❇️ New Deals - 20 Feb 2024

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Hello SMB Deal Hunters!

Thanks for all the great feedback from the deals I shared on Thursday!

🔥 Community Top Picks from the Last Issue:

#1: Managed IT service provider with a 95% retention rate
#2: Legal services marketing agency with an average client tenure of over 4 years
#3: Commercial and residential tree service that just landed AT&T as a client

I’m excited to share 5 new deals worth checking out.

Today’s issue is sponsored by Select Software Reviews, the best platform to discover the top 1% of HR tools.

1/ Potholing And Utility Locating Contractor

📍 Location: California
💰 Asking Price: N/A
💼 EBITDA: $900,000
📊 Revenue: $3,900,000
📅 Established: N/A

💭 My 2 Cents: This is a potholing and utility locating contractor, which is an excavation process that involves making a series of small test holes in order to accurately locate underground lines. It’s a business you’ve probably never heard of, but there’s actually a steady demand for this service, as potholing and utility locating are basic safety and regulatory requirements for any work involving the construction and maintenance of underground infrastructure. In fact, many jurisdictions have strict regulations requiring that before any excavation can begin, all underground utilities, such as water, electricity, and gas lines, are identified and marked so as to prevent possible damage or disruption to critical services. The result is that this business has been in business for over 20 years and boasts 550 active accounts of government agencies, utility companies, engineering firms, and contractors. Not only are these good clients, but they are sticky ones, as the business has an impressive 80% repeat business rate. However, I still want a breakdown by type of clientele and a precise definition of “active accounts”. If everything looks good, then this is an essential business that’s not going anywhere.

2/ HVAC Company

📍 Location: San Antonio, Texas
💰 Asking Price: $2,450,000
💼 EBITDA: $754,653
📊 Revenue: $2,222,210
📅 Established: N/A

💭 My 2 Cents: There’s a reason that HVAC companies are hotbeds of PE investment. They’re a recession-resistant essential service that is only growing in importance due to climate change. This particular HVAC company is listed at a very reasonable multiple, has a 30-year customer base, and has both residential and commercial clients, which translates into both year-round demand and less seasonality. However, I am curious as to what contracts come with the business. Specifically, I’d want to know if they have maintenance contracts with both their residential and commercial clients. I’d also want to know how much of their business is new installations versus maintenance and what percent of their revenue is from repeat business. Obviously, the more repeat revenue, the better. Since it can be hard to hire replacements, I’d also need to know how long the technicians have been with the company and whether they're committed to staying. Finally, although I like that the owner is retiring, I’d want to better understand his role in the company and what might be involved in replacing him.

3/ Factoring Business

📍 Location: Texas (Relocatable)
💰 Asking Price: $1,200,000
💼 EBITDA: $595,418
📊 Revenue: $1,411,519
📅 Established: 1996

💭 My 2 Cents: This business is in a very nice niche in the specialized world of factoring. Basically, the firm buys accounts receivable (A/R), or invoices, at a discount from businesses and then makes money when the full A/R are paid. In doing so the firm provides a valuable service that allows its client businesses to receive immediate cash flow instead of having to wait for 30, 60, or 90 day payment terms. Factoring firms have a steady demand for their services (and repeat revenue!), as SMBs often don’t have access to traditional forms of financing. I like that this firm has niched down even more by focusing on the trucking industry, because trucking companies generally face long payment cycles and are in need of factoring to cover operating expenses. The trucking industry, although a very large $800B market, is also very fragmented, with 95% of trucking companies having 10 or fewer trucks, which means there are a lot of potential clients out there. I also like that the owner is retiring and that there’s a General Manager and team in place that takes care of the day-to-day. I’d still want to understand the role of the owner, but there is a lot to like with a business that has been around almost 30 years, has factored over $779M, maintains strong margins, and is listed at 2x EBITDA, which is a steal.

4/ Home Care Agency

📍 Location: Queens County, NY
💰 Asking Price: $4,500,000
💼 EBITDA: $728,559
📊 Revenue: $8,543,681
📅 Established: 2014

💭 My 2 Cents: I love home care services because they are an essential service that is growing in importance. Our rapidly aging population simply prefers home care, not to mention the fact that the government also prefers home care to the much more expensive facility alternative. This agency primarily services elderly clients (which you’d expect) and is well located in a densely populated area, as it has licenses (which come with the business when sold) to operate in Westchester County and the 5 NYC boroughs. They have 4 contracts with insurance companies and one with Medicaid, with 95% in the CDPAP Medicaid program, which provides services to chronically ill or physically disabled individuals. I really like this Medicaid contract because the government pays on time. Need another reason to like this business? The marketing to get new clients is essentially free, as cases are referred by social workers from local hospitals and medical facilities.

5/ Aerospace And Defense Component Manufacturer

📍 Location: New Jersey
💰 Asking Price: $4,950,000
💼 EBITDA: $1,100,000
📊 Revenue: $5,300,000
📅 Established: N/A

💭 My 2 Cents: This business manufactures electronic components for a wide array of growing aerospace and defense industry customers, including major contractors as well as related contract manufacturers and subcontractors serving these firms. Ultimately, the end users for many of the company’s products include the defense programs at Lockheed Martin, Northrup Grumman, Honeywell, and Raytheon. I like that aerospace and defense contracts are often long-term and funded by the US government, which allocates a significant part of its budget to defense and space exploration. This provides a steady revenue stream that is basically immune to economic downturns, making the firm nearly recession-proof. It is also a business with a built-in moat, as the stringent regulatory requirements make for an extremely high barrier to entry. No wonder the company has been growing steadily for over 50 years, is a preferred vendor to many customers, and rakes in over 90% of its revenue from repeat business. It also has a retiring owner who is available for a transition period, which is always a good sign. My only concern would be over client concentration issues. Other than that, this looks like an awesome opportunity.

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🤝 Vendors and Lenders

I’m committed to helping the SMB Deal Hunter community close more deals, faster. Click on any of the links below and I will make a personal introduction to folks I trust.

SBA 7(a) Lender: The most common way to finance an acquisition up to $5M purchase price with 10% (give or take) down with the help of a government-backed loan. My preferred lender Elyse will help you out.

Non-SBA Lender: Best for smaller deals if you want to avoid the hassles of SBA. My preferred lender Grant and his team are the only private lenders I know who offer acquisition financing with long payback periods without any collateral requirements. Note: You must have great credit.

Quality of Earnings Provider: I always recommend conducting a QoE during due diligence to uncover any red flags. Get introduced to my preferred QoE provider that offers top-tier financial due diligence without breaking the bank.

Legal Counsel: A must-have on your team to help get a deal to the finish line. Get introduced to legal counsel with experience closing SMB deals that won’t rack up your legal bill.

See you Thursday!

-Helen Guo
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P.S. Whenever you’re ready, here are a few ways for us to work together:

1. Invest with me in cash-flowing SMB deals. I’m bringing on a select few investors from this community into businesses I’m buying and operating. Reply “LP” and I’ll share more.

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⏪ Catch Up On Recent SMB Deal Hunter Issues

• February 15th, 2024

• February 13th, 2024

• February 8th, 2024

Disclaimer

This publication is a newsletter only and the information provided herein is the opinion of our editors and writers only. Any transaction or opportunity of any kind is provided for information only; SMB Deal Hunter does not verify nor confirm information. SMB Deal Hunter is not making any offer to readers to participate in any transaction or opportunity described herein.