Kingmakers’ core focus has always been buying and growing businesses. Historically, all of our efforts have oriented towards acquiring and growing online companies, and our team has become known as a pioneer in the space.
At the same time, we’ve always hypothesized that the long term opportunity and sustainability lies in brick and mortar acquisitions.
In September we tested our hypothesis by acquiring an HVAC company in Arizona, and after much deliberation within our leadership team, we’ve unanimously decided to devote more of our efforts and resources towards additional brick and mortar purchases.
We wanted to clearly explain our reasoning behind this change and why we’re excited about it.
First, here is some insight into the acquisition:
This company is a 35-year-old HVAC business with 25 employees and a core focus on water treatment and air conditioning installations/maintenance.
We purchased the company for $2.1mm, based on an annual SDE of ~$830k (~2.5x multiple). After analyzing the books post-acquisition, we’ve come to discover the carry forward SDE is closer to $1mm.
We acquired the business with a majority buyer partner in accordance with our model, and Kingmakers’ role moving forward is to assist in optimizing and growing the business. We were also responsible for hiring a General Manager for the company, and after interviewing several candidates, we onboarded a GM who had previously been the #2 executive at a competing HVAC company that is 10x our size.
After our team visited and toured the business in Arizona, we decided that there are a plethora of reasons why it makes sense for us to focus more of our efforts here.
Substantial deal flow
The vast majority of small businesses are owned by Baby Boomers who are retiring at a rate of 9,000 per day. This represents roughly 10 trillion dollars worth of small businesses that have to switch hands between now and 2029.
There is a serious lack of buyers for these businesses for a couple of reasons:
- Many of these companies are in “unsexy” niches (home services, manufacturing, fabrication, contracting, etc), and so they are simply passed over in favor of trendier niches.
- There are perceived barriers to entry for would-be buyers such as staff turnover issues, customer service issues, and the general perception that owning a brick and mortar business is an all-consuming endeavor requiring you to constantly be present.
The above leaves a lot of opportunity on the table for a firm like Kingmakers and our partners.
By clearly defining our investment thesis, we can find businesses that already have raving customer reviews, high employee retention, and owner-absentee operations, thus reducing common friction points. By hiring a competent general manager for the deal and instilling new systems (something we are very good at), we can quickly optimize and grow the business.
Since we are using SBA loans to acquire businesses, there is always a personal guarantee involved. Although SBA default rates are low, the personal guarantee is still a risk that requires a lot of consideration from our buying partners.
With online acquisitions, there is no insurance you can purchase to cover most downside scenarios, which means most of your risk has to be mitigated through growth and smart money management.
With brick and mortar business, there is insurance coverage for most scenarios that could take your business to zero overnight. There are also more tangible assets that can be collateralized.
These factors mean the risk of the SBA loan personal guarantee is drastically lowered for our buying partners.
Because of the small Buyer pool for these businesses, they typically trade for sub 3x multiples of annual SDE. This coupled with the SBA leverage means returns of over 100%.
An abundance of growth opportunities
The majority of these companies have been earning comfortable profits for years with no plans to continue growing the business. Because of this, they are often severely under-optimized, which leaves the new owners plenty of opportunities. It’s not uncommon for these businesses to lack streamlined systems, up to date technology, referral programs, easy-win-complimentary products/services, effective digital marketing, and more business basics that are common in companies on a growth trajectory.
Here is a list of some of the things Kingmakers, our partners, and our general managers will do to optimize and grow these businesses within the first 12 months:
- Conduct an extensive pricing survey to determine optimal pricing strategy
- Identify and take action on easy wins to add complementary services/products
- Implement a strategy for outsourcing or insourcing various roles
- Redesign and optimize the website
- Optimize and rewrite key landing pages for organic and direct visitors
- Identify and create relevant new content for the website
- Local SEO and link building for relevant keywords
- Optimization of local review profiles (yelp, google, Angie’s list, etc)
- Optimize customer funnel by lead channel
- Optimize copy and scripts for calls and e-mails
- Setup, optimize and automate paid campaigns on Google, Facebook, Yelp and others as relevant
- Implement or optimize the company’s referral marketing program
- Setting up email autoresponders for customer segments and create a content schedule
- Create project management procedures
- Create an organizational chart and job descriptions
- Implement a quality control plan for work performed
- Optimize company vendors and expenses
- Implement technology and systems for quoting, billing Invoicing & collections
- Digitize customer documents and organizing in a CRM
- Implement technology and systems for employee time tracking and payroll
- Implement technology and systems for transitioning accounting & bookkeeping
Earnest interest from our partners
Our operating partners and financing partners are the driving force behind our business model. So making sure they are excited and on board with this trajectory is paramount to our success.
After doing our diligence, it’s clear that we will have no shortage of partners in pursuing offline acquisitions, and our business buying community is fully supportive.
As we look to the future of the small-cap M&A space and consider our goal of building a legacy company that leads its industry, it’s clear to us that small business brick and mortar acquisitions is the path to take.
Throughout our history of acquiring and growing companies, we’ve developed an experienced team and a robust set of tools that allow us to take advantage of opportunities most don’t have a vision for. Through our culture, we’ve been able to attract some of the best investors, buying partners, financing partners, internal team members, external contractors, general managers, and other stakeholders to help turn our visions into reality.
We want to thank you for your interest in our company – we look forward to continuing to do great things!