Would You Buy This Business for $5 Million?

0:00Welcome to Acquisitions Anonymous. Today was a special day. We had a guest and in a rarity. everybody liked the deal that we covered. I know a lot of times we get complaints that we hate on a lot of deals. Well, that's because most deals suck, but today was totally different. So stick around for the whole episode and see what you think after you hear more about it. We'll set Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100 % ears anymore. I'm thumbs downing on just the plus inventory link. When you close a deal, you inherit the cyber and IT problems that have been piling up for years.

0:35Enzo Technologies, that's I-N-Z-O, helps acquisition entrepreneurs evaluate technology risk during due diligence and manage cybersecurity, IT, and voice after close. CEO Nick Akers acquired Enzo and recently led the company through its first add-on acquisition. He brings a buyer operator's perspective to what needs to be uncovered before the wire and stabilized once ownership changes hands. Enzo offers a complimentary IT risk audit of your target company to help surface the biggest risks in plain English and deliver a 30-day plan to reduce exposure and lower the risk of downtime. Visit enzotechnologies.com slash ETA and mention Acquisitions Anonymous.

1:20That's I-N-Z-O technologies dot com slash ETA. Gentlemen, gentlemen, and no Heather. Heather's not here yet, so she's about to show up. Hopefully she comes in. if not we'll just stick with the gentleman yeah will welcome back buddy thank you it's good to be here yeah have you changed your office setup since the last time we we saw you or is this still the same thing just new camera this is a temporary office space that i'm in currently so i think the lighting might be a little bit better oh maybe the mic is better too Has Michael been feeding me chips? He has, but I think it's the same microphone as before.

2:04Sounds amazing today. That's on my list of things to get. 10 out of 10. Well, Will, why don't you introduce yourself? Because we're business partners in our quality of earnings firm. And then Mills shockingly showed up with a deal that involves pickup trucks. So before... It checks out. Before we get there. Yeah, go ahead, Will. Yes, I'm Will McCurdy. I run Bedrock Quality of Earnings, and we focus on quality of earnings and financial due diligence for the lower middle market. So a lot of the deals that we talk about on this podcast, we dive into the numbers. So if anyone's looking at a deal and wants to understand the numbers a little bit more, feel free to reach out.

2:48I think that is an important step. Yeah, definitely. So the business started in March. Will is on track this month to have a record month. You have four employees despite being six months old. Are those numbers correct, Will? Those numbers are correct, yeah. Congratulations, man. And it's his first CEOing job and doing an amazing job. So we're super proud of Will. Yeah, it's been a good experience so far. It's a lot of fun. And I'm going to Boston next week. he and I are going to hang out and we're going to go down to Fenway Park and throw batteries at the opposing team. It's going to be perfect.

3:28Right. Yep. I can't wait for that. All right. Well, welcome. I'm sure you will have some insights into the deal we have today. Let me see if I can pull it up here. I just updated my Mac, so it's not that excited about sharing. But Mills, you want me to read it or you want to read it? You read it. I'm going to have so many things to say. I don't want to steal the thunder. it's like at some point i may just feel compelled to walk outside with my laptop and like walk around my truck mid deal analysis oh dear lord all right so this is an sba approved absentee owned profitable truck and van upfitting company located in san bernardino county california and they have pictures here will these look like vans with like kits and stuff on them how would you describe these things yeah um they lift the truck is that what the business is that it's hard to tell exactly what's going on in these photos i think upfitting is like when something needs to become a work truck and somebody's going to put like a you know a tool bin or like that little cover thing that's on the back these are all technical terms mills you can take notes um like this one here and it's actually believe it or not my son bought one of these trucks used uh and it is the ford f-150 that drives it has 150 000 miles on it four by four but it has all like the electrical like like uh i don't know best relationship like compartments where they like open up and he can lock them and it has an alarm on them to make sure they don't get stolen all that kind of stuff so is that accurate mills like what this what this group does yep yep so they're doing uh service bodies uh you know truck toolboxes ladder racks and then conversions and bands if you're not on youtube you need to stop what you're doing and get on youtube right now because the photo that has up is what really caught my eye it is the cctv image of their shop well it's like bird's eye view well have you ever seen a business this organized.

5:38It looks like somebody like CEO. There's no CEO here. It's OCD. That's who's running this thing. All right. Before we keep going, I want to tell you about a company I've been using across my businesses for years, Mercury. One of the things nobody tells you about running multiple businesses is just how quickly spending gets complicated. When it's just you, it's easy. You have a card, you know what you bought, and you know where the money went. Then you start building a team. Suddenly there are multiple cards, software subscriptions, vendors, reimbursements, and expenses happening across the businesses every single day.

6:08I run several businesses, and even though I have great people running them, I still like to be able to see where the money's going. And that's one of the reasons I'm such a fan of Mercury spend. It gives my teams the freedoms to actually operate while giving me visibility and control from the same Mercury account I already use for banking. You can give people their own cards, set budgets, and spending limits, and Mercury automatically enforces those policies. And instead of chasing people down for receipts, people can capture them through Gmail, text, or just by taking a photo. It's a way better system than having everything funneled back through one person for approval.

6:39The real thing it gives me is time. And with multiple businesses running, that matters more than anything. I can stay on top of spending without becoming the bottleneck that slows everyone down. If you're building a team and want a better way to manage how money moves across your business, check out Mercury Spend. Mercury is a fintech company, not an FDIC insured bank banking services provided through choice financial group and column in a members fdic the io card is issued by patriot bank in a member fdic pursuant to a license from mastercard international incorporated i can't tell if maybe like the place that we shop at and if you go to the next photo michael i think this is like partial retail store like the one that we go to for some of these things, you can walk in and get, you know, some like things like this, like trailer hitches.

7:28It looks like, you know, different like shackle locks, maybe some like extension cords, some like things that would be expendable kind of reusable parts, but then like the bigger toolboxes and things like that, or they'll help you install them. So when you buy a ladder rack, you know, most people get help putting those on or getting them installed. This looks like their actual shop. Yep. It's spotless. Yeah, it looks very good. Looks very good. Spotless. I, you know, some of my friends own companies that do real work like this. And I've been in there. I've never seen anything that's spotless. It's pretty incredible.

8:04All right. So the asking price is$5 million. Cashflow is$1.1 million. And the gross revenue is just shy of$5 million. They've been business since 1973. It's older than me. They manufacture, install, and sell truck and van parts and accessories. They're a well-established and highly profitable truck equipment business for sales, serving contractors, fleet, municipalities, truck dealers, and commercial customers. The company has been in business for over 50 years and has built a strong reputation as the go-to source in its market for contractor truck outfitting, custom truck equipment installation, and specialty truck accessories.

8:37The business sells and installs truck racks, toolboxes, storage boxes, towing equipment, fuel tanks and pumps, bed liners, cargo control equipment, and other truck accessories. They also manufacture their own proprietary steel storage boxes, which gives them a competitive and stronger margins. Customers include contractors, municipalities, school districts, leasing companies, heavy equipment users, and truck and van dealers, and drug dealers. I just added that part to see if you guys are paying attention. Thanks for no reaction whatsoever. The customer base is well diversified with no major customer concentration.

9:12This is a turnkey operation with an experienced team in place and a manager already handling day-to-day operations. Over 50 years of business, makes it over a million dollars a year, high margins, loyal repeat customer base, and diversified revenue with the largest customer of only 5%. They have some proprietary manufactured products, experienced staff, and yada, yada, yada. included the asking price is 1.5 million dollars worth of inventory and furnitures fixtures and equipment are 13 and a half thousand dollars they have 11 full-time all long-term employees and they have a leased facility that includes a retail showroom per your point mills if you can come buy this stuff a warehouse an installation area manufacturing space and plenty of infrastructure for continued growth they have stronger reputation and the new owner could theoretically grow the business in a number of ways and seller financing is available sva sba pre-approved with the owner willing to carry the 10 down payment required they're willing to provide transition assistance to help ensure a smooth handoff and the owner has relocated out of state and is selling his remaining business interests located in san bernatino california and the real estate is owned, but I don't think it's included.

10:20I think it's leased. Cool. All right. So, oh, speaking of SoCal, Heather's here. Heather, we're doing this. I'm tired, but I'm here. We're doing this absentee-owned, profitable truck, and upfitting business that is SBA approved, your favorite words. Absentee-owned and SBA approved to a combination that we don't see very often, so this will be interesting. So Mills, tell me why I want to own this business. Well, so one thing that's perplexing to me about this is that they manufacture. Every, you know, every contractor who has trucks on the road needs some kind of some element of this. They need some kind of ladder rack or plumbers even have these and electricians have these.

11:10not just roofers, but like to put their ladders on top of the truck or to like transport large sections of like piping or pecs or electrical conduit, different things like that. Um, that's just a ladder rack, but then, you know, they install toolboxes. Uh, the way that this works, it's kind of interesting and they don't allude to any of this. So they may not be at this level. None of these are service body trucks, which is where instead of having like a pickup truck bed, you've got like a pre-manufactured base. The big manufacturers of those are Reading and Napide, and they're both privately held businesses that do like half a million dollars, or sorry, half a billion dollars in revenue.

11:52They're massive, massive businesses. And if you are driving, you're ever behind a service body truck, you'll kind of see like embossed letters in the back of the service body. Those are slightly different than what this business does, I think, because they're like exclusive distributors and you can't buy it directly. You've got to buy through one of their distributors and upfitters. This seems like it's one level kind of below that where they're doing kind of more off the shelf installs, toolboxes, interior cargo vans, and then these like, you know, tonneau covers or like the one thing in the bottom of that picture is a little bit more of like a cover for the truck that has some storage built into it.

12:38There's tons of manufacturers who make all these different things, but usually somebody wants to go to a place that can both kind of give them advice on it and get it installed. It's interesting to me though that they say they manufacture, and at first I thought it was like maybe just like a typo that the broker had thrown in, but they do double down on it and say they make some of their own. I think they say, is it for vans specifically? Let's see. Yeah, they also manufacture their own proprietary steel storage boxes, which gives them a competitive edge and stronger margins. None of these pictures on the listing show anything that looks like a steel manufacturing business.

13:23So I'm kind of curious about that and would want to figure out more, but it almost looks like a blend of a retail showroom and an upfitter. So you buy your truck, you need more things on it than Chevy or Ford or Dodge are willing to provide, and you drop it off at a place like this, and they tell you, it'll be three weeks and we'll give it back to you decked out with whatever it is you needed. I mean, this is wild. They have this photo that I pulled up here. This looks like more of the kind of raw materials you were just talking about mills but i don't see cnc machines or any of that kind of stuff except for maybe whatever this thing is here on the left but this picture has like seven trucks just like lined up that they're just like doing them one at a time yeah heather this is in san bernardino county yes which is what we call in orange county we call that the ie the inland empire or we sometimes call it the 909, which is the area code.

14:24And we say it somewhat disparagingly, I have to say, but it's more where the industrial, you know, there's a lot of industrial out there. So this is a perfect place for something like this, for light manufacturing. You see a lot of, you know, I can probably picture where this is, and their customers are probably all right around them too. So like perfect location in a couple of ways. Did they say much about the real estate? Did they tell us if they own the real estate or if they're renting it? They danced around it. They said the premises were leased. And they say they're not. It's not included, but it's owned by the guy who's moving out of.

15:05Okay. So your seller's going to be comfortable. In 28 ,000 square feet. Pretty significantly sized building. Yeah. Yeah, good size space. I mean, there could even be some capacity constraints just from the picture that they gave us, right? Maybe that's just the total number of trucks they can work on. Maybe they have some more in the lot. That would be sort of interesting to know, like, is this a big enough space? It looks pretty packed from the photos that they gave us. So interestingly, the seller will become your landlord, which is good because you could get favorable lease terms and long enough lease to qualify for an SBA loan.

15:41But I guess my question would be, is that, is 28 ,000 feet enough capacity if you wanted to grow? Or would you have, you know, are they at capacity where they are and they've got to get another space to grow? They look like they're falling all over each other in these photos. They do. Yeah. And I mean, the thing we haven't talked about yet is the inventory. These racks are packed to the gills. They are literally up underneath the sprinkler system up to the ceilings, which they at least acknowledge that they have inventory that is included. So, you know, I think we're looking at like roughly maybe four and a half-ish times multiple of SDE, a little bit more.

16:26But they're saying that they are including$1.5 million of inventory in the asking price. it's kind of a shockingly low$13 ,500 worth of FF &E. I'm thinking like just the racking is worth more than that, much less like some of this other actual equipment, like on that one more manufacturing heavy picture. But so that takes your purchase price after inventory down to three and a half million. And so now you're at like more like a little closer to three times STE. but inventory, let's talk about that and what that means in a business like this. Well, look at the retail shelves. They have a lot of SKUs.

17:09I can already see that. That's a lot of SKUs and I think that's the business that they're in. You've got to be able to walk those shelves and find all the cool stuff that you're going to need. So it sounds like probably, what do you think, Will? Inventory turnover is probably kind of slow on something like this because they have to stock so much? Yeah, yeah, definitely. Yeah, with one, was it 1.5 million in inventory? It's, yeah, I would imagine it's relatively slow and they would need, I would imagine they have some sophisticated inventory tracking system for all the different SKUs because the more SKUs you have, the more kind of complex it becomes to track everything and making sure everything's kind of making their way into the balance sheet, into the P &L.

17:58So the inventory from a QAV perspective is definitely something we would dig in on a deal like this and just making sure that it's properly tracked and recorded and expensed and that margin that they're showing is real. And what about a hard count? When you go to review something like this, would you say if the seller does a hard count once a year, that's enough? Or what would you sort of look for? Yeah, I would say at least once a year, you know, maybe quarterly for something like this. And to be honest, a lot of businesses I see like this may not even do an account at all. So it's really, if they even do it once a year, I'm happy to see that.

18:39That's great that you can, there's one number that's reliable at one point in the year. So yeah, and that's on the inventory. And then one other thing, and just going back quickly to the rent, just from a QV perspective is, but with that lease being owned, you want to make sure that the rent expense is in that earnings number that you're seeing because is the owner charging the company rent or is he not? Because post-close, if you're going to lease that facility from them, you're going to have to be paying rent and for a 28 ,000 square foot facility in California, I would imagine it's not cheap.

19:23Well, and a lot of times they will say, yes, we've been expensing rent, but then you go compare that rent and it's way below market because it's more in line with the mortgage, the real estate loan that they have on the property. So yes, a lot of times your cashflow shrinks down quite a bit when you apply market rent to the EBITDA there. So yeah, that would be a question. And I'm not optimistic that they do have sophisticated inventory tracking systems. I was going to say this. I was thinking that's very... Unlikely. ...generous of you, Will. Yes. You would hope they do, but... Yes. Yeah, it's hard to...

20:04Yeah. I always hope, but I'm usually disappointed when it comes to that. Anytime someone brings us a deal where there's a lot of SKUs and a lot of inventory, it's one of the first things we dig in on is... If there's not good tracking, we can already sort of tell that. We know there's kind of a big swing in this deal that's going to happen when we finally do get to do a hard count and to understand what the inventory turnover is really like. So whenever somebody lists a number like this and says there's$1.5 million worth of inventory, Heather and Will, is that, are they typically stating a cost number or are they stating a, like a list price number?

20:47Cost usually. Yeah. In my experience. Yeah. I would say cost is what should, you know, would be on the balance sheet. Right. They're usually thinking, what was the last time I looked at my balance sheet, which might not have been that recent because a lot of them don't have balance sheets recently. But they'll usually just kind of pull that number out of like whatever the last balance sheet I looked at, which would be the cost number. The problem, though, is if the inventory systems aren't good, there could be obsolete inventory in that number. There could be a lot of, you know, could just be wrong for a lot of other reasons.

21:23so yeah you're starting with kind of just a big number that needs to really be broken down in a number of ways before you know what what you're actually getting hey everyone it's bill and i want to talk to you about quiet light brokerage i was so psyched when quiet light agreed to sponsor the podcast because i am a customer i have used quiet light to sell three businesses and if i were selling an e-commerce or a sas business i really would not consider anyone else like i said i went back to them three times i work with three different brokers at quiet light had a great experience all three times.

21:55Even on one occasion, they found a buyer for a business that I just didn't know it was even going to be possible to sell. So they have pulled rabbits out of their hats several times for me. They've been in the e-commerce and SaaS business brokering game a very, very long time. They really know what they're doing. They have great reach with both buyers and sellers. And the other thing I really love about Quietlight is all the brokers there are former operators. So you can't just show up and go, hey, I'm a lifetime business broker. I want to work at QuietLite. You have to be a former operator. So they all know what it's like to be in the operator chair.

22:27So if you go to QuietLite.com, they have free business valuation calls, which they'll do with you. No obligation. Just tell you what they think about your business, what they think it would be worth, and then what you might need to do to kind of get it ready for market. Those guys over there are great, great SOPs, great systems. I just felt like I was in really good hands all three times with QuietLite. So if you're interested in selling your business, especially in e-commerce or SaaS, hop on over to quietlight.com, fill out their onboarding form for a free valuation call, and you can tell them Bill or Acquisitions Anonymous sent you.

23:00Because I'm thinking like based on this level of revenue, at 4.9 million in revenue, depending on what the margins are, this is not a COGS only business. There's a service element to what they do too. It's not just the inventory with markup. There's inventory plus labor plus some markup, maybe on both if they're doing it right. $1.5 million of inventory could be like more than 12 months potentially of inventory, depending on their terms. And like you guys have said, you know, the seller knows what is stale and they know what is hot. And depending on the system that they have, depending on how many skews that they have, depending on what's actually getting booked to inventory.

23:51Like in this picture right now, those racks off to the left that are holding flat sheets of metal that are like four foot by 10 foot sheets. That's what our shop is full of. Like, are those, are those being accounted for or are those just like an element of cogs for the, you know, toolboxes that they're making or the bins that they're making? it's really really hard to tell and i think that this um this brings up a really good point which is how do you handle inventory and working capital on a business like this where it's like you know we're talking about you know a significant percentage of the purchase price i mean almost a third of the purchase price um allocation is inventory and if you get it right then you've covered your rear.

24:41If you get it wrong, then you're absolutely hosed and there's not really much room to go back on. Yeah. It's your whole deal almost in this case. I agree. And if you just buy inventory, let's just say we go deeper in this deal and the seller's saying, no, no, I'm saying a million five of inventory is included, but nothing else. I'm not going to give you any cash or AR. You're going to need some liquidity, especially when you learn like how long it takes this inventory to turn over. It's not like you're going to, it's not going to become liquid overnight. And my guess is it's going to take, it doesn't convert to cash very quickly at all.

25:17So you need this inventory, but you also need cash, whether the seller includes it in the price or you have to bring it in yourself. You've got to figure out how much you need before you can really even make an offer on this business. We don't get too far into the weeds on this, on the podcast, but I I think it would be helpful to just talk through maybe what you guys have seen on some of the mechanics of inventory treatment as a working capital mechanism. Because at least in my experience, what's most common is you set a working capital peg and you say, you know, hey, this much cash, this much AR is normal, this much AP is normal, and then this level of inventory.

26:00and then you kind of haggle on all those points, but then there's at least a true up, right? With inventory where you say, okay, we agree. It's$1.5 million of inventory. But once I buy the business, I have a specific period where I can go and verify. And I come back to you in 60 or 90 days, Mr. Seller, and it's, or Ms. Seller, and it's part of your reps and warranties, right? Where you've got a mechanism to say, hey, I dug through all this. And those boxes that you thought were worth$200 ,000 are actually empty. They've been covered in dust and you didn't realize. Is that the typical mechanism that you guys see?

26:39I would say, because all of my deals are SBA financed, so the lender puts even more constraints on it. I think you could do it that way without maybe an SBA loan. But with an SBA loan, what the lender wants you to do is kind of figure out the inventory before you close. So you would have to come in and do the hard count. I've had a client, there were so many SKUs in an aerospace deal that I believe is hard count. You had to hire somebody to come in and do it. And it was like$30 ,000 to$40 ,000 just to do the hard count. So that's what a lender with an SBA loan would rather do. They want to see this settled.

27:15They might allow some true up in the AR part of working capital, but they typically don't want to see a true up on inventory. And it's also something that could be legally fought over, you know, could lead to a lawsuit. and we'd rather try to clear it before we close. But like major thing you need to know going in in terms of cost related to the deal ahead of time. Yeah, just the hard count itself. Yeah. Yeah, definitely a hard count is what I see like prior to close. And then as part of, you know, when we look at, you know, historical working capital, we'll look at, you know, we won't just take that$1.5 million inventory balance at base value.

27:57We'll really go look at the different SKUs, the different groupings, and figure out how old is this stuff. I would imagine that larger compartments are maybe turnover quicker, but there's probably a ton of SKUs in there that are old, have been sitting there for maybe years. And so for something like that, where it's just sitting there, you can't sell it, we would take that off that$1.5 million inventory number and kind of bring it down to a more normalized level. and that could be like what you peg to. But you definitely want to do an inventory count to just make sure that it's accurate. This reminds me too of my least favorite ad back.

28:39And I hate them all. So imagine if I hate them all and I have one I hate even more than all of the others. And that is cost of goods sold ad backs. You will see it sometimes. And it's like, what are we even talking about? They usually don't make any sense. And it kind of comes down to the seller was playing some games with how he did, how he adjusted his inventory and wants you to accept that as an ad back. So like of all the smoke and mirrors ad backs that are a red flag, that's, that's, that's the top of my list of hated ad backs. Yeah. So, yeah. Go ahead, Will. You're about to, do you have an ad back dance also?