An Entrepreneurial FATFire Update (One Year Later)
(WARNING: This is a long ass post. With bad writing. Read at your own risk)
Hey FATFire Friends,
So its almost been a year, and I thought an update may be entertaining to some. For context, here was my original long ass post from a year ago:
So a lot has changed over the last year. Most all of it for the good. So let's get right to it.
Updated Data: 46yo with 4 kids in LCOL Midwest. NW of 15-25m depending on how you look at it, up from 11m a year ago.
Business Update
As catch up, in 2019 we decided to create a holding company with the intent to buy one business a year and build a portfolio of companies. As of a year ago, we had three companies in the portfolio, and a team of three (President, Marketing Director, and CFO) along with my wife and I. Here's an update on how things are going...
Business #1 - Flooring company in southwest US
This was our first acquisition, and has continued to be our strongest EBITDA performer. They have grown from 8.5m w 1m ebitda to 13.5m with 1.4m ebitda in 2021. Their GM continues to be a strong leader, and they are finally expanding with additional locations. They have engaged our marketing team and they could take a big leap in 2022 to close to 18m in revenue. They continue to provide a strong financial base for our company.
Business #2 - Flooring company in upper midwest US
We acquired this company in late 2020 and they had 13.5m in revenue and broke even. Fortunately they were a quick turnaround. They had a strong leadership team, and have thrived when given the autonomy to run the business the right way. They finished the year at 19.5m, about 40% above previous year. They booked 1m in ebitda, which is solid performance considering the last year (and the fact that we acquired them for 2.25m). They have a clear runway in front of them to continue to grow the company and become the dominant player in the market.
Business #3 - House painting company in midwest US - Dead. #BIGSAD
Sold it for $1. Literally. Fortunately we were only in the purchase price of 350k and another 100k to try to get it going. We thought this would be a nice little 3m rev / 300k ebitda business. We had a good GM. The fundamentals just didn't work. It was a franchise (we no longer will acquire a franchise), and just too squishy. It relied on hyper-effective marketing and cost effective subcontracting...neither of which we could figure out. Possibly with more effort over a few years we could have turned it around, but with limited upside, and the rest of our companies being over 10m in revenue, we decided to cut bait. Sold to the GM for $1.
Important lessons learned:
- Never buy a franchise. They crush your ability to make a profit, and restrict your ability to make changes.
- Small businesses are squishy. Buy bigger when you can...they are much more durable.
- Failure is part of the game. And a reminder that we are not geniuses.
Back on the Acquisition Trail
Due to the excellent cash flow from the two flooring companies, and the redemption of a REIT investment I had made shortly after selling my tech company, we had around 2.5m to invest in early 2021
We also had added a college junior who is crazy smart as an intern. He has taken over deal sourcing, and through a combination of phone calls, sifting through online listings, and making friends with brokers, we found acquisition #4. Side note...he's fearless. I once heard him trying to give advice to some 50 year old buy on how to run a flooring company...when that guy had been running one since before the intern was born.
Acquisition #4 - Flooring company in midwest US
We found a 9m flooring company in the midwest with an underperforming 500k of EBITDA. We LOVED the market they were in, and have plans to grow that market to 30-50m in revenue. The deal went as smoothly as any deal we have had, and ultimately bought the company for 2m in June of 2021. We put 600k down, did 400k of owner carry back, and borrowed 1m to complete the deal.
Funny side note...the day we were onsite to close the deal, the admin team lead literally sat down with our President, unloaded...and demanded a big raise to stay (think 60k->85k). She kinda had a lot of leverage, so we gave it to her. In the end, she quit...much to our relief...about 60 days later.
Another funny side note....at the closing table we had not agreed on the rent adjustment that would happen year over year on the building they owned that was the business home base. They wanted 3%, I wanted 2%. They didn't want to split the difference. So I said "Lets flip a coin. You win, you get 3%. I win, I get 2%." We flipped. I won. :)
We learned more lessons on this deal...the most important being that we did not thoroughly vet what the owners told us about the ability of the team to manage the company as the owners stepped away post-sale. It turns out the person we thought was going to be able to step into the GM position, despite his positive attitude and willingness to work HARD at it, was just not in a position to lead that company. So for the first time ever we have had to recruit a new GM. I'm happy to say we just hired a new GM yesterday...and you guys will have to wait a year to hear how it goes in my next yearly update.
The good news is....even with some challenges at a leadership team level...the company has still performed at the level it was when we bought it. Durable.
Acquisition #5 - Flooring company in southern US
Since we had 2.5m for acquisition and only spent 600k on the small-ish midwest acquisition, we still wanted to do one more acquisition in 2021. Having 2m sitting in the bank account is no way to earn a good ROI. So we continued to look....
I believe in casting a wide net...and one of those things was using a facebook group that is for people in the flooring industry. I post once or twice a year that we are looking to acquire flooring companies...and that turned out to be a good idea. A reader of that forum happened to be in the office of a large, 20+ location flooring retailer in the south...and that owner mentioned he was thinking of selling. Next thing I know I'm getting a "contact us" form fill from our website from the owner saying he's interested in selling his company. Off we go! This one was WILD. 23 locations. 35m revenue run rate (up from 28m previous year) with 3m in EBITDA.
The company was only 8 years old...but had expanded incredibly quickly. They had put in 20 new retail locations within the first five years, and now had wel over 20 retail locations in one large city. They were the wild west. In some ways they were highly organized, with great training and an ultra-aggressive sales team. On the other hand, their cash management was nuts. Their balance sheet was WAY upside down because of deposits customers put down greatly exceeded their current assets (oh boy...). We knew because of seasonality / holidays, that their cash would "crash" from November to February...so we had to be very careful with how we negotiated the deal.
Fortunately, the seller was motivated, so we structured the deal as an 8.5m purchase price (2.5x multiple), seller left 2m in cash in the bank since the balance sheet was under water, and we pushed a LOT more owner carryback than normal. Ultimately we put 1m in cash into the deal, 4.5m bank loan, and 3m seller carryback. Our bank required us to keep the other 1m in cash we had as pledge since we went thin into the deal. We all agreed that was the right thing to do though due to the potential for that company to eat through cash from Nov-Feb.
The due diligence process was wild...because they had no financial person on staff. Getting true due diligence items was a lot of pulling teeth. The owner announced to the entire staff the day after we signed an LOI that "He was selling the company." When we came to town to look at the different locations...normally we'd be there under the guise of being bankers, or insurance agents, or something. Not this one...literally as we are walking through showrooms people are like "Hey its the new owners! Congrats....you got a heck of a business here..." We could have used this as massive leverage to re-negotiate, but didn't. We were happy with the deal. Closed at the beginning of September.
Post close on this deal has been a wild ride. Cash did indeed crash (as expected) through November-> February from 2m to 200k, but now is cruising back up towards 2m. The team there is SO aggressive and motivated to show that they can run the business even better now that the old owner is gone. They are lighting that market on fire. I would not be surprised to see them book a 45-50m year with 4m ebitda. As always, the first 90-120 days is an adventure to see what you REALLY have with a business...this one is a gold mine. As always...its a reflection of a really strong leadership team. We had no idea how strong this team was.
Holding Company
Because of the unexpected size and requirements around business #5, we had to scale our holding company as well. We brought on two additional marketing professionals (three total now) that work across the portfolio. We also added a training and development professional so that we can start building great training programs across the portfolio.
We had our offsite in Cancun to set strategy for the upcoming 1/3/9 years...and set our 2030 goal at 500m in revenue. Considering that we will end this year around 100m rev / 7m ebitda, we are off to a good start.
We also have discovered that while we can buy companies at a 3-4x multiple...once we get our little entrepreneurial endeavor above 150m rev / 10m ebitda, the multiples in our industry are around 9-11x. That puts us in a good position to be able to have exponential return on our continued acquisitions if we stay in the same industry (which we will).
At this point, most of the heavy lifting is done by the team. Our President runs all day to day with the portfolio, leaving my wife and I to focus on our quarterly strategic sessions with the portfolio, and getting to increase our travel.
We are planning to add another acquisition to the portfolio towards the end of Q3 this year.
Real Estate
We made one big move here...deciding to buy our long term home in Phoenix, where we will relocate to once the kids are out of the house (4 years and counting). We already have a condo there, but we fell in love with a 5.5m modern house up on Camelback mountain....which we could not afford (If we wanted to do another acquisition in 2021). But we LOVED it. So we engaged, found out it was rented most of the time. Asked to meet the property manager, who was a great guy. Found out that property had about 400k/year of rental activity. Still didn't want to put that kind of money down, so told the guy to let us know if he saw any other properties (2-3m) up on the side of Camelback that might be for sale and would make a great rental until we moved down there.
What do you know...two months later he brought us an off-market deal for 2.7m for an older house (a lot of lipstick on the pig) up on the side of camelback. Stunning views. Had about 200k in rental income per year. We bit. Bought it in April. The same company continues to rent it. It made 175k after fees from when we bought it til the end of the year. We just engaged an architect for the rebuild, and will start new construction in about two years.
Fun side note...my wife has diamond hands. A month ago our property manager texts and says he has someone who wants to buy our property and will offer 4m, no inspections, all cash. OOOF. I was tempted, but she said hell no. Ultimately I agreed...and I'm glad she has diamond hands.
FATFIRE'ish things
As our income has climbed, we have done more things to "enjoy the ride" to FATFIRE. Some of those things include:
- I hired a clothing stylist for Christmas for my wife. She wanted to update her wardrobe...they spent 6 hours doing just that. Total bill was around 11k. Wife couldn't even look at the receipt....she's not used to spending that kind of money (she still doesn't know how much it was). I had to text the stylist to make sure my wife didn't put anything back when she saw the price tag. Totally worth it.
- We got a Business Centurion card...which has some nice perks. Most importantly it has the 50% off all flights when booked with points. Since our businesses generate about 1m amex points her month, we have stepped up our international first class game.
- The Camelback house
- We are taking the kids on a two week European vacation. Blowing a boatload of points...but it is likely the last time we can be assured they will all come on family trips. Staying in The Shard in London...can't wait!
Lessons learned over the last year:
- I consider myself extremely lucky with some of the talented people my wife and I have around us. Our President is from another planet...he's so good at running the portfolio. Our GM's are crushing it. Fun when you are working with people who love what they do. My wife makes the perfect business partner to me...she sees things very differently and it works well.
- Franchises suck.
- I've had to learn to sit back and relax when the team is doing their work.
- First class / Business class on airplanes is pretty nice.
Things I hope to report have happened over the next year when I do my next update:
- We flew on ONE private flight.
- Portfolio will have a 140m rev RR projected for 2023.
- I've played at least 50 rounds of golf.
Book recommendation:
- "Pleased but not satisfied" by D L Sokol...it'll cost you $100 for a hardback but it's worth it
Remember....the journey to FATFIRE doesn't have to be all work and no play. Learn to enjoy the ride, because you never know when it'll stop.
Nick