This Energy Efficiency Business Looks Great… Until You Dig In

0:00Welcome to Acquisitions Anonymous. This week's deal was a fascinating one. Michael here. I hung out with Heather and Mills. and Mills brought a fascinating deal from New England in the insulation space. And there were some things about this that made us all feel very strongly about it. And I think you'll be fascinated by it. Here's the episode. We'll start Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100 % beers anymore. I'm thumbs downing on just the plus inventory. Are you ready to take a leap into business ownership, but you don't know where to start?

0:32Well, look no further than Acquisition Lab, the premier resource for entrepreneurs seeking to buy their dream business. Founded by Harvard MBA and acquisition expert Walker Deibel, the lab is your fast track to success in the search, diligence, and acquisition process. With hands-on support, world-class resources, and a community of like-minded entrepreneurs, Acquisition Lab gives you the tools and confidence to navigate every step of the journey. And we're proud to call Walker and Chelsea, the lab's director, long-time friends of the podcast. they're passionate about helping entrepreneurs like you take the next big step so don't wait to make your business ownership dream a 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 it is amazing you guys are wearing the same clothes as last episode

1:21change uh cool um so what's new how's your finger mills we just went over this for the third time we did we did you did have an interesting rant last episode about hairstyles and uh i am due for a haircut so now that i'm looking at myself on camera i really need to schedule that. The broccoli cut, I think, would be great. I'm going to just go in and say, Michael said I need the broccoli cut and see if they know what that is. Heather, so why is hair so important to women? I'm curious, what is your perspective on this? I have no idea. I mean, it frames the face. Can you speak for all women and please let us know?

2:08Yeah, right, for all women. It is also that I think we have more options. We can go long, short, middle, curly, and women judge each other. We do our hair and makeup and clothing a lot for each other to notice. Men don't even notice half the time. But I think it's just, you know, we have a lot of options. And so we work with it. You know, if you see, you know, women over a long period of time, they change their hair a lot, try different things. And I think that's kind of fun, too, to do. And the priorities of spend at our house, it's like the kids healthy and eating, hair being done well, like the cat.

2:59the electricity bills electricity there's a lot of products we got a lot of hair dryers oh my gosh hair dryers oof I can't even tell you how much I've spent on hair dryers and flatteners and it's ridiculous amazing so anyway with that segue Nils I heard you had a deal I was waiting to see how you were going to bridge that and that speaking of electricity cost speaking of electricity All right. So I have not, I've looked at these businesses before, but I don't think we've ever talked about one on the podcast. This is a teaser. It's just a one page PDF that I've pulled up and it says acquisition opportunity, premier insulation and energy efficiency contractor in New England.

3:48It's chilly today. And this really caught my eye. It says there is a consistent pipeline through relationships with energy service companies, ESCOs, and the MassSave and EnergyWise programs. I've heard of EnergyWise, but I haven't heard of the others. This is a top-ranked contractor within the MassSave and EnergyWise programs, increasing demand for commercial program work, which will improve margins. They've invested in people and systems over the past three years, which support 50 to 100 % growth without some significant incremental overhead costs. They have the ability to replicate this service with similar utility savings programs in Connecticut, Maine, New Hampshire, Vermont, New York, and New Jersey, growing margins in the last three years, strong name recognition and demonstrable customer satisfaction.

4:39They do 5.3 million in sales, but I think y 'all, this says it's June trailing 12 months. So it's not year to date. So these are or relatively annual numbers. So 5.3 million in sales, 1.7 million in gross profit. They have a 32 % gross margin, normalized EBITDA, uh-oh, 671 ,000 and the normalized EBITDA margin 12.6%. And this is from Catapult Advisory Group and a guy named Greg. Thanks, Greg. Great, great lead today. So the pictures on here is a person in a Tyvek suit with a respirator laying down insulation in an attic. Somebody who was blowing insulation, like loose laid blown insulation in an attic.

5:29And then there's a guy outside and he looks like he's repairing some like lap siding on a house. What they do is they cut holes and then they blow insulation into the walls and then repair, repair the holes. So what do you guys think about this? so so in terms of what this business is so on a day to day basis they go in to utility customers in New England and they are hired to make those homes and businesses more energy efficient by putting in insulation and that sort of thing that's the core of what this business does is that how you guys read it yep Yes, but I'm curious about how they get the leads.

6:14Are they paying the utility for the leads? How does that work? Curious about that. So it says here top-ranked contractor within the MassSave and EnergyWise programs. So my suspicion is what happens here is MassSave and EnergyWise are run by random, let's say, you know, Boston utilities, right? which could be a private or a public utility. And they go to, that is money that comes from the government. It's mandated by the state of Massachusetts. So they run this program because they have to. So they're told to. And then they go to their customers and say, hey, we have this program that will pay 90 % of the cost or 100 % of the cost to upgrade your insulation.

7:04Here's a list of contractors you can use and they're on the website and there are as many people as qualify for that reason. And so, and then in top ranked means, I would guess there's probably some sort of system the utility has where like there's like customer feedback and all that kind of stuff to where when the consumers are doing it, you're going from there. So the specific answer to your question, I think is the utility is promoting this service to their customers and you're listed as one of the options. this is kind of akin to like the led retrofit model um and i i don't actually know how the mechanics work i own a commercial building that one of the tenants said hey i want to do led retrofit and i have a guy who does a lot of this it was a gym space and he's like one of my clients this is all he does and the guy handled all the paperwork and he went to dominion our local regional power company and said, here's how many lights we're putting in.

8:06Here's how many square feet the building is. Here was like their energy bill last month. And I think they put in like $8 ,000 worth of led lights. And it cost me like$300. And I don't know if it was a, I don't know if it's federal grant driven or if it's just the energy company saying, Hey, we'll pay to do this. It seems like a little bit of a conflict of interest that the energy companies like, we want you to use less power and less energy, but there's got to be some incentive for them to do it because they paid for all my new lights. I think this is very, very similar, but they mentioned wanting to or an avenue to doing more commercial.

8:47So I think the majority of their business is residential. I think it's a lot of federal and state money and even local money where the government at each of those levels has said to the utilities, here's funding to go make this happen, go do it. Or on the other side is that you guys need to go do it yourself. Like here in San Antonio, we have a city-owned utility, which by the way, thumbs up, you want that. That's much better than private utilities who've managed to find a way even under regulation to charge you more. And it's great, but they run these programs all the time for more energy efficiency, solar upgrades, lighting upgrades, insulation, and stuff like this.

9:25And this is exactly how it works. The city council says we're going to spend money on this. and therefore they tell the utility, like, go devote$100 million a year to give out in grants to pay for these upgrades to the insulation at the homes in town. It's a very win-win-win model. Like, the contractor is making money like these guys. The utility company is doing something good, right, in some way, shape, or form, and you are lowering your costs, your monthly costs, but it's also highly subsidized. And that's where the rub is maybe. You know, how much are you dependent? How much of your 5.3 million in sales is coming from these subsidy programs, which are temporary.

10:06They usually have like a limit. They have to be refunded. They run out. You know, maybe there's a point in time where there's a gap, whatever. I'd want to know how dependent this business is on continued funding of those programs and what the forward revenue visibility really looks like within those programs. Are people paying out of pocket for this on their own? Are they doing any marketing to find those type of customers? I think we have programs like this in California as well, but you have to be below a certain income level to qualify for the subsidy. So it would be nice to know if this company serves the people above that income level that just pay for it themselves and the people that are getting the subsidies.

10:49So to your point, Heather, solar was big this way. Solar tax credits came out and they were phased over multiple years and they went down. But as of right now, like the residential clean energy credit, it expires at the end of 2025 and it could just not be renewed. There could not be a new one. And all of a sudden, all these companies that have been propped up by it are, you know. I know of one particular business that was acquired with an SBA loan that defaulted because of the changes in the solar subsidies. Literally, you know, the business was so dependent on it. So that would be the key here if you're going to put leverage on this.

11:25This is SBA sized EBITDA. You know, how dependent are you on these programs? And then it becomes like an analysis of, quote unquote, like the political will risk. you know, because it is the city council or, you know, the state program or whatever. And so it becomes the politicians that are deciding your fate every year, every so often, however often these programs come back up. And so you have to sort of do a fair analysis of, like, is this the kind of thing that both sides of the aisle will keep funding? There's just a lot of willpower to keep this going. Or is this something that if the other side gets in power or whatever, we could lose the whole program.

12:07You know, that those are the kinds of, that's the calculus you have to make. Yeah. And ironically, the bet on this entire business is will the subsidies continue and the gravy train keep going? And like, to me, I look at it, I'm like, no way. Like that is way too much risk. It is a huge, that's a huge red flag on this and why it's just like an instant, like I'm out kind of on this deal. But the broker, I'll give him a credit. They basically are pitching this as a benefit. Like, oh, this is a feature. This is not the biggest red flag in the whole deal. This is a huge benefit. Mills, were you just taking my picture while I was talking?

12:48Yes. And there's a train in the background. So I'm muted because the train is like right on the other side of that wall. Yeah. If you need photos, just let me know. Just text me anytime. I'll hook you up. He signs them for you. Anything you want. Do you charge for that? Are these like feet pictures? I'll trade you whatever pictures you want for pictures of that arm club that you have. Okay, so hold up the arm club, please. Sorry to get us off topic. I'm stretching it right now because I have to do exercises, so I took my Velcro straps off. But look, you see my middle finger right there? Why is it black with white zebra stripes on it?

13:25Did they want to bring more attention to it? What were they doing to you? I was wearing a plaid shirt the other day and somebody was like, it kind of matches the pattern on your shirt. Did you question this when the doctor put it on? Were you like, bro, don't be. I honestly have not thought about the aesthetics until you mentioned it. There's a business there. Somebody needs to make better. Well, we looked at that deal that was like the. Stickers. Yeah, the stickers for the diabetes monitor, the insulin monitor. And they were fashionable. So we need some kind of cover for this or whatever. Yeah, thank you.

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15:25So one thing that we haven't talked about is this normalized EBITDA. The fact that they say normalized to me just prepares me for disappointment because I have a feeling you sign the NDA and it's not a good normalization. We had a really bad year last year and some, they're going to argue that we had one-time expenses or one-time events, quote unquote, but one-time events that lowered our margins or something like that. And I think that they're, I mean, you'd really have to dig, but I don't like when the trend has been maybe, you know, a certain expense structure on their fixed costs for the like four years prior.

16:11And then all of a sudden something new comes up and people try and normalize like things that are just like, we had to buy a new truck. Well, you got to do that. That's CapEx. Like it just, you can't normalize that away. Yep. So what is normalized versus adjusted? A bunch of ad backs. Well, so it's not just, it's not just ad backs, but like the normalized EBITDA is probably a multi-year average to smooth out a bad year. Probably. Yep. I mean, normalized, that's, it is, it is, it has that connotation. I think even the normalized EBITDA margin, which means this is, you know, best case of 12.6 % is, is not impressive.

16:49That's a pretty skinny margin and that's normalized margin. So that's probably higher than it really is. And so this, I mean, if this is a sub 10 % net margin business and you've got, you know, 5.3 million in sales, there's a staff, there's, you know, there's workers comp, there's liability risks. That's not enough margin for a business like this, it feels like. And maybe they're low margin because they're the subsidy program contractor rather than there's a, there's one, I think it's called 31 W is the one that I've seen around. And I mean, this is actually like not a bad niche. You, you go into people's homes relatively quickly in and out.

17:32This isn't like a home renovation where you're there for months and months and months and you get bogged down. They're in and out should be relatively high gross margin if you're doing it right. It is semi-skilled labor. They are not licensed. This isn't a plumber or an electrician who has to go pull a permit. They're going up your attic access with bundles of insulation, spreading them out, or maybe doing them in your crawl space, which is really, really dirty work. But you're talking about somebody who's making more than minimum wage by far, but is not a licensed and credential technician. This is a great business in the sense that it's a great niche in the sense that you're not competing for the typical kind of plumbing leads, HVAC leads, where your cost per lead is incredibly high.

18:26I like there's a lot that I like about this but I think that as soon as you sign the NDA you find some things that are not very favorable I will bet all of my hair that this business when you look on the tax return is barely profitable maybe break even once the owner pays themselves a market rate salary when I'd be willing to bet the owner is spending at least 150 days with a respirator on each year working on these deals. I bet that's exactly what's going on here. Because fundamentally, I think you compare this to a normal contractor where you're bidding different deals, you're doing it on relationships, but here there's one payee and it is the utility.

19:09And they are telling you how much money you're going to get paid for this and you're competing with everybody else who's offering an identical service. Like I think this thing, kudos to this broker because I think this is an absolute crap business that's barely breaking even. And they've made it actually look like, oh, we should consider this on the podcast. But now that I look at it, I'm like, this business is junk. It's not a good business to be in. And someone will get it under LOI and come to an SBA lender with this deal. Yeah. Because of the size. Should we give them your phone number now?

19:36It feels like home services. And it's a good size. Yeah. So, I mean, what do you think? Do you think there's a likelihood this generates enough free cash flow to justify any sort of purchase price for it? Probably not for me. It depends on the normalizations, you know, and the adjustments. because they could be really, they could be egregious and they could take what looks like decent EBITDA, you know, down significantly by a third, if I had to guess. All right. I feel like the past two deals we've really pooped on them entirely heavily. Is there anything to like about this? At least you're making the world a better place.

20:08I'm telling you, I really like this. I like this industry. I like this niche. I think that they're in the lower end of the value chain of doing it because it is really, really difficult to scale a business with the retail model because you're just fighting for leads. But in this case, you've already solved for all the leads. You sacrifice some margin for that, but your customer acquisition cost is probably nothing. Yeah. Well, and this is, I mean, unfortunately it's a really hard sell because you're doing the asking somebody to do a big capex to save opex over time sell, which is like the hardest sell to make to consumers.

20:47Like, hey, do you want to do, you know, solar that will cut your monthly bill by 50 % of your house that you may keep from anywhere from one year to 30 years from now? Like, that's a super hard sell, which is why you need these government programs to make them happen to some extent. There is like a DIY element to this too. What you were just saying, trading OPEX up front for, you know, less cost in the future. This is my father-in-law through and through. He insulated the floors of all the homes that he ever lived in himself with rolls of bat insulation and a Tyvek suit himself. He just, you know, went under the house and did it.

21:24There is a DIY model for this. You can go to Lowe's and Home Depot and they sell a little piece of equipment that has a big tube that you run up to the attic and you put these big bundles in it. And there's kind of a threat of substitute. Now, most people are not drilling holes in their wall and pumping it full of low rise foam because that's a little bit more technical. But I don't want to overlook the fact that that's present in this industry. You've probably seen them at Lowe's. And Heather, I feel like you're giving me the face like you've done this before. You've filled your attic. I didn't do it myself.

22:00I had blown in insulation put in because the old insulation was just so old. So I had that taken out and blown in, put in. And it did help a little bit in the summer. For us, it's for the summertime when it gets hot. Yeah. Yeah, this is in the right territory. It's in the New England area. You've got to do this almost. Yeah. I'm telling you, I like it. I just don't think that this is the one, but I think there's a lot to like about this. But Michael, you're right. I will say it. I hate admitting it. I think you're right. I think the owner is wearing a Tyvek suit more days than they're not. hold on i have to bookmark this moment uh mark clip clip created you're gonna make it your ring tone yeah michael you're right michael you're right i'll be at dinner with my wife michael you're right michael you're right well there's a first time for everything all right well you guys pooped on my deal but i like my deal hey where'd you find this one how did it come across your inbox uh i i saw a lead the other day for a mobile phone distributor in New York that was doing$75 million in revenue.

23:11And I just saw like a snippet about it. And I had been Googling trying to find it because I thought it would be cool for us to talk about. And as I was Googling trying to find it, I came across this on the Alliance of Merger and Acquisition Advisors, AMAA online. They have an area of the website called Deal Corner where they post a bunch of deals. And this one is on there. And then it linked over directly to Greg, the broker. I've never been on AMAAonline.com. Have y 'all ever looked at that? No, I didn't know they had a deal corner. I didn't either. I've worked with some of their credentialed advisors or whatnot.

23:49Yeah. All right. Well, sorry I hated your deal so much. I'll try to give a little more anticipation of me hating your deal. But after five minutes, I was like, this is horrible. this is the worst business i've ever seen hey it's not worse than the last one the cold dm one yeah that was one of the worst check out that one everybody if you want to see a really bad business yeah so you guys would want to own this business before you'd want to own the cold dm one yeah yeah yeah i think there's a way to make this one better i i don't want much leverage you know because it wouldn't be easy but i think there's a way to make this business better than it is right now.

24:30Oh, man. But there is 0 % chance if I own the cold DM thing that I'm in a Tyvek suit helping people run cold DM campaigns. You are right. That's my logic here. It's kind of like why I would never own a cleaning firm because I don't want to ever put my hand in the toilet that's fogged up. Unless it's my fault, then I guess I'll do it. Unless it's my own toilet. Unless it's my own fault. I'll make it happen. Yeah. Oh, man. It's kind of tough. I hate both of them. we gotta do better next week guys we need a good one live my experience well on that note I think we can wrap it up here anybody got anything else to say about steel at least the formatting was nice they chose a good font it was good yeah they chose a good font alright we'll wrap it up here thanks everybody for being here this week we had a ton of fun and yeah anything else anybody wants to add they should go to our website and set up our newsletter please do that believe it or not do you guys know we get like 70 open rates on those newsletters it's incredible it's unreal like that is my personal newsletter is 45 which is really really good but getting like three quarter open rates is pretty nuts so i and i because the high quality deals that we review on the podcast well look you know that's part of the deal we're going to show you some there's a lot of frogs out there before you find a prince.

25:57A lot of frogs. And that's our job as a frog myself.

26:05Cool. All right, everybody. We'll catch you next week. Thanks.