Industrial Equipment Manufacturer for Sale with Patents and Real Estate

0:00Hello, everyone. Welcome back to another episode of Acquisitions Anonymous. This is the internet's number one podcast on buying, selling, and operating small businesses. Today, and I'm not exaggerating, I think we are doing the best business we have ever reviewed in nearly 500 episodes of Acquisitions Anonymous. We found this one publicly listed for sale by owner on BizBuySale. It is an American manufacturing business with 70 % reoccurring revenue. They make a type of technological manufacturing system that they sell in and then maintain and sell parts for. It sells into the aerospace and oilfield services industry.

0:42Based in Virginia, I think I said$1.2 million of cash flow. Very reasonable price expectations. this is the quintessential American manufacturing and searcher deal. I want to invest in this deal. If you hear this episode and inquire and buy this business, call me. I want to help invest in this deal. It's super cool. It's me and Heather today. I hope you enjoy this episode of Acquisitions Anonymous. We'll start Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100 % ears anymore. And thumbs downing on just the plus inventory line. 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.

1:24Because 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. All right, Heather, it's Friday and I am jazzed because I think I have found a gem on this.

2:04Okay. I cannot wait to see what you found. So I just want to get right into it. We skipped a small talk, but let's get it. How are you? We don't care. No. I found a cool one on BizBuyCat. So this to me sort of checks all of my BizBuyCell boxes, which is that it's very obscure. There's a ton of detail about what the business does, but it is an industry that I'd never heard of before looking at this listing. And it appears to be for sale by owner and it's US-based manufacturing. Wow. Checks a lot of boxes. I love lots of details. And it is also in the strike zone. It has enough EBITDA and is in the strike zone for an SBA loan.

2:47So you'll like it. Now I really like it. Now I'm in. Do you want to hear? So Heather, I'm going to need your help figuring out exactly what this business does. We're going to figure it out in real time. So this is a high margin industrial equipment manufacturer, 70 % plus gross margin, no debt in a town called Oilville, Virginia, which is in Goochland County. These are all real places. Oilville in Goochland County. So it says, an established U.S.-based designer and manufacturer of advanced HVAF, which stands for high-velocity air fuel, thermal spray systems, and precision industrial powder feeders.

3:30It was founded in 1999 by the inventor of modern HVAF, high-velocity air fuel, combustion technology, and the company is widely regarded as the originator of contemporary HVAF spray system design. Over 26 years, the business has built a global installed base of 165 HVAF systems and approximately 400 powder feeders across more than 45 countries. Roughly 60 % to 70 % of annual revenue comes from repeat customers purchasing spare parts, additional feeders, system upgrades, and related services. How excited are you already? Yeah, sounds good. Lots to like here. Yes. Let me tell you about the financials.

4:16It has revenue of$2.5 million and EBITDA of a million bucks. so great EBITDA margins 40 % EBITDA margins it says cash flow SDE EBITDA for a million bucks SDE of 1.4 almost and it's sitting on 1.4 million of real estate that's not included in the asking price so who knows if they've burned rent into it or not but you have to figure that out it's unlikely you're moving this thing because it's a manufacturing business right Okay. And they want$4.95 million. So that's on an EBITDA basis, five times. On a cash flow basis, a little under four times, like 3.8 times, roughly. Heather, what the heck is HVAF?

5:10Have you Googled it while I was talking? I know. Oh, gosh, I did not do my job of Googling it. I'm sorry. I don't know, but it's obviously a very specific part of a manufacturing process. And what I think is really cool is this is being sold, I think, by the inventor of the technology. I mean, there's got to be patents, I imagine. There's got to be some intellectual property as part of this. But this is something very niche because it's so niche that the inventor only installed 165 of these systems worldwide. So that was the thing that jumped out at me. Yeah. That this guy's the inventor of it.

5:48This is his company. And it's got, not to belittle at all, but only 1.4 million bucks of SDE. Right? and only at 165 installed locations. So I AI'd it. Would you like me to explain what HVAF is? Okay. So HVAF, high velocity air fuel, is a thermal spray process that applies high density, low porosity coatings to protect parts from abrasion, erosion, and corrosion. It utilizes compressed air instead of oxygen. HVAF sprays particles at very high speeds and at lower temperatures than HVOF, which is high-velocity oxygen fuel, which reduces oxidation, because no oxygen, and produces superior bond strength.

6:36So I'm generalizing here, but I think this is essentially like a powder-coating technology. So if you're making parts and you want to powder-coat them to prevent rust, to make them more durable, reduce oxidation, aka rust, you would use this type of technology, this type of machine. It says compressed air is used with fuel, such as propane, to create a high-velocity jet that propels material, which is typically metals or carbides, onto a component's surface. And the combustion temperature is much cooler than the oxygen-driven method. It minimizes thermal degradation of the material, resulting in ductile, non-brittle coatings.

7:16And these types of coatings are often used as a replacement for hard chrome plating and HVOF coatings, offering superior wear resistance and high-density superior bond strength. Common applications include aircraft landing gear, oil and gas drilling tools, hydraulic rods, and steel industry rotors. HVAF is considered environmentally friendly compared to hard chrome plating, and it reduces hazardous chemical usage and emission. Wow. It sounds cool. How cool is this, right? So this is kind of part of the manufacturing process for really durable parts used in intense industrial applications. Yeah.

8:02And they say there's a product portfolio of the flagship systems, which typically range 120 ,000 to 200 ,000. So those are the systems, I guess, if you can install a new system. But it sounds like this revenue feels like it's mostly coming off of maintaining and, you know, providing supplies like the razor razor blade model. They're providing the razor blade, so to speak, to the 165 already installed systems. So it feels like it's it's got he didn't give us the breakdown, but if 60 to 70 percent of annual revenue is repeat, you know, oh, he did. 60 percent is repeat customers purchasing spare parts and additional feeders.

8:45So it really is mostly just maintaining the systems that are already out there, which is kind of nice. Yeah. So they've sold in, it seems, 165 of these systems. And now it's maintenance and spare parts. So, I mean, this is awesome, right? 60 % to 70 % repeat revenue on these things. And in theory, the other 20 % to 30 % is probably selling in new ones that then become repeat revenue, right? Yeah. Yeah. I mean, honestly, that's a characteristic that a lot of people, when they're looking for a business, are looking for. You know, maybe you don't have a ton of new sales, but you don't need it because this business has been around long enough that they've got that portfolio of systems out there already.

9:30And they've built up that recurring or repeat customer revenue already. So kind of a dream come true from that perspective. A lot to like here. A lot to like. I don't know. Let me tell you a little more. Yes, please, please. So the company operates with minimal CapEx requirements and a highly efficient assembly-focused model. Gross margins have ranged from mid-60s to high-70s, producing strong earnings and meaningful operating leverage. The product portfolio includes flagship HVAF thermal spray systems, which they sell for between$120 ,000 and$200 ,000, internal diameter HVAF guns, ultra-thin Tugston carbide coatings that serve as a direct alternative to hard chrome plating, like we read earlier, gravimetric and volumetric powder feeders compatible with HVAF, HVOF, plasma, cold spray, and laser cladding.

10:25So this would be what is feeding the powders in to get sprayed onto the parts. Two active U.S. patents protect core powder feeder mechanisms. The patents expire in 2035 and 2037. So you got some time, you got a decade. The business maintains a full proprietary software suite and complete 3D CAD engineering library. All systems are designed in-house and assembled on-site using outsourced precision machining partners, which minimizes capital intensity. So they build these$200 ,000 machines, but they kind of assemble them. They don't actually make all the parts, it seems like, but they have patents on them.

11:04So the revenue mix, it says in a representative year, 47 % powder feeders, 16 % HVAF systems, 20 % spare parts, and 17 % coding applications and services. It says 50 % of revenue is generated through an established international distributor network with the balance from direct global sales. No single customer accounts for more than 15 % of revenue. Okay. The market position. HVAF technology is increasingly replacing traditional HVOF processes due to superior coding density, higher deposition rates, lower operating costs, and regulatory pressure on hexavalent chromium, CR6 plus hard chrome plating.

11:49As specifications evolve to adapt HVAF, adoption is accelerating worldwide. Conventative strengths include 25 years of proprietary HVAF system and precision powder feeder design expertise, strong technical barriers to entry, embedded global installed base, process agnostic powder feeder platform. Their facility, operations are conducted from a purpose-built 6 ,000 square foot industrial facility on 2.2 acres with expansion capacity to 15 ,000 square feet. so you can triple in size on this site. Real estate is available separately at the appraised value. I think you better buy it because you are not moving this thing.

12:28It doesn't sound like. Growth opportunities. The company has operated without a dedicated sales team, relying primarily on inbound demand and distributors. Key expansion levers include hiring dedicated sales business development, obviously, expanding powder feeder market share across non-HVAF processes, So converting probably other processes to this one. Geographic expansion into underpenetrated regions, scaling their coding services side of their business, which I think they said was 17 % of the business today, and also strategic add-on acquisitions for platform buyers. Again, they're asking$5 million for the business and$1.4 million for the real estate.

13:06It has about$1.4 million of SDE. So you're looking at combined$6.4 million, if I'm doing this right, for the real estate and the business on 1.4 of SDE. So that is a four and a half X multiple. Wow. And it says it has$200 ,000 of inventory, which is included in the asking price, half a million bucks of FF &E fixtures and equipment, which is included in the asking price. It has, oh, here's the rub, five full-time employees, three of whom are the owners, two of whom are employees. Okay. Maybe that's the only thing wrong with this so far. Okay. But we'll talk about it. I'm seeing if there's anything that's down here that I've not already said.

13:56It says, seller will consider an SBA compliant standby note if required. And seller will provide three months of transition support to ensure continuity. Additional consulting support may be available under mutually agreed agreement arrangement they're retiring after 25 years of continuous operation wow a lot to say and the pictures if you're with us on youtube i strongly recommend checking the pictures out you can see how this process actually works it looks like there's a laser yeah type situation or you know kind of a hot powder coating i mean this is like real industrial manufacturing yeah it's pretty cool it's pretty cool i you gotta love a for sale by owner listing that is from an engineer i mean look at the detail that we just got in a in a teaser it it blows all the other teasers away as far as telling us something about the business i think they did a great job uh and that's a lot of information i think um i'm a little concerned about how much rent might not be counted in this EBITDA of a million dollars.

15:07But if the real estate is only worth a million four, you know, let's call it, you know, maybe there's$120 ,000, you know, if they're not expensing rent because they own the real estate. So maybe EBITDA just drops to like 900-ish, something like that. So I'm kind of trying to do the mental math there. Still a great, you know, they're still only asking a little over five times for a business close to a million dollars of EBITDA, if not right at it, but with 60 to 70 % reoccurring revenue. It's not contractually recurring, but it's reoccurring. And I mean, that is a very fair valuation. Where is Oilville?

15:49Because I'm already considering moving. A fair question. So Oilville, Virginia, in the well-known Goochland County, Heather, I can't believe you don't know where Gooshland County is. Oilville, Virginia is an unincorporated community in Gooshland County. It is near Richmond. It's northwest of Richmond, Virginia, probably about 45 minutes. So it's probably very pretty. It's like central Virginia. It's probably a pretty place to live. Yeah, it probably is. I mean, it's rural. Yeah, rural. Definitely rural. I mean, you're on the side of Highway 64. There's not a lot in oil bill, except a couple gas stations, which I find funny and ironic.

16:39So, Heather, are you moving to Gooshland County if you buy this or somebody? Yeah, you have to. I mean, you cannot live somewhere else and try to do this remotely. And in fact, I think you may need some engineering background or some manufacturing in your resume somewhere because this does not look like a super easy little light assembly kind of business. And like I said, I could just tell from the listings, that's an engineer, you know, that's the founder of this technology. You know, you do need to have those kinds of engineering skills, I think. And you've got to live in Oilville, which I've never heard of before today.

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17:51Acquisitions Anonymous Hosts:They're passionate about helping entrepreneurs like you take the next big step. So don't wait to make your business ownership dream or reality, visit acquisitionlab.com today to learn more and schedule your free consultation. And when you do, be sure to tell them the Acquisitions Anonymous podcast sent you. And I was born, I grew up in Northern Virginia. So it's 35 minutes outside of Richmond. Richmond's a fine place to live. Nothing wrong with Richmond. Yeah. Let's see how far it is from Washington, D.C. Yeah. That'd be a couple hours. Three hours from D.C. It's five hours from Charlotte. It's kind of, you know, smack in the middle of Virginia.

18:28Yeah. Right in the meat of Virginia. It's kind of in between Richmond and Charlottesville. Yeah, but Virginia is a beautiful state, you know, as it really is, especially central Virginia is very pretty. So it's not, I mean, it's, and 35 minutes outside of Richmond doesn't sound like you're too far in the sticks. So I don't think that's too bad. But yes, you do have to, for a deal like this, you've got to move there and you've got to live there. And it is SBA size. So I do love that. And I love that these sellers, even without a broker representing them, already seem to know about a seller note and what SBA would require for that.

19:04So I think that's kind of cool. If Andrew Barr is the owner, which it seems implied that he is, bravo to you, Andrew Barr. This is an exceptionally well-done listing. Your pricing expectations are reasonable and at market. Andrew Barr here has a second career as a business broker. Because he's really done a phenomenal job, I think. Yeah. But you know what? The problem for Andrew Barg, if he became a business broker, would be finding sellers who would let them have this kind of information and be reasonable with their valuation. I think that's the challenge. Yes. So you're moving to Oilville because it seems like three of the five employees are about to retire.

19:45Yeah. Now there's the problem. So three people you've got to replace. that is a challenge for anybody because we need to know what each of the three people are doing. If there's only five employees, you can't convince me one of those stories where they only work 10 hours a week or something, because if there's five people, these three owners are all working full time is my guess. And probably they are all engineers and doing something fairly high level is my guess as well. So replacing three people like that, that's a little tough. And if you go with an SBA loan, you have this one little weird problem.

20:23The SBA has a rule. And I think these are the cases where it really doesn't work for the bank or the SBA or the buyer. The rule says if you buy these folks out, they have to leave the business within 12 months. You cannot have a transition. They can't even have a W-2. It would literally be against the rule. So you have to, you're forced into a situation where you're on your own in 12 months. You better be able to figure it out. So, I mean, let me ask you this. Now, I do think these sellers want to retire, which separately means they probably want to be gone in 12 months also. But let's say I do, let's say they are not retiring and they want it.

21:01They are willing to stick around on sort of a consulting basis. Can I W2 them for a year and then 1099 them five hours a week after that? You know, it's a gray area. Everybody asks this question because the rule is so weird and it puts you in a risky position potentially in a case like this. What everyone usually would say to that question is the banks nor the SBA police this rule after close. They don't police it. So however, you've got to convince a bank going in that you can transition fully those three people. Like your story has to be, I can run this whole thing without these three people within 12 months.

21:45So you're still going to have to, and to your point, Bill, they still may want to leave in 12 months, even if you wanted to have them as a consultant, depending on their ages and their motivation to truly retire, they may not really be willing to do that. Yeah. It's a challenge. I'm showing on the screen on YouTube. I don't know if this is the company. There's a number of companies that do this, but I picked this website because the photos are really good. You know, you can see like this is high temperature blasting, you know, of powder coating. This business, like I said, I don't know if this is the one, I'm not claiming it is, but it says HVAF technology is suited for tungsten carbide coatings on pump housings and axles for the oil and gas industry.

22:29This special type of protecting coating is commonly used to repair technology for the oil drilling and gas industries. So this is probably, this business, a bet on domestic drilling. Yeah, right. Which is a good bet right now. Which is a bet I would love to make right now, right? Absolutely. Man, there is just so much I really, really like about this. This is one of the best listings I think we've ever just pulled up randomly off BizBuySell. Absolutely. I mean, we pulled this totally randomly before the pod. And I always like to look on Biz by Sell for the owner listed ones because they tend to have less broker BS.

23:09But this - And a lot more detail in this case. And a lot more detail. Yeah. And it seems like they've got, I mean, there's a ton you could learn about this process. You know, I'm just clicking around on Google. But they've got real technology, it seems, patents. They got an installed base with reoccurring revenue. uh it's the ai is not coming for this like there is a manufacturing moat here yeah right i would be interested to understand what the competitive landscape actually was like they gave us a little hint and maybe not on the competitive landscape but i was concerned about as i always am with technology is this the leading technology or is something coming along to replace this and they gave us a hint in the listing you scroll down they said um this is more environmentally safe and it is increasingly replacing, I think they said, yeah, exactly.

24:01And increasingly replacing traditional HVOF processes. So it seems like this is sort of the winning technology in terms of what it does. If that's true, I like it even more because that's what I usually worry about when I think about something that's pretty high tech like this. So that sounds super exciting to me but then I say, this business is 26 years old and it has not displaced HVOF in 26 years. What is happening now? If the answer to that question is regulatory pressure on hexavalent chromium hard chrome plating, that's a great answer. Like if there have been recent regulations passed that you can't do HVOF anymore, finally the time has come for HVAF and you could be in a perfect position.

24:49That could be. Yeah. Now, and you just made me think of one thing because when you said chrome plating, anytime, you know, there's a lot of environmental problems when you've got a building, real estate, that's had any kind of process like that done on it. They've got to do soil sampling and whatnot. That would be my next question. If I'm going to buy this real estate now, like you said, Bill, we probably want to do that so we can stay there forever. is there any environmental concerns with buying the real estate? You're probably going to have to go straight to a phase two environmental report, which is drilling core samples of dirt and having them tested.

25:30So you have to make sure that the real estate is clean and there's no liability to clean it up. Yep. Yep. That's a good point. I kind of view this business as you're buying the real estate. Like it's just part of it. Like you got to do it. Luckily it's in a low cost area in Oilville, you know, so it's not like totally breaking the deal to include 1.4 million of real estate. In fact, it might help you finance the deal a little bit more easily by ascribing a little more value to the real estate over a longer time. Heather, what's the SBA rule? What percent of the deal can or has to be real estate to unlock the special financing structures?

26:10If you want a 25-year term on enterprise and real estate together, the real estate has to be 51 % or more of the loan. So in this case, you won't get there. But you could do a couple things. You could do just one 7A loan because since your purchase price is$5 million for the enterprise, you're going to come pretty close to maxing out your 5 million 7a loan once you add fees and all of the stuff that goes in there so what you could do though is you could use then a 504 an sba 504 loan for the real estate and that would so the enterprise loan would be a 10-year loan in this case and the 504 real estate loan would be a 25-year loan so you have enough runway to do both if you did it that way the times where you combine them are where the real estate is worth almost the same or slightly more than the enterprise.

27:00And then you could get a 25-year loan if you put them together in one 7A loan. But this one's a better case for a 7A plus a 504. Okay. And tell me, so this is right over home plate domestic manufacturing. And I believe there are some new SBA rules that have just been passed about that, right? Tell me about that. There is one that's been passed and one that we're still hoping for. So the one that's been passed has like a special line of credit against equipment for manufacturers. You wouldn't use it here because this is a business acquisition. The one that is pending and everyone is still hoping for is that certain manufacturing industry codes, and I'm sure this would fit that, will get up to 10 million of SBA runway instead of the usual five.

27:47So that is still, I think, going through the Senate, and we don't have that final yet, but it looks like it's coming. So if you bought this and you wanted to do add-ons or you wanted to expand the facility, I mean, they said you've got, I think, two plus acres of land here you could add on to the facility if you're going to grow, you would still have SBA runway to do all those things, which is nice. So you could do this with a$5 million loan, and then in six months they could expand your capacity to$10 million, and that's fantastic for you. Yes, correct. Because banks love doing add-ons. Yeah, it's just something that every bank would love to have some manufacturing deals to make, you know, for good things for the economy and make, you know, the SBA happy that they're doing it.

28:31So, yeah, it makes financing will be easier in this industry. If you've got some background, though, where you're going to have a hard time is if you have just a financial background and no manufacturing and no engineering in your education or your background. SBA lenders are going to be a little more iffy on you as the right person, especially because you've got to replace three people. So if you're like a, you know, KPMG ripcord puller, this might be tough to convince a bank that you can run. You can replace the three owners in a five-person engineering manufacturing business in Oilville, Virginia.