Industrial Automation Business for Sale Analysis | $656K SDE Review

0:00 Hey, by quickly here. Welcome Jack assistants anonymous. I am recording from on the road. So I'm on my laptop with airpods. So apologize for all that. But today, we did a deal that was brought by Heather and she only brings deals from Southern California. So we did a deal from near her house and I think you'll be fascinated by the things we were able to discern about this particular deal just by reading a one page teaser and then we went into a bunch about how to figure out this was a good deal or not. So stick around to the end to see what we thought. Here's the episode of Acquisition Anonymous.

0:30 Hello, another episode of Acquisition [music] Anonymous. We don't have 100% beers anymore. And thumbs downing on just the plus inventory alone. 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're 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. That's why Alex Brown former CEO of two you laundry built Franzy. Franzy is a free platform that helps acquisition minded entrepreneurs explore franchise ownership without broker bias. You answer a few questions and Franzy shows you franchise opportunities that align with your capital lifestyle and long term goals. [music] You also get free coaching from people who have actually built and scaled franchise businesses. If you are exploring ETA and want to understand whether franchising fits your acquisition strategy, visit franzy.com.

1:21 That's f r a n z y.com and thanks to them for sponsoring today's episode. So Heather, maybe share with the audience. We just went through a discussion between choosing between two deals. We had deal A that was very sexy in Jackson Hole, Wyoming or we had deal B that was probably a good deal but not that exciting in Riverside, California. Which one do you think we should choose? Well, I choose the boring one that's a more interesting business than the touring one because we got to try to make these boring listings that our listeners might actually buy. We've got to entertain them and, you know, make them sound a little more exciting. So, I think that's part of our job, right? Fine. My logic.

2:06 But now the pressure's on. You got to do that. >> one had people going down a river rafting. Looked amazing. A lot more fun. >> [laughter] >> All right, you want to tell us about this industrial and automation Oh, we have a guest co-host today. Will, do you want to introduce yourself real quick and then we can then we can talk about the deal. Oh, yeah. Yeah, my name is Will McCurdy. I am a CPA. I started my career in at the Big Four doing financial statement audits and I spent the last 5 years strictly doing quality of earnings and financial due diligence for private equity firms.

2:40 And now I partnered with Michael here to launch Bedrock Quality of Earnings where we provide quality of earnings reports and analysis for the lower middle market and in Main Street. And you can be a first-time buyer or you could be a seasoned acquirer. Um, we work with with everybody. Welcome. Well, I'm I'm proud to be your business partner. Thank you. Thank you. It's good to be here. Cool. Well, Heather, you have a deal. You want to tell us about it? A deal and it's in California. So, uh it is an industrial and automation equipment manufacturer asking price in Riverside, California, sorry. Asking price 2.6 million, cash flow SDE 656,000, gross revenue 2,113,000.

3:28 Established in 1985. Uh well-established and high-highly profitable. This is funny, the first sentence I think they meant to put at the end, but it says, "Contact business broker for more information regarding this industrial automation system integrator." That's the first sentence. And then we go, "Since its inception in 1985, uh the business has been involved in ever-growing need for industrial automation uh and now enjoys a stellar reputation in the industry. The business is a system integrator for custom and standard product handling equipment and applications needed for automated processes. Over time, the business has developed several distinct product lines and a number of substantial market niches.

4:07 Uh, product lines include proprietary designs for equipment needed for these niches such as fully automated machines for aircraft windshields and window manufacturing, conveyor applications for counting and labeling, and equipment and system mounting. Machine enclosures and frames necess- and frames necessary for safeguarding and protecting both personal and expensive assemblies. Woo, that was a sent- long sentence. Um, in addition, the business has a proprietary standard line of aluminum products and connection hardware for construction of machine frames, enclosures, and conveyors. The business operates from two fully equipped adjacent facilities with a total of 10,180 square feet. The business has nine foot and three- Oh, nine full-time. Sorry.

4:55 Nine full-time and three part-time employees techni- / technicians, and the growth uh, opportunity is significant with just some inside sales activity. The business differentiates differentiates itself through fully integrated services, its manufacturing facility, and its ability to meet all customer standards and quality service requirements. Customers include major industrial product contractors and system manufacturers. The business has never marketed its services and capabilities, and sales have been generated by its reputation. The owner will assist new owners in transitioning the business.

5:31 Contact- There's the sentence again. Contact the business broker. Uh, inventory is 230,000 included in asking price. Furnitures, fixture, and equipment 130,000 included. Uh, employees again nine full-time, three contractors. Uh the two facilities totaling 10,000 square feet. They are both rented. One is 7,000 a month and the other one is 6,180. Seller financing is available. Uh they'll provide support for 20 weeks at 10 hours per week. That's not very much. Uh and reason for selling is retirement. And this is listed by Edward Fixen uh of Business Quest.

6:12 Oh, no. There's two two brokers. Uh actually, Ron Varner at Business Quest Quest sponsored by Edward Fixen. So, what do you guys think? Man, okay. So, just so I have my head around um this business, they just do off-the-shelf um product handling equipment. And like they come in and if somebody needs to like screw caps on tops of bottles or whatever in terms of their many small manufacturing in Southern California, these guys are a reseller and system integrator who assembles stuff from different people comes in and works services manufacturers or people building stuff kind of in the SoCal area. Is that kind of how I should think about it?

6:57 Yeah, and they sort of Did they say manufacturing at the top? I thought they did. Um so maybe it's kind of light manufacturing sort of assembly of these systems to your point, you know, they buy the systems and they they configure it in a way that is customized to that business. That's the way I imagine it. Counting and labeling, yeah, that aircraft windshields, all that kind of stuff. >> um there's you know, they basically just automated assembly line machines. Um and it is a grow It is a growing field. They didn't really wow us with them using any of the latest technology because AI is definitely coming into manufacturing automation, you know, robotics basically, right?

7:40 This is sort of This is to me it's sort of old school robotics, you know? Uh that's what it sounds like. Uh there's a lot of There's a lot of really big advancements happening there, and what would be interesting to me about this business is if they haven't really if they haven't really touched that part of uh you know, manufacturing automation, that's an area of growth. They didn't call it out, and they didn't really say much about it at all, but that's what it has me thinking.

8:06 Is being in California here like a competitive advantage? Cuz it is so hard to start a business in California from what I've seen. As far as starting a business here, you know, you can certainly start a business. Uh you know, it's This This business has got some employees, so they figured that out. They've got a labor a labor pool. They're in Riverside County, which we call the Inland Empire. Uh and that's kind of a good area for an industrial-type business, a manufacturing business to be. That's kind of where a lot of them are uh in Southern California. You're outside of LA, where things are a little crazy and maybe a little more dangerous. This This is a pretty relatively better area. Uh good labor pool, I would say. And you're surrounded by manufacturing companies, small medium manufacturing companies.

8:50 So, that's what's appealing about this business here is that it's well located, I think. Um it's not doing a lot in sales, you know, 2.1 million. That's not a lot. Um and there is probably This is probably a lot of project work. Um you know, this This probably a lot of, you know, install it, and it and it's uh being used for years and years and years. They don't mention any coming in and servicing or repairing. Um so, it's probably a lot of new projects, which that's not great part of it, but uh I think they're in the right location for what they do. I mean, we'll look at this, how much they're spending on on rent.

9:31 $7,000 a month and $6,100 a month for 10,000 sq ft for 12 people to work inside the business. A 2 million in revenue. Wow. Yeah, and I I would definitely want to make sure that the lease is transferable or if it terminates soon, um are they able to renew it uh for another 10-year term because the facility definitely seems like a key piece to this business and it post close if you're renting it and the owner the landlord decides to kick you out, I'm not just quite sure what you would do at that point. So, we definitely want to make sure you can get a long-term lease in place.

10:17 And an SBA lender will make you do that because this is this is a business what we kind of say is location-dependent. There's no manufacturing business where the lender once you did is going to lend when you might have to move in a couple years. Uh they want you to they want to know that you you can can stay there permanently. But to your point, Michael, it is it is expensive real estate. It's not cheap. Um you know, and given the revenue that they've got, it's it's quite a bit of expense relative to that revenue.

10:48 I mean, it's kind of nuts when I do the math here, right? They're spending 13,000 a month on rent. That's $145,000, let's say, plus or minus going out. So, let's say 150,000 going out on gross revenue of 2.1 million. And then you've got 12 employees working for these people. Like that is you know, they kind of talk about this being a VAR. It sounds more like it's just like a machine shop.

11:20 Um like why do they if it's if it's a real va- value-added reseller for this stuff, like why do they need 10,000 square feet? Like it just that doesn't make sense to me. Um so, there's something that just smells off about this listing and I think we see this a lot and maybe will you've seen this too in listings. Our brokers are pretty smart. They know like, oh, a machine shop is not going to get a good multiple, but a VAR is going to get a pretty darn good multiple. So, they miscategorize stuff pretty quickly, but it doesn't add up here.

11:52 Yeah, you'd have to go you could suss that out a little bit by asking for the equipment list. And if you see a lot of CNC machines and things of that nature, you might sort of conclude it falls into the machine shop uh, category. But yeah, that you're right. This is a if if we take the the EBITDA or I'm sorry, the SDE that they're showing of 656, I I'm going to again lop off about 100 156,000 and say it's really 500 of EBITDA.

12:20 You know, so 500 against sales of 2.1 is a is a margin of about 23 24%. Um, so it's not a bad margin. Um, you know, that that that I kind of like so far. I wonder with it having a strong margin is is the owner wearing multiple different hats and you would have to replace what he does on a day-to-day basis with two or three employees and then that could potentially eat into the margins a little bit more.

12:53 Um, and then another thing on the owner, it's they haven't done much sales and marketing over the ever, it seems like is what they said. Uh, so is the owner is the owner dependent on relationships? Is he's doing all the sales? Does he hold all the relationships with customers that uh, going forward you may not have. Yeah, exactly. It's it feels like they serve their neighbors, you know, basically around the industrial parks near them and the sellers contact list, but uh, haven't done anything in terms of sales beyond that. Uh one place I would dig into very quickly on this is customer concentration.

13:35 And when they use these phrases like, "Hey, there's equipment needed for niches." And then they list some really weird oddball niches. It's like aircraft windshields, conveyor applications for labeling, system mounting, you know, uh you know, and then it weird like safeguarding assemblies. It's like, "Oh, these guys have three customers." Describe the different customers. [laughter] Yeah. Um so, I'd be willing to bet there's a huge amount of customer concentration here.

14:06 Yeah, and does it rotate every year? You know, these are the four customers they had last year and next year it's going to be four different customers cuz it is all project work. That could be interesting to know as well. Um so, hard to know that you can repeat the performance uh as a buyer. Heather, how do you feel about this price? It's a little too high. I mean, um I again, I'm going to go off of an EBITDA multiple because it as lenders we just always work with EBITDA. So, 500 EBITDA, a four multiple is 2 million. So, they're asking, you know, they're asking four and a half. That's too much. Um or is that five? I guess that's five.

14:45 They're asking five, way too much. So, uh you know, this is again kind of it's a below a four to me. You know, the the lower middle market small SBA size deals, um if they have any hair on them try regarding transferability or customer concentration, they're below a four. So, my guess is, you know, it it's it's at least two turns too high. One or two. Yeah. Yeah. So, how where where do you think how would you structure this if at all?

15:17 Or is it just a matter of price at this point? Uh it's a matter of price probably mostly. I mean, if if their customer concentrations are too large, there's no lending possible at all, you know, because you can do the math and see that if they use lose one customer, that they wouldn't be able to pay the loan. So, you'd have to look at the customer concentrations carefully. Maybe you could structure a forgivable seller note around one that was maybe 20%, but if it gets much above that and it's really only four customers, banks are just going to say no, period. Um but, you know, maybe maybe you could borrow a million and a half on this if everything else kind of checked out and you had the right buyer. On the positive side, trying to be positive about this, if someone came along who's got like an engineering background, I'm thinking of someone that's uh a family friend. He's young guy and he's selling uh manufacturing automation equipment, but all the all the latest stuff that uses the latest technology. If someone like that could come along to a business like this and could start selling into those channels and that, you know, really utilize the 10,000 square feet and whatever machines they have and know how they have, you know, there's a there's a there's a possibility here where this is a growth story.

16:27 And if it is, you're not going to overpay for the growth, but, you know, it makes it a little bit easier maybe to go all the way up to a four uh because you can you can watch that growth faster than you could as a startup. That's that's probably my best-case scenario for this deal. Hi, Heather here. When I'm not breaking down deals with these guys, I'm helping people get the right SBA loans for their business acquisitions. Because when you're buying a business, the best financing isn't one size fits all.

16:51 There's the best rate, fastest to close, the specific loan structure that you need, or a little of all of those things. That's why my company, Vizo Business Capital, works with over 30 different lenders to find you the best funding in less time and with less friction, so you can focus on the deal. Sign up for a free live Q&A session on SBA loans at vizocap.net, then click Zoom sign up in the top right corner. That's vizocap.net and click zoom sign up. I love how lenders basically force some real levels of like professionalism on businesses like this or a buying process, right?

17:28 It'd be really easy to get over like excited about it, make an emotional purchase, um and here, you know, the lenders are basically creating a pretty good like break on things getting irrational exuberant. And that's the one thing I love about the SBA programs like, "Nah, we can't we can't be paying nine times earnings for this folks because the SBA's just not going to let it happen, which I think is great." Yeah. You can with equity. That's what I always tell people. You can do that with equity.

17:56 You can only borrow maybe three three to point 75, but if you want to pay more, you can do that, but it's going to be with your money. Um I was talking to a lady a few days ago who's trying to buy a business and um so the broker basically uh suggested you know, she's like, "Look, I can't I can't Now that I've got your actual financials, I can't pay this this price anymore that I offered uh because, you know, there's $200,000 in a year in earnings that has disappeared from the CIM to to this."

18:28 And uh the lenders won't let me do that. And so the the broker goes, "Well, you should talk to this lender that I had worked with before with with a previous buyer who'd had it under contract for for basically two-thirds the price." And I was like, "What is this broker doing? Like Anyway, so that guy had fallen out of the deal and wasn't able to get it funded and now he was expecting the same lender to help her fund it at, you know, a a third higher price." It was just like she was like, "What is going on in the world?"

18:59 >> what I say when I see that is I say, "Is their calculator broken?" And maybe theirs is broken. Oh, man. Uh getting getting business brokers to do their job is sometimes very challenging. Um So, Will, how would you go about, you know, doing financial diligence on something like this? Yeah. Um definitely want to understand the customer concentration and revenue quality. Is it actually only a few customers or is it more spread out? Um understanding if there's what contracts are in place.

19:35 Um and seeing how revenue has trended over time. If AI if there's competitors using AI, um how that's impacting this company and their performance and maybe that's why they want to sell. Um another item is inventory and margin. Um that's another key piece that we would look into to see how that is trending and if they're tracking everything appropriately uh to get a real good understanding of the business. >> [clears throat] >> Um I do it does look like it's a niche business, which is which is cool. Um but yeah, I definitely want to understand the the owner's involvement and what he is doing on a day-to-day basis and what potential replacement costs will be needed if he leaves um and retires and maybe moves out of the country. Uh but yeah, those are yeah, a few of the items I would probably look at. Um and what is it like if I'm a buyer, right, and I can choose between not paying for financial due diligence or paying for it? Like what is the trade-off I'm making? Obviously, if I do I have something under LOI, I do a QVE and the deal doesn't close, like I'm out that expense. So, how do you like talk to buyers about thinking through like when it makes sense to do it, how to baby step your way into it. I know, Heather, you do stuff with folks to kind of do a pro basically a preliminary version of a QVE and then later on do the full full bore stuff. So, I'm just curious, what are you guys seeing people do to kind of mitigate the risk and also get the benefit of doing this diligence in a good way.

21:09 Yeah. I would say two things. One is it the price tag of a quality of earnings can be high for um some buyers especially on the smaller deals, but if you are taking out debt and putting a personal guarantee with the SBA or you're even um a you have investors, family and friends are investing in the business, you want to make sure that the business is feasible and can continue to produce cash flow and earnings going forward.

21:43 So, the price of a QOV I would say is definitely worth it from a risk perspective uh to make sure that you really understand what you're getting and um I know Heather likes to look at the bank-to-book reconciliations and so doing that will really tell you the financial quality of the business. Um if they reconcile cleanly, then you may have a nice business and they're reporting things appropriately, but if not, then if they're hiding costs, if they're not recording revenue properly, um you can do a bank-to-book reconciliation and see what you're getting yourself into. Yeah, I I will say I couldn't agree with you more, Will. Uh it's you're putting you're signing a personal guarantee.

22:29 This is the most important money you're going to spend maybe aside from your lawyer, right? It to protect yourself and to protect the risk that you're taking with the guarantee is is your quality of earnings. I think what throws people in the SBA space is this weird thing and that is that the SBA as of now does not require a quality of earnings. They require things like a business valuation. That's required. You can't get a loan without a business valuation.

22:56 Um they require the banks to focus on the tax returns and getting them uh verified with IRS, but a lot of times and I'm sure you've seen this will a lot of times the tax returns are they contain all the accounting errors you know that you're going to end up finding in a QofV. So so yeah, sometimes the the tax returns are overstated in a number of areas. And when a QofV comes along we see that the QofV is actually the more conservative number. Most of the time that's the case. So the fact that the SBA doesn't dictate that you must get a QofV, I think it it makes some people think that it's not really needed. That they're fine if the tax returns check out and I I couldn't disagree more. I think the one thing you want to spend money on as a buyer is your QofV for sure.

23:43 Yeah. Yeah, and if a business is recording revenue and expenses on a cash basis let's say and they want to make the current year look strong they'll reckon they'll invoice a customer upfront for work to be performed next year. So that million dollars of revenue in 2025 will post close as the buyer you're going to have to provide that work and that's revenue that you don't have going forward since you you bought it on a multiple that you didn't include that revenue so yeah, there's a lot of things to consider. Yeah, it's a great process to go through and I think it helps a lot of buyers not only know what their true earnings were and the you know the quality of the different cash flows that they're buying but a lot of times the accounting the bookkeeping problems that might have existed they can now know what to do when they when they own the company. They can fix those problems.

24:41 You know they got a QofV that pointed those things out. So instead of going on autopilot after they buy it they know that's on their list of transition issues they've got to go in there and you know do some improvements to the accounting process or the bookkeeping process which I think is you know another benefit. Yeah, definitely. As I say, in the QofE report, we flag anything that they're doing incorrectly or things that they should fix.

25:03 Um if they're accounting for things incorrectly, if they need to hire people, or their utilization is low, it allows you post close to if you do hire an outside fractional CFO or someone to help you clean up the books, the quality of earnings report is a great starting point for that. >> Yeah. Roadmap. Absolutely. So, do we like this deal? I I found it, so I was hoping you liked it. I'm trying to be positive, but I would pass on this.

25:32 You're passing >> This looks This looks like biting a a nightmare. >> [laughter] >> So. I'm uh maybe with for the absolute right person who who knows how to sell and already understands what this shop does really well and how they can kind of pivot to a more modern uh more you know, more modern automation equipment. Maybe for that person. But for everybody else, I'd be pass. Mhm.

26:03 Did I already give a thumbs down, or do I still need to give a thumbs down? >> I think you did. You said it sounded like hell, didn't you? Okay, here's >> Sorry, a nightmare. I'm giving the deal two thumbs down and the other one thumbs up. Or two thumbs up, rather. Oh, thank thank you. Will, are you buying it? Uh I'm not buying it, so I'm thumbs down as well. Um I think yeah, the asking price is a little high, and it's yeah, for all the things we discussed, it's so specialized, that's maybe project based, and maybe customer concentration. There's a few things you'd want to dig into before going forward, but I'm I'm thumbs down.

26:41 That's a first. Belinda was the only one slightly positive. That'll do it for this episode of We Hate Your Deal. Uh [laughter] thanks So for being here. Heather, how can people find you? Come to my website visocap.net visocap.net and join one of our Tuesday webinars where we'll go through our entire process. Very cool. For getting an SBA loan. I'm sorry. Yes, I didn't finish my sentence. For getting >> [laughter] >> For getting an SBA loan. Yes, that is what it is. Or we'll just Or we'll just hang out. It'll be fun.

27:13 >> Yeah, or we'll just You'll just hang out with me. That's fun, too. >> [laughter] >> And Will, where can people find you? You can find me on LinkedIn. My name is Will McCurdy. Uh you can go to our website bedrockqoe.com. Uh feel free to reach out to me at will@bedrockqoe.com. That's my email address. And if you're thinking about buying a business or currently actively looking for a business, I would love to talk. For all your QOV needs. And you can find me at Chili's. All right, everybody. We'll catch you next week.