00:00:00:00 - 00:00:21:01
Unknown
Welcome to the M&A scene, the show for acquisition entrepreneurs, search funders and holdco builders across the UK and Europe. Each week we dive into the real world stories, strategies and challenges behind buying and building small businesses and whether you're searching for your first deal. But in a growing group of companies or just looking for a bit more info, this is your space to learn, share and get inspired.

00:00:21:03 - 00:00:40:06
Unknown
We are back this week with an ever popular buy side breakdown episode, and I am joined as ever by my co-host Gareth Wilkins. Nice to see. I'll see you. I could see you too, pal. Yeah. Excited to get into another one of these benefits, the blue walls. As we did this. Speaking to lots of acquisition entrepreneurs and various folks in the space.

00:00:40:06 - 00:00:55:26
Unknown
And it's nice to get back on a session with you and look at some exciting business opportunities there in some great interviews recently though. So if you just tuned into this, don't go back now. Listen till the end of this one. But afterwards, go back and listen to the last couple of inches before accepting. They've been really, really interesting.

00:00:56:04 - 00:01:14:09
Unknown
yeah. Well, more to come some later. Further guest lined up. So let's get right into it, shall we? The buy side breakdown. What do we pick this week? Yes. So this week on the buy side breakdown, we're looking at something quite different. So it's a vinyl and merch producer doing just under 10 million a year turnover and claiming almost £2 million.

00:01:14:09 - 00:01:37:22
Unknown
EBIT to fully relocate will outsource everything. A lot of bold claims about working with world famous artists. So is this a collector's dream or a logistical nightmare? Let's get into a bicep breakdown. Well, I think we were drawn to this one largely because I'll let you pick. And it's this all about your passion for music being part of the Manchester Underground scene as you are.

00:01:37:24 - 00:02:00:06
Unknown
And sorry, I'm compartmentalizing Coke. You the world famous deejay? Yes. No, you're not. You have to be person experience of pressing some vinyls or getting some done. Yeah. So this year, for the first time, my music was pressed to vinyl, which was a bit of a bucket list moment for me, something I've always wanted to do. And that was made possible by some of changes in the way that vinyl was pressed.

00:02:00:08 - 00:02:16:00
Unknown
And I will get into that a little bit later and but yeah, this one jumped out at me straight away. I thought it would be an interesting episode and it looks like a really interesting business. We've done a little bit digging and we we think we might know who it is. Not 100% sure, but yeah, I want to name any names.

00:02:16:07 - 00:02:55:11
Unknown
No, no. Obviously and be found though on right is and is from our friends Cbz. So yes there's some unpicking to do some of the wording in here. The who let's, let's get into it shall we. A producer, an e-commerce retailer of limited edition vinyl records from leading artists and allegedly with a rather substantial 9.7 million combined trio and making just under two mil in adjusted EBIT at 1.83 on year ending 24.

00:02:55:14 - 00:03:16:27
Unknown
So they're talking about a predicted rise in revenue for this year. That'll be interesting to see whether that's happened. If it's the company that we think it is, then their year ends is 30th of September. So here we are in mid-October. And if it is a company we think it is, it's a group of four businesses under a banner.

00:03:16:29 - 00:03:47:11
Unknown
Yeah. And two of those businesses appear to be vinyl production, e-commerce websites, and two of them appear to be design agencies. So you can see how potentially there might be a carve out here whereby the business has evolved into more of a design company and now wants to divest of the of the vinyl pressing e-commerce sites. We need to probably unpick why they feel that it's the right time to divest and focus on their their design.

00:03:47:13 - 00:04:05:04
Unknown
Does that speak to something happening is a sort of trend in the market. Maybe we'll go there first, shall we? I mean, what has been because I mean you keep hearing apocryphal that, you know, vinyl's had a resurgence or renaissance and you know, all the Gen Z are buying vinyl instead of downloading M.P. threes or something as the as anymore.

00:04:05:04 - 00:04:24:29
Unknown
But you know what I mean. Is that the case? Well, we've been hearing that for a while and that was the trend for a while. But as we know, trends come and go. So in the period up to about 2020, they really started to power. And then, you know, early part of the decade, again, really strong signs growing sort of at some points.

00:04:24:29 - 00:04:45:04
Unknown
That's 100% year on year vinyl sales. I mean, that's from a very low starting point because nobody was buying them for a very long time. And there has been a kind of shift, especially like you said, with Gen Z, to move towards physical media and, you know, supporting artists a lot more. And there's a lot more independent labels out there because that's an easier thing for people to do these days with the advent of social media.

00:04:45:04 - 00:05:13:27
Unknown
And then with that they want to press a lot more physical media. So things were going very well for a long time. But in this last year or so, they have some people described it as a wobble of sort of vinyl sales. They've stayed stable in some places and dipped in others. So if this is the sort of edge of the cliff and we're going to go back to, you know, where it was for the 20 years before that, where nobody was buying vinyl and I'm not sure maybe the people selling this business foresaw the edge of that cliff, too.

00:05:14:04 - 00:05:30:13
Unknown
So it might just be it's a bit of a stutter step, but there could be a bunch of reasons for this. You know, people are feeling the pinch. Less money is being spent on on, you know, extraneous stuff like, you know, buying vinyls at the end of a month. So it could just be that or it could be that.

00:05:30:16 - 00:05:56:28
Unknown
It was a trend for, you know, five, six, seven years. And like all trends, it's beginning to die off. Yeah, Yeah. So was it a sustained renaissance or was it a moment? Certainly, if it was a moment, then there year on year performance, 2023 into 2024 is quite telling. If it is the London based group that we think it is, they reported group turnover down about 4 million over that period.

00:05:57:00 - 00:06:19:19
Unknown
So yeah, worth worth sort of contextualizing this to the trend And might you be buying, as you say, at the cliff edge of the end of a kind of moment. So that said, you know, I think there'll always be a contingent of the music industry and and a sort of, you know, music enthusiast that love vinyl and will always want to collect it.

00:06:19:19 - 00:06:43:27
Unknown
And particularly, you know, you've got lots of deejays that swear by it, etc., etc.. So maybe it shrinks and maybe that's something you need to build into a deal structure when you're buying this kind of a company, you know, to to hedge your bets and manage your downside risk. But what is interesting is that this business appears to have gone through a sale to an employee ownership trust in February last year.

00:06:43:29 - 00:07:08:18
Unknown
So if as a consequence of that, the sale by the founders into the employee ownership, they now are looking to kind of rationalize the business and divest, you know, let's call it non-core or entities anymore if the core is now designed, I wonder what that will do for sort of tax implications for the original seller. So, so soon after selling it to the IRT?

00:07:08:21 - 00:07:24:10
Unknown
Yes, we touched on it a little bit before and it's something that I am super interested in because I knew nothing about them. So it came up on a previous episode or very little at least. So yeah, it also does it make the sale more complicated? You know, you're not dealing with one or two sellers or a family business, you know, how big is the trust?

00:07:24:10 - 00:08:00:08
Unknown
How many employees are there? How many people do you have to win over and talk around and how many sort of ambitions and expectancies and stuff do you have to meet? So, yeah, super interesting. If it is this business on how a buyer negotiates that Well, I think I think it has to be an asset purchase. I think the carve out, given that these two entity two two platforms, e-commerce platforms are on the one group balance sheet and seem to be sharing the same company reg number I think it becomes an asset purchase.

00:08:00:10 - 00:08:36:00
Unknown
I also think the OTI rules because obviously the original seller would have got 100% CGT capital gains tax relief from selling the business to the employees in the in a trust, and that's normally paid out over a period of time right from the profits of the business over, let's say, five years. And I think the rules are that if the controlling interest that the EOT bought is lost within five years of that original disposal, it has a CGT implication for the original seller, i.e. that exemption can be withdrawn under certain circumstances by HMRC.

00:08:36:00 - 00:09:01:04
Unknown
So that's really worth thinking about whether whether it creates a CGT liability. I mean, it could speed up the payment, if you will, because the original seller to the OTI decided they were happy to get paid out annually over time. But, you know, a big windfall like this, I mean, what would you be paying maybe three times EBITDA possibly on a business doing 1.75 million?

00:09:01:06 - 00:09:24:29
Unknown
You know, I mean, that's that's actually quite compressed. But let's assume that because of the declining market, actually this is a sort of distressed carve out. So, you know, let's say, for example, there's a windfall of somewhere around five and a half million to the AOC, the help speed up the payment back to the seller. The seller's got to make a calculated risk, the original.

00:09:25:01 - 00:09:50:27
Unknown
Does that make the calculated risk? Will look, am I happy to pay the CGT on that? Or you have to structure a deal whereby the payment is made over a period of time that commensurate with the Gotti's payback period to the original seller and then someone somewhere on a far higher pay grade than me with more understanding of the the HMRC rules on pots, We should be advising the seller I think.

00:09:50:27 - 00:10:12:16
Unknown
But yeah, an asset purchase I think would go some way to help manage some of that risk. Yeah, I would say, you know, if they have been I as an AOC paying them out over the years and it was only a year or so ago and they've had a down year then I can't imagine many if any payments have been made.

00:10:12:16 - 00:10:36:14
Unknown
So it might be date the full build, it's outstanding. So yeah, definitely, definitely one for someone with a strong understanding of HMRC, that one, it's going to have some complexity and probably affect the valuation a little and the and the the gains. So let's get into the listing because there's some interesting I mentioned language too, to kind of unpick and drill down into it talks about how everything's outsourced.

00:10:36:14 - 00:10:59:21
Unknown
So actually this platform doesn't do any final pricing themselves. Yeah, they are the lead generation and customer relationship piece, but the production is outsourced. Yeah, yes, I did pick that. And I think that's particularly interesting because if you look at the company website and also if you look at some of the their notes about where company growth could come from, they talk about specialized production methods.

00:10:59:21 - 00:11:22:29
Unknown
So one of the things that they're doing, a special sort of picture this. So we're looking at things like half and halves and cornetto and three color segments and colors and colors. And these are all really the way that vinyl has gone in the way that it's kind of had this resurgence after these limited edition presses and you'll see if you look through some of their back catalog, there'll be artists that haven't released for a long time like Muse or The Kinks or someone, you know, nostalgia favorites.

00:11:22:29 - 00:11:57:21
Unknown
And they'll rerelease short runs of up to ten 15,000 picture discs, you know, or, you know, specialized pressings to committed fans. And they can charge a premium for that. And that covers the cost of pressing and what have you. And the problem is, if they're not the ones actually doing this, then it does make it a little bit more risky because what is it that you're buying and I suppose you're buying there the customer database of up to 2000, 25,000 private individuals worldwide and the existing contracts and relationships that they have.

00:11:57:23 - 00:12:27:04
Unknown
But if really what sets them apart are these production methods and it's not them actually doing the producing, it's a bit of a problem. I think it is, albeit a logistical one. I, I was totally inferring from what you said about the sort of rereleasing limited runs of back catalog, but actually that might create an inventory risk. Like you might end up with a lot of kind of devaluing industry in the jury that sat there on stock.

00:12:27:07 - 00:12:46:04
Unknown
But actually looking at the stocks that they declared in the 2024 accounts, they've only got 36 grand worth of stuff on hand. So not a major issue for a company that's turning over, you know, in this case, almost ten mill. Yeah, I mean, from some inside knowledge of this, there shouldn't be a huge amount of stock sitting around.

00:12:46:04 - 00:13:06:29
Unknown
So generally what will happen is they will labels would take a prerelease on this stuff and they'll grow a list and they'll have predictions and and models based on previous sales to say, look, you know we've got a prerelease sale of this for 5000 copies. And given our database in our last campaign, we think we can sell another 5000 and they'll order a batch of ten.

00:13:07:03 - 00:13:24:16
Unknown
They might go over over a lecture and order 15,000 and keep a little bit in stock. But they shouldn't be huge numbers and boxes and boxes of this stuff on hand. It should be pre-planned because this isn't the old days of everything coming out in vinyl and you do huge runs and you hope that you get chart sales.

00:13:24:16 - 00:13:50:06
Unknown
This is all done to lists that have already been built, customers that already exist. Mark No, I'm doing it. Yes. No demand Exactly. So there shouldn't be a huge amount of stock. Nice. So the listing talks about this being relocated bull and actually it emphasizes that several times, even in the title relocate table and yes, you know, e-commerce sites you know technically are stateless.

00:13:50:06 - 00:14:10:12
Unknown
You know in the kind of like floating in the ether. So, you know, does it have offices, does it have stuff, but does it have inventory? I mean, if it's if it's actually not really set on much stock or that stock is held three PL or at the factories that they use, then perhaps is it truly relocated? But I think it likely is.

00:14:10:12 - 00:14:29:28
Unknown
But I think really what is less relocate bore the relationships because it seems this is a very much a relationship based business. And in order to have these kind of contracts, you know, if you are going to be rereleasing vinyl from some of the major record labels and I'm guessing some of these artists are still signed. So, you know, you're Warners and you're Columbia, and so on.

00:14:30:00 - 00:14:43:26
Unknown
And how much time do you need to spend in London? You know, this is where all of these people are. This is where all these relationships exist. Yes, You could relocate, work from home, from the Outer Hebrides, but are you going to want to travel down to London once a month to go and sort of hobnobbing, schmooze with the label owners?

00:14:43:26 - 00:15:12:23
Unknown
Probably not. So that's the that that would be my worry there with with relocation is how far out of London do you want to go and so the label owner relationships are critical. Yeah this this wouldn't have it sort of supply chain if it didn't have these rights and these relationships. Yeah. Especially at this kind of size. I think if you want to look at small and, you know, independent labels, you can work with those completely online.

00:15:12:23 - 00:15:31:08
Unknown
And that's something that I've done before and they're happy to, you know, not have to go meet with you in person. And if someone maybe running a record label in their spare time and but they're doing very small, limited numbers of runs, probably not with a company like this, I think they're run staffed about 500 copies and it's probably because they do be specialized.

00:15:31:10 - 00:15:51:24
Unknown
And so picture this, but a small to medium sized label probably isn't selling that many and maybe doesn't have the money to invest in that. So again, if you look at their back catalog of artists and, you know, they talk about working with big brands and the kind of pipeline they've got coming, these will be larger record labels and they are probably going to want to meet the impulse and you're going to have to keep that relationship alive.

00:15:51:24 - 00:16:18:28
Unknown
Whether you think you can do that over Zoom to the same level that the current owners have is up to you. But I probably wouldn't advise that. What's the the barrier to entry or the secret sauce here then that gives them this regular kind of turnover at this level like if they're not actually the the vinyl pressing companies, what service are they offering that kind of mitigates any disintermediation risk?

00:16:19:05 - 00:16:41:27
Unknown
Because you'd think if you were a label and you just wanted to get your stuff pressed and out to your, you know, your fan base or say that you wouldn't, you know, you could you could make that supply chain happen. I mean, what do you think the secret sauce is of an e-commerce player like this? I mean, maybe there's a certain amount of audience that they've built up themselves.

00:16:41:27 - 00:16:57:16
Unknown
They said they have their own e-commerce platform and maybe they act as a sort of distribution hub for the labels as well. And they take some of that pressure away from them. You know, if you are Columbia Records, you don't want to maybe, you know, give up too much of your space to, you know, rereleasing an old album from 30 years ago.

00:16:57:16 - 00:17:13:03
Unknown
And maybe that's the angle that they give them. It could also be the design side of things. You know, they do have a design in-house and, you know, they do these specialized, you know, picture disc printing. And I guess you could go straight to the manufacturer and have them do that. But you need to provide them with designs and specifications.

00:17:13:03 - 00:17:31:00
Unknown
And maybe this is a kind of one stop shop that you can go speak to these guys and they will design a great record for you and help you a bit with distribution. And that's what I would see as being their role in this. But again, like you said, that's I think that's a very relationship based thing. You could be circumvented there.

00:17:31:02 - 00:17:55:19
Unknown
So actually the distribution is probably the bigger play here is the pressing could be split amongst a number of different partners based on the the vinyl pressing companies and product line skill set capacity, etc.. But the secret sauce of the of the e-commerce platform is going to be some kind of means of getting those in small numbers to the use it to the fans that are bought them.

00:17:55:22 - 00:18:20:02
Unknown
So it's that shopfront and goods fulfillment piece that's maybe the missing link that the labels don't want to do themselves. Yeah, I would guess so. I mean, my only concern there about whether it is the e-commerce side and the distribution side of things is they, you know, these the Dulux artwork, vinyl aren't available, runs up to 15,000, but they say the database comprises 25,000 private individuals.

00:18:20:02 - 00:18:41:04
Unknown
You're not serving 15,000 vinyls to 25,000 users. And even if isn't a kind of list based marketing that they're going for and it's mainly sort of ad space, you still would expect to be growing that list to a higher number. Now if they've been growing at the rate that they have for the last four or five years, I would expect to have a larger database than that with that kind of money to spend on marketing and distribution.

00:18:41:04 - 00:18:59:18
Unknown
So there is a disconnect there. If they're doing that sort of volume, there's got to be B2B element. Where they're shipping is to sort of specialist record stores and that kind of stuff. Yeah, yeah, I would say so, but these are all really interesting things to dig into. I would love to, I would love to sit down and they buy in.

00:18:59:21 - 00:19:17:03
Unknown
Yeah, I would. I would be I'd be super interested in doing that, but obviously I wouldn't want to waste that time. But yeah, there are look, there are a lot of questions to us and look, sometimes with these listings, it's just the way that it's been written and maybe if you go to speak to the owner, you could get on one phone, call the Trust, and you'd have this stuff cleared up in in an hour or so.

00:19:17:03 - 00:19:39:22
Unknown
Or maybe it's just the creative language used in broker listings. Yeah, potentially. So you touched on a little bit of a sort of macro trend change or manufacturing ability evolution around this space where the sort of smaller runs become possible and that you've got personal experience of that. Do you want to elaborate a bit on how that's disrupting the market?

00:19:39:25 - 00:19:52:22
Unknown
Yes. So part of the reason that I was able to go on vinyl for the first time this year is because you don't you no longer have to press a massive dub plate to press of wax vinyl. So in the old days, say in the old days, up until, you know, a few years ago, that was the way things had to work.

00:19:52:22 - 00:20:16:01
Unknown
And the pressing of the metal plate is incredibly expensive and so is the pricing of the vinyl. So you wouldn't order a run of less than 100. Really, it's not worth the manufacturer's time to create a dub to, you know, to create it. You've got dramatize that cost. Right? Exactly. And even then a run of a hundred, it becomes quite expensive and you have to hold stock and, you know, certain sizes can't guarantee those kinds of sales.

00:20:16:01 - 00:20:32:28
Unknown
So. Well, it's like tooling cost and basically. Exactly, Yeah. What's the reason in the last five years or so is print on demand And I wish I knew more about the, you know, the ins and outs of how they do it. The company that I know, they like laser etching, the sort of my micro indentations into the record bonds.

00:20:33:00 - 00:20:56:21
Unknown
That's what I that's what I've I've assumes the company that we use is a company called Elastic Stage. So if anyone doesn't know anything about elastic size and how they work, please, you let me know. Because I almost elected message him about this just out of curiosity. But with this we can you know, my customers can come on to, you know, via Spotify or wherever it is or, you know, the label site and they can order a copy and and in perpetuity.

00:20:56:21 - 00:21:18:28
Unknown
So they will just print them as send them out, you know, within a couple of weeks. So we can do small runs of, you know, you can sell 20, 30, 40 vinyl, which is much more realistic for a small or independent artist than, you know, having to pay for one and keeping them sat somewhere and not even like this is like Kindle Direct print.

00:21:18:28 - 00:21:43:18
Unknown
This is the kind of book on print on demand thing that's come out of Amazon for books. This is the equivalent for vinyl. Yeah. And you, you know, we worked with an artist, we created some artwork that was just sort of generalized artwork for the album. And then you can drag and drop that over onto the sleeve builder and you can work out how it sits on the chart and there's, there's just a no drag and drop design portion on their website.

00:21:43:21 - 00:21:56:06
Unknown
And you can choose whether you want to have the picture over the disc or not. And maybe they go through similar manufacturers, but for the picture, this will are they much print those in-house as well? We didn't go for that. And yeah, and then, you know, you wait a couple of weeks for the first one to come out.

00:21:56:06 - 00:22:28:11
Unknown
I think it's about a month for the first ones to be produced and sent to you to, to sign off on it. And then yeah, from that point it's, it's available direct to consumer. So that will have an impact on the I mean does it have an impact sorry on companies like this. No, I mean hugely I would I would assume because if they're being able to manage their cost base through minimum runs and actually now the minimum runs aren't really a thing because, as you know, there are competing processes that I it's got to be undermining some of the kind of, you know, cash cow or repeat volume that they were getting.

00:22:28:14 - 00:22:54:10
Unknown
I mean, unless they never dealt in numbers that low anyway, because it does look like the minimum runs here are 500 plus. So maybe they were always just for slightly larger orders and it's not going to instruct them too much. But then, as we said earlier, if they manage the inventory risk by making sure that they sell through, you know, small batches and they don't have to sit on lots of, you know, residual stock, then that they're doing the volume bit well already.

00:22:54:12 - 00:23:18:05
Unknown
So the one offs maybe have never been within scope. Yeah, potentially. I mean they will be sending a bit of a ripple through the industry though and okay, imagine everyone in the kind of rung below this is is suffering. So I'm yeah, it's an interesting quirk of the growth of technology. Who would have thought that there'd have been such growth in vinyl sales that they'd be inventing new print on demand technology for vinyl in the early 2020s.

00:23:18:05 - 00:23:56:28
Unknown
But that's what's happened then. It's been great for smaller artists out there, but perhaps not so for the pressing and manufacturing companies out there. So how do you think lenders would treat a sort of leveraged buyout or a leveraged buy in of this kind of a deal? So you possibly got to do it as an asset purchase because of the structuring of the equity currently you buying into a market that's being disrupted with new manufacturing processes and is facing a little bit of a temporary or permanent, you know, decline or sunset from its from its moment in in focus.

00:23:57:00 - 00:24:21:02
Unknown
I wonder what the lender appetite would be because this ticks the boxes for someone like a Barclays corporate that would be looking for businesses that are doing six mill plus in revenue and you know, at least one mill in a bit like this is doing 1.75 on nine and a half. So, you know, it should be eligible for cash flow lending if everything is, you know, rosy in the garden.

00:24:21:02 - 00:24:43:21
Unknown
But I wonder if actually conditions, market conditions in the nature of this transaction, given that you can't sell it as a going concern if you don't if you want to call the out of a group of business units within one balance sheet rather than lots of individual companies, I wonder if those kind of circumstances will make it more difficult to raise finance for this kind of a deal.

00:24:43:24 - 00:25:07:15
Unknown
Well, yeah, that's that's the question that I was going to pose to you is, is, you know, what are we borrowing and says we're borrowing against cash flow the the customer database and the pipeline. You know what really against cash flow it's got to be. And then what you want to know there is repeat business. What percentage of business is guaranteed, how much of it is coming back every quarter, a month, year, whatever.

00:25:07:17 - 00:25:31:09
Unknown
So the lenders are want to know that there is stability to the ongoing viability of the company or of the operation. So, yeah, it's a really difficult one. Probably takes it out of the scope of High Street and moves it back to the auto lenders. So you end up with a situation where you probably got a higher cost of capital than you may have otherwise had just because of the nature of the market, the nature of the deal.

00:25:31:11 - 00:25:50:15
Unknown
But yeah, cash flow, lend is all that's really available because there doesn't seem to be any assets. No. And then, well, this is interesting because they haven't listed an asking price, but then I suppose it would be interesting to know what the expectation of the seller is, because what percentage of the asking price they've got in their head, you know, all their assets And how much is that?

00:25:50:15 - 00:26:26:11
Unknown
Is this sort of intangible goodwill piece, What are they expecting to make on this 9 million turnover when actually. Yeah. You're only borrowing against the cash flow. Yeah. It was going to be X times EBITDA I guess in order to sort of square the circle and reconcile the boat piece. But if you're going into a kind of personally owned business to buy this and you know, structure a deal, you would be introducing quite a lot of conditionality on a deferred consideration or earnout.

00:26:26:13 - 00:26:53:08
Unknown
So you would want to be sort of having the seller where some of that risk, particularly in a declining market with emerging competitors. So I wonder if that's doable in any hot setting. Like can you pick this up for 40, 50/% of the consideration upfront and the balance over X years when you've already got kind of a structure that's paying out the original seller on similar terms possibly?

00:26:53:11 - 00:27:19:11
Unknown
So yeah, that's a that's an interesting one. Well, how could you structure the deal to use some finance from the sellers in preference to having to go and raise a lot of finance from lenders? Does, does the nature of this current ownership kind of impede that? I don't know. But certainly an interesting intellectual challenge, if nothing else. Yeah, absolutely.

00:27:19:12 - 00:27:35:11
Unknown
And, you know, if this was me and I was going to sit down with them for all the questions we've already raised as a few things that I would want to know. So I want to have a look at the kind of label and artist agreements and see what the terms are, what the territories are, what the window is, what the exclusivity is, and see how long you've got on those relationships.

00:27:35:11 - 00:27:51:10
Unknown
And I suppose that would speak to how long you want the earnout to be at least you want them to sit with you throughout that period and then possibly beyond, at least through one renewal of your major contracts. Also, what would be contracts, do you think there are actually likely to be formal kind of multiyear contracts in this kind of space?

00:27:51:18 - 00:28:09:03
Unknown
I would hope so. After the amount of time that this company's been around, folks, they've been around since 1991, I would hope that it's not just on I sort of released by release basis. You would imagine that there would be some kind of contracts in place. Again, we're not they're not dealing with small labels here. It doesn't look like anyway from from the kind of releases that they've been doing.

00:28:09:05 - 00:28:30:07
Unknown
And but yeah, again, look, this is another interesting point. What's the gross margin by type, you know, legacy reissues and new releases where the majority less majority their money coming from. I would imagine looking at what the releases are, it's the legacy reissue stuff. But you know, bands to releasing new music and you know, are they releasing stuff that's outside of what is listed on the website?

00:28:30:07 - 00:28:55:15
Unknown
You know, are they just putting the big hits there and all they do in stuff for, you know, mid-market labels? And there's actually a lot more volume coming from them. So I'd really be interested in that and kind of also working out what their what the profit level is sort of per per run. So, you know, what's the pricing cost per unit packaging, freight pick impact marketing per drop and see if there is some, some additional money to be made.

00:28:55:15 - 00:29:25:12
Unknown
There. You know what do that preorders look like? What does that strong pipeline they talking about it like in that next year is the company that we think it is you know how much does that negate the fall in revenue for the last year? How do they explain that that I've got a million good building questions that I would love to ask the and also that I think there's a be an army of people in this business just kicking through, looking at their team and their org chart and stuff like that.

00:29:25:12 - 00:29:49:10
Unknown
It looks like a really well staffed, you know, is this with lots of, you know, long serving members of the team that seem to be deep rooted in the space. So I think if you did have questions to ask, you've got a fairly broad leadership team. They're counting one, two, three, four, five, six, seven, eight. Had sort of been in in the sort of senior management and above.

00:29:49:13 - 00:30:15:29
Unknown
So, yes, it feels well resourced, let's put it that way. But but with that comes a high cost base. I imagine it's probably worth pointing out at this time that the adjusted EBIT that the listing is talking about is a country mile away from the declared operating profit that the accounts show for the full group of four businesses, let alone the two in question.

00:30:15:29 - 00:30:41:24
Unknown
So if either there's been a million trucks on an adjusted EBITDA or they're carving this out because it's the it's the design companies that are unprofitable and and this is the bit that's generating profitability and therefore is salable is a really interesting kind of disconnect between the accounts and the listing as sometimes you see. Yeah. that's really interesting.

00:30:41:24 - 00:31:03:26
Unknown
So I've got I've got a bit lost in this org chart. Now one thing that's really interesting is that they have a dedicated sales team. I think that's a really good sign. and it does make me think that there will be contracts in place. So this isn't just, you know, somebody that got into the music industry in the, in the nineties heyday of sort of vinyl and, and the start of indie labels and there's just got by on a handshake in a dream.

00:31:04:02 - 00:31:23:26
Unknown
This is a really well organized company. You do have a sales contingent there already. There's already a marketing team and going back to what I talked about, the kind of geographic slant towards the South, the fact that there are two teams in London and Brighton says everything. I think and again, if you are looking to relocate this, how far away from the southeast do you want to go?

00:31:23:26 - 00:31:46:15
Unknown
Because there's a reason why the team offices are based in those two places and but yeah, really well structured and put together company so they will have the answers that you're looking for if this is a is out for you no doubt I'm I'm really interested by intrigued to to learn a bit more I think yeah yeah it's quite fascinating.

00:31:46:15 - 00:32:22:23
Unknown
You know we looked at the UK market pretty widely in trying to ascertain what company it might be and there aren't a lot of them that are doing it this way, shall we say. I would say is a small pool that there's a fair few kind of niche producers and manufacturers, but, but maybe no one that's managed the artist relation or the labor relation, the multifaceted kind of design and fulfillment and, you know, marketing and digital piece, It's quite a nice, unique combination.

00:32:22:23 - 00:32:42:07
Unknown
I am quite intrigued by it and the whole thing just fascinates me. Yeah, yeah, absolutely. Well, on that note, sort of who who is the kind of person that buys this business because they talk about this being a kind of bolt on, but you'd have to be very closely aligned, like you'd have to already be running something in entertainment, vinyl, collectibles.

00:32:42:11 - 00:33:12:22
Unknown
And is it something you buy as a standalone? Does it do you need to already be in the industry? I wonder if it's even fit for a search fund? You know, I mean, you you think about some of the search funds success stories about, you know, what we came to keto labeling, you know, massive multifaceted labeling company in the Mediterranean that was bought by searcher originally as a sort of specialist one business unit that became the platform that then they just added lots of additional bolt ons to.

00:33:12:28 - 00:33:55:03
Unknown
And today it's, you know, 100 X or something crazy. I can't help but feel that if you read this forward and you look at, you know, maybe as a platform to bolt on other bits to in, you know, e-commerce distribution of specialist collectibles. Yeah you know there's got to be a few other kind of nice profitable spaces where where that makes sense And so it's the right scale, I mean, in terms of it being a couple of million in EBIT, you could see it falling within the kind of view of I mean, maybe it's a little bit less, it's a bit boring for for private equity and there's not a lot of assets to it.

00:33:55:03 - 00:34:17:06
Unknown
But I should think searches both self-funded and traditional, might be in scope. What do you think? I think it could potentially be, as you said, a sort of springboard to build a group from so you could go from here and bring in some complementary assets and maybe, you know, some merch printing and then you'd have some of your kind of in-house production stuff that way.

00:34:17:09 - 00:34:48:01
Unknown
My marketing brain goes immediately to sort of fan communities and starting to build that list a little bit more. That that list is 25,000. I think if you've got some engaged fans of, you know, nostalgic historic bands or Big Axel growing indie labels or whatever it might be, can you segment those out by music types and genres and start to build little communities around those, which then creates a bit of a flywheel for selling more merch and selling more vinyl and also, you know, helping out with ticket sales and taking a cut from those.

00:34:48:01 - 00:35:13:20
Unknown
So yeah, I think you could make it into a sort of fully fledged platform. If it was the right person, I think you'd have to have an interest and I don't think he's the kind of thing that, you know, I just kind of want to buy a business. So I'll buy a boring manufacturing company, I think, in order to be this kind of person and I think maybe even to maintain these relationships and to meet with the label owners and work with designers and stuff, I think you'd have to have a bit of that about it before you went into it.

00:35:13:23 - 00:35:46:22
Unknown
Yeah, I think a music background or music industry affiliation would be would be a benefit to any acquirer here. I think the company has obviously grown through opportunity in terms of the sort of adjacencies that it's been able to expand into and I think may be the sort of watchword here is consolidation and focus. You know, as you would carve this out and focus specifically on your stick to your knitting, stick to the bit that is its main USP, I think you would look to correct some of the kind of amber flags that I'm looking at here.

00:35:46:24 - 00:36:21:02
Unknown
Yet gross margin for the business is about 30%, which is, in my opinion, a bit impaired when you look at the fact that it's distribution specialist goods and also has a creative agency on the side of it, you'd expect that that profitability to be substantially more, you know, upwards of probably 50%. So, you know, the 30% normally speaks to high volume, low margin goods distribution it or wholesaling or that kind of thing where you're selling, you know, large volumes into shops.

00:36:21:05 - 00:36:48:18
Unknown
Yeah, 30% feels a little bit challenged because a business of this size you'll probably find that your operating cost base is somewhere between 25 and 30% too. So are you actually able to make any money out of it? Is is the underlying question particularly is an army of people. So I think there's is probably some rationalization to go through wherein, you know, you replace some of the people with with technology and, you know, you focus on maybe trying to squeeze some of those margins up in the specialist areas, renegotiate some contracts.

00:36:48:26 - 00:37:08:22
Unknown
It's not for the faint hearted. This isn't going to be profitable from day one and net, you know, circumstances. Yeah, I was going to say, the fact that this is any oti that maybe they're not as primed to be profit seeking as as you might like. And like you said, that might speak to the army of people and, and the lower margins there.

00:37:08:24 - 00:37:36:15
Unknown
So and if you add in the sort of leverage, if you if you if you do manage to finance a take down like this, then you've got servicing a debt and, you know, probably looking at three or four years before it really it's cash generative in in real terms. So I don't think it's unexciting or unfeasible, but I do think it's it needs a lot of unpacking and unpicking before someone sort of goes into the fray on this one.

00:37:36:18 - 00:37:59:11
Unknown
But yeah, armed with industry knowledge, with a plan for developing upside and negotiating a sensible deal structure to carve it out that you know, mitigate some of the downside risk. Yes. And a sensible price based on what's happening in the industry. How much of that is profitable? You know, whether whether a bit is the full group or this particular section of it.

00:37:59:11 - 00:38:39:05
Unknown
So yeah, yeah, look, see but I'm on the bias. Just one closing thought because we need to wrap up. But I've met several funds now the London based specializing in carve outs. Okay so where companies want to divest of divisions and happy to give those companies or those divisions soft landings i.e. help meet some of the subsidy that might be coming internally and keeping those those divisions viable and manage some of the kind of transfer risk to PE, you know, insulate the buyer against some of the kind of your potential costs of redundancies or whatever.

00:38:39:10 - 00:39:01:09
Unknown
Like there is a little mini market developing amongst, you know, funds that are happy to those kinds of terms on the basis that they're freeing up the seller from this obligation and then they go and do their value creation with a sort of sense of a little bit of risk mitigation, because some of those, you know, contingency costs have been met by the seller.

00:39:01:15 - 00:39:20:24
Unknown
It's a is an interesting little, little emerging trend. But you could see one of those buying this kind of thing is material enough, you know, circa 10 million for them to want to get stuck into. It is super interesting. I didn't know I was going to make that. Makes a hell of a lot of sense. Yeah, maybe somebody like that is is the right kind of organization for this.

00:39:20:26 - 00:39:42:28
Unknown
And I mean, that is such a thumbs up or thumbs down at me personally as a search. I'm going to give it a thumbs up because this is a business I would love to to turn around. And my little cogs are whirring with all the things that I could. And I think I would have the appetite to to grow it and, you know, take on those relationships and be the person that does this.

00:39:42:28 - 00:39:57:15
Unknown
So it would be tough. And there are a lot of questions to be answered, but I'm going to give it a thumbs up. How about you? Yeah, I like it. I would like to know more. So it's a get the same thing for me. I'd like to like to look into this in a bit more detail. It's it's interesting.

00:39:57:18 - 00:40:19:29
Unknown
I do think it's got some headwinds and you need to right size it for the real market rather than the bubble market. But yeah, it's interesting. Maybe I'm just nostalgic and you know, I remember thumbing through my LPs. I don't know, but I'll give it it I'll give it a proper looking over. NAGA Well, on that bombshell, that's the first one.

00:40:19:29 - 00:40:40:07
Unknown
We've both given the thumbs up, by the way. I get it. Yeah, yeah, yeah, yeah. We've had we had some one up and one down. We've had a couple of two thumbs down. So this is the first two thumbs up. So well done. Consensus rule of thumb overall. Funny. well, that's the end of a bombshell episode. I hope you've enjoyed this.

00:40:40:07 - 00:40:59:20
Unknown
I'm sorry. The bias I break down. It's been fun having one of these again after a couple of super interesting interviews. Like I said, if you haven't heard the last couple of interviews that we put out there, Alexander Callis, Jonah Hill, and Tonya Nagle, some really great ones. So please go back and do listen to those. Gareth, if you got any passing thoughts before we wrap up.

00:40:59:22 - 00:41:19:04
Unknown
Only big thanks to all our listeners and viewers. You've got us up over the 5000 mark and we're really chuffed with all those plays. We hope that you've enjoyed having a senior year. We're looking forward to bringing you a lot more content on the space. Obviously, continue to build out Best Crunch as a platform for the search and seller community.

00:41:19:04 - 00:41:37:18
Unknown
So we we really want to galvanize more success M&A and, other folks doing it. So Absolutely. Yeah. Thanks the thanks for sticking with us guests Thank you very much for the reason we show up and do this every week and we do love to do it. So please do keep listening and engage in liking, subscribing and all of that good stuff.

00:41:37:20 - 00:42:02:13
Unknown
So until next time, keep on crunching, keep on crunching.