How This Restoration Franchise Makes Nearly $500K Profit

0:00Hey, everybody. Welcome to another episode of Acquisitions Anonymous. I'm Connor Gross, and Heather was with me on this episode. On this episode, we talked about a Blue Kangaroo Packouts franchise, which is a franchise that does contents restoration. So we had a lot of good conversations about the restoration industry in general. What the heck is contents restoration? Why are they selling? This business has only been around for a couple of years. And so I dug into a lot of that, as well as some of the cash flow concerns that come with the restoration businesses and some of the lending solutions that Heather has helped people out with in that lane of business.

0:34So be sure to listen to the end. We actually like this one, spoiler alert, but you'll hear all the reasons why. And yeah, follow along as we dig into the nitty gritty. We'll set Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100 % beers anymore. And thumbs down on just the plus inventory link. 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 michaelgirdley.

1:12Well, good to see you again, Connor. Good to see you, Heather. How are you? I am great. I'm just back from vacation, so it really couldn't get any better than that. I went to Hawaii, which was awesome. Ooh, ooh, that is really cool. Were you on the Big Island or were you elsewhere? No, I usually go to Maui or Kauai, and this time I went to Oahu, where there's a lot more going on. It was actually pretty fun. That's really cool. Well, my last couple weeks have not been as eventful, but I'm glad they were good on your end. Yeah, absolutely. All right. Well, did you, I mean, you usually bring us some really cool franchise deals to discuss.

1:49Did you bring something today? I did. We've got a Blue Kangaroo Packouts franchise resale in Charlotte, North Carolina. So, just reading it out real quick. Again, established and thriving Blue Kangaroo Packouts franchise asking price is$975K and SDE is$482K approximately. And then they disclose gross revenue of about$937K. So, all right. So, business description, this is a rare opportunity to start earning day one. Don't miss this rare opportunity to own a highly profitable, established Blue Kangaroo Packouts business. Specializing in contents restoration after fire, water, or mold damage, this turnkey business comes with trained staff, proven systems, and a solid customer base already in place.

2:37Enjoy the benefits of immediate cashflow, brand recognition, and franchisor support without the risk and ramp up of starting from scratch. A fantastic opportunity for entrepreneurs looking to step into a thriving recession-resistant industry with strong growth potential. Growth potential, excuse me. And again, this is in Charlotte. It disclosed about 175K of SSFF &E, 25 employees. Business operates out of a 10 ,000-square-foot warehouse, includes a small office with a shower and kitchen. So fairly new business with a lot of untapped potential. What stands out to you? Well, I'm going to first try to take a guess at what I think this is because you said a key word there was contents restoration.

3:21So I know I think about restoration businesses where they're more like contractors and they're going to fix your walls and your floors and whatever else might have been damaged by a fire or a flood or something like that. But I think contents is where it's basically your belongings, maybe your artwork and your furniture and things like that. They're going to repair what they can. Is that kind of what we're talking about here? It is. I describe them as the highest paid movers on the planet. It's like they are brought in by other restoration groups, typically. They're responsible for the contents of the property.

3:58So, it could be everything from just packing out the house after a flood. They typically have a warehouse, as it sounds like they do, where they bring everything to sort through it to figure out what is salvageable. salvageable. A lot of times they'll help the customer document things for insurance purposes to be reimbursed. They'll store it during the restoration process as things are being fixed. And then they bring the stuff back in and help people pack it out. And then some of them, I don't know if Blue Kangaroo does or not, but some of them actually will sell, you know, contents that people don't want to return.

4:35And so a lot of different revenue streams, Exactly. So they handle one piece of the restoration process. So they get contracts then not with the insurance companies, which is what usually comes to mind when I think of restoration. They're getting contracted or subcontracted by other kind of contracting type restoration companies. Is that right? That's exactly right. So at least that's my understanding. Have you heard of Belfor Group by chance? I know I've seen their. They're the largest restoration company in the world, actually. And they own Blue Kangaroo. So that's where a lot of their franchisees get a lot of their referrals from, is other sister companies like 1-800-Water-Damage, those kinds of companies that are also part of the Belfort portfolio.

5:28So they're what I would call a captive. They're basically serving the parent company's other businesses primarily. but do you think they also get customers that are outside of that family of businesses or just stick within? No, they do. They have other, like they can form relationships with other restoration companies, but they, you know, on day one, they have somewhat of a foundation built of referrals due to those relationships with those sister brands. And I think that's the key whenever, you know, thinking about this versus wanting to be in a restoration company that handles a wider array of the process is that when it's more niche like this, like they, presumably all things considered, can do a higher volume because they're only handling, you know, one line of the process that they can perfect, but they, you know, they're not the one that's interfacing directly with the customer a lot of times.

6:21So there just has to be, they have to be confident that there's a way that they're going to get a lot of referrals from day one, basically, in a business like this. Interesting. So this territory is in Charlotte, which we all know is a growing area. It's a great metro to be in. But I would think it would have been bigger than this. When I look at the total revenue,$957 ,000, not even quite a million dollars a year. However, very good margins. But does that seem about right to you? Does that seem for a big metro area like Charlotte that this is all that they get, a million dollars? It definitely seems low, except for the fact they started in 2023.

7:05Even then, it might be, it seems a little bit low. So I don't know if it's just the nascency of it, which is why they're subscale. Or another possibility is that they don't own the entire Charlotte Metro. So they may only own a piece of it. But we don't know that for sure. Yeah, so that would be interesting to know. Is it just so new and it's still got plenty of growth potential? Do you have all of Charlotte or do you just have a part of Charlotte? That would be interesting to know. And just are there customer concentrations that are coming from that family of companies versus are there outside customers, outside restoration companies that are bringing this group in?

7:44I'm really curious about the margin. I mean, it feels like it's almost, at least on an SDE basis, it's almost a 50 % or is about a 50 % margin. Does that sound right to you? Um, it definitely sounds it's a higher than I would expect. Now, I think relative if you were to take content restoration versus, you know, we'll call standard restoration, I don't know what the proper term is. But you know, your serve pro your Paul Davis that do everything. I think when you compare the PNLs, a content restoration business is going to have lower revenue, because they're only handling one lane of the process.

8:20And they're going to have better margins because their cost of goods sold is going to be lower. lower. I don't believe it's as labor intensive of a business. So I would expect the margins to be higher than your standard restoration business. 50 % is bulky. So I bet what you would find with this one, if you were to read into it a little bit, is that the owner is operating this on a full-time basis and not paying themselves. Or they may be paying themselves, but they've included that in their SDE number. Right. And everyone knows that listens to me. I don't like SDE. anyway. I like to figure out what is the salary that the buyer is going to need, take that out, and then let's just talk about adjusted EBITDA.

9:01So in Charlotte, I guess you'd need at least $100 ,000 salary, I would assume. So this is really like$382 ,000 of adjusted EBITDA, which is a little bit less. But you said something that I want to ask you about. You said it's not as labor-intensive, but 25 employees actually sounds like a lot of people for a business of this size to me. And that's a great point that has making me regret what I just said. Because when I said not as labor-intensive, I guess I'm thinking about the revenue that they're getting from storage of a property and stuff like that. But no, you're totally right. I mean, this is a labor-intensive business.

9:36So forget I said that. All of that said, 25 employees is insane for this scale of a business. So that also has me wondering whether, I mean, are they talking about part-timers full-time. Yeah. No, yeah. It's got to be 1099 part-timers or something like that because, or that was a typo because you've only got$400 ,000 of expenses or 500 maybe. You can't have 25 salaries within that, you know, not full-time salaries. So yeah, it sounds like there's a question to be asked there, what they meant by 25 people. Yeah. And I also wonder, it'd be interesting to look at their revenue on a monthly basis and see how volatile it is.

10:24Because that is the fundamental challenge with the restoration business. I think there's incredibly high revenue upside, but it is incredibly unpredictable. It's an urgent, right? So also just on the employee conversation, it would be interesting to hear how they manage that and how do you manage not being able to know and forecast weeks in advance what your labor need is going to be? And are you able to, you know, turn the dial up and down to make sure that you're not taking on more mouths to feed that, you know, on any given week, you're not going to need? Yeah, and that makes me think the 25 people is more like a roster that they go out to, kind of like a restaurant will sometimes run, you know, when peak times, they're going to bring in more people and slower times, they're going to have fewer people.

11:13So maybe it's something like that. But to your point about unpredictability, that is something as a lender that gets to be a problem with any restoration business, whether it's content or the, like you said, the sort of general ones. They can have really peak times when not only do they have a lot of demand for their services and their people, but it takes a huge strain on cash flow because it takes them a while to get paid. these are the types of businesses, they're working capital positive, they have a longer cash cycle because ultimately the money is coming from an insurance company, which we all know they pay slow.

11:47So I think that's one of the challenges is that you've got usually a pretty long cash conversion cycle because of ultimately where you're getting paid from and an unpredictable revenue cycle throughout the year or from year to year even doesn't always pair well with debt, at least not kind of in the traditional ratios, meaning you're going to be in this industry with debt, you're probably going to want pretty low leverage. You're going to want to set your loan amount, if you will, to your lowest part of the year that you can possibly imagine, you know, or the lowest year that you can possibly imagine and not have to count on those bigger years to be able to make your payments.

12:29So you've got to go low leverage here, something like this. Yeah. Are there lending solutions for a business that's this small, relatively speaking, that like short-term lending solution that's that help people weather the storm? Not really. I mean, I think everyone is aware of the term, like when you need the money, that's when the banks will say no. So if you're ever approaching a bank because you're in a cash crunch of some kind and you're in a business, you're going to find out really fast. They don't They don't say yes to that. They say no right away. So what I have closed deals for clients who bought restoration companies, bigger ones than this.

13:10This would make me a little nervous to put debt on, but bigger companies than this, a little more diverse. And we've always set them up with a line of credit that was undrawn at close and that there was no like immediate need for it all, but that the purpose of it was if we get a large project, you know, that we will use it for that. that's something the bank can get comfortable with. But the reality is once that line of credit's in place, they might use it during a lean time too. You know, they might, the bank doesn't want to give it to you for that reason, but you might, if you have one, you'd be able to use it during a lean time.

13:45Got it. Okay, yeah. And I've heard some other folks that have been in the restoration business utilize different solutions to, you know, to help their short-term cashflow. Like, I think that there are companies out there that will buy your AR from you for, you know, at a markdown. factoring thank you that was what i was looking for yeah well i was thinking my normal world which is no the sba lenders won't do it but you're correct absolutely you could sell your receivables it's called factoring but whether it's this industry or any other it's kind of a last resort because when you do it the cost of that debt if you will is very high they they buy let's just say your receivables worth a thousand dollars they're going to maybe pay 90 or 95 or 900 or $950 for it.

14:31So you're losing 5 % to 10 % off the top, you know, not per annum, but right there immediately. So factoring is very, very expensive. And really, the financing vehicle of last resort, you want to avoid it if you can at all. Right, because that might, I mean, I mean, you might be paying 5 % to 10 % to save three to six months. So when you annualize that interest rate. It's, I mean, it's a credit card basically, right? Yeah. Yeah. Now when you have margins of 50%, maybe it makes sense because, you know, you can handle that. The ones that really get in trouble when they have skinny margins and then they go factoring and then that's it.

15:08You can't make it after that. But ideally you'd want to go get a line of credit from a bank when you buy this business, because that's the time when it's easier to get one and then just keep it on reserve. Don't use it until you need it. Then you'd have it. and it's a lot cheaper because your interest cost is only the time that you borrow, which might only be for three months. So you pay it back and you're not paying much in interest when you do it that way. Hey, everybody. If you've listened to the show, you've probably heard us talk about franchises. While franchises can be a great path to business ownership for the right person, there's a lot of pitfalls and it's important to be really careful as there are certainly good franchises to be in and bad franchises that you don't want to be in.

15:48Conor Gross is a friend of the pod and a resident expert on franchises. And Conor not only owns and operates his portfolio of multiple franchises, but he's also a franchise consultant and helps others work through while picking the right franchise for them. So as he's sponsoring today's episode, everyone should totally click in the show notes below to join Conor's newsletter and attend one of his Gateway to Franchise Ownership workshops. If you're ready to move and move quickly, schedule a call with Conor and his team today. So we've hit on like the two, I think, most challenging things about the restoration industry in general between the unpredictability.

16:21I'm just going to call that the operational BS that restoration companies have to deal with. It's not an easy business to run. So there's that, and then there's the cash flow cycle. I think that the most attractive things about restoration overall is it's just very high revenue upside and the extreme end of recession resistant, and that nobody that has a flood in their basement is going to hold off until, you know, the economy turns around to get it fixed. So I guess just looking at the industry at large, what have you seen as far as restoration is concerned in terms of like the type of buyer you've seen be attracted to these businesses and yeah, your thoughts?

17:01I've seen all kinds of buyers be attracted to these businesses, including folks that don't have like a blue collar or contracting background, but have more of a business financial background. I've seen folks like that step in and be very successful, even though a lot of banks think that's impossible. No, it's not. It is very possible, especially because at least when they're not subcontractors like this, a lot of the relationships are with insurance companies. It requires that kind of acumen and skill. So I see all kinds. I see folks that maybe might be looking for service contractor businesses and would consider these as well because there's kind of a little bit of a crossover.

17:37So I've got a client right now that it's a different franchise, but it's content restoration. I think he bought it four or five years ago. He's doing very well. He's looking at either refinancing the loan for a lower rate or maybe selling. He's open to both. So I've seen them go very well, to your point, because they're very consistent. They're essential services, basically. And if you set the price and the leverage right, you'll be safe. Where I don't think people, I think it's more challenging is growth. You know, to buy one of these for growth, well, it's a franchise system, number one, so you may be very limited just because of that.

18:18And then again, your growth is not within your control. It's not about marketing or a sales team necessarily. It's about floods and fires and, you know, how many they have. And maybe maybe a storm comes along and helps you out, so to speak. But, you know, they're not the easiest businesses to just organically grow. Yeah, I think it's such a good point. And that kind of fits into like, again, the same conversation about who is attracted to these kinds of businesses. I've seen folks that come from a B2B sales background do really well in restoration. Because even though it's technically a, you know, a B2C business, if you will, you're serving a lot of homeowners, I think that the channel of distribution functions very similar to a B2B business.

19:05Because it's like you have to build relationships with plumbers. In this case, you have to build relationships with other restoration companies. And that's the top of your sales funnel versus something else that may be more marketing oriented. Because it's going to be challenging to market a business like this that's very reactive in nature. Like you're waiting to have water in your basement to Google, you know, restoration. And I mean, the reactive part of it, let's just say you're in this business and something happens, you get a lot of calls and you've got to get out there. Homeowners are expecting you out there right away.

19:41If you aren't timely and you're not able to perform because you maybe can't get these employees, you know, available to you at that time, can you lose the customer, the big restoration company that's bringing you in? Will they go elsewhere? I mean, I think that's probably a risk here, maybe not as much with packouts because they've got, or kangaroo packouts because they're a captive. But I would think that there's a lot of risk when you're serving, you know, you're a sub to these bigger restoration companies. Yeah, I think you're right. Yeah, because urgency in this business, that's why I saw they called out the call center.

20:16That's a big thing with all restoration franchises that they really push is that they want to facilitate a way that phones never go unanswered regardless, 24 hours a day, basically. So one thing that stood out to me about this business right off the bat, in addition to the margins, was the asking price. Because the asking price at face value is very reasonable. Any intuition on your part as to why that might be the case? I mean, that is a low multiple. You know, I guess I'm going to call it a three because I'm going to say this is 350, maybe thousand of truly adjusted EBITDA rather than SDE. So it's a little under a three.

21:02Anytime I see less than three, I think, wow, why is that? What's wrong? Or, you know, what's wrong with the valuation? I don't have a guess here other than it is a new company and maybe this SDE and revenue figure that we're given was just TTM. And, you know, the prior two years are not even close to that, right? It's just it's still coming up the curve and they know, you know, it's not worth as much because of that. But then it also makes me wonder, why do you start a business in 23, just get it to this point where you've got nice margins and now you're selling it? So maybe it's, yeah, that's a question.

21:38I completely agree. It seems like a very strange time to sell because it's just getting good for them. It's just about to get juicy. I'm curious how you think about, because there are two kind of like forks in the road here as far as like restoration goes. It's like contents restoration versus standard restoration. And we talked a little bit about that. Then there's also, you know, with this franchise, with Blue Kangaroo, given that they're owned by Belfort, I think that there are pros and cons that comes with that too. So curious for your thoughts on, we'll take the latter there. Like how do you think about the pros and cons about getting into a franchise where they're owned by other, or they own other franchise brands that are synergenic and they presumably have a pipeline and at the same time, it's a larger company and they're captive, so to speak.

22:33Yeah, they're a captive. And I don't, I guess I like it in the sense that it probably, you probably can't get fired very easily, right? There probably even are some, you know, there's probably something even written into the agreements with those other restoration companies that they serve that you can't get fired too easily. So maybe there's that side of it that is a little bit more guaranteed. Your customer relationship is guaranteed. On the other hand, you are buying something that's just kind of a service provider to a bigger operation, you know, and you're at the whims of whatever they do, you know.

23:09So you're not in control of your sales, your marketing, because you're only going to be growing if the larger restoration companies in your family of companies is growing. So you don't have much control. And maybe that's the answer to why this person is selling, because they're a little frustrated that it's two years and it's only a million dollars of revenue. And maybe they just have had some frustrations with that. I certainly heard my share, and I'm sure you have too, of people who thought they liked the concept of a franchise, but didn't like the internal politics or rules or whatever of being in that concept.

23:45Yeah, it's a possibility. But at the same time, I mean, this business probably cost them like less than$250 ,000 to start. And so if they put$250 ,000 into a business and two years later, again, SDE is over$400 ,000, like that's a, it's not a bad outcome. So it's just, it's perplexing to me why they would be, why they would want to sell. Let's say, owner would like to focus on family matters. So, you know, maybe that's a legitimate. Yeah, could be real. Could be. We'll see. So, yeah, I like this one. I personally, I like the industry. I like the lane. And I have my concerns about the cash flow cycle and all of the things that we talked about.

24:37But personally, and obviously the nascency of the business itself. But personally, I feel like that's adequately reflected in asking price in the multiple. And it's in a growing market like Charlotte. So there are a lot of questions unanswered, but at face value, I don't hate this one like I've hated others. I don't hate it either, which is rare. I think that it is a nice business for someone who doesn't want something overly complicated, you know, that has to grow super fast. and would like the safety and comfort of being part of a system and the franchise system itself and then the broader family of companies.

25:22So I think it's a nice one for the right person. And I think it is probably financeable. I don't know if it's not very financeable, if it's just the TTM that's looking good. If the 24 tax return doesn't also look pretty good, it might have trouble getting financed. And, you know, maybe the seller's willing to carry in that case. But I like it. I think it's a nice deal. How much equity or how much cash does somebody have to bring to the table to get this done, do you think? Well, the multiple is so low. It's not a matter of, you know, the equity. Well, assuming 24 looks good. They could get into this with 10 % equity.

25:56No problem. Because the multiple is so low. Interesting. This is a good one for somebody. If you're interested, give them a shout. Yeah, absolutely. Good one. Thanks for bringing that one, Connor. Awesome. Thanks, Heather.