The session reviews a business focused on lawn irrigation and lighting design, listed for $930,000, owned by a 68-year-old seller planning to retire. Despite consistent revenues and maintenance contracts providing recurring income, concerns arise over vague financials, manufactured balance sheets, and questionable add-backs, which undermine confidence in the business’s valuation.

The business has potential growth areas, such as improving its poor website and implementing marketing strategies, as it currently relies solely on word-of-mouth. However, the lack of a sales team and underutilized operational capacity raise concerns about its scalability. The business’s pricing and readiness for transition are questioned, as the seller is willing to remain involved for up to two years post-sale to find a general manager.

Participants discuss the feasibility of financing through cash flow lenders or SBA loans, but skepticism over the accuracy of financials deters confidence. While the seller’s motivation appears retirement-driven, there is insufficient detail on their urgency or need for liquidity. This lack of clarity makes structuring a compelling deal difficult.

Opinions vary among participants: some see opportunities in the business’s potential for growth, while others are hesitant due to high risks and limited transparency. Ultimately, the majority lean towards a cautious red light, recommending further investigation only if the seller provides better financial clarity and demonstrates genuine motivation.

The call underscores the importance of thorough due diligence and highlights the challenges of negotiating deals with limited and inconsistent information.

Full Transcript:

Start at the disclaimer. And I’m only gonna read this disclaimer once, but it does apply to all three deals, of course. It’s important though, especially if you’re brand new. On this call, we cannot provide advice to any specific individual who’s working on any specific acquisition.

That isn’t our purpose. The purpose of this call is to observe how experienced dealmakers look at new opportunities, the questions they form, and strategies they might potentially pursue. If you’re gonna develop an actual acquisition plan and we were gonna be participating, we would need a lot more, not a little more, but a lot more in-depth information on the target companies and on the sellers than we’re able to review on these calls. So if any of these deals, are yours and you submitted them, don’t take any of that we say in this call as advice.

We’re just throwing around ideas, sharing some thoughts, and that’s what deal making they’re doing all the time. So let me just maybe I will share the, hosting duties just so that we can do some muting if it’s necessary. Because sometimes people, do forget to mute when they come on and they’re doing other conversations. I do it all the time myself.

So let me just maybe make Sarkis the host while I’m going to these presentations. People are pretty good. It’s not usually a big problem. But Sarkis, you’re gonna be the host.

Okay? And your meet your hosting duties, Sarkis, it just to, yeah. If someone inadvertently doesn’t have their mic muted while they’re having a slide conversation, you can, you can just mute them mute them up. And then, when they come back, if they’re called on, they can unmute.

Okay. So let’s get into it.

We’ll put the simple model up here. I’ll make it a little bit bigger. I know it’s kind of tough sometimes if we’re doing this on a laptop, but I really need to do this side by side. So this is what is big as I can get the tape to the tape side by side.

We’ll stop there in case anybody wants to do the screen capture. But I do like to, while I’m going through the notes, get you down to the balance sheet and the p and l. Okay. What’s this business all about?

Lawn irrigation and lighting design.

Okay. Let me let me put a little side note in here right as right here as well. There’s a couple of red light green light deals that I have not been able to present, even though they’re quite interesting because they’re just so unique that it would be almost impossible to, you know, maintain confidentiality. It was a beauty business that David submitted.

We did a nine one one call. It is an interesting business, but there’s about three or four parts to that business that were so unique that if I described all three or four parts, it would be dead easy for somebody to do a search and come up with, what the business is. So confidentiality is super important on these calls. I don’t share any information that the, the the broker or the business put together.

These are all my own notes. And of course, the confidentiality is of utmost importance. So, I was worried about this deal. I thought lawn irrigation and lighting design, is that a thing?

You know, if I put this out there and this business does both of these, is that gonna be pretty easy to identify? Turns out, no. This is a very common combination. There are dozens and dozens of listings of businesses that do both irrigation and lighting design.

So no worries there. So customer mixes is an eighty five percent residential business, fifteen percent commercial. They focus on single family homes. It’s located in the US Intermountain Region, think Rocky Mountains.

Founded in nineteen ninety seven. Trading area, regional. Business has been on the market for four months.

Asking price, a little less than than a million nine hundred and thirty thousand dollars. No property included in this deal. It’s owned by Keith. He’s sixty eight.

He’s the sole owner. As far as I can see, he’s the founder as well. Still active in the business day to day And in fact, he realizes that, you know, transitioning will be difficult because there is no number two ready to sort of step into the role of GM. So Keith understands that a GM is going to be needed is needed is going to be needed to run the business in his absence so he’s willing to work up to two years post closing to help the new owner find a GM and smoothly transition the business.

Keith started the landscaping, pretty competitive business and he pivoted into irrigation and lighting. I think a less competitive business, you know, and if you do a good job, strong word-of-mouth. The motivation for sale, retirement, yeah, Keith’s a baby boomer, he’s sixty eight. Not a lot of detail in terms of what he wanted to do after retirement.

Just as a little bit of an aside, why is that question on the submission form? Because what they’re going to do post retirement will have, you know, a retirement will have, you know, bring a fair amount of call ring into what they’re expecting in terms of deal structure. You know, these are real estate investors. These are people who are starting up a new business.

These are people who have an obvious need for a lump sum. It might be difficult for us to put them on an annuity deal or something else that requires most of the funding over time. It’s not by any means the only thing that’s relevant in that capacity, but it’s certainly helpful to know. Here’s someone who’s retiring.

Are they playing with the grandkids, or do they have plans for what they’re gonna do in retirement that requires some cash which would sort of drive them to be looking for a large closing payment. So that’s the reason why we ask those kinds of things and we’re looking for some detail. Legacy is important to the seller to the degree that, yeah, wants to protect employee jobs and so nice that that’s on the list of things that are important to the seller. Six employees work in this business, they’re not operating at full capacity.

When you break the revenue down, new irrigation systems, thirty eight percent. Maintenance contracts, thirty eight percent. Now those are nice, those maintenance contracts, you know, we can get them on a kind of a yearly basis that just roll over annually. That’s nice business when you can set it up that way.

They don’t do any marketing. Nobody works in sales. New business comes through word-of-mouth. Lots of excess capacity in their operations, so there’s plenty of room for growth.

Yeah. The website below average, definitely needs a bit of a refresh. Refresh. I mean, the pictures were good.

As people who’ve been on this call before knows, when you’re remodeling kitchens, when you’re doing hardscaping and landscaping, and you’re doing this kind of stuff, right, have or an interior designer, you have to have the wow factor on the photos. And they do have good photos, but they’re not presented all that well. And the rest of the website, I thought was, you know, was a little bit below average. Google reviews, four point three out of five on twelve reviews.

So kind of a bit of a meh on that one. MUD score, I would say is below average. There was absolutely nothing concrete noted in terms of motivation, urgency, or distress in the notes. You know, I mean, you can’t go by age.

It’s funny. Sam and Jay and R and I were talking this morning about a deal that Sam’s working on, and he’s got a couple of brothers who are seventy seven and seventy eight, and he had himself what he thought was gonna be a good deal. You know, Sam’s really good at working with these sellers. They structured something that did sound appealing till the end of the day.

They weren’t too sure they wanted to leave. They weren’t too sure they wanted to exit the business seventy seven and seventy eight. So sometimes these businesses, when these people are even ten years older than the seller, you know, the business is not necessarily hardcore for sale. You know, if it’s the right mix, the right offer, the right person, the right buyer, the right circumstances, maybe we can get them to sell.

But age is not the, you know, the ultimate sort of test in terms of whether somebody’s gonna sell their business or not. So not a ton of background color on this and again, this is no knock against the Protege member. It could be that they just weren’t providing much in the way of information. If we take a look over here in terms of the financial statements, I mean the the SDE and yeah, you know, people say well maybe that’s not SDE because the replacement salary is in there.

For a couple of reasons I thought it was kind of like a borderline, I put SDE but I could have put adjusted EBITDA in there just just as easily. You know, amazing gross margins, even decent operating margins before before the add backs.

So pretty stable. I mean, the revenue is not, all less than a million dollars. A bit of a smorgasbord in terms of financials that they presented to us. We have financial statements, and we have SIM numbers that were prepared for tax purposes.

The add backs, of course, are in the SIM, and so a bit of a mixed bag. Before I throw it over to Sarkis to get his take on this, one thing that, you know, is a bit annoying about these SIMs is they gave us a balance sheet, but not a balance sheet that’s supposed to do what a balance sheet was designed to do, which was to help you understand the financial position of the business. This was a massage balance sheet to make this look more appealing to sell to a potential buyer, and all these things were adjusted and they made the adjustment in terms of what this business is gonna look like at closing.

So if we got a someone to audit the financial statements of this business, the balance sheet wouldn’t look like this. This is an adjusted one. There was no non adjusted ones. And by the way, if we were gonna take to a lender and all we had was this massage balance sheet that represented the brokers and management’s ideas of what you should know about the assets of the business, you’re not gonna get very far with a lender with that, you know.

So when we press them for give us financial statements off your accounting system, right? Whether it’s QuickBooks, Sage, Xero, whatever it happens to be, give us financial statements from there. Those should reflect the financial position of the business. And what could be missing?

Well maybe, you know, this is the kind of business that someone could have made big deposit on. Maybe it’s a commercial client, right? Maybe they put five hundred thousand dollars, you know, as a deposit. That represented cash in the bank, which by the way the seller wants to remove.

The cash at the bank at zero doesn’t mean that there’s no money in this business. It means the seller wants to keep it as part of closing, right, and they’ve eliminated this potential deposit. Who knows if it’s in there or not, but does that mean that we owe some particular client five hundred thousand dollars worth of work, right, once we take the business over? You know, we don’t know.

And that’s the problem. Just one of a number of problems that happens when you’re looking at a balance sheet that wasn’t prepared according to generative separate accounting principles, but was prepared according to what was going to put the best foot forward for the business for the potential of enticing somebody into potentially buying it. Alright. So I give I’ve given Sarkis some time to kinda digest this deal.

So, Sarkis, for this deal, you’re Karl. What do you think? Do you like what you see here? Is this something that you’d be interested in putting an offer in on?

I guess I would I’ll give you a political answer on this one, John. That probably, you know, depends on my circumstances as an investor to look at this business. So, I mean, what’s good about this business is that we can see that sales is fairly consistent.

Bottom line, more or less, you know, consistent, or in internal operating income. So we know that we know that, even twenty twenty was a COVID year. Right? So they still managed to, you know, put in a decent amount of revenue there.

My question would be, you know, how would this business react in a recession, for example? You know, would this be considered as a luxury item? Would you know, how badly would the business suffer if there was a dip, in the in the economy and people were, you know, saving up? Would they was this something that they would forego?

Overall, they’ve got thirty eight percent out of maintenance contracts, which is solid recurring revenue.

They’ve got new new irrigation systems, thirty eight percent. So I’m presuming that new business coming in, with no sales at all on the business. So that’s something that they can work on in terms of, you know, marketing and getting a salesperson in or whatever, but that will also increase cost obviously.

So, if if, I would I would invest in this business as a if if I felt that I could grow it and if I was a investor that had other businesses maybe or it’s not gonna be my main focus, I’ll bet it that way perhaps.

Okay. Okay. I mean, it’s a pretty simple business. I don’t think it’s a huge, high ticket item in terms of, you know, being a luxury good that people are gonna shut down necessarily if the business cycle, you know, takes a bit of a dip.

So one of the issues let me ask you about this circus. I mean, one of these I don’t like to say and you’ve seen thousands of these sims just exactly the same way I have. Like, all these ad backs are just rounded, Hundred and fifteen thousand. The medical just happened to be eighteen thousand.

Right? The nonessential telephone just happened to be twelve thousand. It didn’t deviate year from year. You know, when I say things like this, I’m like, you know what?

This is just something right off the top of the mind of the seller. Right? We’re not looking at real numbers here. We’re not looking at real numbers at all.

And it gets worse because this balance sheet they manufactured, you know, a fifty thousand of account received, twenty five thousand of inventory. You know, they’re just all these numbers are round. They’re just kinda making them up. Right?

There’s thirty five thousand dollars worth of accounts payable. So as as far as I’m concerned, yeah, I guess this is not a you know, these are not rounded numbers. So I guess these probably represent maybe they represent real numbers. Maybe they’ve massaged or adjusted.

I don’t know. But my confidence factor, on these things, I’m gonna put the big l for confidence factor being really low when I’m taking a look at numbers like this. I definitely if it was me, I don’t know about you, but if it was me, I would not put an offer in looking at these financials without having some, you know, some more meat on the bone and really doing a little bit of a quality of earnings analysis and find out where do these numbers come from. Because clearly, they didn’t come from an accounting system.

They clearly came from the the brain of the of the the owner or the seller who’s just giving round estimates, you know, for the purpose of putting in putting it in the confidential information memorandum.

When that’s the case, then all of a sudden, if these have low confidence here, then, you know, kind of low confidence here. You know?

So Like any deal, if you can’t rely on the numbers, then for sure, you know, you’re not gonna put an offer in. So, of course, you have to have confidence in the numbers that are being presented to you. And I agree with your comment about the add backs, you know, a lot of that would probably be eliminated, you know, so it’s if and if you look at the EBITDA without the adjustments, you know, that’s looking more like a job rather than a, you know, business ownership.

Yeah. I mean, sir, his point his point here is that if we’re just taking a look even at EBITDA, forget about income, right, before these add backs, and it’s looking like a job rather than a business. And so to for to get him to get close to the valuation that he’s asking for, which is nine thirty. Right?

It’s gonna depend upon all of the stuff in here, which is very, very iffy. So I, number one, wouldn’t put an offer in. And then if I did put an offer in once I got some work, you know, clarification on these numbers, I don’t think I’d be looking at nine hundred and thirty thousand dollars for this deal. I mean, I just don’t, I just don’t see it.

I believe. Yeah. And I mean, the fact that we don’t have that the broker didn’t provide or the individual who submitted this didn’t include a little bit more information on Keith really colors whether, okay, there’s problems, but, you know, would we see enough opportunity in terms of a high enough MUD score, motivation, urgency, and distress to think, okay, this is somebody who needs to sell his business in the next six months. And so therefore I’m gonna try and put a creative offer in here just to kind of play off that, you know, high MUD score.

We don’t really know in this case, so I’m really lukewarm about this, you know, without knowing the the urgency and the distress. So I’m generally not feeling that great about this deal. I mean, there is no there are no liabilities on the balance sheet. So, you know, we could potentially borrow some money.

I mean, this is one of the things we do, Sarkis, on these red light green light calls. We try and figure out how can we potentially finance this business. I mean, there are some fixed fixed assets, equipment and tooling and vehicles, two hundred and twenty nine thousand. It says these were prepared for tax reasons.

So one of the things that we review on these deals is whether the fair market value of those assets might exceed, you know, might exceed the tax value. But since this balance sheet is manufactured anywhere, this might not even be an accounting number. This might be a fair market value number, a real one or the wishful thinking of the owner in terms of this is what I think these assets are worth. So taking that, putting it up here, and then doing what I did, assuming I could maybe borrow thirty percent of it, I don’t think we could make that assertation with any confidence at all at this point.

So for the people that say, well, John, how would you finance this? I would put together a financing plan with a little bit better numbers so I knew where I really stood. You know, what is the, borrowing capacity of the assets on the balance sheet? And if I knew that, then I could potentially maybe I can come up with a closing payment.

Maybe I can’t. But right now, I don’t think that I’m in a position to be able to, to say that.

Yeah. It’s definitely very weak financing wise. I probably have been looking up putting a lot a chunk of money from your own pocket or looking at cash flow, cash flow lenders. So, yeah, just add more to the negativity in terms of, you know, putting an offer, on the table for this business.

Yeah. SBA loan, not sure. This guy wants to stick around potentially for two years. That wouldn’t work with the SBA unless we did try to do some kind of a a workaround.

I was gonna do an SBA. It certainly wouldn’t be at nine hundred and thirty. It’d probably be, at half of that or less.

Okay. Let’s, keeping the eye on the old clock here.

John, who submitted this deal?

Carmen, your your, your your thought just exactly matched mine. Who submitted this deal? I’m trying to think think who who did submit this deal?

I think it was somebody new.

Anybody Somebody in Protege.

Yeah. It’s somebody in Protege for sure. K. You know what, Carmen?

Maybe they recognize it if they’re on the call.

Well, if they are, they can come forward, but, oh, usually I write them down. I didn’t write them down today. So, yeah, we’re not, they’re obviously not here. I think Todd.

I think this is Todd’s deal. Yeah. Pretty sure it’s Todd’s deal. It’s coming it’s all coming back to me.

Don’t think Todd is here, though. Okay. Let’s go to, let’s go to some of the proteges and get their take on it. I’m gonna ask you and if you’ve got your camera on, you’re fair game to be asked.

I’m gonna ask you for a red light or a green light. Give me a number, which is a measure of your conviction and, you know, kind of thirty to sixty seconds on why, why you would either red light or green light this deal. Okay? Who should we get started with?

How about let’s go with Chris, Chris McGraw. Chris, I’ve never called on you. I love to call on people who are brand new. Can you unmute and tell me Yep.

Do you green light or red light this deal? Give me a number and maybe some thoughts on why.

Well, I would probably like this I’m brand new, so I don’t know much.

That’s why that’s why I picked on you, Chris.

I don’t know much about this yet, but just given the number First first first at first glance, you know, prima facia gut reaction. I would read like this and probably a medium, so red light ten Okay.

Pop that would that be considered, if I went red light twenty, that’s worse? Is that correct?

Yeah. Exactly. Exactly. I would say red light. Red light twenty is worse than red light ten.

Okay. I would go red light ten just because the numbers don’t seem I mean, like you you mentioned, it seems that all these numbers are just pulled out of the air. This guy has obviously worked in the business for a long time, and he knows best. And, he’s just gonna throw these numbers out because that’s what they kinda, sorta, maybe are.

Yeah. And hoping to find somebody who’s gonna take on an SBA deal and bite on us. That person, me, red light ten from Chris. Perfect, Chris.

Thank you for that. And welcome to the project call. So we can you know, the red light, green light call. Okay.

Let’s go. Let’s go to somebody else.

That looks like we’ve had Carmen on in a while offering her insight on these deals. Carl, Carmen, what do you think? Would you red light this, green light this?

I was just writing in the chat, I would I I wrote, red light zero because, I would just dig. I would have polls with the seller, and I’ll find out about the month score. And, well, it just it just happened that, I was just, re rewatching a part of Carl’s course with the, with the advanced negotiating skills. And I really loved the part where he said, you know, you have to go, seller psychology.

You know, you have to find out why are they selling this business. And the question that he was going on and on about was what are you looking for, out of this deal? And you ask just like in the books that he was asking us to to read, you ask this three times and actually the third time you’re gonna find out what’s driving the seller to sell the business. And then based on that response, you come up with a deal structure that will make that seller happy.

So I would not give it, plus or minus. I would say zero. I would just, try to understand the seller more and try to get some real financials before I decide. Okay.

Fair enough. So since you’re since you’re gonna keep going, let’s call it a green light zero.

Oh, okay.

A red light zero would be the brakes. So a green light zero would be Carmen’s willing to do a little bit of digging on this. So, yeah. Great great take on that, Carmen.

Thank you for that. Let’s maybe go one more. How about, how about Eldon? Eldon, can you unmute and maybe give us your thoughts, a red light, a green light, and and why?

Yeah. So I I think I’m kinda with Carmen. I think, that, so it’s not a deal the way that the numbers are, but, I mean, it could be made a deal. I mean, what if you could talk them into the annuity thing?

So, I think it’s just too much money for that business, and but you could, you know, if you could do it in unity, I think I think you’d have to put the, you’d have to get the payment for the annuity to be somewhere like twenty five percent of cash flow.

Yeah. Okay. Fair enough. So you’re gonna red light this as well.

Eldon, are you gonna get an example?

I think green. I I I think, I’m not sure that I mean, I’m not sure what opportunity the person’s had to work with a seller. But, you know, somebody told me a long time ago that, basically, you know, if you wanna sell something or you wanna buy something, you just gotta make sure that the price that you’re happy to do it at. And so I think, offers could be made that might, you know, if you find out that like she said, find out the motivation and then maybe you can can make a deal.

Okay. Yeah. Great takes. Great takes. I’m I am calling on people who are who are at least brand new to me, who haven’t kind of noticed on these calls before.

It might not necessarily be your first call, but Good news. Let’s, let’s, let’s continue on that, on that thread, and I’m gonna ask Anoosha if she will unmute. Anoosha, what do you think of this deal? Are you kinda thinking, nah, you know what?

I don’t see enough fear to continue or, yeah, I could do a little bit more digging. Red light, green light, a number and why?

I would go, like, green light five.

Okay. It’s because I’d I’d wanna be able to see, like, the real numbers first and then go from there. So I’ve been moving forward to see the real numbers. And then I like that I think there’s several areas for growth.

So they have, like, no marketing. That’s a great area to grow. Their website’s poor so we could also enhance the website, which is another way we could grow. And then there’s excess capacity, which is a good thing.

So yeah. But I also know that I’d either have to figure out whether I’m gonna go through their price and my terms or my terms and their price. So I’d wanna be able to decide that once I see the real numbers. So I’d go, yeah, Greenlight five.

Yeah. I mean, these are great takes. These are these are great takes. Sarkis, what about you?

What are you going what are you going in this one?

I’ll probably go Greenlight twenty.

It’s worth I mean It’s worth exploring it further.

Yeah.

You give it a chance. It’s got steadiness there. It’s got the the potential to grow with, you know, other other, marketing and sales and see if there’s a growth. But, you know, if you do a little bit of research, for sure you can, see make a better decision than if, you know, you’re gonna stop or continue.

Right.

Personally, I would red light this deal. I would give it a red light thirty three. I mean, there’s a lot of deals out there. You know, people who have been on this call for a while know my theory which is, yeah we need tons of deals in the top of the funnel but we don’t want them hanging around you know unless we feel good about them.

I’m not saying that there couldn’t be something here but if I’m gonna roll my sleeves up and I’m going to try and figure out if there is something, I want something that’s a little better starting hand than this one. We want to use the, the poker example. Right? Something a little bit stronger out of the gates before I would be prepared to, you know, push this thing.

Whether this business is really for sale, who knows? You know, we don’t know the mud score. We don’t know the motivation. Seems overpriced.

There’s just a lot going on there. It would probably be a lot of back and forth. And for me, I would go, no loss on that one. But that’s just me.

If You haven’t voted, vote now. A lot of people have put their votes in. Kind of a mixed bag. They’re all kind of low, which is typically what you get when the thing is a little light on information.