A group of experienced business owners, including Steph Botha, Chris, and Michelle Wyant, revisited an opportunity to acquire a small commercial cleaning business. Initially dismissed due to its size and valuation, the deal resurfaced months later when the broker lowered the price, prompting the team to explore creative financing structures. With backgrounds in the cleaning industry and existing operations in place, the group saw potential to integrate the business into a broader roll-up strategy, leveraging economies of scale and operational synergies.

The business, valued at $566,000, operates with ten contracts and focuses on janitorial services, including specialty flooring maintenance. Despite its limited customer base, the company shows consistent revenues and profitability. Adjusted EBITDA reflects realistic expectations, accounting for a general manager’s salary and the removal of personal vehicle expenses tied to the current owner. The group devised a multi-offer strategy, including a 15-year annuity with a 7-year balloon payment, offering flexibility for the seller while aligning with their financial goals.

Challenges with the deal include a 22% revenue concentration from one customer, low cash flow concerns, and skepticism about the valuation at six times EBITDA. The group addressed these by focusing on the seller’s tax benefits and restructuring offers to better communicate the value of creative financing. The potential for SBA financing or transitioning to an annuity-refinance hybrid provides multiple pathways to close the deal while ensuring long-term sustainability.

The team’s existing businesses in the cleaning industry provide a strong foundation for scaling this acquisition. The plan includes leveraging shared resources like accounting and back-office support to manage multiple acquisitions effectively. Rolling up similar-sized businesses could lead to a combined operation generating $2 million annually, amplifying profitability and operational efficiency. This consolidation strategy underscores the viability of the acquisition as a stepping stone for larger ambitions.

While some participants raised concerns about overpaying and the business’s lack of exceptional metrics, others highlighted the deal’s strategic potential within a roll-up. The creative annuity structure, combined with operational expertise, offers a promising pathway to grow the business while mitigating risks. The acquisition aligns with the group’s vision of building a robust cleaning industry portfolio through smart, synergistic investments.

Full Transcript:

Hi, guys. Happy Thursday. Welcome to the red light, green light call. Let’s go to, Steph Botha, Chris, and Michelle Wyant.

I need to step away just for five minutes just to return a call on a deal. And then so I’m gonna ask Jeremy to run points on the analysis, but I’ll be listening to this in the background. So I’ll be able to chime in, at the end as well. So I’m gonna hit my mute button, and, screen show is enabled.

So Chris, Michelle, and Steph, over to you guys.

So this is a commercial cleaning business, pretty small. And for a little background, we own a commercial cleaning business, Michelle and myself. This one is smaller than ours.

Steph is also in the cleaning business, so it’s definitely in our lane. We definitely kinda understand where it is. You know, a little background, this is a broker deal.

We first looked at this probably five months ago and, you know, kinda did all the numbers and went back to the broker and said, you know, thank you, but no thank you. This is just a little too small for us, to to make sense.

And, you know, that we thought that was kinda the end of it. And then, oh, I don’t know, a few weeks ago, maybe as much as a month ago, the broker came back to us and said, hey. They’ve lowered the price a little bit because they were definitely asking for too much. They’re still asking for too much, but, we went ahead and revisited the deal, tried to put, together some creative offers, if you will.

So it would make sense to the makes sense for us, also thinking that maybe they’ve loosened up a little bit, if they came back to us after, you know, four to five months. So, we actually had a, a right before this call, we had a call with the broker.

The seller is out of town.

Five months ago when we had the a seller call, you know, a lot of the the way they do business, the way we do our business really kind of aligned, just in strategies and, you know, quite frankly, limited marketing or customer acquisition, if you will. So, you know, a lot of things lined up. It was just too small.

We had a a meeting with the the broker, the sellers out of town, to really go over kind of a multi deal structure, giving them some options, trying to steer them into a full annuity deal, or an annuity with a balloon.

So it was received, I think, pretty darn well from the broker. So they they need next week to present it to the seller, and we’ll see where that goes. We’re still thinking we’re not sure they’re there yet, but we kinda think they’re at least now open to, some creative financing that maybe they were not open to before because that’s the only way it makes sense with us.

So that’s kinda a little bit of understands that.

Yeah. Yeah. But the broker more on board with the creative financing than than the seller is.

Yeah. We actually the broker you know, we had a meeting last week just to talk some things through, and she gave us a little bit of guidance on what the seller might be looking for and really almost how to rephrase things to to talk to the seller so they might better understand what we were trying to do. So we kinda redid the format of how we were doing our multi offers, if you will, to try to better explain exactly what we’re doing and why we’re doing it. And, you know, if we did go with an SBA or something, the interest rate environment is such that we’re gonna be offering half of what they’re asking for and and that sort of thing. And she completely understood. So, I’ll I’ll let Steph walk through some of the numbers.

Yeah. So, I saw that there were some questions kinda popping up about average multiples. The multiples are definitely on the lower side from the some half a million dollar businesses.

But in, in this case, they’re actually looking for a six x multiple of adjusted EBITDA, which obviously won’t make sense. The offer structure that we’ve put together is about three hundred thousand dollars if we went with a SBA or other bank lender, which gives us gives us a cover of just under two. And our annuity structure and kind of annuity transition to SBA, Both of those would be a fifteen year amortization with either a seven year balloon or a refinance in twelve months.

And that would ultimately, if the seller decided to go with the annuity, she’s she’s open to and understands, you know, tax implications and all the benefits, but I think it’s just getting past the numbers.

But the way that we’ve structured our our annuity offer, effectively pays the seller about seven hundred thousand, which with an asking price of five sixty six, you know, it’s pretty it’s pretty beneficial for her, and it works for us too. And that cover is is of the the mid twos.

Questions?

Talking ten year annuity?

Fifteen. Fifteen year amortization. Sure.

So, a couple questions that I have. So in the add backs and take backs line, what what are those, what are those for?

Is there anything in there is there anything in there for, like, a GM or somebody to operate the business? How Absolutely.

Is the owner?

The owner is quite involved, but there is, I’m just gonna pull it up separately.

We’ve got an an adjustment for the officer salary, an adjustment for personal vehicles, which would be removed from the business during the transaction. So some of the debt, on the balance sheet would disappear effectively.

And then there is a GM salary adjustment in there.

Gotcha. Okay. Yeah. That was my I think that’s my biggest concern with the the cash flow is just making sure to make sure you get all the the right staff in place, the team in place, and those types of things.

What’s the the cash flow left over after that? And then being able to, you know, pay the debt service or whatever the annuity structure is, that that you come up with. I would definitely do this on an annuity type, structure.

SBA might be a little bit tough, but I know you guys are obviously in this this industry, so it’d be a a great, potential bolt on, for that.

And, I I saw a question. Maybe talk a little bit more about the the customer concentration issue. It looks like what one customer makes up about twenty two percent. So what what does that look like?

Yeah. And and one of the reasons that is is quite honestly, they don’t have very many customers. I think ten to twelve contracts. I think it was, like, ten because that’s why we said the top ten customers are a hundred percent of the revenue. So that’s gonna skew those.

We think it’s in an area that has plenty of opportunity for growth. They have a GM in the in the business, who is being groomed to knows the sales going on, is being groomed to take over. So the owner was the GM, but she’s been stepping back really for probably the last year, grooming this person to take over.

So that is accounted for. And then in the, you know, the previous year, there’s some skewing going on because they bought two personal vehicles, one for the owner, one for her husband, took advantage of, of course, the depreciation, which is why there was a big, you know, difference there knowing that they’re gonna keep the vehicles, but they’re gonna keep the debt on the vehicles as well. So those numbers, we think the adjusted EBITDA numbers are are very realistic even knowing we’re gonna have we added, I think, fifty thousand for GM even though there is a GM who’s already there.

But we’re gonna have to pay them more because they’re gonna be the the only person. Now they have support with the owner there.

So Gotcha.

The the one other question I have, so revenues, what, two years ago were about two hundred thousand and they jumped up, you know, basically doubled and now they’re consistent the last two years. Was there any significant or any specific contract that that led to that?

I think it was more COVID related.

Business at the tail end of nineteen, and then that was COVID related. And and in this area, I don’t they didn’t shut down for very long. So there was, a push from all of these businesses to to keep and maintain, you know, janitorial. But they also the the big play for us here is they also do maintenance and do deep cleaning of specialty flooring in the janitorial space. And that in and of itself, can generate quite a a large sum of revenue, and they’re not capitalizing on it. Yep.

Gotcha. Sarkis, what are your thoughts?

I think it’s a fairly small business.

It’s I’m worried a bit about the cash flow in this business. I’ll be wary of, you know, any kind of debt planning or you’re gonna get into just just make sure that, you know, that cash that your cash flow is gonna hold on to it.

Yeah. And like you said, there’s only nine customers. It’s worthwhile to check the contracts, the the longevity of those contract, the relationship with those customers that they’ve got. And, also, I think it’s a little bit overvalued.

And even if you’re gonna pay them more, it’s gonna be I think you should come up with a better deal structure, maybe a little bit more creative, offer them closer to what your valuation. I mean, four and a half multiple on this kind of returns is kind of too big. I’ll probably go between two to three on this one. If they wanna get that five hundred thousand dollar markup, then you can do be creative about it.

And so going annuity, and profit share hybrid mix kind of thing, if you if it’s possible to go that way.

I understand that it’s gonna be, like, bolt on, and, you know, you’re gonna have synergies, probably so. So that could be a positive for them for the seller in new deal structure, that you could put together. But apart from that, Spire, I think my biggest thing about this is, the cash flow. I’m a little bit concerned about that, and apart and just other mentioned that I said. So, yeah, that that’s it for me.

So these businesses typically see, in this size range. To be honest, these businesses typically see anywhere from, what, fifteen to nineteen percent profit, and overheads are typically in the thirty percent range.

Looking at their books, they’re well within that, and they actually exceed those.

So from it may not appear to be as profitable as maybe other businesses are, but this is this is actually better than than we see a lot of of these types of guys, question from me.

Right? So I I’d listened to most of it. I wasn’t looking at the screen. I was taking a call. But the like, clearly, you you guys have got businesses already in the space. I don’t know if it’s in the same geographic location, but, clearly, we talked about this last week, Steph, on your deal with Christina.

Your your your your chops in this space combined with that of Michelle and, and Chris, there’s a ton of value that you can bring to this. So is this gonna be like a well, like, part of a roll up where you put your existing businesses into the pot, you put this in, and then you can just leverage all of your superpowers across all these different businesses and then just create a much bigger entity.

Because, you you know, to echo us That’s the plan.

The the plan the plan is to create a much bigger entity, and this is something we looked at, like, months ago. We left it on the table because it didn’t make sense for us. They came back to us, and we said the only way that this is gonna work is basically with, you know, an annuity. Yeah.

And Chris and I, and and Michelle and Christina had the conversation too. Like, if they don’t we’re not pushed to do this. And, and this was submitted last week, so we’re like, we may as well present it. You know? It’s out there.

So Yeah.

That’s not, like, the ideal deal for us.

Yeah.

So I I like this as an annuity deal.

I do like this as an annuity deal because there’ll be economies of scale across your other businesses.

I think rolling up in the cleaning space is is definitely a a great idea. I I know something I’ve I’ve talked to Tracy a lot about, over the last kind of six months or so.

And and, yeah, I think, you know, you you guys are clearly very, very strong in your respective businesses.

And sprinkling some of that magic dust onto this deal, you could probably scale it, quite quickly. But I think to echo all the other points, yeah, I don’t think it’s a deal I put a closing payment down, but it sounds like if if if, you know, the way the deal is right now, you can definitely do it. So when when Chris was talking at the start, he talked about an annuity with a bullet. Like, just talk to me a bit more about that. Like, how how are you gonna do that?

So we were looking at a fifteen year amortization term with a balloon at year seven.

Right. Okay. Alright. So okay. So you’re probably gonna pay half of the deal in the first seven years through the annuity and then a a bullet payment.

And so, you know, if you end up paying, you know, three hundred and whatever thousand dollars for the business, that’s a low cash burn for the first seven years. And then that second payment, you you don’t need to grow it all that much, really, to be able to to generate those resources. And and, you know, when you combine it with all the other things that you can do, I think that’s a really cool deal structure. I like that.

We even offered the, doing an annuity payment for the first year to give us the opportunity to get the business to a place where it can be SBA financed.

Yeah.

But it would be on today’s valuation.

Yeah. Yeah. Okay. Yeah. So, yeah, that that’s the annuity option where it’s a super quick deal.

You pay for it for a year, and then you’ve got a refi, at the end of twelve months. Yeah. I like that as well. I the the thing I love about deals is when there’s multiple ways to do it.

Right? When you’ve got multiple options on financing and structure, those are always the best deals. Right? Because you’ve got lots of kind of pivot points.

It’s like with Jamie’s deal and Josh’s deal.

There’s ten ways you can finance that business.

So that’s why I know it’s gonna be a great deal for them. And and I think with this, you know, your ability to get super creative combined with the relationship and the know, like, and trust you build with the seller and your ability to leverage your superpowers from your other businesses, as you bolt them all together, great deal. So I like it. I like it a lot.

Thank you.

And just to, kind of echo a little bit, you know, the idea would be we know this is on the small side, which is why we kinda told them four months ago that, you know, it’s too small. But the thinking is if this one’s on the small side, but if we can get another one like this and a third one even this size and, you know, by the time we get to three, four, five of them, all of a sudden, it is doing two million bucks. And guess what? Our our existing accountant and bookkeeper can take care of everything. We can definitely a lot of that back office stuff will will be able to be taken care of. So that’s kind of the thought process.

Cool. Alrighty.

Perfect. Any other questions for Steph, Chris, and Michelle?

David, Gerald, we’ve missed you, man. Come and come and say your thing. Come come on the Zoom and say your thing.

Sure. Sure. Good morning, everybody. Good to be back.

Yeah. I see. My my concern is there’s still you know?

Yeah. I I’m gonna call you off and say, you know, look.

You know, I’ll I’ll pay ten million dollars for the business as long as I can pay for it in a dollar a year.

But but, you know, at at some point, oh, massively overpaying the the seller for a business, they they haven’t really built an exceptional business here. They’ve got ten customers. They’ve got customer concentration issues.

The earnings are are are pretty volatile.

And and businesses in this size, I mean, you know, they’re not four and a half x, businesses e even if you can stretch out the payment. So I I’m that’s my concern is, you know, are you are you really overpaying for this deal because you’re excited about being creative and doing the annuity?

So that’s I’d like to see the the the valuation get brought back a little bit more in the range. And then, yeah, if you can do the the fifteen year with a seven year balloon, you know, I think but I’d probably do is sack aside the extra cash so that in your seven, you can just write a check.

And that that that’s kind of our our perspective on things.

We wouldn’t refinance at seven years. It wouldn’t make sense.

Okay. Cool. Alright.

So no more questions on that. Eldon hates the deal. Gave it a red light eighty. Ouch. I was at green light forty on this.

As I said in my comments, as an annuity deal and as part of a roll up and consolidation, I’m I’m I’m I’m cool on that valuation. I’m cool on that deal.