Industrial Automation Business for Sale Analysis | $656K SDE Review

0:00Hey, Michael Gridley here. Welcome to Acquisitions Anonymous. I am courting from on the road. so I'm on my laptop with AirPods. So I apologize for all that. But today we did a deal that was brought by Heather and she only brings deals from Southern California. So we did a deal from near her house and I think you'll be fascinated by the things we're able to discern about this particular deal just by reading a one-page teaser. And then we went into a bunch about how to figure out if this was a good deal or not. So stick around to the end to see what we thought. Here's the episode. We'll start Acquisitions Anonymous.

0:30Hello, another episode of Acquisitions Anonymous. We don't have 100 % beers anymore. Thumbs down on just the plus inventory line. One of the biggest risks in entrepreneurship through acquisition is buying a business with fragile systems. Unclear demand or a single owner who holds all the knowledge. Franchising approaches that problem differently. You are buying into an established brand with documented systems, unit-level data, and repeatable operating playbooks. The hard part is knowing which franchises are actually worth evaluating. That's why Alex Merezniak, former CEO of 2U Laundry, built Fransy.

1:00Franzy is a free platform that helps acquisition-minded entrepreneurs explore franchise ownership without broker bias. You answer a few questions, and Franzy shows you franchise opportunities that align with your capital, lifestyle, and long-term goals. You also get free coaching from people who have actually built and scaled franchise businesses. If you are exploring ETA and want to understand whether franchising fits your acquisition strategy, visit franzy.com. That's F-R-A-N-Z-Y dot com. And thanks to them for sponsoring today's episode. So Heather, maybe share with the audience. we just went through a discussion between choosing between two deals.

1:33We had deal A that was very sexy in Jacksonville, Wyoming, or we had deal B that was probably a good deal, but not that exciting in Riverside, California. Which one do you think we should choose? Well, I choose the boring one that's a more interesting business than the touring one, because we got to try to make these boring listings that our listeners might actually buy. we've got to entertain them and you know make them sound a little more exciting so i think that's part of our job right fine my logic but now the pressure's on you got to do that the other one had people going down a river rafting looked amazing a lot more fun all right you want to tell us about this industrial and automation oh we have a guest co-host today will do you want to introduce yourself real quick and then we can then we can talk about the deal oh yeah yeah my name is Will McCurdy.

2:26I am a CPA. I started my career at the big four doing financial statement audits. I spent the last five years strictly doing quality of earnings and financial due diligence for private equity firms. And now I partnered with Michael here to launch Bedrock Quality of Earnings, where we provide quality of earnings reports and analysis for the lower middle market and in Main Street. And you can be a first-time buyer or you could be a seasoned acquirer. We work with everybody. Welcome. I'm proud to be your business partner. Thank you. Thank you. It's good to be here. Cool. Well, Heather, you have a deal.

3:08You want to tell us about it? A deal, and it's in California. So it is an industrial and automation equipment manufacturer in Riverside, California, sorry, asking price$2.6 million, cash flow SDE$656 ,000, gross revenue$2 ,113 ,000, established in 1985, well-established and highly profitable. This is funny, the first sentence I think they meant to put at the end, but it says, contact business broker for more information regarding this industrial automation system integrator. That's the first sentence. And then we go. Since its inception in 1985, the business has been involved in ever-growing need for industrial automation and now enjoys a stellar reputation in the industry.

3:53The business is a system integrator for custom and standard product handling equipment and applications needed for automated processes. Over time, the business has developed several distinct product lines and a number of substantial market niches. Product lines include proprietary designs for equipment needed for these niches, such as fully automated machines for aircraft windshields and window manufacturing, conveyor applications for counting and labeling, and equipment and system mounting, machine enclosures and frames necessary for safeguarding and protecting both personal and expensive assemblies.

4:31In addition, the business has a proprietary standard line of aluminum products and connection hardware for construction of machine frames, enclosures, and conveyors. The business operates from two fully equipped adjacent facilities with a total of 10 ,180 square feet. The business has nine full-time and three part-time employees slash technicians, and the growth opportunity is significant with just some inside sales activity. The business differentiates itself through fully integrated services, its manufacturing facility, and its ability to meet all customer standards and quality service requirements.

5:16Customers include major industrial product contractors and system manufacturers. The business has never marketed its services and capabilities, and sales have been generated by its reputation. The owner will assist new owners in transitioning the business. There's the sentence again. Contact the business broker. Uh, inventory is$230 ,000 included in asking price. Furnitures, fixture, and equipment, $130 ,000 included. Uh, employees, again, nine full-time, three contractors. Uh, the two facilities totaling 10 ,000 square feet, they are both rented. One is$7 ,000 a month and the other one is$6 ,180.

5:55Seller financing is available. Uh, they'll provide support for 20 weeks at 10 hours per week that's not very much uh and reason for selling is retirement and this is listed by edward fixen uh of business quest oh no there's two two brokers uh actually ron varner at business quest quest sponsored by edward fixen so what do you guys think man okay so just so i have my head around um this business they just do off the shelf um product handling equipment and like they come in and if somebody needs to like screw caps on tops of bottles or whatever in terms of their small manufacturing in southern california these guys are a reseller and system integrator who assembles stuff from different people comes in and works services manufacturers or people building stuff kind of in the SoCal area.

6:54Is that kind of how I should think about it? Yeah. And they sort of, did they say manufacturing at the top? I thought they did. So maybe it's kind of light manufacturing sort of assembly of these systems to your point, you know, they buy the systems and they configure it in a way that is customized to that business. That's the way I imagine it. Counting and labeling. Yeah. Aircraft windshields. windshield handling. There was, you know, basically just automated assembly line machines. And it is a growing field. They didn't really wow us with them using any of the latest technology because AI is definitely coming into manufacturing, automation, you know, robotics, basically, right?

7:40This is sort of, this is to me, it's sort of old school robotics, you know, that's what it sounds like there's a lot of there's a lot of really big advancements happening there and what would be interesting to me about this business is if they haven't really if they haven't really touched that part of uh you know manufacturing automation that's an area of growth they didn't call it out and they didn't really say much about it at all but that's what it has me thinking is being in california here like a competitive advantage because it is so hard to start a business in California from what I've seen.

8:12As far as starting a business here, you know, you can certainly start a business. You know, it's this, this business has got some employees, so they figured that out. They've got a labor, a labor pool. They're in Riverside County, which we call the Inland Empire. And that's kind of a good area for an industrial type business, a manufacturing business to be. That's kind of where a lot of them are in Southern California. You're outside of LA where things are a little crazy and maybe a little more dangerous. This is This is a pretty relatively better area. Good labor pool, I would say. And you're surrounded by manufacturing companies, small, medium manufacturing companies.

8:51So that's what's appealing about this business here is that it's well located, I think. It's not doing a lot in sales. You know, 2.1 million, that's not a lot. And this is probably a lot of project work. um you know this was probably a lot of you know install it and it and it's uh being used for years and years and years they don't mention any coming in and servicing or repairing um so it's probably a lot of new projects which that's not great part of it but uh i think they're in the right location for what they do i mean we'll look at this how much they're spending on on rent seven thousand a month and$6 ,100 a month for 10 ,000 square feet for 12 people to work inside the business.

9:40A$2 million in revenue. Wow. Yeah. And I would definitely want to make sure that the lease is transferable or if it terminates soon, are they able to renew it for another 10-year term? because the facility definitely seems like a key piece to this business. And it post-close if you're renting it and the owner, the landlord decides to kick you out. I'm not quite sure what you'd do at that point. So we definitely want to make sure you can get a long-term lease in place. And an SBA lender will make you do that because this is a business, what we kind of say is location dependent. There's no manufacturing business where the lender is going to lend when you might have to move in a couple years.

10:32They want to know that you can stay there permanently. But to your point, Michael, it is expensive real estate. It's not cheap. And given the revenue that they've got, it's quite a bit of expense relative to that revenue. I mean, it's kind of nuts. When I do the math here, right? They're spending$13 ,000 a month on rent. That's$145 ,000, let's say, plus or minus going out. So let's say$150 ,000 going out on gross revenue of$2.1 million. And then you've got 12 employees working for these people. Like that is, you know, they kind of talk about this being a VAR. It sounds more like it's just like a machine shop.

11:21Like, why do they, if it's a real value-added reseller for this stuff, like, why do they need 10 ,000 square feet? Like, that doesn't make sense to me. So there's something that just smells off about this listing. And I think we see this a lot, and maybe, Will, you've seen this too in listings. Brokers are pretty smart. They know, like, oh, a machine shop is not going to get a good multiple, but a VAR is going to get a pretty darn good multiple. So they miscategorize stuff pretty quickly, but it doesn't add up here. Yeah, you'd have to go. You could suss that out a little bit by asking for the equipment list.

11:56And if you see a lot of CNC machines and things of that nature, you might sort of conclude it falls into the machine shop category. But, yeah, you're right. If we take the SDE that they're showing of$656 ,000, I'm going to again lop off about$156 ,000 and say it's really$500 of EBITDA. So$500 against sales of$2.1 is a margin of about 23%, 24%. So it's not a bad margin. That I kind of like so far. I wonder with it having a strong margin is the owner wearing multiple different hats and you would have to replace what he does on a day-to-day basis with two or three employees and then that could potentially eat into the margins a little bit more.

12:54and then another thing on the owner it's they haven't done much sales and marketing over the ever it seems like is what they said uh so is the owner is the owner dependent on relationships as he's doing all the sales does he hold all the relationships with customers that going forward you may not have yeah exactly it feels like they serve their neighbors you know basically around the industrial parks near them and the seller's contact list, but haven't done anything in terms of sales beyond that. One place I would dig into very quickly on this is customer concentration. And when they use these phrases like, hey, there's equipment needed for niches, and then they list some really weird oddball niches, it's like aircraft windshields, conveyor applications for labeling system mounting you know uh you know and then a weird like safeguarding assemblies it's like oh these guys have three customers you describe

14:00yeah um so i'd be willing to bet there's a huge amount of customer concentration here yeah and does it rotate every year you know these are the four customers they had last year and next year it's going to be four different customers because it is all project work that could be interesting to know as well um so hard to know that you can repeat the performance uh as a buyer heather how do you feel about this price it's a little too high i mean um i again i'm going to go off of an ebita multiple because as lenders we just always work with ebita so 500 ebita a four multiple is 2 million. So they're asking, you know, they're asking four and a half.

14:41That's too much. Or is that five? I guess that's five. They're asking five way too much. So, you know, this is, again, kind of, it's below a four to me, you know, the lower middle market, small SBA size deals, if they have any hair on them regarding transferability or customer concentration, they're below a four so my guess is you know it it's it's at least two turns too high one or two yeah yeah so how where do you think how would you structure this if at all or is it just a better price at this point it's a matter of price probably mostly i mean if if their customer concentrations are too large there's no lending possible at all you know because you can do the math and see that if they lose one customer, they wouldn't be able to pay the loan.

15:33So you'd have to look at the customer concentrations carefully. Maybe you could structure a forgivable seller note around one that was maybe 20%. But if it gets much above that, and it's really only four customers, banks are just going to say no, period. But maybe you could borrow a million and a half on this if everything else kind of checked out and you had the right buyer. On the positive side, trying to be positive about this. If someone came along who's got like an engineering background, I'm thinking of someone that's a family friend, he's a young guy and he's selling manufacturing automation equipment, but all the latest stuff that uses the latest technology.

16:11If someone like that could come along to a business like this and could start selling into those channels and really utilize the 10 ,000 square feet and whatever machines they have and know how they have, you know, there's a possibility here where this is a growth story. And if it is, you're not going to overpay for the growth, but you know, it makes it a little bit easier maybe to go all the way up to a four because you can launch that growth faster than you could as a startup. That's probably my best case scenario for this deal. Hi, Heather here. When I'm not breaking down deals with these guys, I'm helping people get the right SBA loans for their business acquisitions.

16:47Because when you're buying a business, the best financing isn't one size fits all. There'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 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. I love how lenders basically force some real levels of like professionalism on businesses like this or a buying process, right?

17:28It'd be really easy to get overly excited about it, make an emotional purchase. And here, you know, the lenders are basically creating a pretty good like break on things getting irrationally exuberant. And that's the one thing I love about the SBA program. It's like now we can't be paying nine times earnings for this folks because the SBA is just not going to let it happen, which I think is great. Yeah, you can with equity. That's what I always tell people. You can do that with equity. You can only borrow maybe three, three to 0.75, but if you want to pay more you can do that, but it's going to be with your money.

18:02I was talking to a lady a few days ago who's trying to buy a business and so the broker basically suggested she's like look I can't now that I've got your actual financials I can't pay this price anymore that I offered because there's$200 ,000 a year in earnings that has disappeared from the SIM to this and the lenders won't let me do that and so the broker goes well you should talk to this lender that I had worked with before with a previous buyer who had had it under contract for basically two thirds the price and I was like what is this broker doing like anyway so that guy had fallen out of the deal and wasn't able to get it funded and now he was expecting the same lender to help her fund it at you know a third higher price it was just like what is going on in the world I mean when I say when I see that is I say is their calculator broken maybe theirs is broken oh man getting business brokers to their job is sometimes very challenging.

19:14So Will, how would you go about doing financial diligence on something like this? Yeah, definitely want to understand the customer concentration and revenue quality. Is it actually only a few customers or is it more spread out? Understanding if there's what contracts are in place and seeing how revenue has trended over time. If AI, if there's competitors using AI, how that's impacting this company and their performance. And maybe that's why they want to sell. Another item is inventory and margin. That's another key piece that we would look into to see how that is trending and if they're tracking everything appropriately to get a real good understanding of the business.

20:03It does look like it's a niche business, which is cool. but yeah definitely want to understand the owner's involvement and what he is doing on a day to day basis and what potential replacement costs will be needed if he leaves and retires and maybe moves out of the country but yeah those are a few of the items I would probably look at and what is it like if I'm a buyer right and I can choose between not paying for financial diligence or paying for it like what is the trade-off i'm making obviously if i do i have something under loi i do a qv and the deal doesn't close like i'm at that expense so how do you like talk to buyers about thinking through like when it makes sense to do it how to baby step your way into it i know heather you do stuff with folks to kind of do a basically a preliminary version of a qv and then later on do the full full baller stuff so i'm just curious what are you guys seeing people do to kind of mitigate the risk and also get the benefit of doing this diligence in a good way?

21:09Yeah, I would say two things. One is the price tag of a quality of earnings can be high for some buyers, especially on the smaller deals. But if you are taking out debt and putting a personal guarantee with the SBA, or you're even, you have investors, family and friends are investing in the business, you want to make sure that the business is feasible and can continue to produce cash flow and earnings going forward. So the price of a QAV, I would say is definitely worth it from a risk perspective to make sure that you really understand what you're getting. And I know Heather likes to look at the bank to book reconciliations.

21:56And so doing that will really tell you the financial quality of the business. If it reconciles mainly, then you may have a nice business and they're recording things appropriately. But if not, then if they're hiding costs, if they're not recording revenue properly, you can do a book reconciliation and see what you're getting yourself into. Yeah, I will say I couldn't agree with you more, Will. You're signing a personal guarantee. This is the most important money you're going to spend, maybe aside from your lawyer, right, to protect yourself and to protect the risk that you're taking with the guarantees is your quality of earnings.

22:38I think what throws people in the SBA space is this weird thing. And that is that the SBA, as of now, does not require a quality of earnings. They require things like a business valuation. That's required. You can't get a loan without a business valuation. situation. They require the banks to focus on the tax returns and getting them verified with IRS. But a lot of times, and I'm sure you've seen this, Will, a lot of times the tax returns are, they contain all the accounting errors, you know, that you're going to end up finding in a QAV. So, so yeah, sometimes the tax returns are overstated in a number of areas.

23:17And when a QAV comes along, we see that the QAV is actually the more conservative number. Most of the time, that's the case. So the fact that the SBA doesn't dictate that you must get a QAV, I think it makes some people think that it's not really needed, that they're fine if the tax returns check out. And I couldn't disagree more. I think the one thing you want to spend money on as a buyer is your QAV for sure. Yeah. Yeah. And if a business is recording revenue and expenses on a cash basis, let's say, and they want to make the current year look strong, they'll invoice a customer up front for work to be performed next year.

23:59So that million dollars of revenue in 2025 will post-close as the buyer. You're going to have to provide that work, and that's revenue that you don't have going forward since you bought it on a multiple that you've done, including that revenue. So, yeah, there's a lot of things to consider. Yeah, it's a great process to go through. And I think it helps a lot of buyers not only know what the true earnings were and the quality of the different cash flows that they're buying, but a lot of times the accounting, the bookkeeping problems that might have existed, they can now know what to do when they own the company.

24:40They can fix those problems. You know, they got a Q of E that pointed those things out. So instead of going on autopilot after they buy it, they know that's on their list of transition issues. They've got to go in there and, you know, do some improvements to the accounting process or the bookkeeping process, which I think is, you know, another benefit. Yeah, definitely. In the QV or board, we flag anything that they're doing incorrectly or things that they should fix. If they're accounting for things incorrectly, if they need to hire people or their utilization is low, it allows you post close to if you do hire an outside fractional CFO or someone to help you clean up the books.

25:18The quality of earnings report is a great starting point for that. Yeah, roadmap. Absolutely. So do we like this deal? I found it, so I was hoping you liked it. I'm trying to be positive, but I would pass on this. You're passing. This looks like buying a nightmare.

25:40I'm maybe for the absolute right person who knows how to sell and already understands what this shop does really well and how they can kind of pivot to a more modern automation equipment. Maybe for that person. But for everybody else, I'd be pass. Did I already give a thumbs down or do I still need to give a thumbs down? I think you did. You said it sounded like hell, didn't you? Okay. Or nightmare. I'm sorry, a nightmare. I'm giving the deal two thumbs down and another one thumbs up. Or two thumbs up, probably. Oh, thank you. Thank you. Will, are you buying it? I'm not buying it, so I'm thumbs down as well.

26:24I think, yeah, the asking price is a little high, and it's, yeah, for all the things we discussed, it's a specialized, it's maybe project-based and maybe customer concentration. There's a few things you'd want to dig into before going forward, but I'm thumbs down. That's a first. The lender was the only one slightly positive. That'll do it for this episode of We Hate Your Deal. Thanks, everybody, for being here. Heather, how can people find you? Come to my website, visocap.net, and join one of our Tuesday webinars where we'll go through our entire process. Very cool. For getting an SBA loan. I'm sorry.

27:05Yes, I didn't finish my sentence for getting an SBA loan. Yes, that is what the process is. Or we'll just hang out. It'll be fun. Yeah, or you'll just hang out with me. That's fun, too. Ed Will, where can people find you? You can find me on LinkedIn. My name is Will McCurdy. You can go to our website, bedrockqoe.com. Feel free to reach out to me at will at bedrockqoe.com. It's my email address. And if you're thinking about buying a business or currently actively looking for a business, I would love to talk. For all your QOV needs. And you can find me at Chili's. All right, everybody. We'll catch you next week.

27:50Thank you.