In this episode, three deals are discussed, starting with a motion control automation equipment distributor based in the US Southwest. The business, owned equally by two partners, has been operational for 25 years. One owner, nearing retirement, is motivated to sell, while the other is willing to stay on for a limited time. The company relies heavily on the two owners and their son for operations, resulting in a lean but overworked structure with minimal recurring revenue and no exclusive distribution rights. This raises concerns about sustainability post-acquisition.

The first deal’s asking price is $1.9 million, excluding cash and accounts receivable, with the seller seeking a mostly cash deal. The discussion highlights operational risks, including overdependence on the owners, a lack of scalability, and the need for immediate hires to replace departing personnel. The deal has been on the market for over 18 months, primarily due to the seller’s inflated expectations and an aggressive broker’s tactics. While financials show promise, the reliance on a small, overstretched team casts doubt on its long-term viability.

Some panelists suggest innovative strategies, including consulting-for-equity or hybrid acquisition models, to mitigate risks. These approaches involve gradual ownership transitions, leveraging SBA loans, and optimizing the business structure. The company’s exclusive territorial rights and potential for growth in areas like robotics and 3D printing are cited as key advantages, but substantial effort is required to professionalize the operation and scale effectively.

Differing opinions emerge among the participants. Some see the deal’s potential if approached as a turnaround project, while others highlight the risks of overpaying for a business dependent on its owners’ efforts. Concerns about the sellers’ reluctance to share financial risks and the need for significant upfront cash weigh heavily against the deal.

Ultimately, the panel concludes that while the business has potential, it requires a motivated buyer with expertise in automation and business optimization. The deal serves as a valuable case study in the challenges of evaluating and structuring acquisitions for owner-operated businesses.

Full Transcript:

If you’re brand new on this call, this is Red Lake, Green Lake. We’re gonna look at three deals today. We’re going to discuss them, look at the plus and minuses, potentially look at how they could be financed, look at the the psychological factors behind the seller’s decision to sell, all that kind of stuff. But it doesn’t really represent, advice.

We can’t provide advice on this call to any specific individual who’s working on any specific, acquisition. Who do we have up today? I think we’ve got Steve to start with, then we’ve got Anna, and then I believe the third deal is Alex. Proud of myself.

I remembered all three. So now these people are all veterans. They all understand. We’re not providing advice.

What is the purpose of this call? It’s to observe how experienced dealmakers look at new opportunities, the questions they form, and the strategies they might potentially pursue. Developing an actionable acquisition plan requires far more in-depth information on the target companies and the sellers than we are able to review on these calls. So nothing arises to the level of advice.

We do.

Certainly, teams of deals, I think, when we’re looking at situations where we’re providing advice, we’re making decisions, etcetera. But in calls like this, yeah, we’re not gonna come close to that level of scrutiny. So call you back. You’re muted.

Yeah. Sorry about that, guys. Minor little family, issue I had to deal with, but all done.

So, yeah, John, I’m ready when, I’m ready when you ask a deal, deal number one.

Okay. I’ve, read the disclaimer, so that’s all taken care of. So let’s get into deal number one. This is mister Steven Dobson’s deal.

I don’t know if Steve’s on the call. I didn’t check. Hopefully, he is, because there’s a couple of interesting parts of this deal that we would love to get more set. Here.

Steve.

Hi, Steve.

Good to hear.

Steve. Okay. This business is a distributor of motion control automation equipment. Sometimes they skim over the first part so quickly people don’t pick it up. Is it a manufacturer?

Is it a distributor? Is it a reseller? These folks are distributors. They’re not making this equipment.

They are acting in a distribution capacity. Who who are the customers? What’s the customer focus? Mainly manufacturing companies that mass produce goods.

In terms of the trading area, they address national and even some of the North American market. That typically for US company means a bit of Canada, a bit of Mexico, or a bit of the Caribbean. The products and services, they they have engineering services, design services, system integration, I think that’s a big part of it, and panel building.

That’s a lot when you find out how this company is staffed up, which I’m going to get to in a second. What equipment do they carry? Servo systems, robots, motors, mechanical slides, etcetera. They’ve been trying to sell this business for eighteen months, but they have an aggressive broker involved, which might be why it’s gone the market so long.

I know Steven’s put a couple of pretty creative structures, in front of the brokers and the seller, but the broker’s pretty aggressive in killing them. Maybe looking out for their commission. I don’t know. We can get into that with Steven in a little bit.

This business is located in the US Southwest. The ask price, one point nine million. No property involved in this deal. Now the ownership story.

All three deals are exactly the same way. Just two guys, fifty fifty owners, not related in any of the three cases that I could see. So this business founded in nineteen ninety seven, twenty five years ago by Sam, he’s sixty eight. Ian, he’s sixty.

Each of them owns fifty percent. They’re fifty fifty. Now Sam, yeah, he’s pushing seventy. He wants to retire.

Yes. Ian’s a little younger. He wants to hang around. I think the number used was six or seven years.

Ian also has a son, Neil, who’s very active in the business in a senior role. And Ian has a second son, Lawrence, who does work full time in another profession, but does help out on the weekends. Now, Ian and Neil don’t necessarily wanna leave the business, but they’re following Sam’s lead. So the motivation for sale, Sam wants to retire and he’s under family pressure from his wife to sell the business.

Ian doesn’t think Neil is ready to be a partner in the business, which is why he’s not trying to buy out, Sam and own the business with his son. So all three of them, Sam, Ian, and Neil, this is the key part of this deal, working super hard. Fifty, sixty hour weeks. Sam is sixty eight, still got the foot on the gas pedal right to the floor.

They do as much as they possibly can themselves. That even includes doing bookkeeping on the weekend. They only have five employees full time, and I went back and made sure I read this properly. That includes Sam, Ian, and Neil, and one part time employee.

So if we’re buying this business, you know, the the halls might be kind of empty. Now Sam and Ian are thrifty in the extreme, and they make a good living by doing almost all of the work themselves. I think Steven described it, excellently by saying, you know, they’ve really got good jobs. It’s more of a really good job rather than owning a thriving business based upon the fact that they’ve taken so much of the work on themselves.

Operated a hundred and twenty percent of capacity, they’re running themselves ragged. And sales are carried out exclusively by Sam, Ian, and Neil who are also doing some of the engineering work. I mean, their business is eat what you kill. There is very little in the way of recurring revenue.

Now they do carry most of the premium product lines that you’ll find in motion control automation, but there’s no real evidence of any exclusive distribution rights. So I don’t know that they’ve got any territories or any lines that are exclusive to them.

They could have some. I just didn’t see it mentioned, so I’ll also follow-up with Steven on that. Opportunities for growth that were mentioned. Yeah.

Three d printing is something that they think they probably should get on, maybe expand things in robotics, as well as adding a real full time salesperson. They’re looking for a mostly a cash deal, might consider a ten percent seller note. No. Like, I think that these things are all linked together, especially this third last bullet, looking for a cash deal.

I could see why they would be. Website is professional and looks good for an industrial type business, so no complaints on that front. Yeah. Lutz score averaged to low in my opinion.

Nothing really driving the sale of this business except Sam’s desire to retire while Ian and Neil are happy to stay. Now the numbers look good. There’s a few things that really jump out at me about this deal, but I’m gonna defer to Karl first to get his take on it before I throw in my two cents. What what what do you think, Kent?

So, so a lot of the business, a lot. Although the revenue is a bit choppy, the margins are amazing. I wanna drill into the EBITDA numbers and the outbacks in a bit more detail. But if those numbers are true, then, yeah, I think the hundred thousand replacement salary would need to check that depending on on who’s staying or not because it’s three owners. If that’s there for ten and two of them are gonna go, one’s gonna stay, then maybe seven hundred, seven ten SDE for the current year is fine. I’d love to see the twenty twenty two numbers year to date to see, you know, what trajectory they’re on.

I didn’t include them, Carl, but they are kind of on track for twenty twenty one.

Okay. Obviously, tons of working capital in this business, lots of surplus cash. There’s probably a million dollars of surplus cash, in this business. So one of the questions that I’ve got is, is the one point nine million include the balance sheet as is, or is it one point nine million plus the seller’s gonna take the cash and the AR, which then makes the business probably closer to around three and a half million, which would be way, way over. So I think if this is a one point nine million dollars deal, including the stuff that’s that’s here, I’d be looking to do a deal. I wouldn’t go any of the SBA for this.

I think you can probably get, I’ve not seen top of the model, but I could do it in my head. You could probably get four hundred and fifty k from AR financing, use a million of the surplus cash, and then do the rest on a on a note. But then the other option I might look at, and this is I think this is a really solid deal for Steve, knowing Steve as I do.

I think that this might be a consulting for equity deal or maybe a hybrid where you buy half the business, you know, let let them take the cash out.

You know, Steve gets half the business, helps them optimize and orchestrate the business better, which is what he he does in his current company, and then maybe have a deal where, because what you can do as a partner of the business, if you’ve owned the shares for more than a year, you could use the SBA to buy out your other partners without having to put any personal money into the acquisition.

So that might be something that I would consider.

Some of the red flags to me on this deal is, they they talk about being, you know, totally maxed out.

So, obviously, is that just a case of, you know, weak management from them or, you know, do they have a facility and equipment and employees that’s really kind of redlining? You know, that would be a concern. You need to look into that.

And then it looks like a lot of the production, a lot of the real work that’s done in this business is is done by the owners. So it’s really understanding, if they did exit, can we phase their exit in a way where we can backfill them and onboard those people professionally, so that the business kinda doesn’t really skip a beat. So I think it’s a great deal for debate, John. I think it’s got all the right hallmarks of of a solid deal.

Obviously, you know, the million dollar question is, what do we get for one point nine million? If we get the balance sheet as is, I think it’s a really good deal subject to, you know, the right sort of deal structure and making sure that if these people leave, you know, we’ve got the right people in the business to continue it going. And then there is the capacity to really scale and and grow this in some way because I think this is a business, that that should be able to scale, you know, quite well. Well, I think Yeah.

But I think there’s some things to be considered.

I mean, I think our our our streak of seven deals of agreement, Carl, are gonna be ending on this one.

I really don’t like this deal. These guys are killing themselves, doing everything themselves. So when we talk about adjusting EBITDA, right, in terms of add backs, I mean, I think we need to actually add some expenses here. Forget about adding expenses back.

This is not a sort of sustainable business model. Three of the five people are leaving. They’re doing all of the sales. They’re twenty five years into this.

They know how this business works. Oh, yeah. You can’t you and I don’t think could run this business with five people. We’d have to add people.

That’s gonna impact, the EBITDA on this. They want mostly cash, might consider a ten percent seller. No. Why?

Because they know, I think, that somebody coming, walking into this deal could not replicate their results based upon the amount of work they’re doing, based upon their experience, you know, and just based upon the knowledge of, of the industry. So, I mean, yeah, we could have people who are, you know, industry experts, who are in their lane, who are adding this on, but to me, the thing is way too expensive based upon the financials, based upon what you’re getting, based upon the deal structure they want. I put it to put it mildly, would be deeply suspicious of this deal. I really don’t like it.

Okay. What do you think about because records eight, or or the hybrid deal where Steve buys half of it or sixty percent of it, partners with those guys for a a a short while, and then really because Steve’s a an automation business automation expert. He can go in with his skill set and engineer an SOP that nuts out of that business.

And it just looks like it it it’s obviously, I’m not seeing it until now, but it’s Smacks as a business that’s in a little bit of chaos. It’s, like, all over the place, and all this stuff’s going on and, you know, they’re making really good money.

I do take the point about the replacements. I definitely spoke about that in my in my review.

But I think a more important question for me the million dollar question for me on this deal is what do we get for one point nine million?

We get everything on the balance sheet.

No, it’s not. It doesn’t exclude the cash.

I wouldn’t be turning it down. I think there’s there’ll be a deal to be done there in some way shape.

It definitely excludes the cash. You know, that’s for sure. Yeah. But Steve yeah. I know Steve’s an automation expert, and Steve would do a great job owning this business.

The younger guy, is he gonna Ian, is he gonna allow sort of Steven to come in and be a passive sort of, you know, detached owner, basically debt equity? So in other words, he had a guy who was working sixty hours a week, who was pulling his fair share, doing fifty percent of it. Is he gonna replace that, right, keep the same equity himself and have somebody who is producing or generating, you know, some fraction of that because they’re not involved, that’s almost like debt equity. So I don’t know if Ian could be talked into that, but I wanna get Steve on here because I’m sure Steve’s got some color on this that, that would would help us sort of evaluate this deal. Steve, can you give us a little bit about sort of the background in terms of why these guys run this business like they do? I know it was your comment that they have good jobs rather than a business, but is that your is that your take on it as well?

Oh, I mean, one hundred percent. I mean, the closest that they’ve come to any sort of removing themselves is they brought on the one son who just graduated. I mean, he’s got about, I don’t know, twelve or thirteen months of experience. I mean, he hasn’t been there very long.

I think the thing is there might be a little confusion there.

One owner wants to get out. The other owner and his son, they they actually want us sitting. Right. But they’re selling they’re selling their share. They’re selling their fifty percent.

And their their logic or their rationale for that simply, if they no longer had control, they didn’t want any responsibility.

Right. You know, I I didn’t see it. You know, I thought it, kinda shortsighted, but, well, that’s that’s the decision they’ve made for now. I don’t know if that’s just to go along, you know, with Sam or what the deal is there. These guys definitely work hard. They are really whatever they do. We had discussions of Sam staying for minimum of twelve months, simply to we’re gonna have to bring in a replacement.

And this is in the southwest. I’m in the Midwest. We are, you know, not in a position where we’re gonna go in and run that thing day to day. We want we want the remaining seller to just stay To sail in.

We wanna elevate him and move him into that general manager role, you know, be more of a mentor. We’re probably gonna have to hire two people immediately. Right. One one to take each seller’s place, even though the other seller will be there as a general manager.

We discussed when we came up. And, basically, he wants a salary and to call himself the director of engineering. And my comment was, well, the director of engineering doesn’t actually do engineering.

You know, they provide, they provide tips and guidance. They’re not there every day pounding on the keyboard, or out in the field, making sure all the wiring is correct. So there’s a there’s a mindset shift there that will be required, but everybody seemed up for it. I Think what they what they didn’t seem up for was accepting any of the risk for all of this.

Right. Yeah. And to me, that’s a big red flag. Right? Because they know, I think, that somebody coming in would be really hard pressed to replicate their results based on their experience, how hard they’re working, and how deep people they have there.

Oh, no. Absolutely. I mean, we it was really interesting the day I mean, I I flew flew down there.

I was gonna spend an entire day with with both the partners and and the one son. And the one partner stayed behind, because the other two had to be out customers, basically troubleshooting the same problems. I mean, this is their this is their day to day life. This is what they do.

The partner who wants to retire, he eventually came back and and the son came back, and, you know, we got some we got some good conversation in, but it was really curtailed. And even the partner who who stayed, for the meeting, he excused himself for about half an hour to take care of another customer. I mean, these guys, they’re working in the business. And for me, the whole concept here is to come in, have to change one order, if it’s gonna stay, change their entire mindset of how this business should.

Yeah. And I mean, they’ve been trying to sell the business for eighteen months. I mean, I’m assuming that this kind of basic dynamic, we want all the money upfront. Right? We have kind of like a phony, EBITDA number because we won’t hire anybody to do any of this work is probably the reason why it hasn’t sold. I mean, do you have any take on that, why it’s been eighteen months on the market, Steve?

No. I I think that, number one, they they did have some sort of p I was I am the third LOI, that they’ve actually signed, over that well, now we’re now we’re working on, now we’re talking about twenty three months.

So we’re, you know, we’re we’re getting into the unsellable category.

But, yeah, I mean, it’s when when you get down and you look at the numbers and look at the ridiculous ad that the broker put in and the money that we’re gonna have to spend, you know, their their number, their SDD number is basically bullshit. Yeah.

The hardest part for me was to describe that, especially because the, broker is characteristically he’s got a plan.

He sold them on this number, sold them on an amount of cash that they should And that He broker is he broker number two, or is he the original broker?

I believe he is the original broker.

Do they have any exclusiveness on any of the stuff that they sell geographically or even product lines, or they just basically want lots of people who handle this stuff?

No. In in the southwest, they are, they have a protected territory.

Okay. And they, and they even sell outside that territory because they sell to they sell to OEMs or machine builders in their territory, then ship their machines around the world, basically.

And a lot of times, if it comes down to buying spare parts or something or some addition, they’ll go directly to the those end users will go directly to the, to this distributor and purchase directly to them.

So so this steel, right, is a classic example, like I talked about in Vegas, about why sellers need coaching and educating on on on a business sale process. You know, what what is the true valuation of this business? Is this business ready to be professionally acquired?

And I think it’s clear from this conversation that it’s not. And I think these guys need some help. I absolutely believe this could be a consulting practice project. If there’s any involved in Steve that could go in and really help these guys figure this stuff out, I think it’s you.

Whether you want to do that on the side of running an existing company or not is for you to decide. But, I do think that this business can have some some legs. I think somebody going in and figuring that out and getting it to a place where it’s professionally sellable, then you can either sell it with them and get your equity piece through that deal, or maybe you have an option after a year or so to buy them out. And then, I would go down the SVA route for that once it’s polished up and it’s gonna hit the criteria.

And then you can let’s say you do a fifty fifty deal where you’re in for fifty percent. Maybe they take a little bit of the cash, as a minor closing payment. You spend the year turning it round and then you go get a seven a loan to buy out that fifty percent, and you don’t need to put any skin in the game, because you’ve got the existing fifty percent of the company. That’s personally what I would do.

Obviously, I’m not wired in the way that you are to go in and do that kind of project.

But that’s, I I that’s what I would do on the Steel, personally.

Should we get a couple of votes in here, Carl?

Yeah.

Call on a couple people, maybe. How about, how about Toby? This kinda seems like, might be kind of in Toby’s, wheelhouse. Toby, you like what you see? Give me a give me a color, give me a number, and give me a bit of a rationale in terms of how you came up with it.

I’m probably a low green light to, and as Carl said, for that consulting tip for equity job, so maybe like a green light ten.

I I’ve looked at deals similar to this. My favorite add back from a deal was in an automation business. The add back was the lease on a helicopter.

So some of these businesses do really well and I really liked the industry. It’s a growth industry.

I’m not certain about this deal. There’s just too much work to do, I think, once you get in there. But I think it’s worth Excellent.

Thank you for that, Toby. Alan Gregory says these are exactly the kind of businesses that he’s looking to buy. So can you unmute Alan? Maybe come on and give us your red light, green light, and, the number, and let us know how you came up with that.

So I didn’t come up with a lot of, numbers for it only because I’m half in half out of the call talking to my wife and making my list. But, I heard Cole talk about consulting for equity, and those are the types of deals I’m looking for in general. Because you’re right, sellers do need education on this stuff because they just have no idea, and we’re just passing up deals left and right because they’re not ready, and we’re not helping them fix it.

Okay. Fair enough. Fair enough.

Let’s go one more. Let’s go to Leonard. Leonard, can you unmute? Give us a red light or a green light and, number and maybe a a short rationale on why.

Personally, it’s an it’s an industry that I’m not quite familiar with.

And, but the the red light for me would be the fact that, you know, there’s quite a few people willing to leave, as I said, you know, once the once the acquisition has been completed.

Okay. Fair enough. Fair enough. Alright. Let’s keep things moving. I’m gonna put my, my vote in.

I’m gonna be a very low red light because of the fact they want all cash, because of the price, because how long it’s been on the marketplace, and because most of the people would be leaving, if we if they sold it unless we talked, Ian into staying or we did some kind of a consulting for equity. So, even though Steve is a highly capable acquisition guy, I’m gonna give this a red light.

Woah. Red light one hundred. David Harsh.

You’re all over the map on this one, Steve. Great deal. Yeah.

Yeah, I think that’s what’s great. I love these deals where, like, John, even you and I don’t agree. And then there’s things all over the map.

I I don’t know. This seems like like a bug in my ear.

Like, you know, there’s something in this. I think this this could be a really, really cool business. But as somebody said it, is the juice really worth the squeeze? You know, I think if you’re a if you’re a business automation expert, somebody that can help really orchestrate and streamline, or if you’re like David Gerolt and you’re an action coach master or you’ve been through E Myth or EOS or you really know how to get businesses, you know, properly optimized, I think this would be a really good project.

But hell, they might just be hell bent on, look, we want we want one point nine million now. We’re going to take the cash. We’re going to let somebody else worry about all this stuff then. Yeah.

I don’t think this is a deal that’s gonna close. It’s probably why it’s been on the market for so long. But these guys are gonna get to a stage. This might be a big deal, Steve, where you keep in touch with them over the coming months.

You know, I can guarantee you by January this thing hasn’t sold or we won’t have.

I don’t know the location, but assuming it’s cold, dark and wet in January where they’re based, you know, they’re going to be really ready to do something crazy, I think.

I mean, I was in Tire Red Light, but when Steven said that, they do have exclusive territory, that means something in this business.

So that, that that that’s a big asset as far as I’m concerned. But, thanks for the votes.

Let’s, let’s keep the on these calls.

I know I know we’ve got Mona Carter who’s doing this with her daughter, you know, is in the twenties. I don’t know. Clive’s got his entire family now, working with him on this stuff. And, you know, we always say I wish I’d have had this community and this level of coaching.

You know, when I was in my early twenties, I had to go work for a Wall Street investment bank. And I got to tell you, that was horrible. And I didn’t learn half as much as I think you guys are learning.

Doing these kind of streetwise deals like, you know, people think, oh, Wall Street. Yeah. Wow. That’s cool.

Main Street’s way cooler because we get to talk to people and we get to understand psychology and we get to figure out all these creative things that we’re doing. This is way, way cooler than spending three months crunching a model, to buy shares in a public company. This is way cooler for me in my opinion.