00:00:12:05 - 00:00:14:19 Welcome to the man izing the show for acquisition

00:00:14:19 - 00:00:18:13 entrepreneurs Search funders and holdco builders across the UK and Europe.

00:00:18:21 - 00:00:20:07 Each week we dive into the real world

00:00:20:07 - 00:00:24:03 stories, strategies and challenges behind buying a building Small businesses.

00:00:24:06 - 00:00:25:24 Whether you're searching for your first deal

00:00:25:24 - 00:00:27:05 or running a growing group of companies,

00:00:27:05 - 00:00:30:18 this is your space to learn, share and get inspired.

00:00:30:21 - 00:00:34:22 I am joined this week as ever by my effervescent co-host, Gareth Wilkins.

00:00:34:23 - 00:00:37:19 Gareth, how are you investing?

00:00:37:19 - 00:00:42:25 I feel like a thousand milligram vitamin C tablet buzzing away in water.

00:00:42:27 - 00:00:45:23 Actually, what I need at the moment is I am fake with code.

00:00:45:23 - 00:00:49:14 So when I think of investing, I think of salvation.

00:00:49:17 - 00:00:49:28 Okay.

00:00:49:28 - 00:00:53:11 Well, hopefully it can save you at least.

00:00:53:13 - 00:00:55:21 We've got a really exciting week this week,

00:00:55:21 - 00:00:57:22 so we're doing a slightly different format.

00:00:57:22 - 00:01:00:19 We're going to do what we call the buy side breakdown sort of thing, a company

00:01:00:19 - 00:01:03:25 that is for sale and delving into the details therein.

00:01:03:25 - 00:01:07:21 But before we get into that, Gareth can kick us off with the news.

00:01:07:24 - 00:01:10:02 Yeah, I mean, there's loads going on in this last week.

00:01:10:02 - 00:01:14:24 It's clearly the beginning of a new fiscal year and there's lots of

00:01:14:27 - 00:01:19:15 pent up activity that seems to have been released at this threshold

00:01:19:18 - 00:01:21:30 and we won't talk about Trump and tariffs.

00:01:21:30 - 00:01:24:05 So let's chat about that the better.

00:01:24:05 - 00:01:27:05 But yeah, here we are, 9th of April.

00:01:27:08 - 00:01:30:15 We I guess the big news is that the team

00:01:30:18 - 00:01:33:18 formerly of Ethos Partners search fund

00:01:33:25 - 00:01:37:11 activities, Jo Coburn, Scott Bannerman, Sadie

00:01:37:11 - 00:01:41:06 Farmer, Pascal Willett, they're all formerly equals partners.

00:01:41:06 - 00:01:44:29 They have bought out the search fund activity and relaunched

00:01:44:29 - 00:01:47:29 anew as orca equity partners.

00:01:47:29 - 00:01:52:00 Excitement loving the Orca Pods idea.

00:01:52:02 - 00:01:55:11 They were probably one of the first and most prolific

00:01:55:14 - 00:01:58:25 team of investors in UK search funds and ethos,

00:01:58:25 - 00:02:01:33 and I sincerely hope that they're going to continue to be a huge catalyst

00:02:01:33 - 00:02:06:30 for the UK scene, but super exciting that they're now under their own steam.

00:02:06:32 - 00:02:09:28 I'm going to go on to bigger and stronger

00:02:09:28 - 00:02:14:24 under this new brand that is super exciting news.

00:02:14:27 - 00:02:17:20 my news is from Match's Search Capital.

00:02:17:20 - 00:02:21:10 It's a search fund led by UK based Croatian Cambridge and Absalom

00:02:21:17 - 00:02:23:02 Philip Traumatic.

00:02:23:02 - 00:02:25:13 They've closed their search phase funding round and they now

00:02:25:13 - 00:02:28:13 reports on finding B2B software, business services

00:02:28:13 - 00:02:31:03 and like manufacturing companies to acquire.

00:02:31:03 - 00:02:32:26 So Philip super interesting guy.

00:02:32:26 - 00:02:37:11 He was a mechanical engineer, time management consultant, then API investor,

00:02:37:14 - 00:02:38:23 and he's now, in his own words,

00:02:38:23 - 00:02:41:24 chasing his dream of acquiring a company and preserving a legacy.

00:02:41:24 - 00:02:43:21 So congratulations, Philip, on closing.

00:02:43:21 - 00:02:46:10 What a great journey and actually what a great preparation

00:02:46:10 - 00:02:50:01 to embark on becoming an operator of

00:02:50:04 - 00:02:53:00 the software or services or manufacturing company.

00:02:53:00 - 00:02:56:05 I mean, if he's got a mechanical engineering

00:02:56:05 - 00:02:59:08 and management consultancy background, he's is well equipped.

00:02:59:08 - 00:03:01:33 I think I would say so, yeah, absolutely.

00:03:01:33 - 00:03:04:07 It was a perfect pipeline. So yeah, very excited.

00:03:04:07 - 00:03:06:22 See see what he does in the space.

00:03:06:22 - 00:03:07:15 Exactly.

00:03:07:15 - 00:03:13:02 And speaking of being well equipped, SOCOLOVSKY, a a French based

00:03:13:05 - 00:03:16:28 management buying venture led by Sebastian Wiel,

00:03:16:31 - 00:03:19:27 who is actually ex McKinsey, offers

00:03:19:27 - 00:03:24:10 and has recently closed their search phase

00:03:24:13 - 00:03:29:26 capital race have now launched fully properly in public

00:03:29:29 - 00:03:32:32 and are out there seeking acquisition opportunities,

00:03:32:32 - 00:03:37:29 specifically in France, French speaking Belgium and Switzerland.

00:03:37:32 - 00:03:38:32 What's really

00:03:38:32 - 00:03:42:01 interesting about Simplify is just

00:03:42:07 - 00:03:45:14 how many of the sort of good in the gray,

00:03:45:14 - 00:03:48:23 if you will, in the search fund

00:03:48:25 - 00:03:51:25 investment team have backed in 17

00:03:51:31 - 00:03:54:07 acquisition investors,

00:03:54:07 - 00:03:56:20 including Will Thorndyke

00:03:56:20 - 00:04:00:00 and Tobias Reda from 47 partners.

00:04:00:00 - 00:04:01:13 Yeah this is quite a few on there.

00:04:01:13 - 00:04:04:26 So lovely to see the sort of continuation

00:04:04:26 - 00:04:08:05 of more search funds launching in France.

00:04:08:07 - 00:04:08:29 Exciting.

00:04:08:29 - 00:04:11:29 We love to see and hear more news from Europe

00:04:12:02 - 00:04:14:00 and more to come.

00:04:14:00 - 00:04:15:21 More to come.

00:04:15:21 - 00:04:17:16 Well, okay, so some more news.

00:04:17:16 - 00:04:21:09 So our legacy research fund led by gentleman called and Adam

00:04:21:09 - 00:04:26:06 Jan Syracuse are seeking a company based in the UAE to acquire and operate

00:04:26:08 - 00:04:28:24 have just closed their search phase funding round as well

00:04:28:24 - 00:04:31:18 and we hope to speak to them soon on the pod

00:04:31:18 - 00:04:34:07 here about the search scene in the JCC.

00:04:34:07 - 00:04:36:01 So that's going to be interesting episode.

00:04:36:01 - 00:04:40:09 Yeah, I mean, you think about the JCC and perhaps wrongly, you think it sort of

00:04:40:09 - 00:04:45:07 hasn't got as much history, I mean, in terms of like businesses

00:04:45:07 - 00:04:49:09 and generational businesses that it's got plenty of history,

00:04:49:16 - 00:04:54:10 but has it got as much of the sort of generational wealth transfer

00:04:54:13 - 00:04:58:29 opportunity as the as the European and American scenes have?

00:04:58:32 - 00:04:59:26 I imagine it has.

00:04:59:26 - 00:05:04:03 But it's sort of maybe not as forefront in people's minds.

00:05:04:03 - 00:05:08:15 So I'm really hoping that Adam can educate us on that and tell us,

00:05:08:17 - 00:05:11:30 you know, what's what's going on over there in terms of who's backing

00:05:11:30 - 00:05:16:30 who and and what kind of opportunities he sees in country.

00:05:16:33 - 00:05:19:29 Yeah, I think it's one of those things that you kind of imagine, you know,

00:05:19:29 - 00:05:22:30 the year 2000 was a couple of years ago, but it's actually 20 years ago,

00:05:23:02 - 00:05:26:14 you know, businesses in the JCC that started in the eighties

00:05:26:14 - 00:05:28:21 and nineties are 30, 40 years old now.

00:05:28:21 - 00:05:30:12 So that's true. That's true.

00:05:30:12 - 00:05:30:28 Yeah.

00:05:30:28 - 00:05:34:30 So there is a vintage there to to to go after so and I'm sure he's

00:05:34:33 - 00:05:37:07 he's well equipped.

00:05:37:10 - 00:05:37:24 Okay.

00:05:37:24 - 00:05:41:14 Well so the last piece of such fund news

00:05:41:16 - 00:05:46:07 is about the launch of Tembo Search partners in Germany.

00:05:46:10 - 00:05:50:18 We talked recently about other search investors in Germany.

00:05:50:18 - 00:05:55:24 This is a brand new one led by Christian Geiger and Benedikt on heartfelt.

00:05:55:27 - 00:06:00:05 They launched recently and are already backing to search

00:06:00:05 - 00:06:01:25 entrepreneurs that are leading acquisitions

00:06:01:25 - 00:06:03:17 into some pretty interesting deals

00:06:03:17 - 00:06:07:16 in Germany in the electrical and electronic spaces.

00:06:07:19 - 00:06:11:00 Well, I quite like having spoken to Christian about the model at Tembo

00:06:11:00 - 00:06:13:13 is that they uniquely

00:06:13:13 - 00:06:17:20 provide all of the search capital to their acquisition entrepreneurs.

00:06:17:23 - 00:06:18:19 So they kind of solve

00:06:18:19 - 00:06:22:21 that problem and provide infrastructure and tools to help in the search.

00:06:22:21 - 00:06:25:21 So really quite a hands on.

00:06:25:25 - 00:06:28:06 But they do that at

00:06:28:06 - 00:06:31:15 like not stand for traditional search fund terms.

00:06:31:18 - 00:06:36:32 So the terms are actually more favorable for the entrepreneur.

00:06:37:00 - 00:06:37:23 Yeah.

00:06:37:23 - 00:06:41:33 So the 1.5 X preference is is not necessarily

00:06:42:02 - 00:06:44:00 obligated in this model for them.

00:06:44:00 - 00:06:45:32 So that's really decent.

00:06:45:32 - 00:06:49:33 But they, they only take themselves 10% equity

00:06:49:33 - 00:06:53:16 in the acquisition and then they bring their investors

00:06:53:19 - 00:06:57:00 and co-investors along to to capitalize the project.

00:06:57:00 - 00:07:01:02 So really great for the German Mitchell stand

00:07:01:05 - 00:07:03:22 really interesting to hear from Christian.

00:07:03:22 - 00:07:05:18 I hope that at some point we'll get to meet up.

00:07:05:18 - 00:07:08:13 We'll have another part to talk about the emerging German scene.

00:07:08:13 - 00:07:11:13 But yeah, really great to see Tembo

00:07:11:14 - 00:07:14:14 now out there backing projects.

00:07:14:20 - 00:07:16:20 Yeah, I would love to get Christian on to talk about that.

00:07:16:20 - 00:07:19:06 It'd be really interesting. Interesting to highlight.

00:07:19:06 - 00:07:22:20 Highlight from my chat with him was about the difference

00:07:22:23 - 00:07:25:29 between the multiples paid in Germany versus

00:07:25:29 - 00:07:29:21 the multiples paid in the UK and the other side of the coin

00:07:29:21 - 00:07:32:24 being the cost of commercial finance in both those countries.

00:07:32:24 - 00:07:37:11 So he was quite shocked to hear that sort of 12% was the going rate here for,

00:07:37:14 - 00:07:42:22 you know, senior debt when in Germany it's more like 6 to 8%.

00:07:42:24 - 00:07:45:24 Thank you. ECB versus the Bowie.

00:07:45:28 - 00:07:48:19 But also he was quite shocked to hear

00:07:48:19 - 00:07:51:19 just how low our multiples or how compressed our multiples are here.

00:07:51:25 - 00:07:55:22 You know, averaging 3 to 4 here versus 5 to 6 in Germany.

00:07:55:25 - 00:07:58:07 So, you know, you win on the swings, you lose on the roundabouts.

00:07:58:07 - 00:08:01:13 But it's quite eye opening

00:08:01:13 - 00:08:04:23 how the two geographies differ in that sense.

00:08:04:26 - 00:08:06:30 Absolutely. That leads me to my final piece of news.

00:08:06:30 - 00:08:09:18 So Ian Reece of Premier

00:08:09:18 - 00:08:13:16 Meats and Adrian Goodson, extra income fund manager at Jupiter.

00:08:13:16 - 00:08:17:25 I'm Richard Penny of Oberon Investments were talking on the Financial Times

00:08:17:25 - 00:08:22:00 Advisor podcast and they were talking about how many small mid and small cap UK

00:08:22:00 - 00:08:27:03 companies trade a considerable discount of 20 25% relative to their global peers.

00:08:27:03 - 00:08:30:28 So it's interesting, like you say, the kind of discount that we

00:08:30:33 - 00:08:34:14 that we have here compared to our international brothers and sisters.

00:08:34:17 - 00:08:36:27 Yeah, it's it's inherent, I think.

00:08:36:27 - 00:08:40:32 I mean, we see that on the public markets in the UK that,

00:08:41:01 - 00:08:43:10 you know, in a normal year

00:08:43:10 - 00:08:47:26 there is this sort of compressed valuation

00:08:47:29 - 00:08:49:19 in UK companies right now.

00:08:49:19 - 00:08:53:18 So that's probably why there's so much US

00:08:53:21 - 00:08:57:05 and Gulf Capital that's come in to do kind of take privates.

00:08:57:06 - 00:09:01:24 If you will, in the UK because you can take a listed company

00:09:01:24 - 00:09:04:08 in the UK private and then real estate in the States

00:09:04:08 - 00:09:08:23 and make an arbitrage just out of moving it to a more buoyant economy.

00:09:08:26 - 00:09:13:02 Yeah, but that does tend to trickle down into the private markets as well.

00:09:13:02 - 00:09:17:20 And hence why we see, I think these compressed multiples in the UK that

00:09:17:21 - 00:09:21:14 and you know, it's needlessly complicated and costly to get a deal done here.

00:09:21:14 - 00:09:25:21 So it's not exactly exactly a seller's market in the privates,

00:09:25:24 - 00:09:30:00 but let's hope that that playing field, you know, evolves.

00:09:30:03 - 00:09:33:25 But yeah, really interesting to hear those guys having that conversation and,

00:09:33:33 - 00:09:35:09 you know, coming to the same conclusion

00:09:35:09 - 00:09:40:20 that the the UK small cap private market is abundant with opportunity.

00:09:40:23 - 00:09:41:07 Cool Right.

00:09:41:07 - 00:09:44:06 Well we'll get into our main topic shall we.

00:09:44:06 - 00:09:47:33 Our buy side breakdown. Yes.

00:09:48:02 - 00:09:50:27 At random, seemingly at random.

00:09:50:27 - 00:09:55:25 We have picked from businesses for sale dot com actually

00:09:55:28 - 00:09:59:16 and online retailer of

00:09:59:19 - 00:10:01:03 power and hand tools.

00:10:01:03 - 00:10:04:18 So industrial equipment if you like. Yeah.

00:10:04:21 - 00:10:08:31 This leapt out to us largely to me because this was the space

00:10:09:00 - 00:10:10:18 that I cut my teeth in.

00:10:10:18 - 00:10:14:00 So this is where I did a fair bit of M&A and, and have an exit.

00:10:14:00 - 00:10:18:01 This is what we were supplying to

00:10:18:04 - 00:10:23:09 online resellers as well as traditional bricks and mortar retailers.

00:10:23:11 - 00:10:26:19 But yeah, this one is being represented by Turner Butler

00:10:26:22 - 00:10:32:03 and it's a 30 year old company

00:10:32:05 - 00:10:34:16 that is a respected supplier

00:10:34:16 - 00:10:39:26 through eBay shops and Amazon as well as, I guess from their industrial unit

00:10:39:28 - 00:10:44:02 somewhere in the industrial states of the UK

00:10:44:04 - 00:10:49:23 where they supply workshop and garage equipment products doing about 1.2 million

00:10:49:23 - 00:10:53:10 in revenue from which their adjusted

00:10:53:10 - 00:10:56:10 EBITDA is about 230 K

00:10:56:13 - 00:11:01:07 and they have an asking price asking price of 500 K plus stock.

00:11:01:10 - 00:11:04:10 And interestingly, they want stock at value.

00:11:04:10 - 00:11:08:04 The book value of the stock, which they come on to.

00:11:08:10 - 00:11:09:19 That's quite interesting.

00:11:09:19 - 00:11:12:03 The kind of split of asking price in full price stock

00:11:12:03 - 00:11:13:27 is that's something that I mean, that's not something

00:11:13:27 - 00:11:15:29 I've ever come across before, is it something you've seen before?

00:11:15:29 - 00:11:16:02 Yeah.

00:11:16:02 - 00:11:18:27 It's fairly normal for a distribution company

00:11:18:27 - 00:11:22:32 to be having its, you know, you buy the assets

00:11:23:01 - 00:11:26:19 alongside, if you will, you'll, you'll give it a kind of valuation

00:11:26:19 - 00:11:31:08 on a multiple of profit and then you know, you'll, you'll buy the assets.

00:11:31:08 - 00:11:34:17 In this case, obviously the assets are the inventory.

00:11:34:20 - 00:11:38:11 But what's quite telling about this transaction is that they they seem to feel

00:11:38:11 - 00:11:39:30 that they can get full price for the inventory.

00:11:39:30 - 00:11:41:07 And I don't think I've ever paid

00:11:41:07 - 00:11:44:15 full price for inventory in my life because normally what you what you're

00:11:44:15 - 00:11:50:25 getting with inventory is a lot of stock that doesn't turn up that you can't sell.

00:11:50:28 - 00:11:52:31 Yeah, that's what I was going to get too,

00:11:52:31 - 00:11:55:22 you know, how much of that stock is age discounted?

00:11:55:22 - 00:11:58:02 Seasonal.

00:11:58:05 - 00:12:00:27 You know I'd be very surprised that

00:12:00:27 - 00:12:03:08 face to face value for that.

00:12:03:08 - 00:12:05:22 Yeah I mean a business of this sort of size kind of,

00:12:05:22 - 00:12:08:32 you know, SUB10 million where they're not audited,

00:12:09:01 - 00:12:11:25 it's kind of like they're free to do what they like with the valuation

00:12:11:25 - 00:12:12:09 of their stock.

00:12:12:09 - 00:12:15:32 It's only when you get to an exit like this that, you know,

00:12:15:33 - 00:12:18:33 someone else comes along and actually property values it.

00:12:18:33 - 00:12:23:16 I wonder if they're they're following any kind of internal robust policies

00:12:23:16 - 00:12:27:13 about writing down the value of their stock based on,

00:12:27:16 - 00:12:30:01 you know, speed of turn or what condition it's in.

00:12:30:01 - 00:12:34:14 So yeah I would I would suggest that's probably a point that will be attempted

00:12:34:14 - 00:12:38:15 to negotiate by any prospective buyer

00:12:38:18 - 00:12:40:03 the listing.

00:12:40:03 - 00:12:45:07 So it basically is seeking I guess two times EBIT, which is not unreasonable

00:12:45:10 - 00:12:46:32 and yet

00:12:46:32 - 00:12:49:32 is alluding to the fact that there is a

00:12:49:32 - 00:12:56:21 730 4k gross profit out of the 1.2 mil

00:12:56:24 - 00:13:01:23 in in revenue, which is quite impressive actually, that a business in what

00:13:01:23 - 00:13:04:23 you would consider to be a commodified space

00:13:04:28 - 00:13:08:16 is making that kind of margin

00:13:08:19 - 00:13:11:19 60% I think. Yeah

00:13:11:22 - 00:13:13:11 yeah yeah that's

00:13:13:11 - 00:13:16:30 that's not too shabby for a a tool business.

00:13:16:33 - 00:13:19:27 Well I mean it definitely suggests a healthy business model.

00:13:19:27 - 00:13:24:01 My concern here would be platform risk

00:13:24:04 - 00:13:28:00 and there seems to be a really heavy reliance on eBay and Amazon.

00:13:28:03 - 00:13:29:28 And I think that, you know,

00:13:29:28 - 00:13:33:13 I've traded on those platforms before in the past and there is a real risk

00:13:33:13 - 00:13:38:13 of being delisted or even sort of algorithmically deprioritized.

00:13:38:15 - 00:13:42:30 I feel like not owning a channel gives you less defensive ability.

00:13:42:32 - 00:13:44:17 Yeah,

00:13:44:20 - 00:13:45:02 not just

00:13:45:02 - 00:13:49:07 delisted, but with Amazon disintermediated because Amazon,

00:13:49:07 - 00:13:53:29 our past masters at using their merchants to discover what has.

00:13:54:00 - 00:13:58:08 Yeah popularity and demand and then offering an Amazon equivalent

00:13:58:11 - 00:14:03:03 where they make the margin themselves and don't give it up to the to the vendor.

00:14:03:06 - 00:14:06:26 I previously was an Amazon vendor.

00:14:06:26 - 00:14:10:25 We went through Marketplace before and then became a fulfillment

00:14:10:27 - 00:14:14:13 through Amazon type operation and

00:14:14:15 - 00:14:18:17 yeah they you have to watch your back frankly Yeah.

00:14:18:21 - 00:14:21:00 And you know and then are you buying a brand

00:14:21:00 - 00:14:25:05 or are you buying an Amazon storefront you know and that has implications

00:14:25:05 - 00:14:29:18 for growth and I would think valuation too.

00:14:29:21 - 00:14:32:09 Yeah, it certainly won't command a premium.

00:14:32:09 - 00:14:35:20 I think actually you have to pricing in an element of risk there because

00:14:35:23 - 00:14:38:28 as you rightly say, you know, they could sort of snuff you out in a heartbeat

00:14:39:01 - 00:14:43:02 and you know, I don't know, I haven't probably really explored eBay

00:14:43:05 - 00:14:46:17 as a as a sales channel for quite some time.

00:14:46:20 - 00:14:51:25 But for four years it had a stigma about being more of discounted goods.

00:14:51:27 - 00:14:53:11 Yeah, I think some of

00:14:53:11 - 00:14:56:23 these kind of products are actually fairly well respected to buy through eBay.

00:14:56:23 - 00:15:00:14 I think that eBay a kind of at that adoption curve level where,

00:15:00:17 - 00:15:02:26 you know, everybody in their mum and their grandma knows

00:15:02:26 - 00:15:05:04 and has heard of eBay and they kind of are more respected,

00:15:05:04 - 00:15:07:14 sells front for store, front for some of these kind of goods.

00:15:07:14 - 00:15:10:18 So what you'd hope when you look at this sort of business,

00:15:10:18 - 00:15:15:09 that it would have used these channels to cultivate sales through its own,

00:15:15:11 - 00:15:17:25 you know, own ecommerce store

00:15:17:25 - 00:15:21:16 and it doesn't mention here, I don't think in the listing what

00:15:21:19 - 00:15:23:31 whether it's a big commerce

00:15:23:31 - 00:15:29:21 or a Shopify or a magento or whatever store stack they're running on,

00:15:29:23 - 00:15:32:22 which leads me to think that actually

00:15:32:22 - 00:15:36:01 their own website might be underdeveloped

00:15:36:01 - 00:15:40:22 and that they're hugely reliant on these two third party channels.

00:15:40:25 - 00:15:43:31 Yeah, I would, I would hope for a bit more information on that

00:15:44:00 - 00:15:46:21 and where their site is hosted and what kind of traffic.

00:15:46:21 - 00:15:50:25 I mean, they talk about having high organic Internet

00:15:50:28 - 00:15:51:28 SEO ranking, but

00:15:51:28 - 00:15:54:00 is that for their Amazon products, in which case

00:15:54:00 - 00:15:56:02 that isn't actually their ranking, that's Amazon's ranking,

00:15:56:02 - 00:15:59:01 or is this always their own site ranking well or not?

00:15:59:01 - 00:16:00:12 If it is, and that's excellent.

00:16:00:12 - 00:16:02:04 And maybe they are cultivating

00:16:02:04 - 00:16:04:18 using Amazon as a gateway and bringing them back to their main site?

00:16:04:18 - 00:16:06:09 I would hope so.

00:16:06:09 - 00:16:08:17 I would like more information on that.

00:16:08:17 - 00:16:09:10 Yeah, likewise.

00:16:09:10 - 00:16:12:25 I think that's something to pick up in any due diligence here

00:16:12:27 - 00:16:16:20 that the listing makes a couple of interesting statements.

00:16:16:20 - 00:16:20:02 One around an enviable supply chain sourcing parts

00:16:20:02 - 00:16:23:30 directly from renowned manufacturers and suppliers.

00:16:23:33 - 00:16:25:09 I think that probably speaks to

00:16:25:09 - 00:16:29:10 where the 62% gross margin is coming from, frankly, because

00:16:29:12 - 00:16:33:21 if they've disintermediated, if they're not buying through, you know,

00:16:33:23 - 00:16:36:31 to distributors and wholesalers and that kind of thing, they're getting it straight

00:16:36:31 - 00:16:41:25 from the manufacturer, then arguably, you know, that's where their advantage

00:16:41:28 - 00:16:47:02 lives and probably where they can you know, they've got some means to

00:16:47:04 - 00:16:49:25 offer at attractive price in the market,

00:16:49:25 - 00:16:53:31 but at the same time be profitable, which is which is the holy Grail here.

00:16:54:00 - 00:16:59:20 So I'd love to dig a bit more deeper into the robustness of those relationships.

00:16:59:20 - 00:17:01:08 And yeah,

00:17:01:08 - 00:17:04:32 you know, again, is there a concentration risk just in the vendors as well?

00:17:04:32 - 00:17:10:07 I mean, is it really that they've got a small number of manufacturers

00:17:10:10 - 00:17:13:04 whose ranges they're representing

00:17:13:04 - 00:17:15:30 and they're actually if any of those manufacturers change their policies

00:17:15:30 - 00:17:19:19 and said, you know, you don't have to go through one of our wholesalers and bang

00:17:19:19 - 00:17:22:27 goes 20% of your margin, you know, are they at risk?

00:17:22:27 - 00:17:25:29 They're, you know, being compressed between a rock and a hard place,

00:17:25:29 - 00:17:27:14 if you like, of Amazon on the one

00:17:27:14 - 00:17:31:09 hand, and and a manufacturer that changes its distribution policy on the other.

00:17:31:12 - 00:17:35:31 So I'd want a price that is a sort of risk element

00:17:36:00 - 00:17:36:25 to be honest.

00:17:36:25 - 00:17:40:21 And then it talks about a strong asset base.

00:17:40:24 - 00:17:43:17 So I'm not quite sure they don't really talk about anything more than that.

00:17:43:17 - 00:17:47:13 Just so I'd love to know what they mean by a strong asset base because it appears

00:17:47:13 - 00:17:48:26 that the building is leased.

00:17:48:26 - 00:17:51:16 They have a a very little

00:17:51:16 - 00:17:55:22 in the way of capital equipment and it mostly seems to be an inventory.

00:17:55:25 - 00:17:58:05 Yeah, that is interesting.

00:17:58:05 - 00:18:00:06 And I would love some more information on that.

00:18:00:06 - 00:18:05:03 When I first saw that, I automatically assumed it was, you know, warehousing and

00:18:05:05 - 00:18:06:00 and other such things.

00:18:06:00 - 00:18:07:04 But yeah, that's leasing.

00:18:07:04 - 00:18:10:15 I don't I don't know where that asset base is coming from and they say

00:18:10:15 - 00:18:13:30 I'll reference that stock again it maybe or

00:18:13:33 - 00:18:19:20 you go on to see in the listing that it talks about a 2500 square foot

00:18:19:23 - 00:18:21:06 industrial premises.

00:18:21:06 - 00:18:21:16 Yeah.

00:18:21:16 - 00:18:24:22 Which is where their offices begin when warehousing and storage

00:18:24:22 - 00:18:30:06 and distribution takes place from which can be offered at an annual rent of 13 K.

00:18:30:09 - 00:18:33:24 So I wonder if actually the strong asset base

00:18:33:24 - 00:18:37:09 is that the building is owned by the operator currently

00:18:37:12 - 00:18:40:26 and but is not being made available in the sale, in which case

00:18:41:00 - 00:18:44:31 you would have to start looking at well whether that 13,000 commercial rent

00:18:44:31 - 00:18:49:29 and you know all the other bits that go with it, you know the lighting service

00:18:49:32 - 00:18:52:15 rates, whether that has actually been properly

00:18:52:15 - 00:18:57:30 reflected in the PNL of the business and whether that adjusted EBITDA actually

00:18:57:30 - 00:19:01:24 takes cognizance of that rent or whether it's had it rent free

00:19:01:24 - 00:19:06:12 because it's, you know, in the pension fund of the of the owner, for example,

00:19:06:15 - 00:19:08:32 them owning that that space actually would make sense for the fact

00:19:08:32 - 00:19:12:01 that they've listed this to relocate of all

00:19:12:04 - 00:19:15:15 this business could be relocated if required.

00:19:15:18 - 00:19:16:24 Okay. Yeah.

00:19:16:24 - 00:19:20:06 Albeit you've got to two key members of staff,

00:19:20:08 - 00:19:22:13 a warehouse assistant and an online sales manager

00:19:22:13 - 00:19:25:15 that are obviously, I guess based from those premises.

00:19:25:15 - 00:19:30:07 So you'd have to deal with the sort of sensitivity of that.

00:19:30:10 - 00:19:30:23 Yeah.

00:19:30:23 - 00:19:34:29 And that is a kind of operational risk, only having two full time employees,

00:19:34:32 - 00:19:37:25 you know, all the systems and staff in place

00:19:37:25 - 00:19:40:25 to run this without the current founder slash owner.

00:19:40:32 - 00:19:41:20 Yeah.

00:19:41:20 - 00:19:42:06 I wonder

00:19:42:06 - 00:19:46:01 just how much, you know, you think about when you buy businesses like this.

00:19:46:07 - 00:19:49:07 we could put in X amount of automation and there could be, you know,

00:19:49:12 - 00:19:52:33 customer services and we could we could streamline the fulfillment.

00:19:52:33 - 00:19:54:06 You still need somebody to actually

00:19:54:06 - 00:19:57:27 pick it off of the pallet racking and stick it on the back of a courier

00:19:57:31 - 00:20:01:01 and consign it properly and and manage returns.

00:20:01:01 - 00:20:04:01 Because inevitably, you know, especially with Amazon returns.

00:20:04:03 - 00:20:04:15 Yeah.

00:20:04:15 - 00:20:08:06 I mean this, this was you know my point with the with the staff

00:20:08:06 - 00:20:11:31 is that I would be surprised if there are only two people

00:20:12:00 - 00:20:15:25 picking, packing selling 1.2 million quids

00:20:15:25 - 00:20:19:25 worth of stuff online every year and managing all of the listings,

00:20:19:28 - 00:20:23:14 photography descriptions, customer service.

00:20:23:17 - 00:20:26:17 And that's a hell of a lot of work for two people.

00:20:26:22 - 00:20:29:19 Yeah, and I think the listing

00:20:29:19 - 00:20:32:25 might be a little bit short on detail

00:20:32:25 - 00:20:35:25 there because, you know, when you look at the fact that the adjusted

00:20:35:25 - 00:20:39:24 nice adjusted so that the reported EBIT was going to be less than this

00:20:39:26 - 00:20:44:14 of 230,000 on the 1.2 mil

00:20:44:17 - 00:20:45:00 revenue.

00:20:45:00 - 00:20:50:24 But if we've just said look there's 730,000 of gross profit,

00:20:50:27 - 00:20:55:24 well, you know, we know there's 13,000 effective cost of

00:20:55:27 - 00:20:58:07 of the building in there.

00:20:58:07 - 00:21:01:13 There isn't half a million being paid to those two employees.

00:21:01:13 - 00:21:03:20 So where's the rest of the overhead?

00:21:03:20 - 00:21:04:23 That's a very good question.

00:21:04:23 - 00:21:10:08 My mind would go to the Amazon margin, perhaps being in overheads

00:21:10:08 - 00:21:13:15 rather than cost of sales, which which I think would be

00:21:13:18 - 00:21:16:00 incorrectly accounted for in that sense.

00:21:16:00 - 00:21:20:18 And perhaps if you inverted that, the gross margin isn't quite as healthy

00:21:20:21 - 00:21:24:04 as as it's being made out to be, because you could see

00:21:24:10 - 00:21:27:06 Amazon fees being reported kind of below the line

00:21:27:06 - 00:21:30:05 rather than as a cost of sale in the transaction

00:21:30:05 - 00:21:33:20 if they were doing it this way, because I am still struggling to get over

00:21:33:20 - 00:21:38:04 the very healthy GP on this business, knowing that

00:21:38:06 - 00:21:43:04 industrial tools is very kind of compressed,

00:21:43:07 - 00:21:46:07 commodified, competitive sector.

00:21:46:07 - 00:21:47:24 So I think I think there's an element there,

00:21:47:24 - 00:21:52:02 but I would still, my mind can't work out where about 300 grand is going on

00:21:52:02 - 00:21:55:15 on the overhead or running this business again, could it be logistics?

00:21:55:15 - 00:21:57:16 Could they be spending a lot of money on shipping?

00:21:57:16 - 00:22:01:31 And again, that should probably be in cost but is perhaps in overhead.

00:22:02:00 - 00:22:06:20 But yeah, if you can do this with two members of staff,

00:22:06:22 - 00:22:07:25 that's interesting.

00:22:07:25 - 00:22:10:21 I mean, there are two very hardworking members of staff.

00:22:10:21 - 00:22:13:04 I'd like to know we can find some more of those.

00:22:13:04 - 00:22:16:18 Well, it is quite yeah, I mean, it might speak to the fact

00:22:16:18 - 00:22:20:10 that the the tools that they're selling may be more on the premium end.

00:22:20:10 - 00:22:23:11 So maybe they're more specialized capital equipment rather

00:22:23:11 - 00:22:27:27 than, you know, being hammers and mallets and

00:22:27:29 - 00:22:29:28 wrenches and things that would that would make sense

00:22:29:28 - 00:22:31:22 because they don't have a huge warehouse space

00:22:31:22 - 00:22:36:07 between two and a half thousand square feet, including offices and

00:22:36:10 - 00:22:37:24 as well as their warehouse and storage.

00:22:37:24 - 00:22:40:05 So it's not a huge warehouse.

00:22:40:05 - 00:22:41:23 So maybe there are you know,

00:22:41:23 - 00:22:46:15 maybe we are looking at premium items here and it's not so much. So

00:22:46:18 - 00:22:49:18 yeah, no, it's a think about stock turn.

00:22:49:24 - 00:22:53:13 So I wonder if that half a million

00:22:53:16 - 00:22:56:24 sorry 800,000 of stock, I don't know how many units

00:22:56:24 - 00:23:01:00 that kind of translates to because if this is kind of high value capital equipment

00:23:01:00 - 00:23:06:01 that they're turning a few off but they those items

00:23:06:04 - 00:23:09:09 generate a sensible profit and are actually fairly efficient

00:23:09:09 - 00:23:13:27 on floor space and they're turning them at a reasonable pace.

00:23:13:30 - 00:23:18:16 I wonder just actually whether that means that they don't really have a lot of

00:23:18:16 - 00:23:22:11 of aging inventory and that they they use that two and a half square,

00:23:22:11 - 00:23:26:27 a thousand square feet of floor space, super efficiently potentially.

00:23:26:30 - 00:23:30:15 And so my question for you on this is so we're obviously we're

00:23:30:15 - 00:23:34:05 going to come back to this kind of split of the asking price of, you know, the 500

00:23:34:06 - 00:23:38:16 K for the for the Goodwill and a 50 K for the for the stock.

00:23:38:19 - 00:23:41:06 Is this a good opportunity for a bit of sort of deal

00:23:41:06 - 00:23:44:24 structure, alchemy and you could negotiate the stock value separately and structure

00:23:44:24 - 00:23:48:08 a kind of earnout or deferred payment on sale of that stock.

00:23:48:11 - 00:23:51:33 I think you'd have to because I would suggest that there is

00:23:52:02 - 00:23:54:23 some risk that the seller needs to where

00:23:54:23 - 00:23:59:10 I'm surprised that Turner Bottler have used the word goodwill.

00:23:59:12 - 00:24:01:11 You know, goodwill is an intangible asset.

00:24:01:11 - 00:24:04:33 Most sensible acquirers aren't paying for intangible assets.

00:24:05:07 - 00:24:10:19 Yeah, So I would have said this is more just a straight multiple of orbit

00:24:10:22 - 00:24:14:12 type arrangement and in which in which case,

00:24:14:14 - 00:24:18:30 yeah, half a million is not it's not unreasonable,

00:24:18:33 - 00:24:21:06 but I wouldn't call it goodwill because that lands

00:24:21:06 - 00:24:24:06 in the unreasonable bucket with me.

00:24:24:11 - 00:24:28:04 The, the stock definitely I would, I would want to price that down.

00:24:28:04 - 00:24:32:16 I want to do what's called bucketing where you would look at the,

00:24:32:19 - 00:24:35:29 the sales information and you would see what has transacted

00:24:35:32 - 00:24:39:03 in volume and recently and what has been latent.

00:24:39:03 - 00:24:41:20 And it's sort of like, you know, the peak.

00:24:41:20 - 00:24:46:09 I never pay more than about 10% for the pigs if that.

00:24:46:12 - 00:24:49:29 And you know, I'd only pay 100% for the stuff

00:24:49:29 - 00:24:53:26 that's turning in the last quarter and anything, you know, older than that,

00:24:53:26 - 00:24:57:16 you're on a kind of like a sliding scale with your buckets of like, you know, 50%,

00:24:57:17 - 00:24:59:05 25%, etc., etc..

00:24:59:05 - 00:25:00:17 So I would

00:25:00:17 - 00:25:04:15 I would be definitely bucketing this stock and not paying full price for it.

00:25:04:18 - 00:25:07:21 On that half a million. I would

00:25:07:24 - 00:25:09:28 I would suggest at

00:25:09:28 - 00:25:14:24 asking price wise that there's bound to be a deferred

00:25:14:27 - 00:25:19:24 or likely conditional earnout element on that.

00:25:19:27 - 00:25:21:20 You could probably finance

00:25:21:20 - 00:25:25:08 some of the stock purchase

00:25:25:11 - 00:25:29:05 on an on an asset backed arrangement

00:25:29:07 - 00:25:32:25 that might free up some capital to get a deal done,

00:25:32:28 - 00:25:36:14 albeit the lender would take the same approach that they don't want you

00:25:36:14 - 00:25:39:21 to pay full price and they wouldn't loan full price against the inventory.

00:25:39:21 - 00:25:42:21 So that's that's one thing.

00:25:42:23 - 00:25:45:13 I wonder where that where the debtors are in August.

00:25:45:13 - 00:25:48:06 Is this a fully cash upfront business in which case

00:25:48:06 - 00:25:51:06 they don't have, you know, debtors, but then what's the creditors look like?

00:25:51:06 - 00:25:55:07 So I would be I would be interested in the sort of

00:25:55:10 - 00:25:59:05 the cash position post that doesn't speak to if there's any debt

00:25:59:05 - 00:26:03:01 being carried, it doesn't speak to if there's any surplus cash in the deal.

00:26:03:04 - 00:26:06:17 So so I'd probably be going in thinking let's try and defer

00:26:06:17 - 00:26:11:31 about 30% of this asking price over at least a year

00:26:12:00 - 00:26:13:07 to sort of help

00:26:13:07 - 00:26:17:24 where some of the risk that might come from the transition to new ownership.

00:26:17:25 - 00:26:20:21 Okay. So let's talk growth opportunities.

00:26:20:21 - 00:26:25:03 You know, where could we see someone improve in this business after purchase?

00:26:25:03 - 00:26:26:15 I mean, I think we've touched on one already,

00:26:26:15 - 00:26:30:11 which is if they aren't leveraging their own sales

00:26:30:18 - 00:26:34:33 shopfront online, then that's probably the best place to start, I would say.

00:26:35:01 - 00:26:37:07 Yeah, I think that's a huge one.

00:26:37:07 - 00:26:40:20 I do agree that they should get it through.

00:26:40:28 - 00:26:44:20 They should try and convert more sales through their own channels

00:26:44:23 - 00:26:47:02 and not be giving up as much margin

00:26:47:02 - 00:26:50:13 to Amazon, for example, or the eBay fees.

00:26:50:13 - 00:26:52:05 So if they're not doing that, then that's

00:26:52:05 - 00:26:56:08 definitely an opportunity to value engineer the upside for the acquirer.

00:26:56:10 - 00:26:56:32 Yeah.

00:26:56:32 - 00:26:59:21 You've also got to wonder about geographies like is this

00:26:59:21 - 00:27:04:04 just 1.2 million being done for supplying the UK market?

00:27:04:07 - 00:27:07:19 What if these if they have got a particularly special relationship

00:27:07:19 - 00:27:10:25 with a couple of manufacturers, does that relationship

00:27:10:25 - 00:27:14:26 extend to them being able to supply into Europe, for example?

00:27:14:29 - 00:27:17:32 So, you know, is there an opportunity to grow this business through

00:27:17:33 - 00:27:21:26 additional territories beyond their core UK territory,

00:27:21:28 - 00:27:25:03 Something I'm thinking as well as if you could?

00:27:25:06 - 00:27:28:06 It depends on maybe the relationship with the manufacturers,

00:27:28:12 - 00:27:31:24 but if you if someone took this on and they had some marketing experience

00:27:31:24 - 00:27:35:03 and they knew how to do this kind of thing and they could build up their own

00:27:35:03 - 00:27:41:00 storefront presence, there's a potential to convert this into an actual DTC brand,

00:27:41:02 - 00:27:44:24 you know, and have your own tool rather than be in a kind of shopfront

00:27:44:24 - 00:27:48:11 for other people's manufacture tools they'd have to become synonymous with.

00:27:48:11 - 00:27:49:25 So a value add there.

00:27:49:25 - 00:27:52:30 So yeah, are they, are they the sort of knowledge experts

00:27:52:30 - 00:27:57:09 in wherever the process is that relates to this product, or are they really great

00:27:57:09 - 00:28:00:09 kind of service center to keep the good in the running,

00:28:00:16 - 00:28:04:19 you know, post warranty or do they do planning preventative maintenance?

00:28:04:19 - 00:28:08:21 Yeah, it could be that there's some value added surface element to this.

00:28:08:21 - 00:28:13:27 If they become the synonymous owned DTC or B2B or whatever, it would be brand

00:28:13:30 - 00:28:15:04 supplying this ship

00:28:15:04 - 00:28:18:13 and servicing this kit, that could be an upsell opportunity there.

00:28:18:16 - 00:28:22:09 I'd also think from a cash utilization perspective, like

00:28:22:12 - 00:28:26:04 if the inventory isn't already optimized, could it be better optimized?

00:28:26:04 - 00:28:29:24 I mean, if if they're doing this on two and a half thousand square foot, great.

00:28:29:24 - 00:28:32:29 But what if they weren't

00:28:32:32 - 00:28:33:26 you know,

00:28:33:26 - 00:28:37:16 if you had some good predictive technology in your ledgers,

00:28:37:16 - 00:28:40:16 you could probably work out what your optimal stock really looks like

00:28:40:20 - 00:28:44:23 and not keep looking overstocked,

00:28:44:26 - 00:28:46:00 as you want to say around it.

00:28:46:00 - 00:28:49:24 It seems otherwise, you know, pretty standard

00:28:49:24 - 00:28:53:24 and a business, I would say, worthy of consideration.

00:28:53:27 - 00:28:57:01 I would say that if you are a first time buyer, you're looking at this business.

00:28:57:01 - 00:29:00:21 Go back and listen to our episode about the the first call with the seller

00:29:00:23 - 00:29:02:29 and take some advice there, because I think that's really

00:29:02:29 - 00:29:05:06 where a lot of this information is going to be on Earth.

00:29:05:06 - 00:29:08:30 I think that it's definitely worth consideration, but there's a lot of detail

00:29:08:30 - 00:29:11:01 missing from this, as there always are in these listings.

00:29:11:01 - 00:29:15:02 But there's some stuff that I think if you could find that out fairly early

00:29:15:02 - 00:29:17:20 on, you could know within a phone call as to whether this was worth buying.

00:29:17:20 - 00:29:20:20 I think, yeah. So

00:29:20:23 - 00:29:21:12 if you had a

00:29:21:12 - 00:29:24:24 cool three quarters of a million

00:29:24:26 - 00:29:28:19 in your back pocket burning a hole, would you buy this business?

00:29:28:22 - 00:29:29:28 So we didn't buy or pass.

00:29:29:28 - 00:29:33:14 I for me I think I would pass.

00:29:33:16 - 00:29:35:02 I think there's definitely

00:29:35:02 - 00:29:38:21 a good business here and they're obviously got great profit margin.

00:29:38:24 - 00:29:39:01 I don't think

00:29:39:01 - 00:29:42:06 I have quite enough information and I'm still quite hung up on the the,

00:29:42:07 - 00:29:45:07 the channel risk and the overreliance on Amazon and eBay.

00:29:45:10 - 00:29:46:21 That doesn't quite sit right with me.

00:29:46:21 - 00:29:49:31 So for me, I'm afraid I think it's going to be a pass.

00:29:49:33 - 00:29:51:01 Okay.

00:29:51:01 - 00:29:54:06 Well, I'm going to take the other side of the coin and I'd request the same on this

00:29:54:06 - 00:29:59:17 because I think there might be some legs that the profitability interests me.

00:29:59:19 - 00:30:02:19 I, I mean, I'm intrigued to know a bit more

00:30:02:19 - 00:30:06:10 about what what it is they actually are distributing.

00:30:06:13 - 00:30:10:27 But a business making this sort of money is always worth having a look at,

00:30:10:30 - 00:30:14:32 particularly if they could sort of wean off the Amazon and eBay drugs

00:30:15:01 - 00:30:18:06 and own more of their distribution channel

00:30:18:06 - 00:30:21:06 and make more of the margin themselves,

00:30:21:10 - 00:30:23:20 that that could be a nice quick way

00:30:23:20 - 00:30:27:08 to improve your return on equity. So,

00:30:27:11 - 00:30:29:31 Okay. Well, there we are.

00:30:29:31 - 00:30:32:04 We're in pass one for one.

00:30:32:04 - 00:30:33:20 Again,

00:30:33:20 - 00:30:35:18 if we were an investment committee Alpha, we'd need

00:30:35:18 - 00:30:39:01 someone else on this call to have the casting vote. So.

00:30:39:04 - 00:30:41:11 Well, consensus will have to pass.

00:30:41:11 - 00:30:42:21 Maybe we can do that with our listeners.

00:30:42:21 - 00:30:45:21 So anybody listening and drop us a comment

00:30:45:21 - 00:30:49:09 and give us a buy or pass and we'll we'll collect the results and

00:30:49:15 - 00:30:55:00 and see which way it goes and we'll let you know how we go on to the

00:30:55:03 - 00:30:55:18 call.

00:30:55:18 - 00:30:58:15 And also, while you're commenting, let us know if you like this format,

00:30:58:15 - 00:31:00:24 if you feel that it's the sort of thing you want us to do.

00:31:00:24 - 00:31:06:00 Again, in reviewing some opportunities out there in the wild

00:31:06:07 - 00:31:10:17 and talking about what we do with them or to them,

00:31:10:20 - 00:31:11:01 Great.

00:31:11:01 - 00:31:12:19 Well, thank you for joining us, Alfie.

00:31:12:19 - 00:31:15:19 Any closing comments?

00:31:15:24 - 00:31:18:11 Keep on crunching

00:31:18:11 - 00:31:21:11 why wife's more

00:31:21:15 - 00:31:22:06 people crunching.