This Smart Home Business Checks a Lot of ETA Boxes

0:00Hello, everyone, and welcome back to another episode of Acquisitions Anonymous. This is the internet's number one podcast on buying, selling, selling, and operating small businesses. I'm one of your hosts, Bill D 'Alessandro, and I love today's episode. I hope you will too. It is a smart home and AV home theater installation business in my hometown, Charlotte, North Carolina. I think there is a chance I might have been a customer of this business recently. The business has a million bucks at SDE. There's a lot to like about it. I've also got Chelsea Wood from Acquisition Lab here today on this episode to help me break it down.

0:37So without further ado, 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 % beers anymore. I'm thumbs downing on just the plus inventory. 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.

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1:41Hello, Chelsea. Welcome to Acquisitions Anonymous. Hey there. This is going to be fun. It's just you and me today. I know. I know. I'll get your undivided attention. That's great. And the timing is awesome. I was just telling you before we hit record, I just saw Walker Deibel, who wrote Buy Then Build and was your business partner at Acquisition Lab, here in Charlotte. He was here for an ETA event, and I thought they said, hey, this is happening. Will you come? And I was like, yeah, of course. I thought there was going to be 20 people there. There were 100 people, 120 people almost, I think, at a Charlotte ETA event.

2:16So I was stoked. I mean, it's in the water, Chelsea. It's out there. We just launched local meetups, actually. So we have 15 chapter presidents now, and they're doing quarterly meetups because the local community is really important. And we've not done that before. So I'm kind of excited about that. So you have Acquisition Lab meetups in 15 cities? Every quarter now we'll have them. They launched this quarter. So the first 15 are scheduled between, uh, starting in February. Um, yeah. 15 of our largest markets. We just went with chapter presidents. So lab members will be the chapter presidents and they'll, we have a team that's organizing them.

2:51Um, but yeah. And, but we're not doing like those meetups are different in the sense of, I didn't want it to be speakers. Like, it's not like a, like I'm a walker, but yeah, it's more about, um, like we're calling it searcher circle and it's more for lack of better words. Like I don't want to like, like I'm a modeling it after AA, right? So like I want it to be more about like shared learning and vulnerability and kind of what we do in the library. And so there won't be a sponsors talking and stuff, but it'll be more about like, what are you going through? We're like, what, what's worked for you?

3:22What hasn't worked for, you know, you and just building that community locally like we do in the lab virtually. So anyway, I'm really excited about that. That's awesome. If people want to find it, is there a website they can go to find all 15 cities and the dates? No. not yet because will there be by the time the episode comes out hopefully um it is for lab members it's open to the public they can come to a couple if they want to um but it is an acquisition lab member event um and so you can go to voray.com probably and search for it because that's the um our company that's managing it um and so and just search searchers circle um and i'll send you a list of the cities we can kind of make a link for it awesome that's cool.

4:07So we have a cool deal today. Chelsea and I picked this one not five minutes ago. But this should be good because Chelsea said that Acquisition Lab members have bought businesses like this. I have been a customer of a business like this, and this listing is actually right in my backyard. So you ready here, Chelsea? I can't wait. Okay. So this is a 1.00, exactly a million dollars. I'm a little suspect, but okay. Exactly a million dollars of SDE, a smart home and AV integration company in Charlotte, North Carolina. It has$3.6 million of revenue. It has a million bucks of SDE slash EBITDA. And they're asking$3.5 million for it.

4:54So they're asking for three and a half times EBITDA. It also says it has three and a half million dollars of real estate that is not included in the asking price. So we can come back to that and structuring. It is here in Mecklenburg County, North Carolina, which functionally means Charlotte. It says, this well-established home automation and AV integration company has been serving high-end residential and commercial clients for over 15 years in one of the fastest-growing luxury markets in the Southeast. Specializing in smart home systems, home theaters, networking, surveillance, and commercial AV, the company has built a reputation for premium service, high-quality work, and consistent referrals.

5:30with over three and a half million in consistent revenue and a million bucks of cash flow this company is poised for a strategic acquisition with a strong team loyal customer base and increasing demand from new residents and businesses moving into charlotte this is an attractive acquisition opportunity leadership can remain post-sale for continuity with some recurring revenue through maintenance contracts over three and a half million consistent revenue and a million bucks at cash flow, the company is poised for an acquisition, blah, blah, strong team, very attractive, et cetera, et cetera. 18 employees, including seasoned technicians, project managers, and support staff.

6:07Leadership can remain. Diverse revenue stream is 70 % residential, 30 % commercial. Jobs range from $20 ,000 standard projects to$100 ,000 specialty projects. They have reputation-driven growth, deep referral base and strong online reviews, minimal paid advertising. It's expansion ready opportunities to grow by adding electrical licensing, targeting underserved areas in the south of Charlotte. So the burbs expanding new product categories like smart lighting or automated shades. They have scalable infrastructure, meaning they have high quoting volume. It says recent hires include techs and a salesperson to improve conversion rate and handle growing demand.

6:46The real estate is optional. The facility includes a showroom that is available for purchase or rent. Okay, we'll come back to that. Growth opportunities expanded to high-growth areas like Ballantyne, Waxhaw, and other affluent suburbs. Add license electrical to enhance commercial bid capacity. Increase marketing efforts. Build recurring revenue via service plans or maintenance packages. It says ownership is flexible and open to retaining a minority stake or supporting a transition period to ensure smooth handoff. It has$200 ,000 of F, F, and E. It's weird. it says lease showroom and office space.

7:22So I'm hoping they've adjusted the P &L for a kind of a pro forma lease if they also own that real estate. It says most rivals are small firms lacking the staff infrastructure and reputation to compete on complex and high-end projects. So that gives them a strong competitive moat because they've been around for a long time and they have experienced team and they get good referrals. They really want you to grow by adding electrical licensing. They keep mentioning that and expanding into other areas like smart lighting and automated shades and then also going out into the burbs. The reason for selling is older owner facing retirement.

7:56Okay, that was a lot. Chelsea, you said you've got some experience. Your members have some experience. Tell me about this industry, about this business. Like, what does it really do? Is this a good business? I mean, I like it because I feel like it's one of those evergreen, like it's a core part of functioning that's not going to change, right? well the technology will change but like people will always need this type of a service the challenge that i have is that it's tied to um typically it's tied to new construction right so like this is done in new construction and so it's going to wave or follow those kind of trends which i don't ever love anything tied to new construction um but it there is some potential for um upgrades so like when somebody buys an like an outdated house and they have kind of these higher expectations so i love i just i just spent five figures on this exact retrofit in my house exactly and so like i i like that it's diverse um and when you look down at um it's commercial and residential so i like that um the line the license your reference keeps me a little concerned to be honest um talent is a challenge um they tend to be a high cost talent because it tends to be a specialized talent base.

9:18And so that posed a challenge in one of our members who acquired in this space. It's just the cost, right? They were underpaying their workforce, and so then they had to come and adjust them to a market rate, which was not necessarily something that was planned for. Because, and this is, it's one of these things, and I'm sure you experienced this in the past, Like on paper, somebody can be paid within the range when you do diligence. It's like, oh, everybody's good. But then when you get in and you learn how specialized the knowledge base is, then you're like, oh, like, yes, you're paid appropriately for the title, but not for the specialization.

9:56and so i would just say that when you're going into something so specialized as in smart home installation and maintenance you have to recognize and make sure that people are being paid based on the the skill level that they carry and just make sure that you're not going to have an increase in overhead there well you also don't want to lose them too you know if you're underpaying your people you'll have people churn and your people are delivering your service here so you don't want people churn no exactly well and this is again a really highly skilled workforce so it's not even easy to replace right and train there's a long training period and so this i like the industry because i think it's always going to be there it might look different right like what they were doing in the 80s looks different from what they're doing now but they were still doing this kind of high tech av um service and so i like the place it's it plays in um i like the cash flow level.

10:49I like that it seems like they are, um, they have an infrastructure. Um, I like the average, um, about like order value. Um, it doesn't really say anything about customer concentration or where they're getting their, um, work from. And so typically it's a referral base from construction companies, um, or, you know, developers. And so I would want to know kind of what that looks like to see if there's transferability because they keep referencing that the person's willing to stay. I read it as it's not the owner that runs it because it says several times strong manager. And so I think they're implying that management will stay, but the owner will do a transition period.

11:31Got it. So leadership can remain, okay. So - Which is much better. Yeah, that's a thousand times better because the whole like referencing licensure and saying like leadership can remain post sale for continuity. I'm like, so why do we keep talking about licensure? Like, do we need to have licensure? Are we saying that this person will stay, so it's not a concern? What I like about this, Chelsea, is I don't think this does require licensure. So this is all low voltage, right? Correct. And what they're saying is, so you don't need licensed electricians, which is awesome. Now they keep saying, they said three times in this teaser that you should add licensed electrical, which makes a ton of sense.

12:12I mean, I just did all this and I needed to bring in someone different to do all the electrical. Yeah, I wonder if this is the business that I used. So, I mean, it's a slam dunk no-brainer. There's a reason they mentioned it three times is to bring electrical in-house so you can sell that work too. Well, and the challenge is if they don't have it. So I will be honest, one of our members bought an almost identical company and it did have the electrical, right? Which is why it was so expensive. So then I would argue you should have that. the fact that you had to bring in somebody to go and do the other half of this work is kind of not the best experience from a customer perspective.

12:50But that's great, right? Like, this is a big growth opportunity. Like, bring on some licensed electricians. Your job size is going to go up. It's going to be a better customer experience. It's a win-win all the way around. But it's a high-cost workforce. Well, but in theory, there's a margin in it, right? Like, electricians bill out at more than their rate. In theory, right? You've got a million dollars of EBITDA here, right? But if you go and hire, like how much can you actually increase the cost of, and again, I don't know what they're charging. It feels like they're charging like they already have that workforce.

13:21I would be surprised if, go ahead. No, the way it's typically built, I'm having just been a customer of this. So the way it's typically built, like you will get a quote. I really wonder if it was this company. You will get a quote for like all the low voltage work. So that will be like pulling all the ethernet cable that will be like mounting the TVs that will be putting the speakers in the ceiling that will, you know, pulling all the speaker wire, you know, all that stuff, surveillance cameras, alarm, like all that stuff. But then they're going to spec out and they're going to go, we need electric here, here, and here.

13:53And then they will typically have a partner electrician and he will come in, you get a separate quote for the electric. So you'll have two quotes. So by bringing licensed electrical into this business, you would just only get one quote for a larger amount from them. So you'd hire an electrician, like I don't know how much an electrician costs, 150K. So that would, you know, you can't sell him immediately. So yeah, there would be a bit of a J curve. You bring your licensed electrician in. But I mean, I will tell you 100 % of these jobs need electrical. And there will be a 100 % attach rate, which is great.

14:29So you would book this guy up pretty quick. I think that's why they mentioned it so many times. Well, because it needs to happen. But it begs the question for me, if you're making a million dollars of EBITDA, why in the hell haven't you done that already? That's my question. I really wonder why they haven't done it. I mean, obviously it's occurred to them. They've mentioned it extensively, right? I really wonder why they haven't done it. The thing, you mentioned it's leveraged to new construction. There is some retrofit, but if you're going to be leveraged to new construction, I can't think of a much better place than Charlotte, North Carolina.

15:03I mean, like, this is just, there's a fundamental and structural population migration, you know, out of the bigger tier one cities to places like Charlotte, Atlanta, Nashville, whole Southeast, etc. So you have this population tailwind, the construction is like crazy. Your point, Chelsea, was very good. I really want to know where their leads come from. Like, is this all builders that have them come in and put it in a new home? Is it like spec builders where I would bet not? Because I don't think like putting extensive smart home in a spec build drives your sale price of the home, I would think this is probably custom built if it's new built or retrofit.

15:41So I really want to understand kind of where my leads came from if it was just a couple builders, because if so, that's customer concentration, right? You lose those guys. It's really lead concentration, even though the homeowner may be paying you, but if the builder is the one bringing you all the leads, that's risky. Well, and I think that's the challenge for everybody buying in this space, or in any space, I should say, like the ETA space specifically is like, there's an underestimation of the skill required to find and convince key decision makers to use your product. um and so i think that understanding where they're getting their leads and how the bright buyer needs to know how to continue furthering those relationships um because i have a lot of conversations with folks that are like oh well i've did sales and it's like okay well not the type of like then you have to buy something appropriate for the skills you have um because that's where i see lab members and just buyers in general even not lab members on podcasts right Like they go wrong not being able to identify and convert customers, you know?

16:47Yeah. So this business, if you think about it, like how this works, it's system design. So Homer comes in, they go, I want a home theater. I want the lights to be automatic. You know, all this stuff. You've got to understand, you or your techs have got to understand kind of what you're selling. You might be a licensed dealer for some of these brands, which is great because then they'll be training. You'll be a licensed dealer. there's a little bit of brand value there. I mean, I don't think you're going to be exclusive for a territory, likely. But you will be, you know, you have support from the brand, the manufacturer.

17:20So you have to design the system. So there's a little bit of a sort of engineering and design capability up front. Then when it's designed, you've got to actually install, which basically means pulling cable through walls, cutting drywall, you know, mounting TVs, you know, putting speakers in walls, like that type of stuff. It's like light construction. it's not that feels pretty easy to and i don't mean this judgmentally of the of the workforce but that feels like a pretty easy workforce build a hundred percent yeah like this this labor is easy to find the the kind of design labor a little harder but again you're supported by the manufacturer and like i don't think that's that hard either you know you're probably you're probably selling mostly the home same home theater every time right it's not like you're totally design.

18:06Yeah, different configurations, but it's not that different. Then you got to do the work. And then sort of the tail end is you have to configure the system. So like you got to, it's like a little bit of software configuration to make it all work. And again, the manufacturers support you there. And that's maybe a little bit more technical. So you probably got like your system designer and your system config are probably like the same work. And then you've got You're more, you know, hammers and saws, people pulling cable and cutting drywall. So that's how this business delivers its service, if you can picture it.

18:39I love this, actually. Yeah. I love it. I have a member. Is it a member or somebody trying to get in? I don't remember. I just talked to somebody yesterday. And there's a talent with being able to manage both of those types of workforces, right? The more skilled workforce and then the more hands-on workforce. that I just, it's like, as soon as you're talking, I'm like, oh, he would be a really good fit for this, right? Because it's like, I like the business. I like the, there's a lot about the business that I really like, but I also, in light of how the market feels right now sometimes, I really like their valuation.

19:16This would be like a$7 million listing because I feel like so many listings I'm looking at these days are seven to 10 X, which is just absurd. And especially cause I use the term strategic. So that was part of what put me on my heels a little bit was there, like, this would be a good strategic acquisition and strategic acquisition to me feels like someone saying this would be good for someone that can already operate. This business needs somebody to come in and just kind of swoop it up. It can't stand on its own. But I think they were just using that word differently than what's in my head. and so in our world that means i want a huge multiple right right like you're going to basically get all these efficiencies by like wiping out the business and just buying the book of business um but like i like the valuation i'd like to talk about the real estate because i think that's interesting um i like this what appears to be the structure to your point it seems like the owner is not necessarily core so the trans um the transferability doesn't seem as concerning um originally as it was i still want to understand if the owner is owning those referral relationships because that would be you know important to recognize but i really like the business it's it's got a long history it's got good earnings it's got a team it sounds like it's got a manager like it's got a from everything we can see so far i would be very excited about it i like it are you ready to take a leap into business ownership but you don't know where to start?

20:48Well, 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, longtime friends of the podcast. They're passionate about helping entrepreneurs like you take the next big step.

21:18So 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. So let's talk about the real estate. So the business has a million bucks of SDE and they're selling the business for three and a half million bucks. They've got a separate three and a half million bucks of real estate and they describe it as a showroom. They didn't describe it as a warehouse or logistics facility, although I'm sure it does. They'd probably warehouse some equipment there, some cable, things like that.

21:53But you probably don't need a huge warehouse and that part can be moved. I mean, you probably need 1 ,000, 2 ,000 square feet, nothing major. So I would think what this really is is a showroom. do you chelsea how would you think about you know valuing this real estate what are the gotchas when real estate comes with a business and do you think it would be severable that's a good so a couple of things the biggest thing and you called it out earlier is like i really hope that they've adjusted the earnings to reflect the leasing component um in the value like in their sde value because i feel like a lot of times when real estate is listed, they don't do that.

22:33And so you think that it's a million dollars, but then when you go and actually include the cost of leasing the property, now it drops dramatically depending on the market it's in. And this is a high valued property according to them, right? And so I would be a little bit concerned about what the cost of leasing the property would be in relation to the million dollars of earnings that they're listing. well to me though i wonder do you really need it i mean that's my first question is like do you sell business in the showroom like do you really need this like are builders and people coming in and sitting in your recliner with speakers in the back of it and watching top gun and being blown away by the audio and going i have to have this in my house or is it a lot of times in all businesses especially i mean this is owned by a nerd and i say that affectionately because i am one this is this is owned by like a home automation nerd and he is like you mean i can trick out this awesome showroom with all the coolest stuff and expense all of it like let's do it right and he's convinced himself it's a business expense and owners in all the industries do this right but the question is do you really need it and i would be tempted just to just to not lease it go do whatever you want we'll move out.

23:49See you later. I have mixed feelings. So I have a love-hate relationship with real estate involved in deals. So on one hand, I have my grandpa in my ear telling me that real estate is the most valuable asset you can ever have. Go buy real estate. Real estate is always good, blah, blah, blah, right? And then on the other hand, I know the economics of deals. And so a lot of times the real estate doesn't make sense. But I know nothing about this market. I'm in St. Louis, Missouri. I think I've actually been there, but we're going to say I've never even been here, right? But everything you've said to me about the market makes me think it's a good market to own real estate in.

24:29Broadly, it is. And so anytime there's real estate that could potentially be valuable aside from the deal, it makes me go, well, maybe that changes how I feel about real estate involved in the deal because in and of itself, it's also a good investment. The other part of me is also thinking, this is a Chelsea problem, so anyone listening, this is my perspective only. I think that as humans, we are longing for tactile experiences related to our purchases. because we've gone so far in the other direction of buying everything online and having a hard time actually getting to see something in person before buying it that having a showcase for this type of product product is probably actually kind of important because it is a luxury item and it is very much selling someone on the experience and like they won't get to experience it until it's completely done so i think not having a place to actually bring them and have them experience what they're about to do to their house might be a bad thing.

25:33And so I would go more towards, yes, I would want the real estate. I would not want to lease it if I could help it because it feels like a valuable asset. And I think I would structure the offer slightly differently so that I could get the terms to work in my favor. I think I would offer a little bit more than a 3.5 multiple for the business because I think it carries enough value that I could. And so I think, again, guys, this is not, I'm not telling anyone to make this offer on this business, but like if I were doing this from an economics perspective, I would rather pay$4 million for the business and pay$3 million for the real estate so that I could take advantage of the business being more valuable than the real estate and get better terms um right or i'd flip it actually so the real estate has to be more valuable than the business yeah i'd probably flip it right because your debt on your real estate is going to be cheaper than your business your business exactly and so it's like i think in the in this regard because they valued it appropriately that's the dyslexia kicking in bill i always yeah um but yeah it's like i think the real estate actually because it feels like a valuable market to own it in.

26:48The valuation of the business is a reasonable valuation. It would just depend on if the real estate valuation is also appropriate, but it could be that including the real estate here actually positively impacts the economics of the deal because the terms can be better, because the real estate can be more valuable than the business. Sorry, I flipped it. So my gut says the real estate would be included here. I wouldn't know until I modeled it out, but like that's well that would be the first question for the owner right is honestly do i need this showroom right really tell me honestly like how much business you sell out of the showroom etc let's assume you need the showroom so just for purposes of the of the analysis going forward um to your point chelsea um i was first going to say you kind of need to look at this buying the real estate as a separate transaction that's got to make sense it's got to be valued appropriately You know, I'm going to assume for a second that they have fairly burdened the million bucks of SDE with a market rent.

27:50Because if they haven't, they need to. And then you've got to, if there's$200 ,000 of market rent, then you've got to take it down to$800 ,000 SDE and the purchase price of the business has got to come. Everything changes. Right, everything changes. But let's assume that they know what they're doing here and they've burdened a pro forma lease rate, assuming you don't buy the real estate into that million bucks. Yeah. So you're going to buy the business, got a million bucks SDE, burden for rent. Then you got to go, oh, I'm paying$200 ,000 a year for rent. Is it a separately a good investment to invest my capital and make$200 ,000 a year of yield?

28:25And that's how you'll figure out if the real estate is valued appropriately. What's interesting though, is savvy listeners have already picked up that these variables are interdependent. So if you own the business and the real estate, which you in theory would upon the instant of closing, you can mess with the lease rate, right? You can pay yourself, your real estate entity, a higher lease rate, which to a point, I mean, lenders aren't stupid, but you could pay toward the high end of market, which will in theory juice the value of the property, which might let you get more leverage on the property than you would otherwise get on the business.