We Buy Gold Business Model Explained: Why This Deal Is Risky

0:00Welcome to Acquisitions Anonymous. Michael here. Today's deal was a super fun one. We had five of us talking about this deal, which, as you could guess, means we go a little bit longer. But we dug really into a fun one that I think you'll enjoy. It's a big company that buys gold. So stick around for the whole episode. You'll see what we thought about it. And I think you'll be surprised where we ended up on this one. I was. All right, 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 down on just the plus inventory.

0:34Hey, everyone, it's Bill. And I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod. It's called CapitalPad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So CapitalPad is a marketplace for acquisition entrepreneurs, that is people who want to buy a business and need capital to list their deals and solicit capital from other people who want to invest in acquisition deals. So if you want to back somebody buying a small business, CapitalPad is the place to do it. And if you want to buy a business and need capital, you can go on CapitalPad to be introduced to investors.

1:17So the really great thing too from the investor side is that CapitalPad takes care of all of the details that can get hairy with small business acquisitions. They handle standardized terms, standardized governance, standardized distributions, all up front in black and white. Basically, Capital Pad professionalizes investing in small businesses, and the returns can be really, really good. I'm so stoked they exist. It's founded by my friend Travis, who is a phenomenal entrepreneur in his own right. So if this sounds like something that's appealing to you, if you want to buy a small business and need capital, or if you want to invest in small businesses, go check out capitalpad.com and tell them that Acquisitions Anonymous sent you.

2:01I would rather it that way. So who's New Year's starting the busiest? And why is the answer Heather? Yeah, it's Heather because everybody wants to close at year end, but then the holidays come and nobody really can get, it can't get done. Especially the way the holidays fell this year they really took us out for two weeks which was great but now most of the deals that wanted to close at year end are closing in january this year mills will you walk us through that the psychotic whiteboard behind you a pin board it kind of looks like that meme you know where the guy's like yeah we're trying to find what's going on there yeah they're all different jobs.

2:40Could you? Okay, thank you. It starts over here. These are jobs we have coming up. These are jobs that we have coming up. These are jobs that we're on, and these are jobs that we're trying to finish. That is a lot of jobs simultaneously. How many crews? It depends on the type. Overall? I mean, like 14. so you're trying to staff 14 crews across all of those jobs simultaneously yep wow what is the what is the top line size of your business just you don't have to say exact number but i'm just curious a rough magnitude 30 million 30 and you're so that means a job is like roughly one or two million bucks typically uh average order value is like 350 but they range from like 5 000 to 6 million okay wow crazy and it's mostly still yeah a lot of schools all but all commercial no shingles yeah well gang happy new year we have a special guest today josh is with us back again for your third time josh yep and half of those times so far i've been without me so you're welcome yeah me and josh have been holding it down every time it feels like thanks for having me well I brought a deal but before we get into it Josh you want to introduce yourself tell the audience who you are and what you do sure yeah I'm Josh Tunneson I own and operate Tunneson accounting services my firm we specialize in quality of earnings reports for people buying small businesses so would you say you've seen a lot of small businesses Josh I've seen a lot yeah that's why I love having you on the show because you've done you know that's like you and Heather bring this like different perspective of you know the debt and then the accounting like the more technical, because the equity guys are the optimists.

4:33You guys have to be the pessimists. So it's good to have some pessimism on the pod. We think so, right, Josh? Yeah, we see it all day and we're tired of it. So yeah. Speaking of a deal, I brought one and it's a big boy. I want to see it. What do you got? It's a generational equity deal. Oh, Mel's a favorite. It's number 09159. And it is a high-performing and scalable precious materials buyer located in the eastern United States. So for over 15 years, this precious materials buyer with locations in the eastern United States has acquired gold, silver, coins, diamonds, luxury watches, and other valuables directly from consumers through their storefront locations.

5:15Items are evaluated and purchased through the customer's presence using advanced exfoliative fluorescent technology and proprietary ERP software, ensuring transparent, accurate, and efficient transactions. Acquired items are sold to refineries, jewelry stores, resellers, and direct-to-retail customers via eBay. They've been reinventing and disrupting an antiquated industry in much the same way CarMax legitimized and modernized used car dealerships. The company has established a highly scalable platform that can be easily expanded to other markets nationwide and are accelerated through a franchising model.

5:46In 2025, they are projecting$41 million in revenue. They did$6 million projected EBITDA in 2025. So it's about 15 % EBITDA margins. And that is up from about$22 million in 2024 and$2.9 million EBITDA in 2024. So hell of a year. Almost double. Almost exactly. On top line and bottom line. Yeah. Yeah. So Bill, do you understand what these guys do? So I think this is like literally we buy gold, right? This is like you drive down the street and like someone has hammered a sign into the telephone pole that says we buy gold, text us or whatever. And you bring your grandfather's gold watch so you can make rent.

6:32Is that what this is? I think so. and then they're reselling it like on ebay they're not like they're not like melting down the gold and selling it as a commodity it seems like they're selling i want to say pawn shop but they're not i don't think i think they're buying it outright they're not doing the whole give you a loan against it kind of thing is what it seems like no this is a trading business so they're going to buy your precious metals and it says that acquired items are sold to refineries jewelry stores resellers and direct to retail on ebay so any of the above like they will they are flippers basically like they're gonna lowball you on your on your watch or your gold bar the thing you stole out of that fell off a truck etc uh and then they're gonna resell it at full market value i would think i mean that's this model yeah it's almost like the arbitrage play of you need to sell it now and we know who will pay the fair price for it and we will hold it you know yeah we'll carry it for a couple months on our books and then get market price for it yeah so do do they have a bunch of storefronts somewhere like all across the northeast like we buy gold storefronts so i was gonna say no except then it said the items are purchased in the presence of the customer didn't it say that using the electra is yeah items are evaluated and purchased in the customer's presence using x-ray fluorescence technology and proprietary erp software so yeah right like people are bringing valuables into storefronts, I would think, or they're coming to your house, which sounds very dangerous, you know, with cash, I guess.

8:09I mean, I would assume this is a cash transaction. There are so many accounting questions that come up. Oh, yeah, Josh, your head's running around. Warming, like, oh, my gosh. It describes that their differentiation is they have an upscale and refined customer experience over typical gold buyers and pawn shops. okay so it's a storefront right it's gotta be yeah or it's like we come to you and i show up in a suit and spread out a white tablecloth and i inspect your thing with a mobile uh electro freeze a mobile x-ray fluorescent thing and i give you a bid right there but like that you're walking into their house with a briefcase for cash like you're gonna get mugged that can't be true yeah i don't think they do that josh so this deal comes across your uh your desk what is the first couple questions that come to mind?

9:00First couple questions, I obviously want to review the balance sheet. I want to see how much they're carrying. So I did a quality of earnings on not the same business, obviously, but a similar one where it was actually sell to retail though. And a lot of what we saw is that they made a lot more money when gold prices were accelerating or appreciating, I should say, which is that something that you could really count on being repeatable income? not really right gold can accelerate in theory maybe for a few years but right you can't have that every year so um that's where tying back the actual EBITDA that they're advertising to to what gold or other precious metals are doing is important because you want to make sure right what's consistent what's repeatable what can you um what can you bank and then two it's like well what's the hold life on it right so it's like well they're they're buying it and selling it a week later then the gold appreciation probably doesn't have as much of an impact as if they held it for six months or something.

9:54So there's no inventory and reviewing the balance sheet for that, I'd say. So gold has gone up like crazy the past year, right? Bill, GPT, what's the answer to that? Yes, like nearly double. I mean, over the last 18, 24 months, yes. Gold is up huge. So that helps these guys because if people's gold's more valuable, right, in theory, it's going to sell for more. Therefore, they can get more total margin on the whole thing. Yeah, I mean, their balance sheet is just appreciating in value, right? Anything they're carrying. Their inventory is just increasing, right? They can't lose. The longer they hold, it just goes up.

10:28All right, pessimism, Heather. Yeah, pessimism, pessimism, raising their hand. But what happens when the price of gold declines? And what did they pay for the gold that they're carrying? Like to Josh's point, how long did they carry the gold is where the risk is because they can get caught on the other side of that. Yeah. I mean, that's the thing about this business, right? Is it's like a giant gold trade, right? You need to, you need velocity. Like you can't, the goal of this business, like this business run well is not a price of gold speculation business. This business run well is a volume business and like you own it for a couple days and you can't, you know, you're just not, you don't own it long enough to get really creamed on the price of gold because you know, you're going to sell it in three days to your refinery or whatever.

11:16And you just need to move as many gold watches and bars through as possible. So that's my question is like their balance sheet, like if they're doing it well, it should be three days of sales. Yeah. The interesting thing about these businesses is like on the acquisition and disposition side, like it's so fine. It needs to be, if you sign the NDA and you look at this, you get the SIM, it needs to be so finely tuned. like are they disciplined in the way that they acquire things is it just that we have a hundred storefronts like in atlanta or something like that and that's how we get it that that has a moat that's actually pretty competitive but then on the disposition side when they're getting rid of it like is it just a giant hustle or is there some kind of formulaic way that they know now is the right time to go to ebay versus now is the right time to go to you know the the smelter and it just gets melted down into something else.

12:11I would be really curious because businesses like this in this industry have a tendency to be very like hustle kind of it all like a guy's cell phone rings and like all roads lead to him. And if he dies, like the whole business goes to zero. Yes. I mean, in theory, these guys should be able to, you know, buy at a discount from the consumer, right? And then at having more scale means in theory, they have people whose entire job is to understand, okay, we just got three ounces of gold in today from Topeka, Kansas. What do we do with it? And sometimes it's in a good finished product and they're going to go sell it at wholesale to somebody.

12:51Sometimes they're going to go send it to the refiner. In theory, they should be seeing benefit from being bigger. And I think they talked about here, they have this custom ERP software that they've built, which in a perfect world, if I design the perfect business, there There is a whole software system in the background that is basically doing all of this thinking and optimizing how they get rid of all this gold or diamonds or silver and then maximize their outcome for it on a daily basis, like a trading house almost. I think that's what they're saying they have, Michael. That's what it says. It's their proprietary ERP hooked up to their electrophoresis machines and they should know what the bid is right there.

13:31The ERP probably probably makes the price of gold. It does sound cool. Yeah. I mean, like in a perfect world, that ERP is connected to whatever the smelter is paying on spot price that day per quantity, right? And it would just be kind of magical. Well, and then it becomes, that's what you want. Because then it becomes not a hustle. And you know what you can pay. And you're going to do the deal. And you probably know where you're going to sell it before you even buy it, right? The ERP knows where you're going to unload it to. And so then it's just back to what I said before, is it's a volume business.

14:03And then it's actually, you know, if you have that set up where you can buy right and you know you can sell, then it's just like any other business. It's marketing, it's location, it's lead gen, it's how do I get people through the door, and it's just how much volume can we do. How does this deal, you signed the NDA, how does this deal actually get done? I think there's a high likelihood that there's some, like, skeletons in the closet and probably some things that disqualify you from financing. Oh, I'll tell you what I think kills this deal immediately. I think I'll tell you what the problem's got.

14:36All right. The rule. We got to get to 10 minutes yet. You can't poop on it yet. Sorry, sorry, sorry, sorry. Well, he asked. I was going to tell him. We're 13 minutes in. Okay. Yeah. Keep going, Bill. Tell us why this is a great deal before I kill it. Well, hang on. Let's first talk about like, Heather, can I get a loan for this? Or is this like a money transfer business? Like, does this become more like a commodity trading thing and no bank's going to touch it? I think that's the problem, is that they're not willing to take the risk. You really have to know your inventory. Yeah, ERP sounds good, but a lender is going to look at that and still say, somebody's still got to have the smarts behind it to know how much inventory should we be buying right now?

15:16Is the demand soft right now? All those things that you kind of have to have some instincts for. I think this is a tough one for a lender to get comfortable with. And is it because the lender is just going to be nervous about the value of the inventory, or is it because the lender is going to be contractually or regulatorily prohibited from lending to this business? I don't think there's any prohibition for a lender to do this. I think they could do it if they wanted to. I think that anytime you talk about commodity goods trading, you find lenders running out the door. They don't want to be involved in lending in that business because any business in commodities from a lender's perspective can be doing beautifully for long, long periods of time and can just drive right off the cliff in a day.

16:04And they don't want to be involved in something that has that potential for volatility. And it's because of the reversal on your inventory, right? Like the market moves against you and you're stuck with a ton of frozen water. You made a bad trade. You bought too much at the wrong price and it's over. Yep. I did due diligence on a deal an almond farming slash almond brokerage deal? Do you guys know where most almonds are grown? I do. It's California. 80 % of the world's almonds are grown in California. And it's very contentious about water consumption as I guess are most farming operations. But it was very hard to find, even like at a very high equity ratio, it was very hard to find somebody who got comfortable with it because they're like, I mean, And it's so, it's commoditized.

16:54It's a commodity good and it's being traded. So that's risky. But there's, it's so niche that like, there's not that many people who really understand the nuances of it. And lenders couldn't get comfortable with it, even at like 50%, you know, debt and equity. Very common. Anything commodity trading oriented, you're going to find that. So that's going to hold down the multiple on this business significantly, right? Because you're not, it's going to be darn close to all equity, I would think. Yep. seller note and equity. Yeah. That's what you've got to work with. There's one thing on this that I wonder about from a regulatory and a compliance standpoint.

17:29Like we scrap a lot of metal that we take off of jobs and we have to have a scrapper's license to be able to take it, to take like copper and aluminum and steel. I wonder if there's a dynamic at play for them where they have some competitive advantage because not just anybody can walk like with a, you know, a bucket full of gold watches to the recycling place and say, how much will you give me for this? There may be some regulation. And I don't know if that's just state by state, I'm pretty sure. Well, is that probably different? Like I need to haul off all this copper and aluminum versus I'm buying this watch.

18:07Well, yeah, but I think if they are, if they are actually taking some of this, like if they're like, it's a bunch of broken jewelry and we're not going to repair it. You know, it's just a bunch of broken necklaces that we've gotten over the last quarter. and they're just going to take them to be melted down. I would think, though, that you can't, because of trying to protect consumers and protect, I mean, it happens with catalytic converters. We got a bunch stolen, and you can't just walk into the place with a catalytic converter, much less like 100, and be like, how much will you give me for these?

18:39Because they want to know where you got it. And so if somebody's showing up with 100 catalytic converters a week, they want to know who you are and at least your alibi for why you got it. Exactly. Because there's like very small trace amounts of very expensive metal in those that gets, you know, parsed out. So similarly, if you're showing up with 50 gold watches a week, you got to have a good reason that you got 50 gold watches. They want to know who you are. Yeah. Okay. But probably, I mean, that's more of a, you know, you got to do the paperwork. Like it's not impossible to get that, right? Correct.

19:09And I'm thinking these people obviously have it if they're doing something like this. And that is a valuable, you know, just credential of the business that you would want to figure out how does it transfer at the at the sale the qualifier is probably the founder or the owner not the business itself at least that's the way it is for scrapping licenses is there any chance that this business uh is connected to or involved in some illegal stuff money laundering there is a chance yes well either explicitly or implicitly i mean you could be very easily implicated right people are bringing you stuff and you're just buying it and you don't know the providence of the stuff, like where these gold bars come from, right?

19:51You could be the part of the chain that is turning an illicit gold bar into clean dollars and have no idea. You're the launderer, whether you know it or not. Right. Right. Are you ready to take the leap into business ownership, but you don't know where to start? Well, 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 and 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.

20:25And 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. 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. Have you guys read about all the dispensaries, like the cash-taking dispensaries in Colorado and places like that, and some of the estimated stats on where the money's actually coming from? No. How does that work?

20:59Okay. So the dispensaries historically, because it's federally regulated, you're not allowed to sell marijuana, the dispensaries historically only took cash. And then eventually... Because they couldn't have a banking license. I couldn't have no way to take a credit card. There was no way to have a bank account. So it was like a cash business. I lived in Colorado during this time, Michael. Yeah. So massive, massive dump loads of cash. They got robbed all the time. All the time. That's basically what Tulsa King is about with Sylvester Stallone. I haven't watched any Sylvester Stallone movies since Rambo.

21:35So basically so much cash is coming in these things that eventually the Federal Reserve just started to create services where they would actually go pick up the cash at these dispensaries and give the cash receipts to these folks because they couldn't do anything with them. And so supposedly the rumors are what the majority of that cash is, they're actually being used as money laundering fronts to take cartel money and put that into the system. So it looks like they're selling so much in the way of marijuana, but some estimates are it's a third or half is what I've read of a lot of the cash coming in is actually drug money from other drugs, not from THC.

22:16So meaning like they take the drug money and they just use it to buy more marijuana, which they will then resell illegally and end up with, like it's just buying more inventory. But now the money that they bought becomes clean because it was retail, it was washing. Yeah, yeah. Well, it gets put in the system because it's supposedly semi-legal marijuana sales. But in reality, they just showed up with$2 million in cash and ran it through one of these money laundering marijuana dispensaries. So that's where a lot of the cash is supposed to come. We're not actually using that much pot. So they'll own one and half of it will be normal consumers just patronizing the business and then the other half is their laundering operation.

22:52Yep. Interesting. That's some of the estimates. It's pretty nuts. Believable. All right, so back to this. So do we think these guys are doing anything illegal or do you think they're just kind of a byproduct of some of that? Because stolen boolery is... Total revenue figure again? $41 million,$2 million. Up double year over year. That's a lot of transactions of like small purchases or sales, right? So that's like my first hint is that maybe, you know, it could be the same thing as the dispensary. A certain percentage of that is legitimate transactions and another percentage might not be. Yeah, the thing that I want to do in diligence here is basically get a customer list.

23:33Like you're going to break down that 40 million. And if, if 15 of it comes from three customers, I don't, I don't like that at all. Right. Because now I've got a, even if it's perfectly legitimate, now I need to underwrite those customers. Where are they getting it? Is that clean? Are they going to keep coming back? Now I have customer concentration risk, but it's worse than customer concentration risk because either they could leave you or they could be criminals. You know, it's like, like that is not typical customer concentration risk. So I would love to see, you know, just a whole bunch of mom and pops off the street and no big customer concentration risk.

24:09And like maybe, maybe best case scenario, they are a clearinghouse for pawn shops or something like that where you go, okay, you don't necessarily have the full retail experience. And maybe they do have a very nice elevated retail experience, but they also are a backend, you know, and a clearinghouse for others. That would explain to me, I'm dying to know, I would sign the NDA just to figure out how did their revenue double. The reason I think it's probably legit is because of how much they talk about the software, the x-ray fluorescence machines. It feels like they've actually built a system here that scales.

24:47I would love to hear the story of the entrepreneur who started this. This probably started as a hustle, the guy with four cell phones trading watches and stuff. there's a great chance like this is like a you know started eight years ago by a 22 year old hustler right who has who like gradually professionalized it and it was like i know how am i going to verify instead of i don't have to bite the gold every time i could buy one of these x-ray fluorescence machines and they're like then we're going to build custom software to pipe the price of gold into my app on my phone and like i bet it potentially just built like that and the guy turned a hustle into the business which are like my favorite stories in all of business people never lie in their teasers either so it's it's probably what bill's saying but it also could be exaggerated generational equity is up there with website closers these guys never let us down you can always trust them i mean i would one thing i would definitely do is sell them some gold as part of diligence like i would have a friend go sell them some gold and watch that transaction happen this is a great if you want the real customer experience bill you can go over to Mills' house, break into it, steal whatever gold is there, smash it with a hammer, then take it to one of the stores like the rest of the customers are.

26:01Well, wouldn't that be funny? Like, you report your own gold stolen and then try to sell it to them and see if they'll buy it and see what happens. And then hire Josh and go, okay, Josh, why don't you see how it hit the books? Like, what price are they carrying at? Watch them sell it. Like, just watch like a known quantity go all the way through the system. Yeah. I would definitely. I mean, one thing I love about this business, this is an inflation-resistant business, right? If prices of the dollar is getting less and less, like the price of gold in theory is going up, right? And gold is an inflation hedge.

26:35Silver's the same way. Luxury stuff, these coins. Like this is a nice business to own if you believe inflation's a real problem in the United States going forward. I mean, if you believe that the dollar, I'm not trying to say the dollar is going to zero and the dollar is going away, but if you believe the dollar will lose even any little bit of prominence, fractions of percentage point, this business should do better. As people hold more precious metal, transact in more precious metal, more of the world's value is denominated in precious metal, this business should do well. You could also just buy gold ETFs and save yourself$41 million or whatever they want for this.

27:11I would be worried if they have any wholesale accounts. like if it is literally all the supply side is coming from retail customers and you can you can verify that through the erp okay then i feel a lot better than if they do say oh yeah we have a few of these wholesale pawn shops or whatever because that's where if there is any illegal activity that's where it's going to be and i would think as a buyer if there's any of that that that's a risk that would be very hard to underwrite there's just no way you really know what you're getting into on those wholesale type of relationships until you own the business.

27:46And then it's too late. There's this interesting subset of deals that I think you can take a business that is kind of in a gray area and legitimize it and put a bow on it for an institutional buyer and extract a ton of value. There is a different subset of businesses that no matter how big it gets, it stays illegitimate and there's contagion risk. we looked at buying a firearms business years and years ago and like pension funds and like institutional investors were like we we can't be associated with it good or bad like it's just too volatile to to touch and then i realized there's whole realms of people who just buy vice businesses solely based on the fact that other people can't buy them yeah i don't know which fund this is i mean i have a friend who many friends that do oil and gas and they're like a big part of my advantage is all these other big pools of capital have esg mandates and they just can't do it um and i don't have an esg mandate and so i can do these deals and they can't and it's kind of the same thing if you're able to invest in this it's a moat all right josh where does this deal fall apart uh no i think it's the gold depreciation like you see it doubled from last year, right?

29:00Gold doubled. So it's not only the revenue that's increasing, right? But it's also when people get excited about it and they start to sell and go, wow, gold is higher. So even if gold stays the same price, but the excitement decreases now, you're going to run into trouble. So it's really just a matter of price, right? Are they basing it off of the highest year right now? Or is it a lower year? And can you make the terms work like Heather was saying? Yeah, that was my prediction for why this deal falls apart, Bill. It's just like, They're going to have it price peak. These guys are trying to sell at the top.