EBITDA, but there is some leeway to stretch up to five, six million in EBITDA, given the investor appetite. Nice. Heather, do you have any questions? Otherwise, I have one more. No, and I've worked with, when I was at Live Oak Bank, I actually worked with these traditional search fund deals that did not use SBA financing. So it's all pretty familiar to me. And you're with a great group, Brian. Great, great team they have there. Amazing. How big is their fund? 300 million assets under management right now inclusive of the port coast yeah great is that's EV total or that's just like cash that they have under the oh EV total got it okay so with seller node and bank debt and stuff okay so that means they're probably like at a 50 to 75 million dollar fund under across all of them gotcha something like that yeah perfect I had a dream last night I woke up and I was you know this is the kind of dreams I have.

5:06And I had a nightmare that I became a VC. And then 10 years into becoming a VC, I realized that the role management fees happen when you run a hedge fund. The hedge funds are all these billion dollar funds. You're making 2 % on that. And VCs are raising these$50 million funds, grinding it out for a million a year in fees plus expenses. And that was my nightmare. So that's how my life went last night. You're welcome. Yeah. I don't know if you want to do that, or you might lose the side pieces of hair you still have. I was a VC for a while, and I'm still working on one of those funds 15 years later.

5:38So yeah, it's fascinating to watch in that situation, watch the power law distribution of VC happen. You know, for that particular fund, there is one company that is going to be three to five times our original fund. Everything else is noise. Like it's just totally fascinating to watch the math happen in practice. On that note, let me pitch you this aerospace deal. All right. So this caught my eye. It showed up, I forgot which site sent me this. Business Exit sent me this. And it came to me in being very interesting because it is a specialized military and aerospace parts distributor. So revenue in 2025 was 8.2 million and profit was 1.9 million.

6:23So they operate at, looks like just shy of 25 % profit margin. Is that my math right there, Heather? I don't know. I have to get my calculator out. We usually ask Bill, Bill GPT. Yeah, Bill can do it in his head. And then they have a picture of what looks like, Brian, are these familiar to you? You're the aerospace guy. I mean, it looks like they got some avionics equipment in there. And like a raspberry pie. I was like, what does that have to do? But anyway. Pre-cooked. Just the ingredients. So profit is$1.9 million. They're asking 4.2 times that,$8 million. And it says it's a distributor. So they show us historical financials and adjusted EBITDA, which is interesting.

7:13So up here it says profit, but down here it says the$1.9 million is adjusted EBITDA. So in terms of being internally inconsistent, we are off to a bad start. It says not SBA eligible, which is two strikes against this, Heather. Yeah, this is no fun. Who chose this? Who chose this? All right. So revenue in 2023 was 8.3 million. 2024 was 8.8 million. In 2025, it was 8.2 million. Profit was pretty steady. Our adjusted EBITDA was pretty steady. I'm sorry. 1.9 million, 2.1 million, 1.9 million. So pretty consistent. Description is established in the mid-1990s, this US-based export distributor specializes in high-quality military-spec aerospace and defense components.

7:59The company's sources and supplies specialized electromechanical parts, including connectors, relay switches, and precision hardware to international aerospace and defense manufacturers. The business operates under a lean model and is distinguished by its exclusive export focus, strong compliance infrastructure, and long-standing relationships with mission-critical customers in highly regulated industries. They have a concentrated base of large international aerospace and defense manufacturers, approximately 95 % of revenue is generated from five customers. I'll pause there. Heather, I think in nearly 500 episodes, this is the first time that somebody has listed customer concentration as a feature.

8:39Well, this is the kind of business where it's hard not to have a concentration, I think. You're talking about the government and big airlines. that's that those are their customers um and i guess it's nice it's refreshing that they're just going straight forward with it so we don't have to guess and ask and waste the broker's time finding this out we now know it's five customers uh they have a consistent monthly backlog of approximately one and a half to two and a half million dollars they have daily requests for quotes and purchase orders with transaction sizes ranging from several hundred dollars to six figures They have aerospace and quality management certifications in place, and they have a U.S.

9:19export registration with ability to obtain export licenses as required. They have established and transferable relationships with government-qualified U.S. manufacturers and authorized distributors. Industry-specific ERP systems support inventory control, quoting, compliance, and full traceability. Ownership is open to a structured exit, including potential partial rollover and transition support. They're looking for a strategic or financial buyer with experience in aerospace, defense distribution, or regulated supply chains. And you can click here to sign the NDA. Brian, are you a strategic or financial buyer with experience in aerospace, defense distribution, or regulated supply chains?

9:56I am, technically. I mean, when I was in the Air Force, I was an aircraft maintenance technician. So very familiar with using these parts to do maintenance on planes. Spend some time in distribution as well. So this one's right up my alley. Yeah. Is this a good business to be in? It is because there is so much repeatability. Like there's before flight inspections, mid flight inspections, after flight inspections. There's all of these standard schedules. So like nobody wants to wait for parts to be delivered to be able to do any of that maintenance. Things are pre-ordered well ahead of time, which gives you the reoccurring revenue that most of us are looking for.

10:34how much inventory do you think they have to keep to run this business i guess that's you know these smaller deal listings often say how much inventory they have and i don't think this one did say that i would assume it's significant yeah significant in dollars and probably skews right because usually it's small parts that we're talking about so that's that's an interesting piece of it. Yeah, the fact they're telling us adjusted EBITDA and interest as part of that leads me to believe they may be financing a big bunch of inventory sitting in a warehouse somewhere. This is like a line of credit, a big conventional line of credit borrower type of business.

11:16And when you carry a lot of inventory versus receivables, they probably have a long cash conversion cycle. Let's just say that. We'll start with, you know, that's from the time that they have to buy and spend money on this inventory to the time that they convert it into cash. You know, it goes to receivables first and then to cash. It's probably at least, it's probably well over 90 days. That's my guess. You know, it's probably over a hundred and some odd days. What do you think, Brian? Yeah, especially when the customers, it seems their customers are probably like the U.S. Navy, the U.S. Air Force and some Boeing or something like that.

11:49So they have absolutely no power on terms or pricing. So, yeah, I mean, any of these customers could just decide, we want to be 120, actually. And what are they going to do? Right, and they've got to have enough inventory to have it in stock, so that tends to drag out your average inventory turnover even more. So this is one of those businesses where it's a really long cash conversion cycle and you need to buy the working capital, for sure the inventory you're going to buy, but you probably need to buy the receivables and have some cash go on balance sheet to close this deal and be liquid enough to run it.

12:28And it's probably a big number. So can I add a niche, a nuance to this that I may have missed when I described it? The business is actually, it says it is exclusively export. It has an exclusive export focus. so that means they are taking u.s like mil spec aerospace and defense components and then selling them to overseas buyers from what i see here so that's why that's why i was like oh this is relatively interesting compared to what i think the dynamic you guys were talking about where like mcdonald douglas yeah they're going to get care on delivery or they're going to get paid up front before they send it.

13:10I think some of this is like the Philippines, like Air Force needs a new switch for their aging F-16s and you provide those, which that's what makes sense. Because as I look at this, like this is an almost a$9 million a year business, which is a small distributor. I mean, there are hardwood distributors that do that on a weekend in san antonio but unlike those guys these guys are operating at almost 25 net margins which is incredible for a distributor like most of the ones we've looked at it are what like 10 8 net margins heather sometimes worse yeah yeah right good point so they've got this really niche market where they're able to they're selling overseas i guess it would be nice to know do they have country concentrations, you know, so they said they did tell us they had five customers, you know, are they all in one country or one region?

14:05And, you know, what are the risks associated with that potentially? Yeah, potentially. Yeah. Well, are tariffs, it's interesting, interesting if tariffs, how many of these folks are putting tariffs on military components? And also whether they're, but, but it's also like you think about who your customers probably are here. It's probably like the Saudi Arabian Air Force, like the Dubai, like, you know, Navy, the Philippine Coast Guard, like that's probably they have those handful of folks who bought US equipment over the years, boats, missiles, all that kind of stuff. And you're, you're suppliers of, of products to them and your, your niche is your subscale.

14:49So the manufacturers of these things are happy for you to exist because, you know, McDonnell Douglas or these guys who are making these aerospace and defense components, they're not wanting to mess around with supplying those guys. Like they just want to, they just want to focus on the big dogs who have big budgets. And it's remarkably consistent. I mean, both in terms of, of revenue and EBITDA. So, I mean, that's, that's a really good feature. Yeah. Hi, Heather here. When I'm not breaking down deals with these guys and helping people get the right SBA loans for their business acquisitions. Because when you're buying a business, the best financing isn't one size fits all.

15:25There's the best rate, fastest to close, the specific loan structure that you need, or a little of all of those things. That's why my company, Viso Business Capital, works with over 30 different lenders to find you the best funding in less time and with less friction so you can focus on the deal. Sign Sign up for a free live Q &A session on SBA loans at visocap.net. Then click Zoom Sign Up in the top right corner. That's V-I-S-O-C-A-P.net and click Zoom Sign Up. Do you guys want to dig into why aerospace is like such a good business to be in, manufacturing parts for it? Have you guys ever looked into the whole business?

16:02I've done a few SBA loans to aerospace distributors and the switch, you know, the main thing is the switching costs. will usually accept some concentrations because they will have them. That's just very common. But the switching costs are so high to go find a new supplier of whatever it is that they're providing. So it just ends up being very, very stable business. The margins remain stable. The revenue remains stable. There's always demand for it. Yeah. And there's also an incredible amount of parts and components in any individual plane. It's like... Yeah. And the beautiful thing about it is, you as a manufacturer making the, let's say, the bolts that go into the landing gear for a Boeing aircraft or even a Cessna, right?

16:54That may cost you like a dollar to make that bolt. and somebody in theory should come along and make a bolt just as good or better for two dollars but no aircraft mechanic is going to risk people's lives to save you know to save 50 on a bolt so you turn around you sell them that bolt for like five dollars or 50 bucks right because because unlike cars and consumer vehicles if a plane stops working it falls out of the sky or the wings fall off and that's really bad. So it's, you know, ultimately why so many fortunes have been made around, you know, making components for aerospace. And there's, I got to look up what the roll-up is.

17:33That's just like a massive beast around, around manufacturing aerospace components, but it's really famous. I'll look it up while we keep talking. Yeah. One of the things I remember about the aerospace distributor deal that I did finance a couple of years ago was the final hard count of inventory. It was very expensive. They had to get a vendor in, and it was very expensive to really confirm exactly what inventory you're getting. This one did make a point in the teaser down a little bit lower about having really good systems in place. And it needs to. I mean, if you're in this business, you better have great systems in place.

18:12So it sounds like you'd have a lot of data to do diligence on. And you'd have to ask the seller, when was the last hard count? And as a buyer, you're probably going to have to come in and do your final hard count. And it's going to be going to be pricey to do it on this deal. One rivet, two rivet, three rivets.

18:33I've walked through these places where they're in little bins all in the shelves. And, you know, it's incredible how many tiny parts a business like this would have in their warehouse. it is also a testament to how Boeing can be so massively mismanaged as a business and screwed up so bad and they're still making money just because like you know you look at Southwest Airlines has all of these 737s and they have no choice but to keep doing business with Boeing no matter how stupid Boeing is it's just kind of crazy oh you know who else is in the aerospace industry? GE speaking of poorly run companies they're in everything Yeah.

19:16So, Brian, would you call on this one or no? I would. I think there's enough here to want to know more, especially when it comes to military. Sometimes there can be a lot of different programs underneath one sort of umbrella. So let's say the Saudi Air Force, they could have like 20 programs. So the customer concentration may not be as crazy as it looks. and definitely want to try to understand more about kind of like the win rates on these RFQs. I actually like the RFQ business model because a lot of times folks have to send multiple RFQs for every order. So you can get a chance there and at bat at new business all the time as long as you try to do that.

19:55So I think I would want to dig more into that. And I'm going to say it could get an SBA loan. I think, what are they asking, 8 million here? They said not SBA eligible. I don't see anything that makes it not eligible. It's just a little large for SBA, and I'm sure lenders are going to have a hard time with the concentration. But this is the kind of concentration you might be able to get a lender through because of the nature of the industry. But because it's all export, believe it or not, there is an SBA program for exporters that gives the bank a higher guarantee. So normally they get a 75 % loan guarantee from the SBA.

20:32But when it's an exporter, they get a 90 % guarantee. So lenders are actually encouraged and will try harder to get these deals done. So this could be an SBA peri-pusu for the right buyer. I think it actually could work. It has to be the right buyer. But peri-pusu is where the lender lends$5 million, and then we'll do a conventional loan alongside that for up to$3 million more. So they could maybe do$6 million, something like that, in total debt on something like this and get the 90 % guarantee on the$5 million. And is the guarantee just because the government wants to encourage more U.S. exports?

21:11Trade deficit. Yeah, exactly. It's a trade deficit kind of tool to try to encourage lending and anything they can do to help capital flow to exporters. Yeah. So how would, you know, Brian, as you think about this, how would you grow the business? Do you have any first thoughts around it? Because that's where this gets really interesting because this is a big market. They're operating at high margins, but they're only working with five, six customers, right? how do we make this bigger? Well, I would try to look at what are the friendlier nations with the U.S. and I think the answers just get into those other programs.

21:45I'm sure they run things through RFQs as well. So like I said, that's the at-bat. If we can go and look maybe not Canada anymore but look at the Canadian Army, our sister country there what are their needs and what are their processes, how does their procurement work because it's like the needs are going to be the needs of these five programs they're in if they need more programs. And that gets rid of the customer consultation. To your point, Brian, there's political risk because you are exporting and if one of those countries kind of goes out of favor with the U.S., you could lose one of your five customers pretty quickly.

22:21Good thing things are so stable with our relationships with external countries right now. So this is a tangent, but I think it's a case in point of how long some of these manufactured weapon systems and planes last. There's a whole group of people, and I don't know if you guys have seen these, how they're like the people who are like airplane nerds. They're kind of like train nerds, but they're the same thing for airplanes. Are you familiar with this subculture? No. As a female, I don't know any of these people. It's kind of like, you know how some ladies are really into horses? Yeah, okay. Okay, I'm getting it.

22:57For men, it's the same, but for like different types of airplanes and trains. but one of the pilgrimages that a lot of these airplanes nerds do is to go find like unique flying planes and old kind of stuff and so like the original boeing 707 which was like the very first boeing jet that came out the last one that was flying was an original kind of basic stock model and it was still flying daily flights in iran as local as a few years ago because the iranians can't get parts from us because of embargo but like i would watch these youtube videos and guys would go to basically fly on this plane and like take pictures of it taking off and gets like super excited and turn around and fly back on it.

23:38But it's just a testament to how long some of these systems last, which I think is a good thing for this business, right? Even as grumpy as some of these like international relationships get, like once Saudi Arabia buys this stuff, like they're going to be asking for parts for decades, right? As long as that stuff keeps running. All right. So Brian, I think the big question to ask yourself, like, like, if you get into this one, like, are you comfortable like flying to all these random countries and like figuring out how to sell to these militaries? Like, that's the thing that I feel like that's the way the growth has got to happen here.

24:09They've got a few customers who know to call them. But other than that, like, got to figure out how to sell them more to make this thing a home run. I mean, at four times, it's pretty good. But man, I think if you could double the sales, therefore double the profit, that would be killer for this business. My concern is less like maybe cultural and more potentially everything's relationship driven, especially with external governments. I wonder if current suppliers are just so locked in at a lot of these countries and if there is a way to break them off from that. I could try, but I would imagine, I don't know how long this company's been in existence.

24:46I would imagine they've tried to penetrate some of the country. So I think that would be part of my line of questioning. Is there any kind of ongoing conversations with any other military operations? Or have there been attempts in the past on what happened? Because yeah, that would be the blocker. Especially like we go over to the Middle East and maybe not as friendly to the US. And probably a lot of backhand relationships and things of that nature. So I just want to know, probably have my eyes wide open what I'm walking into. Yeah. Super good. All right. Well, you guys want to give your final judgment on this deal?

25:24Heather, where do you stand? I would want to go further and learn more about it. Thumbs up. Yeah. Brian? Thumbs up at an angle.