Best of Acquisitions Anonymous - This Mattress Company Has Explosive Growth

0:28Welcome back to Acquisitions Anonymous. Okay, where do you guys sit in the market of mattress manufacturers? To triple the top line and lose a million dollars of margin of real dollars is amazing.

0:51Welcome back everybody to another episode of Acquisitions Anonymous. I'm Mills Snell, one of your co-hosts. Me and Michael talk about a fascinating company today. I don't think we've ever done one of these, which we're continuing to try and mix it up and find unique deals. And this one is one of those for sure. It's a mattress manufacturer and they have had explosive growth. It's unbelievable. They triple the business in three years. They've only been around five years. They get up to 40 plus million dollars in revenue, but they have declining margin. So we talk about why would that be the case?

1:17Very, very red ocean, lots of competition. We're scrolling Amazon midway through the episode, looking at mattresses and trying to figure out, is there any differentiation in this market. Why does this business need outside capital? Who's the right type of buyer for it? It's really fascinating to look at markets that are kind of this transparent and this competitive and try and go, how in the world does somebody make this work? And this business is on declining margin, even as they triple the top line. So it's just really fascinating. I think you'll really enjoy the episode. Stick around for a quick word from our sponsor.

1:49Hey, Michael here. This episode is brought to you by Tonninson Accounting Services, the leading provider of quality of earnings reports for small and mid-sized business deals. Every year, their team reviews over$500 million in transactions, and the reports are trusted by buyers, bankers, sellers, and brokers nationwide. What sets Toninson Accounting Services apart is premium quality work at an unmatched price, a full quality of earnings report for just$6 ,000. You'll get more depth and insight than firms who charge twice as much, which is why so many dealmakers turn to Toninson Accounting Services when accuracy and speed matter the most.

2:21There's a link to TonnensonAccountingServices.com in the show notes, or reach out to Josh Tonnenson on LinkedIn for a free consultation, where he'll walk you through the process step-by-step and answer any questions that you have. Tell them that Acquisitions Anonymous sent you. Mills, I have some bad news. I'm disappointed. We don't have 100 % beard anymore. I shaved. I'm so disappointed. Well, I mean, I felt like I looked really good with the beard, but I also feel like there's, I think there's three types of people. There's people that are always without beard. There are people that are always with beard.

2:55And then there's the people that kind of go in between. And I think I'm the in-between person. Yeah. You like, you know what? Keep people guessing. I don't know. Is Michael going to have a beard this month or not? Uh, my wife would tell you I like change. I like when things are changing. So there you go. Uh, speaking of change and bad non non sequiturs, i brought a deal that's a bit different than anything we've looked at um so let me pitch you on this and then uh and then you can tell me if you hate it or not hit me okay so this is actually for once it's not listed on a broker it's not listed on a direct listing site uh it is something really interesting and as we get through it i think you'll see why i think it's but it's brokered by goddessman company which appears to be a broker still listed as available I actually first looked at this over a month ago and it is still still on the market.

3:50So it is a mattress manufacturer and they also sell accessory accessories. And it's located in the southern United States, which to put a pin in that, by the way, I got an argument on Twitter this morning. People arguing whether Texas is in the south or not. And I was like, come on, like Texas is further south than all of the south. How is Texas not in the south? so anyway but you guys are but just snobby south carolinas as far as i'm concerned yeah you got that right uh so this is located in the southern usa so i gotta assume since it's capitalized southern it's somewhere alabama mississippi south carolina maybe florida georgia florida's also not part of the south just just so we're clear on that wait oh were you just arguing florida is not part of the south yeah yeah they're totally different it's like texas you're You're in a totally different category.

4:40What about North Florida? Like all those Pensacola people? I still just, Florida's, they're a whole, it's a wild breed, man. They're totally different. All right, we'll put a pin in this and we'll save it for our future geography podcast. All right. So for over five years, this company has been manufacturing and known for selling high quality mattresses and adjustable beds at affordable prices. Manufacturing is done both internationally and nationally. U.S. production has diminished supply chain problems and removed tariff issues. The company has over 50 branded SKUs and over 1 ,000 accessories.

5:13Revenue is driven by online sales through both Amazon and Shopify. Business is also expanding in the B2B vertical. This company's home office and manufacturing facilities in the southern region of the United States. The company has talented ownership, management, and staff. Ownership is seeking an equity partner to expand and fund the company's future growth. owners would like to maintain a minority ownership and insist in both scaling the company and reaching aggressive sales projections. So maybe we pause there. There is a very coded language of what they're trying to do with this business and that translated to who the potential buyer is.

5:46But what's your reading on that, those two sentences there? I got to go a little bit further up. I didn't, I can't imagine a thousand accessories for mattresses even existing. 50 SKUs is one thing, right? Okay. So you've got, you know, every size mattress, there's less than 10. You've got pillows, maybe you've got like pillow toppers, you've got probably allergy covers. I mean, but a thousand accessories, what are we talking about here? Well, let's Google it. I'm Googling the term mattress accessories and seeing what comes up. because this is something I've never done before. Okay, so you got mattress covers.

6:29Those are accessories. You have, obviously, those ones. I don't know how if your kids are past the bedwetting age, there's all kinds of things to protect you against that. Now, I wonder if they include accessories being like the frames and stuff like that as well. Yeah, maybe it is. Maybe it is bed frames. Also, I mean, this company's only been around five years. The last, I would say maybe five to 10 years of online mattress selling has been in a huge heyday and completely, I think, was an upheaval of the existing mattress industry, which was big box and they were everywhere. And they grew geographically by opening big expensive stores with a lot of inventory.

7:15yeah we should definitely dig into some of the things i know about the mattress industry it is it is fascinating uh and it's it's it's one of those industries you run into that's kind of like the um uh what's another what's what's a way of describing it the glasses industry like you know the whole glasses industry is basically dominated by luxotica so you go into like sunglasses hut or whatever and you think you're choosing from like 40 different vendors it's all from one company and like they own like 70 percent of something like they own ray-ban and everything else around it tommy hopefugger glasses if somebody's selling you sunglasses they all come from luxotica and uh so there's similar kind of dynamics going on in the mattress industry where there's all these kind of fake fake things where it looks like uh yeah it looks like there's competition by the way a similar thing happens in the fireworks industry everybody has their own labels on everything yeah i think all the stuff comes from like 15 different factories using 10 different designs.

8:11Like it's all the same. It's all the same stuff. So, but you got a high average order value, like to your point, mattresses and glasses, high average order value. Yep. You probably are buying them, you know, once every five to 10 years and maybe glasses a little bit more frequently. And so there's this like rush to grab these customers because it's such an infrequent purchase. Holy moly. Yeah. Well, let's, let's come back to the dynamics of the mattress market and talk about what has happened to this company. So in 2020, they did 16 million in revenue and 5 million in EBITDA. In 2021, they did 33 million in revenue and 4 million in EBITDA.

8:53In 2022, they did 43 million and 3.7 million in EBITDA. They tripled in three years and are losing margin. And are getting less profitable. Yeah.

9:07And this is EBITDA. So we don't know. The big crux of this business. If they are actually cash flow positive or not. They may be growing like crazy. The big thing about this business is customer acquisition costs. And it, I think, has been some of the more expensive AdWords, right? Yeah. You got like Casper and, you know, AteSleep and all these different, you know, people who figured out. I think it's been within the last 10 years that you could actually order a mattress online and they ship it to you and it's vacuum sealed and you, so that, I think that's the industry we're talking about, but they manufacture it domestically, which is surprising to me.

9:46Yeah. But were there, I Googled tariffs by a mattress online and on Google, it is one, two, two, three, four, five, six, it's 15 ads before I get to Mattress Firm. In one native organic search. Yeah. Mattress Firm is the first native one. But yeah, it's such a weird dynamic in the mattress industry because how infrequently people buy them. And like, how often do you guys buy mattresses? Like we buy a new mattress maybe every five to seven years. And I'm going to get totally pilloried by somebody who's like, that's bad for your back. But no, we're in the same boat. And, you know, like maybe around like a life event, like you, you know, you move and you're like, it's probably time to get a new mattress, you know, that kind of thing.

10:36So it's such a weird thing where you and you end up with, you know, maybe this is a good time to talk about the weird dynamics of the mattress. So it's highly consolidated. And then a lot of times you'll see like a mattress firm or like Mattress Express directly across the street from each other. and those two companies will be owned by the same company. Like, there'll be fake competition. And then one of the things that opened my eyes to how retail can work, and I don't know if you know this, Mills, but basically, like, if you ever, let's say you want to buy a Subaru. Let's say, like, you're a genius and you want to be a Subaru driver.

11:12Let's say you want to buy a Subaru. Like, you can price shop Subarus because there's only a few different configurations, and the stuff they change doesn't matter much. You can go from ABC dealership, right? And they all kind of, you know, you can price shop those. It's impossible to price shop mattresses because what they'll do is you go in and they'll change just like the color of one part of the stitching on the mattress. And that becomes like a totally different skew. Like you can't go into one mattress store and be like, okay, I want a Sealy Posturepedic and I want number nine and like, like show me your best price on number nine.

11:46Because you go to the other place, they're like, oh, no, we don't have number nine. We only have number 999. Yeah. But they're, so that's why we can't. Functionally the same, maybe aesthetically slightly different or they, there's like misnomers associated with it. Yeah. Or they just like, if one of the tricks was like a better way for me to describe it is they would change just some tiny imperceptible part of the skew of the mattress and create an entirely new skew. So two mattress shops could both be carrying Sealy, for example, and like they would are Tempur-Pedic and like, it would be the identical mattress with a slightly different change to one aspect of the mattress.

12:23And that caused the entire mattress to be a different skew. So it made it impossible for you as a consumer to price shop. And therefore, both of these firms then did kind of what you would expect, which was go charge monopoly prices for these mattresses. And that's, to some extent, why there's so many of these damn mattress stores.

12:46it's interesting i mean the the dynamics make it hard like you can't ever compare apples to apples exactly yeah it's genius when you look at it so i mean before the days of online mattresses right the whole scheme was you had a handful of mattress stores that would specialize in this stuff or you had furniture stores that would carry it and furniture stores are mostly dead these days right or and and i don't know if it was still that way when you're a kid but also the department stores would have big bedding areas they would have like you'd go to the third floor and it was like half of it was mattresses and the reason was is because they knew a couple things one people wanted to sit on a mattress before they bought it because they know they're going to spend half their life on it so they want to be comfortable they know that customers can't price shop it's a big enough price point that they can finance it and make money on the financing like an auto dealership does.

13:38And because of those dynamics, where it was such a personal choice, people would take these $500 mattresses and sell them for$3 ,000. So it was super high margin. So everybody wanted to be in that business. And this is all pre like online shopping. But it created this fascinating dynamic where you as a consumer, it kind of always felt to me buying a mattress like you felt buying a car where it's just like, well, okay, I'm getting screwed here. My goal is just to get screwed as minimal as possible and not come back to this place ever again. That's the same feeling I have buying a mattress every day.

14:09And oh, by the way, I sleep on a$3 ,500 mattress that we got totally screwed on, but my wife loves it. So. I remember looking at a deal out West at one point and it was a multi, you know, it wasn't mattress firm, but it was a, it was a, I think they were maybe like 15 to 25, you know, units. And these are very big stores. Typically they're very expensive. And, you know, you're talking about like mattress firm and some of these others, they're signing long-term leases on very expensive real estate in order to sell this. It's like, okay, yeah, everybody's looking at it going, I'm coming for your margin.

14:44I can tell you have margin from a mile away. I'm coming for it. Hey everyone, it's Bill. And I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod. It's called Capital Pad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So CapitalPad is a marketplace for acquisition entrepreneurs, that is people who want to buy a business and need capital to list their deals and solicit capital from other people who want to invest in acquisition deals. So if you want to back somebody buying a small business, CapitalPad is the place to do it.

15:24And if you want to buy a business and need capital, you can go on CapitalPad to be introduced to investors. So the really great thing too from the investor side is that CapitalPad takes care of all of the details that can get hairy with small business acquisitions. They handle standardized terms, standardized governance, standardized distributions, all up front in black and white. Basically, CapitalPad professionalizes investing in small businesses and the returns can be really, really good. I'm so stoked they exist. It's founded by my friend, Travis, who is a phenomenal entrepreneur in his own right.

15:59So if this sounds like something that's appealing to you, if you want to buy a small business and need capital, or if you want to invest in small businesses, go check out capitalpad.com and tell them that Acquisitions Anonymous sent you. Yeah. So to your point about real estate, Mattress Firm got in trouble by having too many expensive leases. They filed chapter 11 in 2018. And to put it in perspective, they had 2 ,300 stores as of 2021. And they tried to break 700 of those leases, like a third of those leases to get out of those because they were unprofitable. And I think that all ties back to the change that happened in the mattress buying industry, which was direct to consumer.

16:41Casper, Purple, all these types of Satva, like one of the 85 different online mattress firms that showed up, companies that showed up when I Googled it. So I think that begs the question, is there any real differentiation that occurs within the product type? You've got, most of these are foam, right? If they're shipping them to you, they don't have, they don't have springs, they're foam. And I, like my wife, you know, will tell me, Hey, we really need one that's like very clean and green and, you know, doesn't off gas, you know, these forever chemicals and stuff like that. But is there any differentiation between the brands?

17:21Because this is a manufacturer. It actually, like, this is probably the part of the food chain that is maybe least affected by these whims of online. But it seems like they're a manufacturer who is just selling direct-to-consumer, not as much wholesale. They mention it as like an opportunity. Yeah, and I think that's the very big first thing you want to understand. And this is like, okay, where do you guys sit in the market of mattress manufacturers? Like, like, what is your differentiation? What are you doing, you know, in terms of having some sort of defensibility, because at least looking at the numbers here, it looks like these guys have rushed headlong into the online mattress selling market.

18:05And as it keeps getting more and more competitive, Amazon, Google, Facebook are all incredibly efficient marketplaces at making everyone pay the maximum possible dollar for customer acquisition over time. And it looks like at first glance, this is a relatively undifferentiated product and all the profits are getting eaten up by the billionaire platforms. and that's what i would want to understand like what what are we doing here like is this triple the top line and lose a million dollars of margin of real dollars is just amazing yeah well and it's it's not your real dollars yeah yeah they could they you know if they have a bunch of equipment and that they're depreciating like they could be showing net losses on all this stuff and um like i think that's that's the key thing here what has caused this growth how is it are they just spending more on meta and in amazon ads um they do say here they're on the amazon platform so they're definitely having to pay to promote what they're doing but that is totally what it smells like is going on here well and and you alluded to this earlier and and we went a different direction first but they're looking for a growth equity partner and they say they want a partner to help fund the company's future growth.

19:21Guess what? That means growth is expensive and the business is capital consumptive in terms of the path to growth. Yeah. Well, they're an integrated manufacturer and direct-to-consumer thing. Like, ugh. And you're competing with mattress firm who's just restructured through bankruptcy and has all these economies of scale. And you're a startup. So, yeah, I'm with you. Unless there's some sort of niche that these guys have carved out, like it's, it doesn't smell great at first, at first glance. And then I think what you have more recently now is you have more of these, not just kind of, I'll say like dumb, you know, foam mattresses, but like the smart mattress where you've got, you know, analytics integrated into them.

20:11You've got temperature control. You've got, you know, look, look at the, just look at television ads, right? they're spending so much money educating you and trying to differentiate on expensive TV ads that tells you something right about their customer acquisition model. And you're going to be a small fish competing against big fish. And you're going to be a small fish competing against VC backed companies who have actually probably some product differentiation with like a smart mattress. Oh my God. Look at, look at the red ocean. I just pulled up Amazon. sponsored sponsored sponsored sponsored sponsored so for those of you that aren't following it amazon has become quietly making an enormous amount of money through advertising so half the stuff that you see when you're looking and trying to buy something on amazon you're getting shown that because the because amazon is having the supplier pay to promote their stuff and so you see it and you see it as a choice.

21:14So Amazon and Google have basically like gone headlong together. And like I searched mattresses here in, in Amazon and the entire first page of results is paid. A hundred percent. Wouldn't you love to know? So like, look at this, some nectar, right? Is it, is a, is a name I've actually heard of, but what do you think they're paying for this massive banner at the top versus all these others? There's a couple names I recognize like Casper's down there, but then there's so many that are just generic, you know, queen mattresses, Sienna, you know, like other just kind of generic non-descriptive names.

21:51Well, to Bill's point, when you see on Amazon two pictures of a product that looked like it came from the same factory, but have a different brand name, they're pretty much coming from the same factory. And they're, you know, I think it's a sign here that these things all look the same. And, uh, and based on that it's like oh like look at the review volume too i mean the all of these things this one has 156 000 reviews right most of them have tens of thousands of reviews for a 300 mattress yeah wow this one says 6 000 of these were bought in the past month i love how google or amazon kind of tells you how big the market is for stuff so yeah uh man this looks like look at this place look at this one it's called sursper it's like it's like a chinese knockoff of can't i think that's even the same color scheme oh here's the greatest sign that this is a red ocean mills like this one is called pay less here mattress brand that's their name that's just like and look it is it is less it's a hundred dollars less than the than the others oh man you know like i don't know if you've seen it but the olympics are going on right now and all these beds designed to make sure the Olympians have fewer hookups in the rooms because they're cardboard beds.

23:10I think those would look more comfortable than these things. These are horrible. Oh my God. There's a Tempur-Pedic mattress for$191. I thought Tempur-Pedic was like a premium brand. Oh my gosh. I mean, they are probably for the spring mattresses. If you do it right, It is way more expensive from a manufacturing and a cost perspective than these. And I don't think they're getting sold online. I think you've got to go in store, which is why I think there will always be a place for those physical stores. But the footprint, like you said, is probably getting cut by about a third, like Mattress Firm and others.

23:50The other thing that is interesting, this is anecdotal, but I had a friend who worked for one of those mattress stores in high school. and one of the things that they have to do is they have a return policy. If you sleep on it within the first two nights and you don't love it, we'll take it back, but they can't resell those. So they have to take them back, but it's been in somebody's home. They can't put it back in their inventory. And so my friend had this side racket going on where anytime they had a really expensive, like an$8 ,000 mattress get returned like that, he would tip somebody off and they would go because they don't put them back in inventory, but they also kind of have to be smart about how they dispose of them because you can't just have like an$8 ,000 mattress on sale for$1 ,000.

24:38And then you realize, oh, wow, okay, this thing has very, very little cost actually associated with it. So he had this little sideline business where he would help people source these really expensive mattresses like a few times a year and he would take a cut. There's a great there's a great line in, uh, that people talk about when they kind of just think about stuff like that, you know, it's like capital finds a way, you know, it's like this idea that money always seems to find a way to be made. Uh, and people are, are there. So, uh, I love stories like that where you're just like, Oh, like, and you run across them when you're looking at buying businesses, like you end up with just like seeing these guys, you were like, like random CPAs who figured out a way to make$4 million a year, just from some little niche that they discovered, you know and uh it's like okay well i'm gonna file that away as a pattern i could use at some point in the future but it's like it the more i look at businesses the more i'm just fascinated by the ways creative ways people figure out how to make money absolutely uh cool well you want to wrap it up on this one i think um look i think from a meta perspective the fact that i first found this a month and a half ago and it's still been sitting and looking for growth is a sign of how I would say most of the private equity and growth equity folks are thinking about the mattress market right now.

25:53They probably look at the numbers the way we do and they see the trends that they know about and are scared of getting into a high capex, blood red ocean, running into a recession style business with made in the USA that seemingly looks pretty undifferentiated, right? Road to wave probably of the DTC stuff coming along has grown up and now is seeing all their profits eaten up by the advertising platforms online. So other than that, I'm sure everybody loves the deal. What do you think?

26:25You also wonder, right, there's no 2023 numbers. So is it going to be a little bit of a bait and switch where you're like, wow, look at this growth trajectory and all they need is like a little push. Like their unit economics aren't working with their customer acquisition costs. Like, is there something that will tip the scales? No. And then you sign the NDA and you realize 2023 is probably, I don't know, have they even maintained this level of revenue as things have gotten more competitive? Right. Makes you wonder why, I mean, I guess maybe I'm going to answer this question as I ask it, but why hasn't a bigger player in the space acquired them?

27:01And it's probably because it's all so commoditized that there's no accretive value to buying something like this. It's like, why? I mean, we're just going to continue to spend more money on customer acquisition and there's not really much differentiation. Yeah. Yeah. I mean, I would suspect if they had figured out a way to differentiate themselves and carve out a defensible part of the market. And there's all kinds of different ways, right? You can have organic mattresses. A number of the ones on Amazon are green tea mattresses to make you think that it's green tea healthy. There's the ones where you can change the number to make it softer or stiffer.

27:36like we have that one i've put it to super stiff and never touched it again like it's a total waste of money um but the fact these guys don't talk about that in the teaser and are selling through amazon a lot um yeah that's that's not good brutal um super interesting though i think if i wanted to dig into this i think the positive side would be to look and say okay seemingly smart people and common wisdom is don't dig into it don't go into a market like this a lot of times when you see common wisdom, that's a chance for you to be an actual real contrarian and go figure out a way to make money that everybody else is just writing off.