Would You Bet $1.6M of Equity on This California Courier?

0:00Hello, everyone, and welcome back to another episode of Acquisitions Anonymous. This is the internet's number one podcast on buying, selling, and operating small businesses. I am one of your hosts, Bill D 'Alessandro. And on this episode, I am with Heather Anderson. And we review a courier company in California, north of LA, serving San Luis Obispo and surrounding areas. Beautiful area of the country. So if you want to move to California and run a courier business, this is the one for you. It's got$770 ,000 of SDE. So it's chunky enough. and they're asking 5X, so it's a little pricey, but there is actually a ton to like about this business.

0:38Sometimes we have to be nitpicky, but this business we really liked kind of top to bottom. So this is a fun episode breaking down a courier business in California. Without further ado, I hope you enjoyed this episode of Acquisitions Anonymous. We'll start Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100 % ears 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? Well, look no further than Acquisition Lab, the premier resource for entrepreneurs seeking to buy their dream business.

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1:43And when you do, be sure to tell them the Acquisitions Anonymous podcast sent you. Hello, everyone. Welcome back to Acquisitions Anonymous. Today, you've got me and Heather, and Heather is looking tan and happy because where did you just come back from, Heather? I just came back from Maui and it was wonderful. And it's whale season there, which is really fun. So I am very relaxed. That is awesome. Every time somebody says whale season, I think of that business that we did on the show in the Pacific Northwest, the whale tours business that got so mad at us. Yeah. Yeah. It's not, we didn't, I didn't go there.

2:18I went to a nice warm whale weather or whale season location in Maui. It was beautiful. That sounds great. I'm super jealous. Um, for, if you are not a long time listener of the pod, the most controversial deal we've ever done on the pod was a whale touring company in the Pacific Northwest by Olympic National Park. And it was a public teaser. You know, we don't sign NDAs on this pod. Uh, and we got, uh, the biggest anger gram from the CFO. We are not for sale. Where did you get all this information? Uh, he was so mad. And then I got a call from the Pacific Maritime News or something like the local trade rag wanting me to comment on the deal.

2:55and I was like, no comment. I'm so sorry. This guy was big mad. I said, take it out with your broker. It's on his website. Because we didn't know the name of the company, but apparently there are only like five of them. So within the little bubble, it was obvious based on how many boats they had and all that stuff. So he had put out a pressure lease that they weren't for sale. They had hired a broker. I mean, it was crazy. It was. that was, we always worry a little bit that we're putting people on blast, but in general, if you're selling your business, we hope this helps you. Yeah, exactly. If you're not selling your business, why is your company listed on a broker's page?

3:38Exactly. So this one, we don't know the name of this one, but this one is really cool. Heather, you found this one. Do you want to read it? I can put it on the screen or I can read it whatever you want. Okay. So it is in California, profitable courier business for sale in California, Ventura County, California, which is just north of LA County, if you don't know where that is, asking price$3 ,850 ,000 cash flow, or it says SDE, $770 ,000, established in 1977, gross revenue$2 ,600 ,000, serving Ventura, Santa Barbara, and San Luis Obispo counties for 49 years, profitable, well-established courier business for sale.

4:21This premium same-day courier company represents a rare opportunity to acquire the oldest and most established courier business on California's Central Coast. Operating successfully for 49 years, this profitable business has built an exceptional reputation through word-of-mouth referrals and consistently reliable delivery service. Financial performance, annual revenue, 2 ,600 ,000 cash flow, 770 ,000 strong 29.6 % cash flow margin demonstrates, demonstrates operational efficiency, 80 % recurring monthly revenue. Ooh, that sounds good. Provides predictable income stream, uh, profitable operations with a proven track record, uh, model advantages, business model advantages, asset light operations with zero vehicle ownership requirements.

5:10Drivers utilize personal vehicles, minimizing capital investment and maintenance costs. Established scheduled route network on the central coast of California. 1 ,200 square foot leased head office facility supports operations efficiently. Management team in place for seamless transition. Market position. Dominant market presence as the longest operating courier service in the region, strong brand recognition built entirely through referrals and repeat business, no formal advertising required due to established customer relationships, premium service positioning in growing Central Coast market, growth potential, scalable business model with room for expansion in medical, aerospace, and defense business, opportunity to implement modern dispatch and marketing strategies, potential for geographic expansion or service line additions, turnkey operations ready for new ownership to elevate performance.

6:10This established career business offers an exceptional combination of stability, profitability, and growth potential. It represents an excellent opportunity for a strategic buyer or an individual buyer seeking to grow the business to create greater value. Qualified buyers must sign an MDA and present proof of funds. There is support and training. The reason for selling is retirement after owning the business for 16 years. So interesting. The business is older than that, but this owner's had it for 16 years. And it doesn't say much about the business location or really much else. What do you think?

6:50So interesting. So this is a courier business. So what this is, is, hey, I need this kidney or this bottle of medicine or this aerospace part to be, to go from A to B right now, today, like within the next couple hours, because my machine is down, the patient is dying, you know, we're out of paper and can't keep printing at our magazine shop, you know, whatever it might be. So this is, I need to go to A to B right now. I'm fascinated, Heather, that it's been around for 49 years, but the current owner has only owned it for 16. yeah so it's already been through a leadership transition which is great it says management team is in place which is also positive nice so it is possible this is a nice transferable business um it is i mean they're asking five times cash flow which is definitely on the high end of deals that we look at you know and yet it's got some size it's 770k it's not you know i always loved were bigger.

7:51You know, it seems like it's professionalized. It's been around for a while. I mean, I don't think it's egregious. Like there's a lot to like about this business. Yeah. Now, one of the things they really want you to like, I think is the reason they said it is 80 % recurring monthly revenue. Now, what kind of recurring monthly revenue does a courier service have? This is what I kind of puzzled me as I read it. Like, I usually think we use that word recurring revenue if we've got a contract contractually recurring revenues what i think i wonder if this is more reoccurring revenue where the same customers are using them and about 80 of revenue represents the same customers back coming back again and again what what do you think yeah i think you're right about that i mean it could be you know i don't know imagine you've got a pharmacy so the picture on the listings is a box on it this is pharmacy um you know pharmacies can be prescribing things that are needed right now.

8:45So maybe the pharmacy every day fills their prescriptions for the nursing home or for the hospital or whatever and couriers them over every day. So that's darn close to recurring revenue. If the pharmacy has recurring revenue, you, the courier, couriering that revenue is almost recurring. So I would certainly, you're exactly right, Heather. I would want to kind of diligence the contracts, the customer relationships, I don't know if there are contracts or not, or if it's just, hey, we're on speed dial, you know, our number is printed on the whiteboard next to the phone at all these pharmacies. And, you know, people just call us.

9:23And as long as we don't screw it up, you know, we're never going to lose. We're the go-to. Yeah, it's kind of like we're the go-to. The thing that worries me a little bit about that, it's great to have, you know, be the consistent provider to, you know, maybe several pharmacies if that's what it is. But at$2.6 million dollars of revenue, I am guessing there's some concentrations. Because if you're working hard for a couple of, it might only be a couple of pharmacies, you know, that would be my concern. And, you know, the Central Coast area of California is, first of all, it's a beautiful area, absolutely gorgeous.

9:53But it's not really as dense as you think of like LA or San Francisco, or even where I am at is in Orange County. It's a lot more spread out. So I think that also means could have more concentrations at only 2.6 million. Because how many customers maybe are there really covering a larger service area? Right. I also am really interested in their business model. It says they are running asset light operations with zero vehicle ownership requirements and all of their drivers are 1099. Think of Uber, right? So their drivers are getting a ping, a text, an email, something like that. It's probably very lo-fi.

10:32I don't think there's an app because it does say there's an opportunity to implement modern dispatch strategies. So they're probably just calling these drivers or texting them and say, I need you to pick up the package at A and drive it to B. This is really great because we have no assets on the balance sheet. We have no depreciation of all these cars. We probably don't have nearly so much liability. We don't have our drivers on the road. They're 1099s. So there's a lot of reasons to love this business model. So it gives me, I would really want to understand the structure of the P &L though. Because if we're charging a pharmacy, say,$100 to courier this thing, and we pay our guy$50, are we recognizing the$100 and then we've got$50 paid out to the courier?

11:22Is our revenue just our fees? And then it's our costs are only our overhead? You know, I'd really want to understand how the dollars flow through the P &L on this business. Yeah. And I mean, at a 30 % margin, I'm guessing they're recording the whole, like in your example,$100 sale. And then$50 is the cost of goods sold or whatever that gets paid to the driver. And maybe the rest is administrative and marketing. I mean, it is a nice model to have all 1099s and all their own cars. I do think there's probably some challenge, though, in managing that because you have people that may not always be available, may kind of cycle in and out of your sort of go-to list of people.

12:09So it could be kind of stressful to manage this team of 1099s and their own cars and whether they're available when you need them. Because like you said, this is the kind of service where it's all about did you show up on time with the product or whatever the thing is that they're moving around. Yeah. I mean, you've got to have a deep enough network of 1099s such that when something's got to go today, someone's going to answer the phone and take it. Right. And they've also got to be reliable because your business's reputation rests on your 1099 contractor. And for courier, like it's got to be there today.

12:44Your guy doesn't show up enough times and suddenly they erase your phone number off the whiteboard and they put some other courier service and then you're really screwed and it's tough to win that business back. You know, this is like, don't screw it up and it's very stable. Screw it up and you have problems really quickly and it's really tough. You could vaporize the 49 years of goodwill very, very quickly. Yeah. Now that said, somebody bought it 16 years ago and to hold onto it for 16 years until they are retiring, which is what they're telling us here, you know, they found a way and they've got a team and maybe it's not as, maybe it's not as difficult as I'm making it sound, or at least they found, you know, put some systems in place that made it a little bit easier.

13:25So there's a lot to like on this business. So I would, there is a lot to like, I agree. I would really want to structure a lengthy transition process with this seller because, you know, other businesses, you come in, you get two weeks of training and, you know, but you get an order, you have a couple of weeks to deliver it. You know, this business is very, very time sensitive. I get an order, I have to deliver that order today. right and having you know all the edge cases the corner cases the things that go wrong what happens you know in this in this certain scenario having that guy around you know at your hip for a while will be really important because you cannot drop the ball on this handle right this guy made the handoff from the prior owner 16 years ago he clearly didn't drop the ball it went great but there is a six-month real risk period while you're doing this handoff.

14:18And this is true for every business acquisition, but especially this one, because it's such short order cycles, such time-dependent order cycles, and it's such a trust-based business. And if you fumble this ball, the riskiest two periods in this business history were the last time it got sold and this time. Yeah, absolutely. I would require some real handholding from this guy. Yeah, I agree. And let's go to the price a little bit in the cash flow. I mean, as a lender, I don't work with SDE. I always have to lop off a salary for that. And let's just call it$100 ,000. However, I will say in the central coast of California,$100 ,000 may not be enough, you know, just to kind of live bare bones.

15:01So, but let's for the sake of argument say that$170 ,000. Yeah, 170. So let's just say it's really 600 EBITDA, right? You can afford to borrow, this is the rule of thumb, about 3.75 times the adjusted EBITDA with an SBA loan at today's rates. That'll get you to a decent debt service coverage ratio that banks will want to see. well 600 000 times 3.75 is 2.2 million yeah yep and they want 3 million 850 so do you want to do you want to put that kind of equity into a deal that i think is probably hard to grow and that's kind of the crux of why i have a problem with the multiple here yep so this is going to take 1.6 million of equity to get done and about$2.2 million of debt at this price.

15:58Which you're right, Heather. I mean, if it's a sparser area up there, I would have during diligence a ton of questions. How do I grow this business? And is it, you know, there are more pharmacies and I'm just not serving. Can I win this business? Well, flip side of your business being sticky is that your competitor's business is also sticky. So how do you get their number erased off the whiteboard and your number put up there. That's also tough because that's a zero-sum game, right? You got to knock another courier off. I'd be much more bullish on this, and I don't know the area, Heather, you can inform us, but if the population of this area were growing and new pharmacies were opening all the time or whatever their end market is, and I could sell into those new ones without having to knock somebody off, that would make me feel like it was easier to grow.

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18:12And that could be the case. I mean, it is a retirement hub. You know, there's a lot of retirees that live up in these areas. So it could be that. But again, I certainly wouldn't pay this multiple if there's a customer concentration and I have a feeling there is just based on the size of the revenue. And then I would really just sort of decide, you know, how much equity I'm willing to put in is really based on how hard or easy I think it is to grow. And I think this is at least medium to grow. You know, it's not easy. Maybe it's hard, but, you know, it's not the easiest thing. Like you said, you have to knock somebody else out.

18:47You're not just going to get a brand new pharmacy popping up and you become the courier to it. I also noticed, I don't think there's a broker on this listing, is there? Well, it's a business listed by KSM Investments. I don't know who that is. I don't know if that's the seller. but this KSM Investments does not have any other listings on BizBuySchool. All right. Yeah. I'm looking. Well, there's KSM Investment Banking, I guess, but now I don't see anything interesting. Okay. Well, it could be it's for sale by owner, but the broker's not listing other businesses. So I do feel like maybe there's an opportunity here to bid a little bit lower than what they're asking.

19:28And I think that's something that is interesting. I come across a lot in my business is talking to buyers who are first-time buyers, and they see these listing prices and think, it's like real estate. That's the list price that we have to offer close to that. And I have to educate, no, you don't. Most of the list prices are way too high, and they may entertain something quite a bit lower if you walk them through why that's your bid and why you're still a good buyer. So I think this is one where I like it, but I certainly would not be thinking that$3 ,850 ,000 makes any sense. Asking prices are just that, asking.

20:07It's not like you walk into a store and there's a sticker price on a thing and that's the price and you can't walk out without paying that. So I don't think I'm bidding five times for this. Now, of course, someone might, you might lose, but probably not bidding five times for this, but this is a good business. I mean, right? Been around for a long time, reoccurring or recurring revenue, whichever one it happens to be. seems like they're focused in an end market, which I like. They're kind of specialized. They can build credibility in those end markets. They're not just waiting for revenue to kind of fly in the front door.

20:38Also kind of makes it easier if you're going to try to grow it to think about your marketing strategy, focus it just on those end markets. So I mean, I like it. Heather, question for you though, as a Californian who follows Californian politics a little bit more, I know that DoorDash and Uber and all of these, they all run the same asset light business model, right? With 1099 drivers. I also occasionally read a whole bunch of headlines about how California is trying to reclassify all these people as W-2 or coming after the gig economy people. And this strikes me as a business that, while not in the crosshairs, would absolutely be collateral damage of any regulation past targeting DoorDash and Uber.

21:20What is the status right now of that in California? You know, I don't know, actually. I should follow that more closely than I do, but I don't believe it's happened yet. And you're right, though. If it did happen, this would be very disruptive to this business. They would have to treat them as employees, pay them completely differently. All the logistics would change. Could you even still have them using their own cars? I don't know. I think legally and financially, it would change the business model tremendously. So that's a good point. You'd have to kind of put that down as political risk, so to speak, of owning this business and buying it.

21:55There was one other thing I was trying to think through, and that's working capital. I always think of business valuations, and I think, but what is the cash conversion cycle of this business? I would think the pharmacies would pay pretty fast for this kind of service, but they may not. It's possible that this company carries receivables. Have you ever run across a courier service? I hope that's not true. Wouldn't that be terrible? Yeah. Yeah, I hope that's not true. But a pharmacy, you know, being healthcare and a little more archaic, everything in healthcare feels so archaic in terms of the payment systems.

22:30I would worry a little bit about that. I'd want to know, I'd want to diligence and ask questions about that right away. How do they get paid? How do they pay their drivers? Because I'm sure they have to pay their drivers quickly. If you're doing this kind of work, 1099, you need to get paid immediately. um so what's the mismatch between them paying the drivers and when they get paid from the pharmacy if it's a big number of days then you would be stuck with a big amount of permanent working capital and if you do have that you better include that in your offer and it better be in the price like the seller is selling you the working capital you have to pay this multiple plus bring in that working capital it's not going to work at all and that's that's tough too and i think this is something that people really underappreciate in small business.

23:14If you are giving your customers terms, you are lending them money, which means that you need to underwrite them. And in our business, we sold stuff to Bed Bath & Beyond, Big Lots, those types of places. And those retailers went bankrupt and we got stiffed for five figures. You're an unsecured creditor, right? Right? Like in bankruptcy, you are not going to see a penny. So if you've got, you know, AP or AR rather out to all of these pharmacies, it's only a matter of time until a couple of them go out of business. Right? And what do they do when they go out of business? Usually they stop paying for a little while and their balance balloons even more.

23:58So if you are, if you have a business and you are in the business of giving your customers terms, you need to be constantly underwriting them. right you know what what is the balance that they typically have is their balance up are they paying late you better stop couriering more stuff because you suddenly have a credit risk on your hand right a good communication yeah right the person that's doing your billing better be speaking to the person that's dispatching drivers and saying hey they're not current but that happens a lot in small businesses where that communication does not take place and you keep extending more credit to this company that is showing signs of weakness.

24:35I always tell folks when they're looking at business P &Ls, if you see bad debt expense in more than one period, if you see it at all, frankly, there's a sign they had to write off something. They extended credit to somebody, they had to write it off. If you see it in more than one period, you really need to diligence their whole billing and collection practices. They may be worse than it appears even. And same thing if you see receivables that are aged 90 days and over pretty regularly. That's a pretty bad sign too. But I'm curious. I mean, you'd really want a system where the pharmacy is paying immediately.

25:13But I don't see how pharmacies, I don't know if they would do that. Oh, I'd want to charge their credit card. I mean, there's... Yeah. They want you to deliver it same day. I'm not. I would tell them, I got to pay my drivers. I want this on credit card. There is absolutely no way. If I come into this business and it is extending terms, I would be thinking hard about converting it to credit card pay and eating the interchange or raising prices to offset the fee. And this kills me, these small businesses all the time that don't take credit cards. And they lose the sale over not taking credit cards.

25:51And they lose the sale. And they lose a sale. They lose a sale and they go, oh, I would rather chase AP. Like, no, the cost, the default rates on your AP need to be 3 % or less over time to break even on the credit card fee. I guarantee, and not just your default rate, also your, oh, I forgot to collect a hundred bucks from Heather's Pharmacy because, you know, I don't have good records, right? If your loss rate on that is less than 3%, you're making money. If your loss rate is more than 3%, and I'm sure it is if you're extending credit to small businesses, just switch to credit card. And you get paid faster.

26:31I'm not even talking about the time value of money. And unlock all your working capital and all that stuff. It's crazy to me how business owners get so hung up on the interchange fee of accepting credit cards. I mean, working capital is one of the trickiest things of small business buying and ownership, both. and it's probably of all the things that people learn about when they're going through this process I feel like in general it's the least understood topic working capital, the cash conversion cycle the system that the company is using today and whether or not you can change some of it and then what are the best platforms and systems to go on once you own the business I've heard a lot of stories on the internet of people who had bought a business and it went bad.

27:19I listen very carefully to all the details when people are willing to share about those. And most of the time, I think it comes down to badly managed working capital. If they have a problem in the first two years, it's usually that in some way, shape or form. So it's super important. If I had to guess, this business is accepting credit cards. But if it's not, I would be thinking about converting into credit cards and unlocking all that cash out of receivable, which could help create working capital for your deal. You know, it's the type of thing you could get paid for, you know, you could have that seller finance that working capital.