Yesterday, I closed on a $1,600,000 local sign and mailbox manufacturing business.
This deal was two months in the making.
In April, I Tweeted about it:
We finally close the deal on June 30th.
It was a grind.
There’s so much to unpack that I’ve decided to split it into 3 separate issues.
In the coming weeks, we’ll cover:
- Mistakes made and lessons learned
- Why I love the business
- How we’ll grow it
But today, let’s start with the deal itself:
How I found this listing and structured a compelling offer.
I’ve promised to be so transparent it hurts.
Well, here we go:
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Before getting into the specifics of this transaction, let’s spend 30 seconds on our vision.
I say “our” because I’m buying businesses with a partner.
We’re 50/50 on everything.
The cash we contribute, the time we spend, and the decisions we make.
Together, we share the vision of building a “baby” Berkshire Hathaway.
A collection of profitable small businesses that exhibit a few common attributes:
- Greater than $500K in annual discretionary earnings
- Serving primarily business customers
- High net margins (30%+)
- Retiring owner
This is our first offline acquisition.
We’d like to acquire one more business soon and fine-tune our operations.
Then potentially raise equity capital to scale the strategy.
More on our thesis next week…
I recently posted about 20+ online sources for deal flow.
What I didn’t mention was that none of those sources are my favorite.
I prefer regional brokers.
Advisors serving a specific industry niche or geography.
In this case, we found the opportunity through SD Business Advisors.
We saw the listing before it hit sites like BizBuySell.
Here it is:
A few things stood out:
- 27 years of reputation
- Seller willing to stay on
- Solid cash flow to hire an operator
- “They outsource most of the work” = high margins and low overhead
All positive signals.
I sent an inquiry.
After signing an NDA, I received the Confidential Information Memorandum “CIM”.
It’s a summary of the business that includes financials, seller Q&A, employee details, growth opportunities, etc.
After spending 30 minutes with the CIM, I sent some questions to the broker:
Who are the company’s direct competitors?
How many hours per week is the seller working on the business?
What will be the biggest gap operationally when the seller leaves?
Does the business require any special licensing?
What is the size and duration of an average contract?
The top 3 customers account for [x%] of revenue - roughly how many customers make up the remaining [x%]?
What 3 things would the seller do immediately to spur growth?
Is the seller open to an earn-out?
This step in the process is critical for a few reasons:
- It demonstrates to the broker that you are a serious buyer
- It saves you time (no need for a phone call if red flags emerge early)
- The broker’s reply gives you a look into their attention to detail
That last one is important because you are trusting that the broker did preliminary diligence on the business and accurately represented the financials in the CIM.
Warning: not all brokers are honest.
The First Offer
We received the CIM on April 19th.
On May 1st, just 11 days later, we submitted a non-binding Letter of Intent “LOI”.
We offered $1.6 million for the business structured as follows:
- Cash at Close: $1.0 million
- Seller Note: $300K (6 years amortization, 6% interest rate)
- Earn-Out: $300K (based on the achievement of 2024 revenue)
We ended up signing the LOI two days later (May 3rd) on terms that were largely in line with the ones above.
The Final Structure
After signing the LOI, we spent the next 6 weeks on due diligence.
We learned a ton about the industry, the team and the seller.
Ultimately, our process revealed two primary concerns:
- The seller was more critical to day-to-day operations than initially presented
- The required net working capital was greater than what was disclosed in the CIM
We felt the need to renegotiate the deal structure to compensate for these items.
After 2 weeks of tense conversations, we settled on the following:
- Purchase Price: $1.6 million (unchanged)
- Cash at Close: $900K ($100K less)
- Seller Note: $450K ($150K more)
- Stability Payment: $50K (new; based on 2023 revenue)
- Earn-Out: $200K ($100K lower; still based on 2024 revenue)
It was a grind to get here, but I really like this final structure.
- The combined seller note, stability payment, and earn-out represent 45% of the Purchase Price. The seller has a ton of incentive to support a smooth transition and be a good long-term partner.
- If the business grows next year, the earn-out will largely pay for itself.
- The seller note is at a very attractive fixed interest rate of 6%.
We funded the $900K cash at closing with a balance of cash generated by the other assets in our portfolio and a promissory note with a private lender.
This deal came with its fair share of emotional swings.
The negotiations were tense.
We were unsure if we’d walk as recently as last weekend.
I’m glad things came together and the outcome was positive.
We couldn’t be more excited to get to work.
Next week, I’ll cover why I like this business so much (and how it fits with our broader thesis).
If you have any questions at all, shoot me an email.