The Appeal (and Risk) of Buying a Consulting Firm

Summary

Acquiring Minds: The Appeal (and Risk) of Buying a Consulting Firm Hosted by Will Smith | Release Date: March 10, 2025

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Introduction

In this episode of Acquiring Minds, host Will Smith delves into the unique journey of Nick Muncie, a seasoned entrepreneur who recently acquired Hales Engineering—a specialized traffic engineering and transportation consulting firm. Departing from the more common blue-collar acquisitions, Nick's venture into a white-collar, niche consulting business provides valuable insights into the complexities and rewards of acquisition entrepreneurship.

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Nick Muncie’s Entrepreneurial Journey

Timestamp: [06:31]

Nick Muncie, co-owner of Hales Engineering, began his entrepreneurial journey in the property management sector in Northern California. Starting his business in 2010, Nick quickly embraced the strategy of growth through acquisitions, a path recommended by his mentor in 2012. Over the next decade, he successfully acquired eight additional businesses, significantly boosting his company's cash flow and operational capacity.

Notable Quote:

“I loved the process of analyzing the business, getting to know the quirks within it and how those would fit into our operation.”
— Nick Muncie [06:58]

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Discovery of Acquisition Entrepreneurship (ETA)

Timestamp: [12:07]

Despite already being entrenched in acquisitions, Nick only connected with the broader ETA community around 2020 through resources like Walker D.’s book "Build" and the SMB community on Twitter. Prior to this, his acquisition activities were somewhat solitary endeavors, operating "on his own island."

Insight: Nick emphasizes the importance of community and knowledge sharing in ETA, which can provide searchers with support and resources that solitary efforts lack.

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The White Whale Deal: A Missed Opportunity

Timestamp: [15:35] - [20:45]

One of Nick's most ambitious acquisition attempts was a substantial traffic engineering firm in the Southeast U.S., generating nearly $50 million in revenue with a 30% EBITDA margin. The deal, characterized by a sub-3x multiple and 35% seller financing, ultimately fell through due to financing challenges and internal family decisions by the seller.

Notable Quote:

“I spent the whole next day watching like three movies laying on the couch and I don’t do that. Yeah, it was pretty heartbreaking honestly.”
— Nick Muncie [17:57 - 18:52]

Key Takeaway: This "white whale" case underscores the critical nature of pre-established relationships with capital providers and the inherent risks in pursuing large-scale acquisitions without adequate financial backing.

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Acquiring Hales Engineering: Deal Structure and Strategy

Timestamp: [30:44] - [52:55]

Nick acquired Hales Engineering through a strategic deal involving a sub-3x EBITDA multiple, secured by a 65% SBA loan and 20% seller financing. The remaining 15% was covered through additional capital. This acquisition highlighted the importance of understanding industry-specific risks and the necessity of having a strong management team to mitigate key-person dependencies.

Notable Quote:

“If I had been less confident that there would be a lot of work like projects out there, this business wouldn't have been very appealing.”
— Nick Muncie [79:23]

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De-Risking the Acquisition: Replacing the Key Leader

Timestamp: [55:18] - [65:21]

A significant challenge in acquiring Hales Engineering was the dependence on the original seller, who was the linchpin of the business's operations and client relationships. To mitigate this, Nick incorporated a contingency requiring the presence of a capable replacement leader, Josh. To incentivize Josh's commitment, Nick structured a profits interest—a form of non-taxable equity grant that aligns Josh's interests with the company's long-term success without immediate tax implications.

Notable Quote:

“We grant this ownership stake, which we're just finalizing right now, and that the individual, he gets to participate in cash flow distributions immediately.”
— Nick Muncie [58:50 - 65:21]

Understanding Profits Interest: This mechanism allows Josh to benefit from the company's future growth and sale without incurring a taxable event upon granting the stake, fostering a collaborative and motivated leadership transition.

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Growth Strategy and Market Expansion

Timestamp: [66:41] - [75:46]

While the initial plan involved a roll-up strategy—acquiring similar firms to consolidate and grow—Nick quickly realized the scarcity of specialized firms in the traffic engineering niche. Instead, growth opportunities shifted towards enhancing organic growth through increased sales and marketing efforts. However, the primary challenge remained: recruiting qualified civil engineers with expertise in traffic consulting.

Notable Quote:

“Our challenge here was going to be adding talented people to our team as opposed to trying to go out and beat on doors to find more work.”
— Nick Muncie [72:16]

Strategic Expansion: Nick is focusing on expanding geographically by establishing a presence in new markets like Denver, leveraging local expertise to build relationships and penetrate these regions effectively.

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Margins and Financial Sustainability

Timestamp: [79:23] - [82:08]

Hales Engineering boasted impressive EBITDA margins of 47%, primarily due to the seller's over-involvement in daily operations. Under Nick's ownership, margins are expected to compress to around 25-30% as operational responsibilities and administrative tasks are distributed among a broader team. This adjustment is anticipated to create a more sustainable and scalable business model while still maintaining healthy financial performance.

Notable Quote:

“I want to make that investment so that the business is sustainable long term. To grow.”
— Nick Muncie [81:26]

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Building Institutional Knowledge and Managing Relationships

Timestamp: [82:36] - [87:25]

Transferring the seller's tacit knowledge and managing client relationships emerged as critical post-acquisition challenges. Nick admits that the handover process with the seller was not as smooth as planned, leading to some client concerns. To address this, Nick maintains a consulting agreement with the seller to ensure continuity and support, emphasizing the necessity of proactive relationship management and institutional knowledge capture.

Notable Quote:

“I would have taken more control over that process and, and said, okay, day one, who are these customers? Okay, call them today, tell them you'll be here for six months and that you have all the trust in the team that is taking over and you'll hand that off slowly over time.”
— Nick Muncie [85:58]

Lesson Learned: Effective communication and structured transition plans are essential to preserving client relationships and retaining business post-acquisition.

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Incentivizing Leadership: Profits Interest Explained

Timestamp: [58:49] - [65:21]

Nick detailed the innovative use of profits interest to incentivize Josh, the new key leader at Hales Engineering. This structure ensures Josh is financially motivated to drive the company's growth and success without the immediate tax burden associated with traditional equity grants.

Process Breakdown:

1. Granting Ownership Stake: Josh receives an ownership stake with a zero initial value, avoiding a taxable event.
2. Cash Flow Participation: Josh benefits from cash flow distributions proportional to his stake.
3. Liquidation Participation: Upon the company's sale, Josh receives a share of the proceeds exceeding a predefined hurdle amount, aligning his interests with long-term value creation.
4. Vesting Schedule: The stake vests over five years, ensuring Josh's continued commitment and performance.

Notable Quote:

“We decide to establish it because it was in writing. We just, we had just gone through a transaction where it established value. We set that hurdle at the purchase price.”
— Nick Muncie [62:18]

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Conclusion and Key Takeaways

Nick Muncie's acquisition of Hales Engineering exemplifies the nuanced approach required when entering a specialized, white-collar consulting business. Key insights from the episode include:

• Importance of Pre-Established Capital Relationships: Building rapport with financial partners before pursuing large deals can prevent missed opportunities.

• De-Risking Through Leadership Transition: Establishing a capable replacement and incentivizing them effectively is crucial for maintaining business continuity.

• Adapting Growth Strategies: Flexibility in growth plans, such as shifting from roll-ups to organic growth through sales and marketing, is essential when initial strategies encounter market constraints.

• Institutional Knowledge Transfer: Proactive management of knowledge and relationships during leadership transitions is vital to retaining clients and sustaining business operations.

• Innovative Incentive Structures: Utilizing non-traditional equity incentives like profits interest can align leadership interests without immediate financial burdens.

Final Thoughts: Nick's journey underscores the complexities of acquisition entrepreneurship within niche markets and highlights the critical strategies needed to navigate and thrive in such environments.

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Join the Conversation

Have questions for Nick Muncie or want to delve deeper into his acquisition strategies? Register for the Live Q&A session on Tuesday, March 25th. Connect directly with Nick via Zoom to gain firsthand insights and personalized advice.

Register Here: Acquiring Minds Show Notes | YouTube Notes

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Thank you for tuning into this episode of Acquiring Minds. Subscribe on YouTube, Spotify, Apple Podcasts, or wherever you get your podcasts. Don’t forget to sign up for episode summaries at acquiringminds.co.

Transcript

[Will Smith]

Because blue collar businesses so dominate the world of self funded search, I'm always interested to hear stories where the target business was white collar. Today's guest Nick Muncie acquired the epitome of such a business, a consulting firm. Traffic engineering and transportation consulting to be specific, a narrow niche, but because of that there aren't many providers of such services and Nick's acquired business enjoys quite healthy margins of 47%. But this is a case of a seller who is doing too much. So those margins will almost certainly come down under Nick's ownership. But he paid a low multiple, so even with narrower margins in the future, his effective multiple will still be very solid for a business with earnings like this. But to that point of the seller doing too much, he also had the local relationships, he had the technical expertise. The business really orbited around him as principal. So we spend a lot of time on how Nick de risked that dynamic. Listen for how Nick incentivized a replacement leader for the seller, which was a contingency of his acquisition. Nick insisted that there be someone else who could run the business. The model seems to be going well. Nick is working strictly on not in the business and not even on a full time basis. So to me this seems like an appealing business to own. And when I think of the myriad types of consulting work that are performed across the economy, I'm surprised we don't see searchers acquire more such businesses. See if you agree. Here's Nick Muncie, co owner of Hales Engineering and if you have a question for Nick as you listen to his interview, we're excited to introduce a cool new feature, Live Q and as with our guests so that you can come meet them and ask your questions directly in a Zoom call. Nick's live Q&A is Tuesday, March 25th. Register for that at the link in today's show notes or in the YouTube notes if you're watching on YouTube or at acquiring Minds Co. Come meet Nick. Ask him a question at his live Q and a on Tuesday, March 25. Register at the link in the Notes announcements this Thursday, March 13th legal office hours this one on employee issues and non competes, a key theme of any business acquisition. Attorneys Bill Barlow and James David Williams return to cover all the employment, non compete and non solicit issues that commonly come up on deals. That's this Thursday, March 13th at noon Eastern. Register at the link in today's show notes or on the Acquiring Minds homepage. Acquiring Minds Co, also M and A launchpad is back for its spring show M and A Launchpad is a one day event that brings together searchers and independent sponsors, seasoned business buyers, owners and private equity investors to go deep on buying businesses, finding financing and closing acquisitions, meeting investors and lenders, learning value creation from those who have done it. These are just a sampling of the workshops and panels that are packed into a very full day and that day is May 3rd. The show is in Houston. The organizers are running a promotion just for US$200 off with the code acquiring minds. Go to malaunchpad.com and use the code acquiring minds. All one word or use the link in the show notes. And finally, don't forget our new podcast Meeting of the Minds, a weekly show focused on independent sponsors. As you know, the independent sponsor format of buying businesses is quite different than that of search larger businesses small, more outside capital, higher expectations from investors. But for some searchers, it's where their business buying careers might take them. Case in point, last week's interview was with Alex defeifer and Ross Porter, who started as searchers, evolved into being independent sponsors, and evolved again into traditional private equity. They most recently raised a $220 million fund to buy businesses in the lower middle market, A fascinating story in its own right, but particularly for searchers as it shows the possibilities of choosing entrepreneurship through acquisition as a career. The podcast is called Meeting of the Minds. It's on YouTube, Spotify, Apple, every Wednesday. Please join us. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. An SBA loan broker, as opposed to a direct lender, doesn't work for a particular bank. Instead, the broker pairs you with the right SBA lender for your deal based on industry terms, risk thresholds, then helps you navigate the process better than many lenders themselves do. Matthias Smith of Pioneer Capital Advisory is just such a broker. Matthias worked at two of the country's top 10 SBA lenders, so he's been on the inside of the SBA process and knows well the pitfalls and hurdles and how to avoid them. He struck out on his own to laser focus on the ETA and search space. Our niche is his niche. You'll see Matthias at all the ETA conferences. He's closed over 30 search deals since starting Pioneer in May of 2022, including some acquiring Minds guests. To learn more and get in touch, go to PioneerCapitalAdvisory.com or click the link in the notes. Nick Muncie welcome to Acquiring Minds.

[Nick Muncie]

Thank you. Thrilled to be here, Nick.

[Will Smith]

You bought an interesting business. Traffic engineering and transportation consulting. This is obviously very different from the blue collar services businesses that are so common in eta. We're going to hear all about it. But let's start, Nick, with your personal discovery of acquisition in a former life in the property management business. Business. How, how did that go?

[Nick Muncie]

Right, yeah. So I, I, I still own this business, by the way, a property management business out in Northern California. I started that in 2010 and quickly, it was 2012, ran into an opportunity. I had a mentor that told me that the fastest way to grow was through acquisition. And so in 2012 I had an opportunity to acquire a company and went through small, I mean these are small acquisitions, but bank financing. Super nervous about making the, you know, the loan payment. But we closed that first acquisition, found that it immediately boosted cash flow and made the payment and more and it was super excited. Loved the process of analyzing the business, getting to know the quirks within it and how those would fit into our, our operation and kind of coming up with the process of merging the operations. First one, first one went really well and I was kind of hooked after that. And we did seven other acquisitions over the period of the next 10 years and that was a huge part of our growth. And I just love that process of analyzing businesses and figuring out how to mesh them into your existing operation and love the fact that you can grow so much faster that way.

[Will Smith]

Yeah. And to be clear, this was not what we would call ETA entrepreneurship through acquisition. You hadn't been exposed to that. This was simply, you were already an entrepreneur with a business. Just buy another business as opposed to trying to grow the doors, the number of doors yourself. That's great. Really interesting. There's a whole story there maybe about, you know, business owners who already own a business and how to use acquisition to unlock growth for another day. But just for, for before we leave that chapter of your life, of your story, where'd you get it to this property management business in, in Northern California that in terms of size.

[Nick Muncie]

Size. Yeah, we're about somewhere around, I think it's 6, 700 units or so. These are. And we've dabbled in all fields of property management. We've done a little commercial vacation rental management, some apartments. And we found that our sweet spot and our ideal customer profile is single family homes owned by single investors. We worked with hedge funds. All those, those are not fun to work with, honestly. But our clients are just, you know, working professionals that are building a small portfolio of rentals as their retirement plan and we do it really well and that's what we've decided to focus on for quite a while now.

[Will Smith]

But you're not in Northern California. So this is a successful small business that you run and own remotely.

[Nick Muncie]

Where are you? Yep. So I grew up in Utah, Northern Utah. I'm in Mountain Green, Morgan county and I moved there in 2010 to start this business. We lived in Bay Area for a couple of years and then moved up to Sacramento for six and a half years and then in 2018 or so decided to move back to be around family in Northern Utah again. But we have a super strong management team. All those guys, everything love them and they're running the day to day show there.

[Will Smith]

Then you obviously coming into our world had a big advantage of having a decade of experience in small business. So that's real operational chops there and having done acquisitions, a lot of them. So what an advantage. Great. So you. So, so I guess let's probably pick up the plot there. You, you come back to Utah. Why? And how does that path lead to wanting to buy a business?

[Nick Muncie]

Yeah, came back to Utah really just to be around family. My, my family is a. Has been small business owners all the way back. I've worked within a small business all growing up and one of the reasons was to come and try to be around my, my family and raise my kids around them. My father passed away just this last year, so it was awesome to be able to have the opportunity to spend time around him, you know, during his final years. But came back with the intent of buying, buying more businesses. Just love, love the process of, like I say, analyzing, acquiring and figuring out how to make a business more efficient. And this was, this was before I knew the ETA thing and SMB on Twitter and the whole community existed. And so I was kind of alone on my island for a while, but I would say I started my, what I now know as a. A search for a period of. It was probably two or three years until we found something and looking at all kinds of different businesses. Wasted a ton of time looking at different businesses. I wouldn't say it was a waste of time though. It was an education. And so yeah, started looking for different businesses and.

[Will Smith]

And so did you discover ETA eventually at kind of this World and the podcast and the books and the networks.

[Nick Muncie]

Yeah, yeah, I read what was it by then? Build. Yeah, by Walker D. That was probably 2020 or so that I discovered that and started to find the community on Twitter.

[Will Smith]

Yeah, but you had already discovered it for Yourself, you had already decided you were going to buy a business.

[Nick Muncie]

Already doing it. I just didn't know it was a thing that other people did.

[Will Smith]

Yeah, your search was unpleasant. You, you said to me you were closer to retirement than you ever want to be again. Say more about that.

[Nick Muncie]

Yeah, it was, you know, it. I think it's a problem with small business owners, but we wrap so much of our self worth in our, in our businesses and the success and the ego that's easy to be gained from being the boss and calling the shots and all that kind of stuff. And I realized as I kind of unwound myself from the day to day operations of my business in California and eventually I didn't have a lot to do on a daily basis that I think I was very much wrapped in that up in that and kind of came away from it not knowing what to do. I don't sit still and just hang out very well as it is anyway. And so started the search process looking at different businesses. I really didn't have a direction. I knew my passion is in real estate and construction, so I knew I was interested in businesses in that space but was also looking at all kinds of other different things. Spent quite a bit of time on a food manufacturing business and it was, it's lonely. Nobody, nobody tells you that. And you know, you find one deal, it doesn't work out, you go to the next and the days in between those, it's kind of get up in the morning like what am I supposed to do every day? You know. And honestly was kind of depressing to not have, you know, meaningful work that I needed to do every day.

[Will Smith]

Well, and what I'm also hearing is that as kind of long and brutal as the search can be, it's actually not hugely, there's not a ton of work to be done.

[Nick Muncie]

Yeah.

[Will Smith]

So. So it's actually not hard work. I, I, I, I'm, I'm treading lightly here because I, because I'm sure there are searchers who are like what are you talking about? This is so hard. But I feel like, you know, once you've kind of exhausted deal flow, a lot of it is just figuring out where you can find more deal flow which isn't huge quantities of hours.

[Nick Muncie]

Yeah.

[Will Smith]

So there's some of it is kind of wait, waiting. There's kind of a waiting game involved which is for ambitious, productive, like to be active people is an uncomfortable feeling. Depressing even.

[Nick Muncie]

Yep. 100%. Yeah, it's, yeah. I would argue it's saying it's Hard work is not the right way to put it. I would say it's very mentally challenging. It becomes a mental game to keep taking one step at a time and to be persistent about going after what you're trying to accomplish. But yeah, there's not 40, 60 hours of work to do.

[Will Smith]

Yeah.

[Nick Muncie]

In a week. And so you find a lot of time. And that's the other thing is nobody's pushing you. Nobody's calling and saying, hey, when is this going to be done? And so you kind of have to push yourself to say, yeah, I guess I'll start looking at some more listings and I'll go to this meeting with this potential business that I think actually is not very promising, but just kind of looking at every single opportunity that you can uncover. You know, that's kind of what I had to fill my time with.

[Will Smith]

Tell us about the deal that didn't happen. Your white whale.

[Nick Muncie]

The white whale, yep. Yeah, that was, that was a big one. I was, I was looking at, you know, a bunch of different businesses and then my partner Dave brought this one, knowing this was before, before we became partners. But he brought me this business in the kind of the Southeast U.S. it was a construction related business and it was much bigger than I was looking for. It was, you know, in the nearly 50 million in revenue, had 250 employees and they were operating on like, what was that? About a 30% EBITDA margin, which is very uncommon for businesses that are in this space in that size. And so he got the financials. It was not listed by a broker. It was by another private party that shouldn't have been trying to sell the business honestly. And they got the financials and took a look at it. It was off market deal and it's like, man, this is an incredible business. This is way bigger than I was, I was looking for though. And I kind of, generally when there's opportunities, I like to say let's go after this until there's a clear point that we can't or if, you know, somebody tells us to go away or whatever, let's chase it until we can see if we can get it or not. Yeah, so that's essentially what we did. I found some good friends of mine that we've partnered with on other deals. They had a lot of experience in that space. So I met with them, started to talk about the opportunity and decided to partner up and go after it together. And we, we actually got an LOI signed. It was for the, I mean the multiple of earnings. It was like 2.8, 5 or something like that.

[Will Smith]

What?

[Nick Muncie]

Yeah, it was a sub, sub 3 multiple and we got. Or the seller agreed to carry seller financing for about 35% of the purchase price. Wow. Yeah.

[Will Smith]

Now of course it didn't happen, so.

[Nick Muncie]

It didn't happen.

[Will Smith]

Yeah, we, but that's an incredible. So, so what is that? 17 million, give or take EBITDA? If it's a, if you said 30.

[Nick Muncie]

Margins, it was about, I think the last year we looked at it was about 11 and it, it was 40, 46 or so million in, in revenue.

[Will Smith]

Okay. Unbelievable. And, and so the multiple. This is just an example of why proprietary can be powerful because it wasn't an auction process.

[Nick Muncie]

Yep, that's exactly. There were, I mean for quite a while. There were no other buyers. We got it under LOI with 90 day, with a 90 day exclusivity period. We struggled and I think really we could have got this deal done if we knew how to source the funds from the beginning. So we spent too long trying to figure out how to source the funds was I believe ultimately why the steel fell apart. We had, you know, we got to the end of 90 days, we didn't have the funds all together. We asked for another 30 day extension, they granted it. I think they gave us another 30 day extension. We granted it.

[Will Smith]

Meanwhile, you're talking about granting you these extensions? Yep, correct.

[Nick Muncie]

And we were, you know, we're, I mean I went to countless private equity meetings, you know, different capital sources, banks, SBIC funds, all that kind of stuff. We were basically chasing anybody that showed any interest. And we found, we found a lot of the private equity firms were, would say, yeah, we were, will contribute some of the cash you're trying to raise, but not all of it, so go find some more. And it was just kind of a tight timetable to try to get that aligned. And so anyway, towards the end of the 30 day, the last 30 day extension we had, I, we had sourced the funds and be before we had got confirmation, basically a letter of, a letter, letter of intent from the bank we were working with. I got a call from the seller who was the CEO and president and he is a family owned business and he was on the board with five or six other family members and he called me and said, hey man, I hate to make this call, I want to sell to you guys. But unfortunately I got outvoted and the rest of my family decided to sell to somebody locally here who is ready to buy that. And that, we know, deal fell apart. It honestly it kind of crushed me because I was, I was like, there's this huge white whale that I have no business going after and we're so close to getting it. And then to find out that we were, you know, at the finish line and then have them call me and say it's not an option anymore, that just crushed me. I, I, I spent the, I think I told you I spent the whole next day watching like three movies laying on the couch and I, I don't do that. Yeah, it was pretty, pretty heartbreaking honestly looking back on it though, honestly I would have had to relocate my family and probably be running this business. And it made me realize I wanted this deal more than I wanted to own the business. I think if you ask owners in.

[Will Smith]

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[Nick Muncie]

It was going to be producing, you know, if it continued on the path that it was incredible cash flow, we were not going to have to put a ton of cash into it proportionately anyway. It would have been a, you know, a huge game changer and even just producing cash to do other smaller acquisitions like it would have just set us up to launch like a rocket in terms of having cash flow and capital be able to do other things. But looking at it, the, the business is in a very tough space. It's competitive. They were definitely, I would say the premium brand or service provider in the market that they were in, very well known. So that was another huge asset we would have been buying was the brand and the reputation. But it's a very tough space and there's a good chance I would have been caught running the day to day of that business. And thinking about that right now, if I was doing that, I don't think I'd be happy. That's not what I want to be doing long term. So I, that's That's why I say I wanted that deal because it was such a good deal and looking at, you know, functionally I would have been operating this business and relocating my family, that would not have been good. So I think ultimately it's good that it didn't happen.

[Will Smith]

You, you were making the mistake that I think a lot of searchers are warned not to make, which is don't fall in love with the numbers on the spreadsheet.

[Nick Muncie]

Yeah.

[Will Smith]

Really, really envision the implications of owning this business. Owning this business. The keys are given to you and all eyes are on you. And you know, what's that going to be like for, you know, your day to day for if you have to move for your family and so on. Right. It's so it's, it's a hard exercise, especially when, when it is a white whale. I mean, the numbers on that make you want to cry. Now, is there anything to, to be said or for the audience to learn from your fundraising process? Do, do you think that you weren't able to. First of all, the dynamic that I hear is that the kind of the classic fundraising or capital raising chicken and egg dilemma where nobody, nobody wants to be your anchor more an independent sponsor land less in self funded search, but probably in self funded search as well. Yeah, nobody wants to be the anchor investor, the, the first to really make the bet. But once you get an anchor a lot the dominoes fall and it's easier to raise the rest. But getting that first big anchor, that first big yes is, is hard. So maybe say more about that and then I'll, I'll tee tee it up this way. You yourself said I had no business in a deal this big. Do you think that the, the capital saw that as well?

[Nick Muncie]

Yeah, I guess to answer the, the first part of the question, I, I think we could have, yeah, we, we could have done our homework beforehand. The, the, the, the thing was, is I wasn't looking at deals of this size. So even if I had thought of it before, I, I wouldn't have gone looking for capital sources that would have, you know, taken this one down anyway. But if I, if I knew I was going after deals this size, even if I didn't have the deal yet, I realize now going around and meeting with all of these private equity firms and all these capital providers beforehand and having a relationship and telling them about my background and telling you about the type of deals that we were looking at, then I, we could have gotten this deal done. And so I think building those relationships is paramount to going and taking something down like this and, and trying to do it after the fact, getting it under contract or under loi, and then trying to go get the sourcing. Not that it can't be done, but I, I feel like it's infinitely more difficult to try to do it that way.

[Will Smith]

Yeah, yeah, of course. Again, kind of another chicken and egg. It's hard to make relationships with capital when you don't have a deal because they don't want to just get on the phone with somebody who may someday in the future have a deal. They kind of only want to spend their time when there is a deal to look at. So that's kind of what you got to juggle. And really, this would have been kind of an independent sponsor, more of an independent sponsor deal.

[Nick Muncie]

Yep.

[Will Smith]

And I'll also just call out that for budding independent sponsors or people who don't know the space. One of the challenges for independent sponsors, and basically the definition of that is you're doing a private equity deal, but you don't have committed capital. Correct. You find the deal, then you go raise the capital. And so from the seller's perspective, the big question is, especially with a nice business like this in the, you know, tens of millions of dollars, can this guy really pull this off?

[Nick Muncie]

Yeah.

[Will Smith]

Can he go raise the capital? And that and that. And independent sponsors, you know, that's always the, and that's always the argument that they have to make to the seller. Yes, I can. Yes, I can. But now we're hearing, you know, behind the scenes from the independent sponsors perspective. Indeed. It's a real risk. Yeah, it is a real risk for sellers.

[Nick Muncie]

Yep.

[Will Smith]

Yeah, for sure.

[Nick Muncie]

And to kind of speak to your point about my qualifications, had it been me on my, on my own, you know, my own, and I kind of led the deal for sure, all the way through. But if I had presented myself as, hey, I've, you know, I'm, my experience is I own a little property management company in California and I've got a little construction company and flip houses and stuff like that, I would have been laughed out of the room from the beginning. So I think a huge part of that being successful as the team that you put together and the guys that are good friends that I partnered with, they, they came from a background of a, a business in this space that was bigger than this one. So I think that like putting, putting their background on, on my deck, putting their experience and, and telling them they were involved in this deal, I think was paramount to even opening any doors or getting our Loi accepted too.

[Will Smith]

Okay. Nick, anything more to say about your search or should we turn our attention to the business you did buy?

[Nick Muncie]

I. I guess just if I could give any advice to people out there in their search. The sooner that you can, like, it's kind of counterintuitive, but the sooner that you can specify what type of businesses you're looking for and you know, what kind of size it, it gets so much easier after that because you would think that, oh, I'm open to anything and that that would be easier to look at every opportunity, but every business is so different. And the capital providers that are involved in those different industries and the partners that you need and the people operate them, it's so hard to take the shotgun approach and look at so many different kinds of businesses. So if I give any advice, the sooner you can determine what kind of business that you want to purchase, it becomes infinitely easier because then you can say, you know, all right, I want a construction company or I want an accounting firm. You know, specifically I'm going to look for accounting firms where without a specific search, you're saying, I'm looking for businesses. And it gets really hard to find businesses when your search is that broad.

[Will Smith]

It's a great point. And I'm, I'm reminded of this point being made so clearly, but in a different way. Previous guest, Tripp, who actually, I think his interview airs next week, worked with a buy side advisor, Calder Capital. And when they onboard a new client like Tripp, they say, we what, what, what kind of business are you looking for? And the business buyer is often like, oh, you know, super broad, Anything, whatever you got.

[Nick Muncie]

Yeah.

[Will Smith]

And they say, no, you gotta dial it in. You gotta dial it in. And often there's resistance. No, no, no, I'm open to anything. And, and, and the buy side advisor, in this case Calder Capital, who has seen this hundred times before, knows that. No, the more specific you get, in fact, the faster this process goes. Counterintuitive, but. But very true.

[Nick Muncie]

Yep. 100%.

[Will Smith]

Super. Super. And so, and so did you do that, Nick? Did you, did you finally dial it into. To traffic consulting businesses or what?

[Nick Muncie]

We didn't get that specific, but kind of narrowed it to B2B service businesses, which I understand is still pretty broad, but. And then. And. Or construction real estate related services, since that's where my passion and background is. And it did become easier once kind of narrowed that scope. That's still pretty broad, obviously. Yeah, but like, and that's why I give the advice, like, narrow as much as you can, like, even if it's like, well, I don't want to, you know, be a direct consumer retail business. Okay, then Mark, cross that one off the list and like, narrow as much as you can. And I think as you go along the journey, you'll continue to refine that as you look, inspect and analyze different businesses and find out what you really want. And I would argue if you're early in the process, I don't think it's bad to look at every business and to learn about different businesses and find out what's appealing and what's not, what you don't want to be dealing with. I don't think there's any shame in looking at everything, but after each one, I think it probably makes sense to say, yes, that one is on the list of, you know, potential businesses I want to buy or no, I'm not going to look at any more like that.

[Will Smith]

Yeah, I love that. Great, great, great exercise.

[Nick Muncie]

Yep.

[Will Smith]

All right, Nick, how did you find Hales Engineering?

[Nick Muncie]

Yes, that's a great story. So I was at the independent sponsor conference, McGuire woods in Dallas. This was, I think it was September 2023. Was sitting at a table for lunch, sitting across from a guy, was telling him, I'm looking for, you know, real estate, construction related businesses in the Mountain west region. And he, he told me, oh, interesting. I just looked at one this morning that didn't have a location listed on it and it's actually in Salt Lake City. So he sent me the link to that. I inquired about it pretty quickly, got a meeting, signed an NDA, got a meeting, set up with the seller. I think by the time that happened, it was November of 23. And so met with him. We quickly got an LOI into him. I think it was in mid December of 23 and it was accepted a few days after that, which is always exciting. I don't. People who bought a business will understand this, but there's a few like super exciting moments and terrifying moments, but one of them is when you get your LOI accepted. It's like, yes, I got it. Oh crap. There is a whole bunch of work to do in a short amount of time right now. Yeah, yeah. So quickly dove into that process of due diligence, analyzing the business that I was going to say the, the other kind of scary part is when you close the transaction. It's like, yes, we closed it. Crap, now there's a whole bunch of work to do in taking over this business. I will say those are, those are two different experiences though. The the due diligence process in closing a transaction, like there is a time clock on that and you are very much like, it's a high pressure environment, I feel like. And you have to get this done by this time where post closing, I, I would say the, so the due diligence that's exciting and challenging, the post closing is more fun and challenging because now you have basically to a degree, an infinite timeline to improve this business. Nobody's going to completely kill it and cut it and you don't own this business anymore after 90 days, you know.

[Will Smith]

Yeah, yeah, well, and, and on the point about the ticking clock of between loi and close, you were probably more acutely sensitive to that than anybody, given that that was, that was sort of what collapsed. The last deal with a white whale was that, you know, you weren't taking, just asking for a 30 day extension for granted anymore.

[Nick Muncie]

Right? Yep, that's exactly right. Yep.

[Will Smith]

Yep. Great. And okay, so this guy you met at McGuire woods, by the way, if you were in the McGuire woods independent sponsor Conference, which happens once a year in Dallas, you were really start, you had really started to self identify as an independent sponsor.

[Nick Muncie]

Uh, that, that's kind of what I was exploring honestly. And I, I think and, and that's so like when I didn't have a lot to do during my search process, I, I kind of told myself and that the really the only thing I have control of right now is meeting new people and learning new things. And so in general I think it's a good idea to take every advantage to go gain knowledge or make new relationships. So I was, it was still early in me kind of exploring what independent sponsor, even me even meant. Like as we were doing this other, the white whale business, like we were meeting with private equity firms and they were like, okay, so you guys are the independent sponsor for this? And we were like, yeah, we're independent sponsors.

[Will Smith]

I know what that means.

[Nick Muncie]

And so it was kind of after that, that experience I was like, I should probably figure out what independent sponsor means. So decided to attend this conference and learn a little bit bit more about it. I think I'm generally operating in a smaller space. I like small businesses that I can own most of and have an intimate team and grow from there.

[Will Smith]

Let's use this opportunity, Nick, to define how do, how would you define independent sponsor and then contrast yourself from that definition.

[Nick Muncie]

I hope I get this right.

[Will Smith]

So I'll try to fill in the blanks. Okay.

[Nick Muncie]

Yeah. So from my perspective, an independent sponsor is searching for a deal they Are I guess it, it depends but generally they're probably incurring some or all of their due diligence expense and all, you know, paying their own wages while they're on the search. They're identifying a deal. They are then once they get one and they're probably making relationships beforehand with capital providers and partners and stuff like that. Once they get a deal under loi, they are going and raising money most or all of the capital for that and they're taking a minority stake, probably a carried interest position and taking a minority stake. And they, they can be either the direct operator employee, you know, CEO of the business or from my perspective they can also be more of a chairman kind of position where they are hiring a CEO, but they are ultimately responsible for the success or failure of that business.

[Will Smith]

Well, well defined there. You, you sure did Nick. That was great. I'll fill in a couple of details. Typically much larger businesses. Yes the way they get paid is with the carry as you said, which usually is 20% with, with hurdles up to 30 and beyond sometimes so performance B which is, which is really the kind of conventional private equity model. They also get paid typically a percentage of EBITDA that the business is generating every year. Management fee, management fee Y and then there's also a deal closing fee typically where they, they get paid upon closing the business. And a lot of that is often kind of you the justification for that is paying themselves back for often the hundreds of thousands of dollars of deal costs that there's been to get the deal closed. The, the other, the other key difference is there are, there are of course always nuances but the standard down the fairway independent sponsor is, is very much a private equity hold and grow period. So that they're tasked with growing this business and then, and then exiting at the end of you know, seven or eight years.

[Nick Muncie]

Right.

[Will Smith]

Whereas a searcher, if they have investors will probably there will be a similar expectation but it's going to be a far looser expectation. And if they don't have investors, often searchers intend to hold the business forever and have their own optionality. Not necessarily forever, but there is, they have the option and it's not the, it's not the, the kind of investors breathing down their neck to get liquidity out of the business. So and, and, and just lastly to your point about does the independent sponsor operate the business or not the typical is no, they're the, it's the chairman model. But there are certainly exceptions to that where the sponsor gets in there and is. Is active or semi active. Right. Great. There's just so much confusion around that term. I, I have defined it and redefined it on the podcast and probably will probably continue to for people. You haven't told us about the business. You told us how, how you found it just across the table from somebody at, at McGuire Woods. Tell us about the business, please.

[Nick Muncie]

Yes. So it's a very interesting business. It serves a very specific niche, but they do traffic consulting and engineering as well as kind of general transportation. So the firm is a civil engineering firm, but that's a very small piece of the civil engineering world. So when there are, there's new, we work both with public and private sectors. On the public side, we're working with municipalities, departments of transportation, in kind of reviewing some of the work of other consultants as well as performing some of our own studies. And when I, when I say studies, that's a lot of what we do. It's, it's basically analyzing traffic data and making suggestions based on that traffic data on how to improve the flow of traffic or the functionality of traffic in transportation. Where a lot of civil engineering firms, they're doing a lot of design where they're actually designing the roadway and we don't do any of that kind of stuff. So it's a very specific and specific niche and small corner of the civil engineering space. And then on the private sector, we work with a lot of private developers. So if they're putting in a new McDonald's or a new shopping mall or even a new residential development, we are analyzing the surrounding traffic to that development and making suggestions in a, in a report based on our analysis on what they need to do to handle the new in influx of traffic flow on the infrastructure around it.

[Will Smith]

And so civil engineers, the ones who actually design the traffic pattern, they don't, they don't do this analysis themselves. They farm it out to you or it depends.

[Nick Muncie]

Yeah, so a lot of them farm it out. So a lot of the big dogs are in civil engineering doing design and, you know, big heavy hitters from what I understand. And I, I'm not an engineer, so I don't have a background in this. I've gained a, you know, a fire hose of knowledge and learning over the last year, as I've come to learn this business. It's a fascinating one. But the, the traffic analysis that we do is kind of the ugly Reddit head, redheaded stepchild in, in the corner. They do it because they have to, which that's kind of, that's kind of a space I come from that's property management in the real estate space. You know, real estate brokers, they, they look at property management as painful, unnecessary evil. Which I, I like. My dad told me when I was young, if you want to be successful, do the type of work that unsuccessful or the unsuccessful people are unwilling to do. So I, I like that. And I remember he even told me example of the waste management that that business makes a buttload of money because they deal with garbage and nobody else wants to. So why, why is.

[Will Smith]

But your business doesn't seem particularly unpleasant? It seems. No, it's interesting and intellectual and I.

[Nick Muncie]

Mean, I imagine for some people suggesting. Yeah, not at all. It's not unpleasant at all. But it's like these are fairly like a civil engineering firm. They could get a, you know, a $3 million contract to, you know, produce a new roadway design where ours are very quick, you know, 5, 10, $15,000 of like a two week project where we're just analyzing traffic and then making recommendations to the other civil engineering firm that's going to design that roadway. So it's just, it's for a lot of the big firms, it's kind of, I guess you could say small potatoes is the scraps that are kind of left over from the big projects that they actually want to do.

[Will Smith]

Okay. So you tell them put the stoplight here. This many lanes of traffic. Yeah. Right turn is okay. Right turn shouldn't be permitted here. And then they go off and design it. You give them the plan and they generally.

[Nick Muncie]

That's correct.

[Will Smith]

Okay, very interesting. Like, I mean, I think it sounds like a really interesting business.

[Nick Muncie]

I've been fascinated by it, honestly.

[Will Smith]

Yeah. And what can you tell us numbers wise?

[Nick Muncie]

Yeah. So we looked at this business in the, the last year it was revenue wise. It was in the kind of lower to mid seven figures in revenue. And then this is, this is what piqued my interest, obviously. But the, in, in last year it had a 40, I think it was 47% EBITDA margin, which I think for any business that's a pretty incredible margin to look at. So it's a fairly small business. But with the margin that it was at and kind of learning more about the opportunity. I don't know if you know this, but traffic problems aren't going out of style. They're probably going to be around for a while.

[Will Smith]

Yeah.

[Nick Muncie]

And just understanding the, you know, the opportunity and the Runway for additional work there, it became, it caught my interest and I became very serious about looking at it, obviously. Yeah, yeah.

[Will Smith]

Well, I'm going to, I'm going to do a little math for the audience. I know you can't be more specific, but 47% margins, for easy math, call it 50% margins, lower mid seven figures. Call that 2 to 3 million. So this is a business that was earning a million to a million and a half in annually se. So yeah, that's, that's great. Now we're going to get into are those margins sustainable? But first let's hear about the. How you bought the business, the terms.

[Nick Muncie]

Of the deal and how you structure terms of deal. Yep. So we, yeah, we made an offer of. It was. I guess I can't disclose that either, but I'll tell you the multiple. The multiple was a just under a sub 3 multiple, 3x multiple. And as far as the breakdown in the capital stack, we got, we got an SBA loan for, I think it was about 65% of it. And then we had seller financing, which actually was made up of two seller notes, but the seller notes equaled, I think it was about 20% of the purchase price. And then we came up with the capital for the other 15%. I think I did my math there. Right.

[Will Smith]

Yeah, yeah, yeah, that works. So that's.

[Nick Muncie]

A.

[Will Smith]

There's more equity in that deal. Well, I'm sorry, seller note is not equity, but there's, there's less SBA in there than, than we sometimes hear about.

[Nick Muncie]

Correct.

[Will Smith]

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[Nick Muncie]

Yeah. So we had originally negotiated in the LOI A. I think it was a 14% of the purchase price. A seller note. It was. The rate was in the, the, was it 6, 7%, something like that? It was a 10 year amortization with a five year term. On that note, then we, we got into, we're working through the SBA loan process, which I'll just say this. I, I probably will be doing an SBA loan again, but, and this isn't my first one, but if I ever, if I never have to do an SBA loan loan again, I wouldn't be mad about it. It's, it's a painful process. But we got our, you know, we, we had gotten a letter of commitment from a number of banks for, you know, the 65% or whatever it was. Maybe it was 70% that we were looking for. Yeah, I guess is about 70% of the purchase price we were looking for. And then we, and that's kind of the other tricky part is you choose these different lenders and you're not sure which one is going to go the distance because we've done a deal in the past acquiring another business and we got to the near the finish line and the SBA lender had internal issues and ultimately dropped the ball and we had to scramble and find somebody else last minute and got terms we weren't thrilled about. So it's kind of stressful, I guess, going through that experience, not knowing if the lender that you choose can go the distance.

[Will Smith]

Yeah.

[Nick Muncie]

And so we got through the process. We weren't too far along that it was going to cause, like, at least cause significant issues where it could kill the deal. But the lender for one, I can't remember the reason, but they basically came back and said that we, we can only, we originally committed to this loan amount. Well, for whatever reason, the loan, the only loan amount we can commit to is about $300,000 less than that. So we ended up, you know, fairly far along in the process having a $300,000 shortfall. And we kind of weighed our options. We, we could have put more capital in, we could have raised more, but we decided first to go talk with the seller and kind of explain the situation. In any of those prior situations, we probably would have had to extend closing. And so we went and talked to the seller and said, hey, I'm sorry this happened. We're gonna, you know, this was our deal. This is essentially what I told them, is that we committed to bring you this much at closing. And I'll make that happen because I committed to it. But I'll probably need more time to do that because of these problems with the bank. However, I Just want to ask you if you're willing to carry a second seller note on whatever terms and interest rate that you want for a few hundred thousand dollars and then we can proceed with closing on schedule and we won't be delayed. And he is very generous. He's a super good guy. I love the guy, honestly. I consider him a friend. And he, he agreed to carry that extra 300 on a two year note fully amortized at 11% interest.

[Will Smith]

So nice of him or you know, accommodating of him to do it. Correct. But that loan was, is no joke.

[Nick Muncie]

No, yeah, it's, I mean that's the two year AM That's. I have a bias towards good deals and high cash flow generating businesses for this reason alone. If you're generating extra cash, you can absorb a lot of problems and mistakes. If, if, if your margins are slim and you have a hiccup even after post closing, it just makes life infinitely more difficult. So we, we had the benefit of buying this good business with good cash flow that you know, particularly from the perspective of the bank because they were going to factor this into our debt service coverage ratio, that we had plenty of leeway there to take on another two year note with a fairly healthy payment.

[Will Smith]

Well, and, and let's not forget the multiple plays a giant role here as well. You're buying for sub 3x.

[Nick Muncie]

Yeah.

[Will Smith]

For, for a business that's doing over a million in earnings. My calculation, you're neither denying or confirming that, but for a billion, a business that's probably doing over a million. How did you get that low multiple? And yeah, let's just underline the point that this is one of the great things when, if, if you can strike a good deal, you have that much more room to absorb more leverage. Basically.

[Nick Muncie]

Yeah.

[Will Smith]

How'd you get, how'd you get such a multiple?

[Nick Muncie]

I mean we, I mean there's a fair amount of risk in this business. So the offer that we made was basically it was calculated by the risk involved. So it's a fairly small firm, we've got about 10 people. And the more we learned about it, the seller was extremely crucial for the day to day operations of the business. He, he basically was the brain of the operation. Everything ran through him and could that, so that key man risk, you know, kind of combined with coming into an industry where didn't have a ton of knowledge or experience that factored into basically what do I feel comfortable offering for this business and you know, determining the cash flow on that and determining kind of what our risk was if we, you know, lose 25% of the clients, then our cash flow goes to this and all of a sudden we can't make our debt service payments. So ultimately we arrived at that number and got that multiple because we said that's what we're comfortable paying for it.

[Will Smith]

When you say we, by the way, Nick.

[Nick Muncie]

Yeah.

[Will Smith]

Is that the royal we or is there a team?

[Nick Muncie]

Yeah, there's a team. So I was kind of leading this one, but partnering with my partner Dave and then a couple other guys that are. So they're actually the same, same guys that we, that we are partnering with on the, the other white whale business. They're good friends, trust these guys, very savvy in business. And so we, we had them as our investors in on this deal as well.

[Will Smith]

Can you share? So, so by the way, Dave, Dave Gilbert, who is your partner in Salt Bros. Dave actually introduced us also listener to the pod, and Dave bought proven, which is a, which outsourced financial services CFO business. So that's part of the Salt Bros. Holdings.

[Nick Muncie]

Correct.

[Will Smith]

So you have the, the investors and you have. Dave, can you share how all of this ownership breaks down?

[Nick Muncie]

Yeah. So the ownership structure is Salt Brothers holdings, which is owned by Dave and I, we own 65% of the business. We put in a little bit of capital and we guaranteed, put PGS on the SBA loan. And then the, our other partners, the greens, they own 35% and they put up the lion's share of the capital. They have no PG's on it.

[Will Smith]

Okay. Okay, great. So Dave has a P. Is it is a personally guaranteeing the loan as well?

[Nick Muncie]

Correct? Yeah, that's what. Same kind of structure on Proven, CFO as well as this, this firm hails.

[Will Smith]

Engineering and, and your Salt Brothers Holdings.

[Nick Muncie]

Yeah, it's, it's. Yeah, the name is abbreviated in writing, but Salt Brothers Holdings. Yep.

[Will Smith]

Salt Brothers Holdings. Is the intention there to acquire more or now that you've each acquired one and you've both guaranteed each other's loans, that you're kind of at max capacity?

[Nick Muncie]

I mean, we're at max capacity at sba and we're trying to work through some strategy right now around solving that problem. But I think generally both of us, I can speak for myself, I, I have learned that I really like the process of acquiring businesses, analyzing them and closing the transaction. And I like solving the big hairy problems and I like working with the leaders of those business businesses in building the future and setting goals and driving forward towards that. And so my intention is not to get involved in the day to day on an ongoing basis in any one business. But rather to buy multiple businesses, put really, you know, just super intelligent, strong, hardworking people in those positions to lead those companies and work directly with those leaders in building the future of that business and kind of rinse and repeat.

[Will Smith]

Okay, great. Well, that does, that does sound good. I think that's, that's, that's the goal and fantasy of many people listening.

[Nick Muncie]

That's fun, man. I, I, that's what I, the work that I'm doing right now, I, I could do 60 hours a week for, until I'm 95 years old. I honestly love it.

[Will Smith]

Yeah, yeah, it's, isn't it? That's just so wonderful. And I, and I hear you actually, perfect segue. So the risk in this business you've identified, you know, identified at the outset, a lot of it locked up in the owner's head. You said, you just said yourself that your, your own personal trajectory in buying businesses is not to be the operator. So both of those dovetail into how did you de risk the acquisition of Hales and the fact that you don't know anything about traffic consulting and the fact that so much of the knowledge was locked up in seller's head.

[Nick Muncie]

Yep, very important factor because if that problem's not solved, we don't do this deal like 100%. And so one of the very, like the first, I mean, the first meeting before we even had an all, I signed with the seller, which is kind of the conversation we're having with every seller of a business that we're looking at because we're still looking at other businesses. Is, is there an individual within the organization that can replace the work that you do and fill your role? And so we had that conversation early with the seller of this business. And he said, yes, there is, there's a super sharp guy who's been with me for eight years and I've kind of been grooming him to become a manager and take over the operations of this business. And so we said perfect, because that is a contingency on us closing this transaction. Because I'm not a traffic engineer, I don't have one close to me. And so we're not doing this if there's not someone in there that can step into your role. So made it very clear early on that that was a contingency. And also shared with him that I understand the, the sensitivity around telling your team that you're selling the business, but we need to meet with this guy, get comfortable with him and make sure. He's on board and has an interest in working with us and ASAP as soon as we can. And so I think the original agreement was that let's get our legal legal docs in place and then you can meet with them. Well, I don't know if any. Anybody that's been through legal that's not like, oh, yeah, okay, we got them drafted, just sign them and we're done. It's a negotiation back and forth on terms. I would argue the. The most painful part of doing a business acquisition, I would say, is probably, number one, legal. And I'm sorry to our attorney, he made it as smooth as it possibly could be, but it's just a painful process. And number two is bank financing. So with that contingency of getting the legal docs done upon. That's the contingency. Upon meeting our potential operator, we. The legal process went on and we didn't get a chance to meet with him until about three. I think it was about three weeks before we closed. And by that time I was getting quite nervous that, you know, that he wasn't going to be interested or he wasn't a good fit or whatever the case may be. But we did ultimately meet with him three weeks before, and we met with him, talked for probably hour, hour and a half, really liked him. He seemed super sharp. And we were still even at that point, rolling the dice a little bit because we're counting on this guy to run the operations after an hour and a half meeting, and we're about to close and commit, you know, all this capital to buying this business and take over responsibility for it. So even to that degree, it was still a little bit of a roll of the dice to continue on with closing at that point.

[Will Smith]

And of course, you know, he becomes your key man. Risk. Yeah, I mean, it is the nature of these businesses. There's too small. They're too small to completely avoid keyman risk. But it does feel like keyman risk has shifted from one to the other. Well, now is probably a good time to turn our attention, Nick, to the. To how you incentivize. So, so to. To this point about him being your new key man. Y How you de. Risk that because you actually do have a structure in place, and I think the audience will really benefit from hearing about it. Correct.

[Nick Muncie]

Y.

[Will Smith]

So let's get into that.

[Nick Muncie]

Okay. Yeah. I think we recognize very early on that we. We wanted this. This guy that we were going to be working with that's going to be our. Our operator to have a stake in the business one way or another. And so we were exploring different options. We could do a, you know, a stock grant. The problem with that is that's a taxable event. And so you're, you're either asking that individual to come up with a bunch of cash to pay the tax bill for that grant, or you're, you know, issuing a pile of cash for him to be able to pay the taxes for that. Neither of which were super appealing for obvious reasons. I learned about and actually from our partners, the Greens. They've done this in multiple businesses, but a structure called a profits interest. It's essentially a grant award, but the profits interest structure allows them to participate. And they are, it is a form of ownership, but the structure of it is not a taxable event upon the grant. So just to kind of explain the mechanics of that, so we grant this ownership stake, which we're just finalizing right now, and that, so the individual, his name is Josh, he gets this ownership stake in our business. He, he participates in cash flow distributions immediately. And then on a liquidation sale or the sale of a business, the profits interest basically tells the IRS that we are granting this stock or this ownership to this individual. And as of Today, it's worth $0. And that's what allows it not to be a taxable event. And then if we sell the business in the future, he gets to participate in the proceeds of that sale in the difference between the hurdle amount that we establish at the time of the grant and the amount that we sell for in the future. So just for round, round numbers, let's say that we're valuing the business at $5 million and we give him a 10% stake in that. If, if that was a stock award, he would immediately have a $500,000 taxable gain that he would have to pay the tax bill. But we didn't give him $500,000 in cash to pay the taxes, which is kind of a non starter from the beginning. So with this profits interest structure, we grant it today with the value of the hurdle is 5 million. And today that stock is worth zero. If we grow this business and we sell it for, we sell it for $20 million five years from now, then his 10% stake of that, he now gets the difference between that $5 million hurdle and that $20 million exit.

[Will Smith]

So the gain there is 15 million and he gets 10% of the 15 million.

[Nick Muncie]

Correct.

[Will Smith]

And, but when you say so, you can, you can actually, but if you can just allocate that his, allocate the value of stock being zero at any point. Why not just allocate the value of stock being zero now and give them 10 now and call it and say, you know, say that it's worth zero so that he can avoid paying taxes on it.

[Nick Muncie]

Yeah, so that's what. I can't pretend to understand all the mechanics of the tax law and stuff besides, you know, in regards to that. That's why we paid bunch of attorneys, smart attorneys to figure that out. But it, what I do understand is that it has to be like the, the hurdle amount. It has to be reasonable. And because we just recently did this transaction, we have an established value. The risk was placing that hurdle any lower than that purchase price. Then you run the risk of the IRS auditing and saying, no, that was not, I don't know what the term would be an appropriate hurdle. But so we, we decided to establish it because it was in writing. We just, we had just gone through a transaction where it established value. We set that hurdle at the purchase price.

[Will Smith]

Okay, so, so, so that incentivizes him for a nice exit. He will participate in an exit.

[Nick Muncie]

Yep.

[Will Smith]

As if he were X percentage shareholder. Call it 10%.

[Nick Muncie]

Yeah.

[Will Smith]

And then, and then say again in the meantime, how he's participating in, in annual profits.

[Nick Muncie]

Yeah, so he, he participates as an owner, you know, as, as if he had a capital interest in terms of the cash flow distribution. So this is cash generated, excess cash generated by the business that you would distribute to shareholders.

[Will Smith]

Okay.

[Nick Muncie]

Yep.

[Will Smith]

So 10% of the annual distributions, correct?

[Nick Muncie]

Yep.

[Will Smith]

Okay.

[Nick Muncie]

And we did set a, a vesting schedule on that. So his, it's a five year vesting schedule. And the total, his total grant is vested over five years.

[Will Smith]

So it's like 2% year one, 4% year two sort of thing.

[Nick Muncie]

Yeah, Yep. And what, and what that means, I think this is relevant too, that I wouldn't have understood this either. And the listeners might be interested in is that entire 10% is granted immediately. And so if we distribute $100,000 in cash, then $10,000 of that is his. But in year one, he's only getting 20% of that or 2,000. And then we hold that other 8,000 in a segregated account and those funds are released to him as those additional shares are vested each, you know, preceding year.

[Will Smith]

Ah, so he'll have a big payday when he gets, when he fully vests.

[Nick Muncie]

Yep, because he'll, he gets a payday each anniversary year because he gets the funds released that were previously previously distributed. So he'll progressively get bigger, you know, Cash in his pocket. The, the cash is his now, but it's not distributed until those shares are vested.

[Will Smith]

Ah, interesting. Interesting. Okay, fascinating. Thank you for that. And the other thing to say about all this, Nick, is that it's because it's, this may be phantom equity, what we call phantom equity. I, I should know, Fant. Phantom equity may be the kind of colloquial name for, would you call it profits interest? A profits interest.

[Nick Muncie]

Profits interest award. Yep.

[Will Smith]

The other benefit to you is that in not granting equity, you know, equity is forever. You're also protecting ownership. You know, the kind of, the kind of frankly, power that comes with keeping all, all of the equity. Correct. Is that, is that a feature of how you thought about this?

[Nick Muncie]

No, not necessarily. I, I, I consider this a form of ownership. Okay. So the, the only, from my perspective, the only difference is, is that that original grant was not a taxable event. He's a, you know, he's a minority, he's a minority partner, so we still retain voting control and everything, but he's in, in all. In all, you know, aside from the IRS perspective, he, he is an owner of this business.

[Will Smith]

Okay. So this was really all about figuring out a way to not to give him the 10% without having it be this giant taxable event.

[Nick Muncie]

Correct.

[Will Smith]

Okay. Okay. Thanks for that, Nick. That was, that was just fantastic. All right, so got a few more topics here. Let's hear about just the nature of buying a consulting business because so often, as I said at the very top, you know, it's, people are looking at blue collar services businesses. You've bought a consulting business, highly specialized. Is there anything more to say about that?

[Nick Muncie]

Couple things I could add. I'm a big fan of acquisitions. So our original growth plan was going, going into the buying this business was, let's go find more traffic engineering firms, you know, in neighboring states and acquire them and roll them up together. The classic rollup strategy. The more I've gotten into this, I've, my mind has done a complete 180 for one, there are not very many firms that specialize in this very tiny niche of the civil engineering world. So even finding one that does just what we do would be difficult. Not to mention I'm a huge believer in culture and protecting that culture. And so, you know, if we found one and the culture wasn't right, the team wasn't right, then we wouldn't buy it anyway. So quickly, pretty quickly became obvious that the acquisition opportunities in this space to roll up and grow through acquisitions is going to be pretty Limited So that, that, that's something that I didn't come to terms with until after we bought the business. So I think understanding the, you know, whatever your growth strategy is going forward, I think it's important to be flexible and be able to adapt when new information comes to light anyway. But kind of under having an understanding of what your growth strategy is from a practical perspective I think is pretty important.

[Will Smith]

And, and so if, if considering a consulting practice, a white collar consulting practice and if it is super Nichy.

[Nick Muncie]

Yeah.

[Will Smith]

Really examining the market in advance to see if there are other niche players.

[Nick Muncie]

Yeah, yeah, yeah, yeah. Because a roll up strategy be very difficult from that perspective.

[Will Smith]

Yeah. Okay.

[Nick Muncie]

Another factor too is that you know, kind of when realizing that you know, quickly doing acquisitions for growth was not really a possibility, also recognize that there fortunately there's another opportunity for growth within the business. This is, this business is incredible. It. I, I've, how do I put this? I've never seen a business that did so little sales and marketing. Like they don't do any like none they, and they have more work than they can handle. And which part of another huge thing I'm a believer in is like understanding the reputation in the industry of the business that you're buying. And this one had a very strong reputation in the state of Utah, some of their surrounding states for being the very best at what they do. So that was a huge asset that we were purchasing in the process became pretty obvious pretty quickly that I think there's some opportunity there for doing a little bit more sales and marketing to grow the business because we have more work than we can handle. And what I realized the bigger challenge was going to be recruiting. And as I've learned more about this industry that's been a problem for a long time because we're talking about we want qualified, hardworking, ambitious civil engineers, but they need to have a specific interest in doing traffic consulting, not design work. So the market for someone with those expertise is very slim and it's pretty competitive for those, for those potential recruits as well. So it became pretty clear that our challenge was not necessarily going to be growing revenue by this is a billable hour business. So you can essentially determine your top line revenue by the number of engineers you have producing work. And so that became pretty obvious pretty quickly that our challenge here was going to be adding talented people to our team as opposed to trying to go out and you know, beat on doors to find more work. And that has, hasn't did indeed been the, been the challenge. But we've Added some super talented people on our team and our, our guy Josh that's running it, love the guy, honestly, and I have a ton of faith in him. He's a hard worker, super smart and he's kind of leading the team and I think he's been a huge part of doing some of this recruiting and I'm working with them to bring in more talent to help us grow organically. Another thing I'll add to that too in our growth strategy is we of the type of work that we do and the traffic studies that we do. I don't know this for sure and the seller shared this with me when we were going through due diligence. But along the Wasatch front, which is kind of northern Utah, we probably do have a majority of the market share where we're at for the work that we do, our small firm does. So the growth opportunity, you know, to try to imagine that we were going to 10x in our current market that we're in, that would be very difficult to do. So part of our growth strategy is to look at neighboring markets where we're doing a little bit of work but we don't have a physical presence and open up additional offices and build teams in those markets, try to leverage our reputation there and do more of the type of work that we're doing in building a small team in neighboring markets.

[Will Smith]

Okay. So, so, so even though there's no sales, real sales effort or marketing effort and that made you salivate, in fact, you've deprioritized it because. Because demand is not the issue here, it's supply. Finding people, finding people to build out your team to, to absorb some of this work that is banging down the door. Correct. And so that, so that recruiting is really where you and Josh are spending a lot of time. And it's a challenge.

[Nick Muncie]

Yeah.

[Will Smith]

And then once you do crack that or as you crack that and build the team, you're going to need to penetrate other markets because you've tapped out your own kind of your own market.

[Nick Muncie]

Yeah.

[Will Smith]

Yeah. Great. And do you have any sense of if these neighboring markets have a hails engineering already?

[Nick Muncie]

Yeah. So we, we actually, we, we hired a recruiter just to find talent locally like more senior engineers to, to add to our team in Utah. And the recruiter brought us a super sharp individual from the Denver metro area. And so that has kind of kick started our campaign to open an office in Denver and have a presence there. We're going to spend some time getting to know this guy. Really like what we See so far and get him trained up in our process. But he and we kind of had an understanding of this. But he has told us with his extensive experience and knowledge in that Denver market there that the quality of the kind of work that we do in that market from the service providers there is, is, it's not high quality and it's, that's well known within the industry in general. So we see a ton of opportunity to go in there and bring our systems and processes and produce higher quality product to present to the market there and grow a team there in the Denver market by doing that.

[Will Smith]

Great. Sounds like a great opportunity. And what of this, this relationship of person needing to know the local market? This is not something where you, you guys sitting in Salt Lake City or Salt Lake area can service civil engineers.

[Nick Muncie]

In D.C. so we can, we can, we can do work. I mean we're doing work and I can't write as 12, 13 states. We just did a pretty big study for residential development in Hawaii. One of our guys unfortunately had to go out there on site for a week and check it out. Yeah. But we're doing so we can do the work anywhere in the state. We just have to get licensed there and make sure we're meeting the proper requirements on the, you know, different code or requirements when it comes to their traffic regulations. But the, this is a very, it can be a very much relationship driven business and it's hard to have relationships if you don't have a presence in a market. So that's one of the factors. Is. So our guy in Denver right now, he's, we're looking at hiring another, another person in Denver, but he's there kind of alone on an island right now. But a big part of his role as it is is to go out there, build relationships which fortunately he's been in that market for, I don't know what it is, 10, 10 plus years or so. And so he has a lot of those relationships right now and he's starting to go meet with them and say, hey, I moved over to this firm. These are the services we can provide. But, but those are, I think those are relationships that are super hard to certainly if you're, you don't have a local presence and you're not seeing them at your local, you know, trade shows and stuff like that. But even if, because we even talked about promoting somebody from our Utah office and moving them to Denver, wherever else and opening up a market and I think that would be challenging too because they got to start from ground zero on Building relationships. And so I think that's why it's important to have a physical presence and have somebody, if we can find people that have those relationships established and then leverage those to kind of grow in that market.

[Will Smith]

Sure. But this, your Denver guy is, is a. Also a, a technician wouldn't be the word, but a consultant. Right. He. He would, he would deliver the service as well.

[Nick Muncie]

Yep.

[Will Smith]

So at some point, obviously you're going to need to decouple sales, which is what you want him to do now from service provisioning, which is what his main thing should be.

[Nick Muncie]

Yeah.

[Will Smith]

Right.

[Nick Muncie]

Well, to it, to a degree, I guess I see our, like our, our office managers, the general managers of any one location. A big part of their role will be relationship building and procuring work. But right now, while he's going out and securing work, our team in Utah can do a lot of the actual technical work on the projects that he's securing in Colorado. Oh yeah.

[Will Smith]

Okay. So. So the local relationships that you need, the, the local on the ground people you need are really sales relationships to a degree. And then the actual work can be somewhat centralized there.

[Nick Muncie]

They need to know how to talk the talk and you know, speak intelligently about the work that they're doing. So it's not like we could hire a, a solar sales guy to start, go out and sell traffic studies that would not be effective at all. So they need to have a background in this and they also need to, you know, on these relationships there's a lot of meetings in person, even over zoom and talking about the progression, you know, within doing a study and talking about why we're doing this, why we're suggesting this. So they need to kind of lead that project, but a lot of the hours spent on that project can be done by somebody else in Utah. Gotcha. Y.

[Will Smith]

Well, this gives us a, a window into I a consulting, buying a consulting business where it's not just, you know, unlike in blue collar land where there's kind of job estimation and then job execution and then kind of done. It's. It's this constant unfolding of a project. Yeah. And. And to, and to use the, the, the word that is. That is often kryptonite in, in acquisition, entrepreneurship, land project. This is a project based business. You like real estate and construction. So it was probably inevitable that Mick Muncie would end up in a project based business.

[Nick Muncie]

Yeah. Yeah.

[Will Smith]

But any, anything to say about that? Anything to that, you know, to assuage the critique that, that you know, this is project revenue, which is not Great.

[Nick Muncie]

Yeah. The, because I come from, you know, I've got 15 years in the property management space which is monthly recurring revenue, which is really nice if you, if you can land a business with that. That's nice knowing what revenue you're going to be realizing the next month. You know, but to a degree the, you know, the, they call it the not, not recurring sales but going out and having to kill your dinner every day. Yeah. Is kind of project based work. Yep. If I had been less confident that there would be a lot of work like projects out there, traffic problems to solve, this business wouldn't have been very appealing. But knowing the flow of work that they have and they literally weren't doing any marketing or sales to bring this work in, it made me feel a lot more comfortable with taking on a business that is project based revenue.

[Will Smith]

Yeah. Just a demand supply imbalance that you're, you guys are sitting on, the supply side of, which is great. Okay, let's close by circling back to two of the themes that we, we, we addressed earlier and kind of how now that you're inside the business, think about it. The margins.

[Nick Muncie]

Yeah.

[Will Smith]

So do you this, these crazy 47% margins are almost necessarily going to come down. We heard that so much of the business is locked up in the seller's head, which is the final point we'll end on. How much margin compression do you expect to see?

[Nick Muncie]

I mean I, I, I've kind of projected, I, I think if, if it meant steady top line revenue growth that I would be comfortable with that, that margin dropping down to 30, 25%. I think we can over the next and a lot of that is investment in systems software, but also in, in people doing marketing I think is a big part of it too. A big, a big KPI essentially in this business is billability or utilization rate. So total number of hours engineer is producing, how many of them are billable. I think that's common in billable hour businesses in general. We're going to have to, they've had a fairly high billability rate historically and I think we're going to have to cough some of that up to be able to go out and secure more work and grow the business. And I think it will, you know, necessarily, you know, the seller, I think he was working 50, 60 hours for the last 20 years because he was lead project engineer as well as office manager, HR manager, all that kind of stuff.

[Will Smith]

Yeah.

[Nick Muncie]

And so I think to, to be able to fully utilize the skills and the technical skills of our engineers, we're going to have to bring in administrative staff to support and to, you know, run payroll and keep track of this and that. So I think we're going to cough up some margin on that as well. But. Oh, honestly, I'm, I'm happy to. I want to. If that means building a more sustainable business that is not dependent on individuals and that can, you know, have systems and procedures to run smoothly without, you know, my guy Josh having to work 60 hours a week. I want to make that investment so that the business is sustainable long term. To grow.

[Will Smith]

Yeah, yeah, exactly. Yeah, well, and I will say that when you consider the multiple that you paid for the business and, and how, you know, this is a classic case of the founder seller just doing too much, doing everything, doing the work of three people. So when you really cost out what it would look like under your ownership to, to, to, to fill those hours and not have it just be done by his superhuman passion, the effective multiple you're going to be paying was higher because the true margins of this business, the true earnings potential of this business under your ownership are less than what he was reporting.

[Nick Muncie]

Correct? Yeah, that would be correct.

[Will Smith]

And then just final question on, you know, building value into this business in this same problem of extracting from the owner's brain all of this knowledge. Have you started that process and what does it look like? How are you building institutional knowledge at the business? How, if at all, are you building SOPs? What does that, what does it look like to, to download the, the seller's brain in a consulting business?

[Nick Muncie]

Yeah, that's, that's probably been the single biggest challenge taking over this, this business. I think I had shared with you on our pre call, but one of, one of the huge concerns was the relationships the seller had with customers and even vendors and relationships like that. Touching on the relationships of the, the seller, that there was a pretty big concern about how those were handled. And I think, I think we did it the wrong way, frankly. And it was a lesson learned from it coming into. Yeah, we had kind of told the seller, you know, we want you to your role here. And he stayed on consulting with us on a consulting agreement for six months, by the way. So we kind of told him that one of your, well, really your primary responsibility over the next six months is you to train Josh on your role, which I think he did a pretty good job of that. And also to hand off those relationships with those customers and those necessary relationships that need to be maintained. And I don't feel like we did a great job on that. We kind of left it to him to take, like to handle that handoff however he thought was necessary, given that they were his relationships. And what ultimately, what ultimately happened is we went along for six months during his consulting agreement and he wanted to keep it pretty quiet that the company had sold and that he was planning on exiting. And then we got to the end of the six months and frankly, he, he put a auto reply on his email that said, kind of said, I don't work here anymore. Please call the office if you need anything. And there was a number of customers that were alarmed by that, understandably. So looking back, I would have taken more control over that process and, and said, okay, day one, who are these customers? Okay, call them today, tell them you'll be here for six months and that you have all the trust in the team that is taking over and you'll, you'll hand that off slowly over time. We didn't do that, and I think that was a mistake. So I do that differently. If we did it again, did you.

[Will Smith]

Actually lose any clients as a result?

[Nick Muncie]

No, I don't, I don't believe so. There's one pretty big one that like, we were, we were already like, part, part of our job is, is as a traffic consultant is to tell like private developers, to tell them that what you want to do is a bad idea. And sometimes those conversations can be kind of sticky. So this. That happened. They got that notification via email while the, during the middle of the time when we were telling them that something they were trying to do was not a good idea. So that one got a little hairy. But the seller came back in and kind of helped smooth that out. We ended up keeping them and working through the problems. So to my knowledge, we haven't, we haven't lost any customers from that. But I guess to a certain degree too, we also don't. Well, I should say we also don't know what customers that we have not retained because a lot of them have personal relationships with him. They're calling him on his cell phone call. And I don't think that we're losing a lot from that because we're still working with him. We have kind of an ongoing consulting agreement with him. And I love the guy, He's a great guy. And he has been taking those calls and handing those off to us. But it made me feel a little uneasy knowing that we don't know what we're missing out on necessarily, you know.

[Will Smith]

Well, yeah, you don't know what you don't know, but it sure is a strong signal of the business that in the middle of a sticky conversation he sets up this rather ungraceful auto reply and you still retain, you're retaining your customers. They aren't immediately dropping you for the, for the next firm.

[Nick Muncie]

So it's great.

[Will Smith]

That's a good sign. And what about just his knowledge? Aside from those relationships which hugely key. What about his knowledge? Is that something that can be downloaded? Yeah, yeah.

[Nick Muncie]

I think to a degree that some of the more senior guys, including Josh over the last few years, my understanding they had kind of picked up the knowledge from a technical perspective and maybe even were maybe had kept on it, kept up on it better than even the seller did. So I think from a technical perspective, I think we're pretty sound with the team that we have. I think the biggest concern is just the, the relationships there. But I think that's pretty important why we keep a good relationship with the seller. In fact, I think we still have, Josh still has a, a meeting with him once a week going over certain projects and the seller's able to add context with this relationship for that. So he'll, he's still available in retirement to kind of help consult with us and make sure things go smoothly.

[Will Smith]

And you're full time in the business, Nick, you're.

[Nick Muncie]

Are you. I'm not. I've got other, other business. I'm, I'm still on the search. I'm kind of perpetually on the search looking at two or three different businesses right now about to sit submit an LOI on one. I'm probably, you know, and I, I've shared this with Josh and the rest of the team is I, I am. Will be heavily involved for probably this first year as I help them set up the system structure, put the team together and then will step back as we put those pieces in place as I continue on doing what I do. But, and really I'll, I'll be involved to the degree of I, I want to provide support in terms of advice, mentoring, coaching, capital, make connections through my, my network and help kind of drive the bigger visions. I think that's what I'm good at. So the, this business will never be from my perspective one that I check in once a quarter and ask him to send me a distribution. This is something I want to keep my finger in and spend, I don't know, some amount of time. It'll vary but every week kind of helping them grow this business and grow the organization.

[Will Smith]

Right. But to be clear this, you, you already have kind of realized the kind of holdco vision where you're serving as chairman and, and you're going to be more active in year one and maybe a little bit more active than you would be in some of your subsequent acquisitions. Maybe you'll be more active in this business perpetually. But you're already. This is. You're already doing the thing that you described wanting to do.

[Nick Muncie]

Yep. It's great. Living my dream.

[Will Smith]

Okay. Good job, Nick. I like having people on who are living their dream.

[Nick Muncie]

Yeah.

[Will Smith]

Anything. Anything we didn't get to.

[Nick Muncie]

Not that I can think of. I'm. I'm. I guess one thing I'll share is that there, there's something. And people will have a different opinion, obviously, but there's. There's something that has become more appealing about businesses that serve a very specific niche and have, you know, I guess you would call a wide economic moat and a competitive advantage in doing, you know, work that others don't want to do and doing it better than everybody. Like, I, I want to go find more businesses like that, you know.

[Will Smith]

Yeah. Yeah. So a new appreciation for just Super Nichy.

[Nick Muncie]

Yeah.

[Will Smith]

Re. The Reishes are in the niches.

[Nick Muncie]

Yeah. Yeah, that's right. Yeah.

[Will Smith]

Cool. Nick, if people have a question, how do you like them to. To reach out?

[Nick Muncie]

Yeah. You look me up on Twitter. I think it's at Nick Muncie. You can shoot me an email. Nick, @saltbros.co any of the above.

[Will Smith]

Great. Nick Muncie, thanks for coming on. Congratulations on a really neat acquisition and living the dream.

[Nick Muncie]

Thank you so much. Will appreciate it.

[Will Smith]

I hope you enjoyed that interview with Nick Muncie. If you want more Nick, if you have a question for him, come to the live Q and A that we're doing with him by Zoom on Tuesday, March 25th. Nick will come just to answer your questions, direct questions from you, the listeners of his Acquiring Minds interview. Register for that at the link in today's show notes or in the YouTube notes. If you're watching on YouTube or at acquiring Minds Co. Come to Nick's live Q and a on Tuesday, March 25th. Register for that at the link in today's show notes, in the YouTube notes or at Acquiring Minds. Co. See you there.