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- [00:00]
Will Smith
Today's guest was 40 years old when he looked over at his wife and said of his corporate job, if I do this for 12 more months, I'm.
- [00:09]
Marvin Carlo
Going to be dead. Happily, Marvin Carlo avoided that fate and.
- [00:14]
Will Smith
Instead partnered with his best friend to do something entrepreneurial. What that something would be, they didn't know at first, but it ended up being the acquisition of a $2 million powder coating business in Tampa. They bought it in 2011. Eight years, one acquisition and a lot of hard work later, they exited the business to a public company for $21 million. A lot of themes to listen for in today's interview with Marvin the Value unlock of Buying a distressed business their one acquisition was a business losing over $50,000 per month on 5 million in annual revenue. They bought the whole operation for $400 and turned it around. Now, this is not a suggestion to go out and try to do the same. Turnarounds are not for rookies, but if you pull it off, the value creation can be huge. QSBS aka qualified small business stock aka section 1202 exemption. This should be on your radar. It could mean an extra million dollars.
- [01:25]
Marvin Carlo
In your pocket at a liquidity event.
- [01:28]
Will Smith
Rob's Marvin tapped his 401k for the initial equity and finally, good timing paired with hard work. We often hear that the best outcomes in business are down to timing, and this is true. But you also have to be prepared when fortune smiles upon you. Marvin and his partner had worked hard to do all the things put in technology, improve operations, grow sales, turn around a hemorrhaging business. They first spent years creating value and then capitalized on that value by selling at a premium multiple to a public company who just happened to be looking for acquisitions in their market. Good timing plus real value. Please enjoy this conversation with Marvin Carlo, former small business owner and now M and A advisor. As you have probably heard, the SBA just issued the biggest rule change in years, with serious implications for searchers who intend to buy a business with an SBA loan. Attorneys Bill Barlow and James David Williams return for a timely legal office hours to unpack how your SBA deal will now need to be structured. Topics to be covered include sellers, rolling equity, standby notes, deals that depend on licensing, franchise acquisitions and non US investors. That's this Thursday, May 8th noon Eastern Register at the link in today's show notes or on the Acquiring Minds homepage Acquiringminds Co. Not to be missed if you are contemplating an SBA loan for.
- [03:18]
Marvin Carlo
Your business acquisition this Thursday, see you there.
- [03:32]
Will Smith
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. The team at Aspen HR recently published a short white paper targeted at searchers Entitled A New CEO's Guide to Human Resources. It lays out the key items you should be thinking about as you transition into CEO and owner of the business you bought. The link to download it is in the show notes. Aspen is a professional employer organization or peo, run by a searcher for searchers. Search fund veteran Mark Sinatra runs the company which provides HR compliance, flawless payroll, Fortune 500 caliber benefits and HR due diligence support for your acquisition, all for a fraction of the cost. Go to aspenhr.com or contact Mark directly@markspenhr.com.
- [04:36]
Marvin Carlo
Marvin Carlo welcome to Acquiring Minds.
- [04:40]
David Bridgeforth
Well, thank you so much for having me. It's. It's truly an honor to be here. I sort of can't believe it, but I'm looking forward to sharing kind of the story of, of our ETA journey.
- [04:53]
Marvin Carlo
Well, it is a good one. We are. Your story is really a full life cycle of an ETA journey and a very successful one at that. Starting as corporate refugee, let's say, and ending with an exit to a public company.
- [05:12]
David Bridgeforth
Yes.
- [05:13]
Marvin Carlo
So where do we begin, Marvin? Where does this story begin, please?
- [05:18]
David Bridgeforth
Well, at the risk of terrifying people with the length, it actually begins when I'm 12. But before. But before that we're going to talk through this and it's going to sound like I did a whole bunch of things. I'll try to say we. That's kind of my default. But I just want to be clear that through this journey I've had one partner, his name's David. Could not have done it without him. Absolutely would have flown the plane into the side of a mountain without him in the co pilot seat or maybe in the pilot seat.
- [05:54]
Marvin Carlo
What's David's last name?
- [05:56]
David Bridgeforth
Bridgeforth.
- [05:57]
Marvin Carlo
David Bridgeforth.
- [05:58]
David Bridgeforth
Yeah. And then I had three other partners for part of the journey named Robert, Jim and Daryl and we'll get to them. I've also had a wife the entire time and that's a miracle in and of itself.
- [06:15]
Marvin Carlo
That's more than can be said for some search journeys actually. Sadly.
- [06:18]
David Bridgeforth
Yes, sadly. And then I'm a follower of Christ and I could not have done any of this without my faith. So.
- [06:27]
Marvin Carlo
All right. Lovely of you to. To distribute credit right at the top.
- [06:32]
David Bridgeforth
Rolling back to when I was 12, I made, I made the really obvious decision when I was 12 that I wanted to be a theoretical particle physicist and that I wanted to spend my life as a physics professor at some high end university somewhere in the world.
- [06:48]
Marvin Carlo
Well, you were on track. I noticed that. That shiny pedigree on your LinkedIn.
- [06:53]
David Bridgeforth
I eventually graduated with a PhD in physics in 1995. I did discover along the way that I wasn't quite world class enough to be a physics professor. So I think before the term pivot was coined, I pivoted and you know, I headed off to industry. So my first job was with Texas Instruments and then there was this pattern where I'd work at a big company, a small company, so I worked at Texas Instruments and then I went to a startup and I went to another startup and then I went to JP Morgan Chase and then I went to a startup and then I went back to a company that was acquired by another public company and that's where I kind of ended my career. And by the way, all of the startups that I did flamed out for some reason or another. One literally exploded in midair. But one of the one thing that I learned in that startup experience was that I was not a zero to one guy. So I end up at this small public company in Dallas, Texas, which is where I've lived the whole time. And this, this public company is a Holdco and they have three divisions. And one of the divisions is kind of this grab bag of technology assets that's been assembled for reasons that pass understanding. And the, the Holdco is primarily in the oil and gas space. And the CEO of the HoldCo is simultaneously the CEO of three separate New York Stock Exchange traded companies. My boss gets fired and then the president of our division commits suicide. And so I get a battlefield promotion to leader of this technology division. And about two weeks later he calls me into this giant office that he occupies and he informs me that it is now my responsibility to sell off all of these stupid assets because we have no idea why we own them. And then I will be fired at the end. And so the silver lining in this is that I get a absolute baptism of fire on doing transactions because we've got five or six assets to go sell off. And so I get to do five or six transactions back to back. And the last one of these assets is kind of the crown jewel to the extent that there was one. And we get these two 800 pound gorillas in the space into a bidding war and they bid each other up to crazy numbers and finally one of them taps out and we sell it to the other One. A week later the loser calls and says, oh, we're by the way, were you stupid enough to sign, you know, like a non compete or anything? And I said no. And they said, well, how would you like to come work for us and build what our competitor just bought? And I said, well, I'm soon to be out of a job, so that sounds fantastic. And, and so that's what happened. And then they sat me down and said, well, how long is it going to take to build it? And I said, well, probably 18 months. And they said, well that's way too long. And I said, well, we could buy one of the two or three other competitors that we had. And they said great, go do that. And so off I went to buy one of the competitors. And that was really my first foray into, into buy side M and A. And that's how I got to a company called Choice Point, which was acquired by LexisNexis, which gets us to the middle of 2010 when I'm responsible for 1500 employees on in three countries. I have three offices and you know, kind of an assistant and a half and I am, I'm making very good, you know, mid to high six figure money and I am absolutely miserable. And there's this day in late summer that I'm sitting at the dining room table with my wife and she and I are not in a tremendously good place at this particular point in our marriage and almost entirely my fault, by the way. And I look at her sort of, and just, I hear myself say, if I do this for 12 more months, I'm going to be dead. And she cocks her head to the side and pauses for a second, looks at me and says, what do you mean dead? And I'm like, you know, have a funeral, collect the life insurance debt. And she thinks about that for a second and she says, well then you probably ought to get out. I think the other option was probably.
- [11:36]
Marvin Carlo
Only probably, which suggests the other option.
- [11:39]
David Bridgeforth
Might have been how much is the life insurance?
- [11:41]
Marvin Carlo
Yeah, yeah, exactly. A rather tepid lifeline there.
- [11:47]
David Bridgeforth
So. So less than a month later, I find myself in my seat, my boss's office, who's the, the CEO of this, you know, $100 million division of this multinational company. And with absolutely no plan or intention whatsoever, I leave the meeting having apparently resigned. And I thought they would just, I thought I was just resigning my post because I told them, hey, I'll do this for 18 months. It was 24 months and my message was supposed to be, hey, just find somebody to replace me like we agreed and I'll go off and do something else and try to not be quite so miserable. Well, they took this as, you know, whatever it was that I said was interpreted as extreme disloyalty. The organizational immune system, you know, kicked into absolute overdrive and by the end of the week I, the, the HR manager from Atlanta had flown to Connecticut and sat down with me and informed me that this was the plan. I was stripped of all responsibilities. I no longer had a role or a title that I previously had, but they really, really needed me because I had this key relationship with a key customer that we were in the middle of the largest project that our division had ever delivered. And so if I would please kindly stick around until the project concluded, they would continue to pay me, pay me my year end bonus and package me out as if I'd been laid off. To which I said, absolutely, no problem. Love to do that. So I basically got nine months to sit at home with my wife and new baby. She was 2 at that point, I guess rebuild our relationship and figure out what to do next. Except I already knew what I was going to do next because from the airport that Friday afternoon on my way home, I called my best friend and said, hey, you know how we've been talking about doing some sort of a business for, you know, ever in a day? He said, yeah. I said, well, it's time because I basically just got fired and we've got nine months to figure something out.
- [14:18]
Will Smith
Looking for an SBA loan to buy a business Then meet Pioneer Capital Advisory, your team for getting an SBA 7A loan quickly and at great terms. The team at Pioneer has closed 81 SBA loans in just the last two and a half years with with an average close time well under the industry standard. Founder Matthias Smith and general manager Valerie stash both have 10 years of SBA experience and know the process cold. There are three analysts at Pioneer who build you a lending presentation that speaks the language of the bank's underwriters and gets them to yes, two account managers to guide you from underwriting to close as fast and smoothly as possible and two sales associates ready to walk you through the Pioneer Capital advisory process. That's nine people at Pioneer, a real team to get you where you're trying to go. New owner of a business. Go to pioneerCapitalAdvisory.com or click the link in the notes and so how did.
- [15:27]
Marvin Carlo
You decide to do eta? Marvin, how did you decide on buying a business?
- [15:30]
David Bridgeforth
As the path I knew I didn't probably couldn't even get another corporate job. And I knew I couldn't do 0 to 1. So sort of by process of elimination, the only other choice was to buy a business, whatever that meant. I mean, and I literally think by a business was the. The sum total of what I knew about what I was getting into when we embarked on this path. Right. So my business partner was retired. He was living in the Tampa Bay area. His daughter was. Was going to IMG to pursue a professional tennis career. And he basically, he said, when he said yes, he said, you know, my daughter Kennedy's at the point where she needs to see me do something other than wake up every morning and drive her to practice. Right. I can't tell her to work really, really hard when all I do when I'm not. Right.
- [16:24]
Marvin Carlo
Yeah.
- [16:25]
David Bridgeforth
So he said, all right. And so we. We sat down. I'll never forget, we were on. We were on a call. We were not in person, and I had a yellow legal pad sitting in front of me and a pencil, and I assume he had more or less the same thing sitting in front of him. And we said, all right, what are we going to do? And he said something to the effect of, well, let's start with what we're not going to do. And so we wrote a list of things that we weren't going to do. And I suppose in today's parlance, it boils down to we weren't going to do anything that dealt with the public. We weren't going to do anything. D2C. We wanted to buy a B2B business, I think. Right. And the second thing we said was that it had to be in either Dallas or the DFW Metroplex or the Tampa Bay metro area, because neither one of us was going to move.
- [17:21]
Marvin Carlo
And the idea would be that you would fly to Tampa or vice versa. And so one of you was going to likely end up commuting a lot.
- [17:28]
David Bridgeforth
That's what ended up happening. Whether we were explicit about that at that point or not, I. I don't know.
- [17:36]
Marvin Carlo
And Marvin, both of you, he. You said he was de facto retired. You had just come from a cushy situation, although it didn't end on the terms exactly you wanted.
- [17:47]
Will Smith
So what were your.
- [17:49]
Marvin Carlo
Your bank accounts like at that point? Or set another way, what was the target size of business? How much capital could you put toward this adventure?
- [17:57]
David Bridgeforth
I'll answer that question, but I will say we had no idea what the process was. So we had no target size. Our target size was absolutely wide open.
- [18:08]
Marvin Carlo
Yeah.
- [18:09]
David Bridgeforth
I didn't even know SBA loans existed at that time. Yeah, okay. No clue. So I don't think we gave a moment's thought in the beginning to how we were going to finance this thing. We were just sort of on step one. Let's find something. Yeah. So I, to this day, I don't know what their net worth was at that point. What I do know, this is an interesting little aside which will come up a little bit later, is that they were fairly far down the track. On. Again, Remember this is 2010 on building a wind farm in West Texas. And this was a partnership. This was a three, had started out as a three way partnership between David, me and another gentleman. And they had actually kicked me out of that partnership a couple years later or a couple years earlier. And they were, they were a, you know, a significant six figure sum into building this wind farm. Um, so he at least had enough money that he'd invested half of that sum. Right. And was living a very nice lifestyle on the beach in, in Florida. And I had probably $500,000 worth of net worth between cash and 401k.
- [19:46]
Marvin Carlo
Okay. All right, so back to the criteria and how you. So how did you actually execute the.
- [19:53]
David Bridgeforth
Search for a business exactly as you would expect in 2010? We found Biz Buy, Sell. So I found a listing in Tampa and I called the broker. It was an E commerce motorcycle parts business just for whatever. And the broker said, well, it's, it's under LOI already, but I haven't based on your criteria. I have another listing that I think you guys might be interested in. Said, okay, what is it? Well, it's this industrial services company and, and whatever. And so we said, great, we'll take a look. And so they sent us the sim and it's this. It's a powder, it's an industrial powder coating operation. I don't know what powder coating is. I can barely spell it. Like I literally have to look it up in the dictionary.
- [20:42]
Marvin Carlo
And so what is it exactly? For those of us who don't know Exactly.
- [20:46]
David Bridgeforth
So, yeah, so powder coating, very simply is you apply a powder paint, which is some form of plastic electrostatically to a metal, typically a metal part. Then you run it through a cure oven, which, which cures it and hardens it and then, and that's the process. And so it's significantly more durable than paint.
- [21:10]
Marvin Carlo
And, and, but is it done to, for the aesthetic outcome that you want to have something have the color of or is there, are there other properties that powder coating does so, yes, it.
- [21:20]
David Bridgeforth
Is both to make it pretty and it's a very durable coating. So, for example, almost all of your patio furniture is going to be powder coated. All of your window frame, all your fenestrations, door frames, window frames, if they're metal, they're powder coated.
- [21:34]
Marvin Carlo
Okay.
- [21:34]
David Bridgeforth
There's so much, there's. There's so much powder coating out there that nobody knows about. It's just a very durable finish.
- [21:40]
Marvin Carlo
So it's to give these things color. So, so it's not paint that chips.
- [21:45]
David Bridgeforth
Off color and texture, and it's just harder and more because it's baked on. It's, it's. It's sort of halfway between paint and enamel.
- [21:58]
Marvin Carlo
Okay.
- [21:59]
David Bridgeforth
So it's this industrial powder coating operation in, in Tampa Bay, you know, in Tampa. And so I'll never forget it. My wife, daughter and I fly to Tampa in the early part of December 2010, and it's this rare day where it's below freezing and we go visit this powder coating operation. This powder coating operation. 25,000 square foot warehouse. No, not that you needed it. When it's 30 degrees outside, but no air conditioning anywhere. The bay doors are all rolled down, there's steam coming off of the wash. There's sort of this fog hanging in the rafters. And we're standing there looking at this, this ginormous operation when we walk in. It's a husband, wife team that own it. The husband is hanging parts on the line with the, you know, the, the laborers who are doing that. And the wife is very meticulously putting these tiny little parts on these tiny little hooks on this giant rack sort of in the back of the shop. And David and I kind of look at each other and go, is this really. I'm at this point I'm thinking that I really quit my.
- [23:14]
Marvin Carlo
Right, right.
- [23:15]
David Bridgeforth
I know. By the way, this is the first trip I've taken in, in memory that I'm not on somebody's expense account. Yeah, yeah. It's culture shock.
- [23:25]
Marvin Carlo
No, sure. You know, this is, and this is probably today because of this podcast and others. That moment is something that a searcher today is, is. Is expecting. So, you know, it's not the, like, slap in the face, like, oh, my gosh, is this really what, what I, I might be doing? Is this what my. Where my career is taking me? But without, without all these other stories of people doing this and you guys just doing it alone? Yeah, it must have been like, what am I doing? Am I doing this?
- [23:55]
David Bridgeforth
What am I doing here? I mean, it's not like it was a, you know, I wasn't some sort of blue blood white collar. I mean, I paid my way through right through high school as an auto mechanic. So it's not like the first time I'd been in a greasy, dirty garage, you know, with people working. But it definitely was, you know, it.
- [24:15]
Marvin Carlo
Definitely a long way from corporate.
- [24:16]
David Bridgeforth
It was a long way from. From having an assistant that processed my emails before I ever saw them.
- [24:22]
Marvin Carlo
Yeah, that sounds nice, by the way.
- [24:25]
David Bridgeforth
Yeah, it's lovely. It really. That is lovely. That part I do miss just a little bit. So anyway, we walk out and we kind of all have dinner together as a family. And David looks at me and goes, this is just too big a stretch. We need to. We can't do this. This is why.
- [24:42]
Marvin Carlo
Why what specifically? Too big an operation, Too much money, too. Too foreign?
- [24:47]
David Bridgeforth
I think all of the above. He was just like, yeah, we. No, this is not, this is not the drop, the, you know, the droid we seek. So, so we wake up the next morning and we drive over. I'm sure this absolutely annoyed the brokers to no end, but we. He. We don't know what we're doing. So we just drive back over to the business and we sit down with Mike and Janine and we say, guys, thank you so much for yesterday and appreciate it, but this is, this is not going to be the deal for us, so best of luck and thank you and, and, you know, great. So I fly back to Dallas and we continue looking at stuff. By the way, this is the very first business we've ever. This was the first business I called on off of biz by sell. And it's the first business we looked at. Okay, so get back, get through Christmas. I meet this, this. I meet Jim, who's now a former business partner of mine, at a Christmas party. And he is. He and his partner Robert have gone to Harvard Business School. They're very pedigreed guys and they bought a business. And so we sit down for. We go to dinner together. We're meeting for the first time and I say, jim, tell me the story. And he's like, well, you know, we did this, this and this. You know, my partner was on Wall Street. I went to the Naval Academy, blah, blah, blah. And then we, we met at Harvard Business School and we got degrees and they taught us how to do this. And so we went out and we raised a fund and we spent 24 months and we looked at 300 companies and we put in Lois on 30 and we visited seven and we finally bought one.
- [26:20]
Marvin Carlo
Wow. He just distilled my whole podcast into, into an eggnog at the Christmas party. So, okay, so you're like, what is that called? And he says, search fund.
- [26:30]
David Bridgeforth
Search fund. And I look at him very transparently and I say, jim, I don't have a degree from Harvard, nor does my business partner. I don't have friends who are going to put $250,000 into a search fund. And I don't have 24 months to kiss 300 frogs to buy one. Ani looks at me, pauses for a second and says, well, Marvin, if the Lord's in it, you're not going to need any of that crap. And I said, okay, so this is probably December 29th or something. January 1st, David calls out of the blue and he's like, I woke up.
- [27:12]
Marvin Carlo
David is your Tampa.
- [27:13]
David Bridgeforth
David is my Tampa partner. And he says, I woke up this morning and I really feel like we need to re approach the powder coating operation. It's like, I think I can see it now. I'm like, okay, so January 2nd, we call the broker. Business is still on the market, don't have any offers, and 48 hours later, we've got an LOI to him.
- [27:39]
Marvin Carlo
What do you think changed in your, in his mind?
- [27:42]
David Bridgeforth
You know, probably just at that moment, by that point, we'd processed everything that was on biz by cell in Tampa and, and Dallas. I mean, what I think is, is the Holy Spirit showed us that this is what we were supposed to do. And look, if that's not your jam, whatever, but his instinct, his tuition intuition, whatever. But I also think that we kind of come to the conclusion that, no, this is actually a really, really good business. And that was our fundamental criteria. I'd done a bunch of turnarounds in my career. I did not want to try to do a turnaround. I was not looking for something that needed a whole bunch of change management, et cetera, et cetera. And this was a fundamentally sound business. The one thing I remember so vividly about our visit was there's this giant stainless steel wash. It's, it's 200ft long and 15ft tall in this absolutely industrial setting. And you can literally floss your teeth in the reflection on the side of this thing. And I just knew in my gut that this was a well built business.
- [28:45]
Marvin Carlo
I love that.
- [28:47]
David Bridgeforth
And, and we'd seen the financials. These people weren't even running their cell phones through their financials. I mean, this was, to this day, still some of the cleanest financials I've ever seen in the small business. And I do this for a living, like. So it was well run, it was well managed, the whole nine. Right. So in any case, and Marvin, about.
- [29:04]
Marvin Carlo
Those financials, what can you tell us?
- [29:06]
David Bridgeforth
Oh, okay, so I will not remember what revenue was, but. But call it $2 million at. Call it a 30 to 35% EBITDA margin. So it, you know, the trailing. The trailing. At this point, no one did. Trailing 12 back then. So the trailing 36 months, EBITDA was right at $700,000, maybe seven. Not.
- [29:28]
Marvin Carlo
Not big for two successful professionals to sink their teeth into. Not. Not a lot of SDE to go around.
- [29:35]
David Bridgeforth
No, no. We were both. Well, he was going to get a pay increase and I was going to take a staggering pay cut.
- [29:42]
Marvin Carlo
He was going to get a pay increase because he was retired with no.
- [29:45]
David Bridgeforth
Right. He was living up savings. Right. So really low bar. So. And they were asking two. One. So they're asking 2.1 million for. Call it $750,000 of SD. So exactly. Three times. Yeah, just. Just under. Three times.
- [30:07]
Marvin Carlo
Just under three.
- [30:07]
David Bridgeforth
Okay. And we didn't negotiate the price. We just said, great, full price offer. Here you go. And so this is. Call it January 4th of 2011. And if you were alive then, the credit markets were absolutely frozen, like nothing was happening. And this. The. The. Despite all of the things that the business brokers did absolutely wrong. And by the way, there were two business brokers involved in this deal. One for the seller and one for one for us. So as big a CF as it is with one, just multiply that by two for two.
- [30:51]
Marvin Carlo
You guys had a broker.
- [30:53]
David Bridgeforth
Well, because we'd called in and talked to a broker about one listing and he'd said, hey, oh, these guys were both in the same office at one of these franchise business broker firms that everybody's heard of and nobody wants to deal with. I won't name them. But anyway, that. That's how this went. Right. So there's two brokers. They did basically everything wrong except for two things. The first thing was they introduced me to an SBA loan broker who I still work with to this day, as it turns out. Great guy.
- [31:25]
Marvin Carlo
You can call them out if you want.
- [31:27]
David Bridgeforth
Steve Mariani at Diamond Financial Group.
- [31:32]
Marvin Carlo
Okay. And he's a loan broker.
- [31:34]
David Bridgeforth
He's the loan broker.
- [31:35]
Marvin Carlo
He's not a lender. He's not a direct lender. He.
- [31:37]
David Bridgeforth
No, he's a loan broker.
- [31:39]
Marvin Carlo
Okay.
- [31:40]
David Bridgeforth
So that got us introduced to the SBA process. And then they told us about rollover for business startups, AKA Rob's, which we'll talk about in a minute. Okay, so I won't take. You put it. Suffice it to say we went through three banks before we finally got our loan done. We close June 30th of 2011 and walk into the business on July 2nd, because that's a Friday. So like on July 3rd to start work.
- [32:15]
Will Smith
You know that one of the most common levers to pull in a target acquisition is is technology updating the systems of a business that may still be running off a spreadsheet or even pen and paper. But tech is complicated with tons of solutions out there. So choosing the right cloud platform, CRM, telephony, compliance and cybersecurity, not to mention implementing all that, is a job in itself. Acquiring Minds Guest Nick Akers knows this firsthand. As a former searcher who now owns Inso Technologies, Nick has seen the tech challenges searchers face when acquiring businesses. His team at Inzo regularly works with searchers and their acquisitions, offering a complimentary IT audit of the target company. Nick takes a personal interest in all their searcher clients, drawing from his own experience in the search phase. Enzo dates back to 1989. So this is a company that has managed the tech for hundreds of small businesses over decades. And one last thing, no long term contracts with Enzo. A big differentiator. Check out enzotechnologies.com I N Z O or email Nick directly@nicknzotechnologies.com and don't forget to tell them you're a searcher before.
- [33:39]
Marvin Carlo
We get to that transition. Just, just quickly, on the point of going through multiple lenders, is this an opportunity to say why working with loan brokers can be good? Was this gentleman that you named kind of introducing you all around? And so had you not had that, and had you gone kind of sequentially to lender one and lender two, it would have been a far worse outcome.
- [34:04]
David Bridgeforth
Far worse outcome. Like at that point in time, I don't even know if Live Oak existed, but Wells Fargo was 80% of the SBA market or 7. I mean, it was some huge percentage back then. And yeah, we would have just had our paper with Wells Fargo and when they said no, we would have just been done. Right.
- [34:22]
Marvin Carlo
Okay.
- [34:24]
David Bridgeforth
And the first bank, the first two banks by the way, went into receivership while we were in the loan process. That's how they fell out. So again, this sort of puts in perspective the, the time environment we're living in. Yeah. So anyway, yes, having a loan broker, I, I Refer again as an investment banker today I refer buyers to loan brokers. Like get a loan broker. These guys know where the appetite for, for the debt and the risk that you're trying to place lives better than anybody on the planet.
- [34:56]
Marvin Carlo
Great.
- [34:57]
David Bridgeforth
Just use one so.
- [34:58]
Marvin Carlo
Exactly. And I would be remiss if I didn't mention a sponsor at this point. Matthias Smith. Another one. Heather Anderson. Carry on, Marvin. Okay, perfect.
- [35:05]
David Bridgeforth
Yes. No, no. Yes for sure. Pick one or, and, and, and use them. They're lifesavers. So, so we, we buy the business. And just talking briefly about the robs transaction. You can do it under your own power with an attorney or you can work with one of the groups, you know, that are out there that advertise for this sort of thing. I wasn't super happy with the group that we use, so I'm not gonna call them out. But nonetheless, the way we did it and I, you know, I'm not an expert on robs, but the way, the way we did it was we set up a C corp and we put personal money into that C corp for common shares. And then we rolled, and we set up our 401k. We rolled money out of our existing 401ks into the 401k that we owned. And then that 401k bought shares in the C corp that we'd set up. And the reason we had to do it that way, we were told was a 401k can only own shares of a C corp. Yeah. So we created a C Corp. We created a 401k. We put money in the 401k it bought, it put, it bought shares. We bought personal shares. And that's how we came up with a 25% down payment on the loan. And those were the rules back then. 25% down payment was, was the, the minimum you can do.
- [36:35]
Marvin Carlo
Well, I, I'm not going to get into the weeds with you on the Robs because it is a little bit, a little bit of time ago and I'm not conversant enough in it to, to ask a good question there. So everybody do your own homework. But suffice it to say the principle remains today where coming up with if you want to tap your 401k to, for the equity that you need to complete this transaction, this is a way to do that. It's a lot of documentation and careful entity creation and structuring, which is why you typically hire an outsourced firm. Big name today. I'm not saying this is who you use, but the big Name today, of course, is Guidant. And the, the kind of. The upshot is that your, your 401k owns the entity that you created, which the. The C Corp. Which is the receiving entity of the business that you buy. And unless you want to add more to that, Marvin, we can leave it there.
- [37:40]
David Bridgeforth
No, the only tweak is it it owns a portion which could be all. But if you put, you can put personal money in and 401k money in.
- [37:50]
Marvin Carlo
Good distinction or. Yeah, clarification.
- [37:52]
David Bridgeforth
So again, we could not have affected this transaction without. At least I couldn't without rolling over my 401k. Yeah, yeah, because you can. I mean, I already said my net worth was prob. My liquid net worth was probably a half million dollars, maybe a little less than that. And we're putting in 25% or you know, actually 30% on a 2 million, $2.1 million transaction. I mean, you can sort of do the math. Unless I was going to put all of my liquid net worth. Oh, and by the way, the liquid net worth included my 401k. So without it.
- [38:25]
Marvin Carlo
Right.
- [38:25]
David Bridgeforth
Like it, this was just a non starter. None of which we knew, I think when we put the LOI on the business, but nonetheless.
- [38:34]
Marvin Carlo
And did you and Dave go in 50.
- [38:36]
Will Smith
50.
- [38:36]
David Bridgeforth
Effectively, yes. Although shout out to my business partner because of this wind farm liability that he had on his balance sheet, they, the bank, at the last minute actually forced us into a 4951 position because they were scared of the potential debt, you know, $50 million of debt that were possibly rolling onto his personal balance sheet. So they forced me to be in control, even though we both had personal guarantees. And the fact that he said yes to that is just sort of a testament to his character. But we did everything except it sounds.
- [39:09]
Marvin Carlo
Like he had to do it.
- [39:11]
David Bridgeforth
He could have walked the. I mean, he could have walked the deal.
- [39:14]
Marvin Carlo
Walked away all day.
- [39:15]
David Bridgeforth
He could have walked the deal, sure.
- [39:16]
Marvin Carlo
Yeah.
- [39:17]
David Bridgeforth
I mean, and in fairness, I needed the deal at that point way worse than he needed it. Ah, right.
- [39:22]
Marvin Carlo
Okay. How does it go now? The, the culture shock continues. You're flying back and forth. Dallas, Tampa, Dallas, Tampa. Talk to us about what this transition feels like.
- [39:33]
David Bridgeforth
So I've heard a couple of your guests say, you know, throw out the fax machine.
- [39:38]
Marvin Carlo
Yeah, right.
- [39:39]
David Bridgeforth
Well, we literally threw out the fax machine.
- [39:43]
Marvin Carlo
It's a cliche for a reason.
- [39:46]
David Bridgeforth
So this company, if you googled this company, all you got was a Google. My business, they didn't have a website. And the number that Came up was actually the number to the fax machine. So you couldn't call the business unless you knew what their phone number was by some other means. There was no website. We were still using paper time cards and a punch time clock. So there were lots of things we could do. We, as many buyers do, negotiated this, you know, negotiated harder on the transition services agreement than we did on anything else. And two weeks after buying the business, my business partner comes into me and says they've got it, they've got to go home. Like we can't run this business with, with Mike and Janine here.
- [40:31]
Marvin Carlo
Why did he say that?
- [40:33]
David Bridgeforth
You know, just because of the way the business. They were great by the way. They were the best sellers on the planet. But they're just in that kind of an environment which is, you know, 15 guys in a warehouse, you know, working together. No one knew who the boss was. Like, do we listen to Mike or do we listen to David? Right, okay, so. And they, they helped out a ton from, you know, after they went home. But.
- [41:06]
Marvin Carlo
And Marvin, you just said that like so many buyers do. And by the way, I just want to underline the point that as a sell side bank, sell side broker, investment banker, as you are today. Yeah, it's great to be able to get the perspective of you across. You know, you see all these, all these transactions happening today. So yeah, let's, let's take advantage of that. So what you just said is we, I think you said like we like so many buyers really over engineer the transition services agreement, essentially wasted time because turns out we wanted out of them out of there after two weeks anyway.
- [41:40]
David Bridgeforth
Right.
- [41:40]
Marvin Carlo
So is this something, is this something that you see buyers do and shouldn't.
- [41:44]
David Bridgeforth
Do all the time and.
- [41:45]
Marvin Carlo
But what about the case, Marvin, where. What if you had wanted them to stick around? Isn't it better to have your docs or to negotiate a requirement that they do so and then it giving you the freedom to let them go early if you so choose. But otherwise, because of course there are stories where you really, maybe they're less than we think, but you really do want the sellers to stick around for whatever the prescribed three months or whatever it is.
- [42:10]
David Bridgeforth
So I mean, I think that's a good point. I think my experience is that this negotiation creates a fair amount of tension between buyers and sellers as you kind of go through the purchase agreement. And you know, it can feel like handcuffs and in a transition that's done well, at least in my experience, the buyer, the sellers are very generous. Right. And so you Know, it's kind of like, do you want people because you have. Do you want people in your house because they want to be there, because you have bars on your doors? Right. So it's just, I think there's. I think my message is, you're going to learn, you, buyer, you, searcher, are going to learn the business a whole lot faster than you think you're going to learn it. So give yourself credit for that. Like, the 80, 20 happens really, really fast, and then the 20 that you're missing, you don't need and in many cases even want them there because it is confusing for the employees in many situations, and they will continue to answer your phone call unless you've just been a complete ass through the. Right. And. And at that point, what do you really need a contract for?
- [43:31]
Marvin Carlo
Like, and I guess it's also one of these where if it turns out that they've been playing, you know, good guy, sweet seller during the transaction, and then once they've sold their business to you, turns out they're a bad guy with not the best intentions or whatever, that even if you've negotiated all these transition requirements, they're not going to be very. They're not going to be helpful anyway. So, I mean.
- [43:56]
David Bridgeforth
Yeah. Are you going to believe what they tell you? Are you going to want to see them? I mean, would you cross the street? Yeah. I mean, it's like, no. So, yeah, it either goes, well, and in that case, all this negotiation is kind of moot, or it doesn't and it de facto ends you up where they wanted to be anyway.
- [44:12]
Marvin Carlo
Yeah. So there it is. There it is.
- [44:15]
David Bridgeforth
Yeah.
- [44:15]
Marvin Carlo
Okay. Okay, Marvin. Okay, carry. So, carry on. So. So what? What. Anything more to say about the early days in the business? Well, them out. You needed them to get out.
- [44:25]
David Bridgeforth
Yeah, they left. I kind of. We. We picked our lanes. And I would say, I think one of the things that David and I did that has resulted in a very long history of. Of a high degree of partnership success in addition to being best friends. Before we started was we picked our lanes and we stayed in our lanes. And the way we picked our lanes was it was day one. We'd been in the building for about an hour. We're standing side by side sort of in the middle of the floor, watching everything go. David, we've had the employee meeting. David looks over at me and goes, do you know anything about QuickBooks? I'm like, a little like I've opened the program. And he's like, why don't you go get Quickbook sorted out with Janine. I got this out here.
- [45:18]
Marvin Carlo
And from then on, you were the. You were the finance guy.
- [45:22]
David Bridgeforth
From then on, he was responsible for operations, which logically should have been my deal. Right. I mean, I'm a chief operating officer from a multinational. Like I'm supposed to be responsible for operations. But no, he's got operations and I've got everything else, and that's how we've done it from that day forward. But the point is, pick your lane, stay in your lane. I think that just solves a ton of partnership turmoil down the road.
- [45:50]
Marvin Carlo
Marriages as well, by the way.
- [45:52]
David Bridgeforth
Marriages as well, by the way.
- [45:53]
Marvin Carlo
Yes. Mar. Marvin, the.
- [45:55]
Will Smith
And was the business.
- [45:57]
Marvin Carlo
The business that you thought it was?
- [45:59]
David Bridgeforth
It was. It was 100% of everything we thought that it was. Now, the customers took the opportunity of an owner. Two customers took the opportunity of an ownership change to initiate very aggressive price negotiations. And so over the course of the first year, we made substantial operational and efficiency improvements and we gave 100% of that back to the customers in the form of price concessions to keep them.
- [46:32]
Marvin Carlo
So that's. That's an unhappy outcome. That's a very unhappy outcome. You do all this work only to get back to baseline because.
- [46:39]
David Bridgeforth
To maintain baseline. Yeah, yeah. And. And we also went into a little bit of a slump. So there was the moment where we had to write a check to cover payroll out of, you know, personal reserves.
- [46:49]
Marvin Carlo
And you say that very nonchalantly, but for many people listening, that is the fear.
- [46:55]
David Bridgeforth
Well, I mean, I guess I say nonchalantly because we. Because we survived it. Yeah.
- [47:04]
Marvin Carlo
But I mean, was it. Was it a brutal moment, as you recall? I mean, yeah, it was a very.
- [47:08]
David Bridgeforth
Brutal moment because at that point, there was no guarantee like we hadn't lost business, just the economy was kind of crappy and we just weren't getting parts to powder coat, so.
- [47:23]
Marvin Carlo
And is there anything great and is there anything to be learned from the price increase? So there was concentration in this business, customer concentration, was there not? Didn't.
- [47:31]
Will Smith
Didn't you.
- [47:32]
David Bridgeforth
I would say the top five customers were 70% of the business.
- [47:36]
Marvin Carlo
Okay, so what is that, 14? Yeah.
- [47:39]
David Bridgeforth
Yeah. I mean, the top two were. Were a significant chunk, and they went after price pretty hard, so.
- [47:47]
Marvin Carlo
Wow. So. Okay. And anything to be learned from that? I mean, is that it? It sounds like you don't regret like that that wasn't a such a weakness in the business that it shouldn't have been acquired. And obviously you bounce back from it, but, man, to have to give back all of the all of the improvements.
- [48:05]
Will Smith
That you're making to build equity, to.
- [48:07]
Marvin Carlo
Build value has just been zeroed out because they've just extracted that from you in the form of higher prices, as you've already said. So that's it. I mean, that's a new one and a brutal one.
- [48:18]
David Bridgeforth
Yeah. So on the. That's how it looks on the P. L. Right. But on the capacity chart, we've got all this excess capacity that we can go sell. Right.
- [48:27]
Marvin Carlo
Okay.
- [48:27]
David Bridgeforth
So that's the silver lining. Right.
- [48:29]
Will Smith
Okay.
- [48:29]
Marvin Carlo
Okay.
- [48:30]
David Bridgeforth
Right. So which is what we did. I mean, we just sort of started filling in our capacity with other customers, which began, you know, mitigated the customer concentration issues to some extent. Right. And all of the things. So, yeah, we got. Yeah, it sucked. I mean, but I don't think that. So first of all, I don't think that the customer concentration thing is. Is unusual in businesses of this size. True. And so what. Real quick, I think a big part of the success in this is doing something that fits you. Right. So there's this conversation that everybody has during search about, well, are we going to be wide and shallow? Are we going to be narrow and deep? I don't think it matters much. Do what works for you. Just don't try to be wide and deep. You're. That doesn't work. Right. But pick you and pick a business that fits you. Same thing. Like, if you're just terrified of customer concentration, then don't buy a business with customer concentration. Right. So I would rather have five customers that I can build a relationship with and negotiate and all of those things than have a thousand customers and the headaches associated with that. But that's me. That's not the right answer. That's just me. And that's just my opinion. Your mileage may vary. Do what fits you. It's great.
- [49:59]
Marvin Carlo
Marvin, I. I thought what you were saying was kind of that what we, you know, we call the business buyer fit, where the skills or expertise that you're bringing can be. Can be. Is what the business is lacking. Which, of course, is a really valid point, but you're actually saying something different. I think you're. I think what you're saying is every business has weaknesses. Every business has its poisons. Choose the poison. You know, pick your poison, the one that you can tolerate more than everybody else can. Yeah.
- [50:29]
David Bridgeforth
Pick the poison for which you have the antidote. Right. Yeah.
- [50:31]
Marvin Carlo
There it is.
- [50:32]
David Bridgeforth
I have an extremely high ambiguity tolerance. Right. I just do. It's because I got a PhD and that's sort of the whole deal of that is huge ambiguity until you finally succeed. So I was good with. With shallow and wide and not having done a deep dive on the financials and not having the first bit of experience with powder coating and not speaking Spanish, even though 17 of my 19 employees only spoke Spanish. And I mean all of the things. Right. But if that doesn't fit you, then don't do that.
- [51:03]
Marvin Carlo
Yeah. And Marvin, how is it flying back and forth from Tampa? And because another pattern that we see is sometimes searchers overestimate the extent to which they're comfortable traveling, there will be the temptation to widen their, you know, to broaden their own search funnel by broadening their geography. And then many will find that it's not realistic to think they're going to fly somewhere to drive two hours, let alone fly. Have to fly to their acquired business.
- [51:35]
David Bridgeforth
Right.
- [51:35]
Marvin Carlo
You did it. And it sounded like you had a daughter in high school at the time, Is that right?
- [51:38]
David Bridgeforth
I had a two year old. No, I'm sorry.
- [51:40]
Marvin Carlo
Sorry.
- [51:41]
David Bridgeforth
My daughter turned. Or the summer we bought the. The business. So, you know, will, again, I think this is what fits you. So I am lifetime titanium with Marriott and I'm lifetime executive Platinum with American Airlines. Right. So I know how to travel like I've done that. However, we got a condo in Tampa. My daughter was 4. She wasn't in school yet. My wife came out and stayed for kind of two weeks at a time with my daughter. So we'd put a lot of things in place to kind of mitigate the travel and mitigate the separation from family. But there's no doubt about the fact that. That traveling to your business is less desirable than rolling out of bed and walking across the street to your business like that. That is a factor and I think it's a very valid factor for searchers to consider.
- [52:41]
Marvin Carlo
How many times in total do you think that your wife flew to Tampa and state over the. Because I think it was about two years that I'm jumping ahead.
- [52:48]
David Bridgeforth
I was there for two years, so I think she was there two weeks out of a month for the first year and then she was probably there two weeks out of every two months for the second year. Okay. And then you kind of already alluded to it. My business partner and I agreed at the end of the second year that we wouldn't renew the lease and that I would primarily base out of Dallas. And at that point, not only are we throwing away the fax machine, but we'd gotten the business so virtualized that I could do 100% of the administration remotely. We were using an EA in El Salvador to help us out with some of that. And so if you didn't actually have to physically handle a part, everything else could be handled, you know, quote unquote in the cloud. This is sort of before there was a cloud, but it could all be handled remotely. So we'd done a complete technology overhaul on the business. You know, CRM, erp, financials, blah blah, blah.
- [53:49]
Marvin Carlo
So you had really run the playbook that we all talk about and been successful with it.
- [53:55]
David Bridgeforth
Successful with it, yeah.
- [53:56]
Marvin Carlo
So operational efficiencies somewhat forced upon you by these customers raising prices, although you probably would have, were planning on doing at some point anyway. And then out with the fax machine, in with the cloud.
- [54:08]
David Bridgeforth
Correct? That's exactly right. Exactly right.
- [54:10]
Marvin Carlo
And just, and so at the end of two years, were you sitting pretty? Were you in good shape? Were you guys pretty excited that you.
- [54:16]
David Bridgeforth
Yeah, I mean the, the business was, was very sound. At the end of two years we were adding customers and we'd got our team sorted and, and you know, the whole deal. David was still in the plant every single day, but that was more his choice than his requirement. He's a very hands on manager of, of people and so that's how he wanted to run it. We had a gen, we had a GM who was perfectly capable of running it, but he showed up every day anyway just to make sure that the trains ran on time to the second rather than the minute. Right. So.
- [55:02]
Marvin Carlo
And, and Marvin, what of this is, what of this point? That 17 of your 19, I think you said. Yeah, or Spanish and only Spanish speaking. And of course in trades businesses this is going to be not uncommon. But it never comes up, hardly ever comes up. You know, I'm not asking it, I guess I should. Maybe it's a sensitive point, but it's, it's obviously a feature of many of these businesses. How did you guys deal with that? Through the foreman. Was the foreman bilingual?
- [55:32]
David Bridgeforth
The foreman, yeah, that we had. And I may have overstated slightly for effect. I mean most of these, you know, most of these guys spoke enough English to, you know, where's the bathroom? And, and that kind of stuff. But, but English was, was. Yeah. So we had three or four employees who were fluent and we would just kind of work through them and we rapidly learned enough Spanish to communicate on the business pieces. So you know, I could give somebody instructions in Spanish on kind of the business pieces.
- [56:04]
Will Smith
Well, maybe it doesn't come up more.
- [56:06]
Marvin Carlo
Often because it's, it's it's not as serious a. Is, it's the friction is not as much as you might think. And everyone just kind of blunders through and it's fine after a little bit.
- [56:17]
David Bridgeforth
I think, I think that's right. And, yeah, and, and these businesses tend to be a bit hierarchical, so. So long as the leads.
- [56:24]
Marvin Carlo
Yeah.
- [56:25]
David Bridgeforth
Part of the reason they're leads is that they do speak English.
- [56:27]
Marvin Carlo
Exactly right.
- [56:28]
David Bridgeforth
And now the only caveat I would say is, look, if you're buying a business from a fluent Spanish speaker, I would pause. Yes, I would, I would sort that out. But if you're buying as, as they say, from another gringo, you're probably okay.
- [56:46]
Marvin Carlo
Yeah, yeah, no, that's excellent clarification.
- [56:52]
David Bridgeforth
So I'm back in Dallas and we.
- [56:55]
Marvin Carlo
Got, yeah, 23 minutes.
- [56:57]
David Bridgeforth
Oh, we've got a couple things to cover. Okay.
- [56:59]
Marvin Carlo
Yeah, we still got a couple things.
- [57:01]
David Bridgeforth
I'm back in Dallas. My two new business partner, they're not business partners yet, but my two friends, Jim being one of them, call me and say, hey, we'd like to talk to you about powder coating. Long story short, one of their lps in one of the businesses that they've bought is a private equity an SBIC PE firm. And they own a powder coating and electroplating operation in Dallas that's, that's performing very poorly. And they're not a Dallas based PE firm. But my friends Robert and Jim are in Dallas and they have very successfully bought and built two companies with this lp. And so the LP has said, hey, you guys are the best operators we know in Dallas. Would you take a peek? And they don't know any more about powder coating than I did when we bought our company, but they know I do and so they've brought me in. And so what we end up doing is carving this powder coating and plating operation out of this PE portfolio. We hand them back a $3 million. We, we write $300 worth of, sorry, $400 worth of checks. A hundred dollar. There's four partners in the, in the deal. Robert, Jim, Daryl and me, we tried $100 check. And so for $400 and a non recourse, non PG loan, we get this operation which.
- [58:37]
Marvin Carlo
And what's this, what's the size of this operation?
- [58:40]
David Bridgeforth
Well, the size is it's losing 50 to $75,000 a month.
- [58:46]
Marvin Carlo
Right, right.
- [58:47]
David Bridgeforth
But top line, it's about 5 million bucks.
- [58:51]
Marvin Carlo
Great. So it's a two and it's two and a half times. Although your business in Tampa's grown at this point. Yeah, but it's probably, probably what, twice or one and a half times the.
- [58:59]
Will Smith
Size of your tamp operation.
- [59:00]
David Bridgeforth
A good double. Double in size. Okay, so come in, look around, you know, build a plan, execute the plan and 45 days later we're break even.
- [59:16]
Marvin Carlo
Okay, okay, hold on, hold on. So basically what, let me just distill this for the audience because I've heard this a couple times. Your search fund buddies, those guys who tell you what search fund. So they, they basically the LP that they're working with on their deals has this other powder coating operation. So it's basically the, the only relevance there is the network. How you came up on this deal that's through your network. You come across this powder coating operation that's bigger, let's call it twice as big as your Tampa operation, but is losing money to the tune of 50 or 60 thousand dollars a month.
- [59:47]
David Bridgeforth
Yes.
- [59:48]
Marvin Carlo
And you and these guys in your network buy it from the PE firm wants to dump it, they and you all pull 400, not thousand, but dollars for $400. I mean this is the sort of just buy it from me for a dollar sort of. It's exactly, just like we just. There has to be some, it has to be some consideration here for the lawyers. So you buy it for $400 literally and take it over and you stop the hemorrhaging in 45 days. It's now break even.
- [60:25]
David Bridgeforth
Correct.
- [60:26]
Marvin Carlo
So you've already just by breaking it, making it break even, probably added some millions of value, let's say into the entity.
- [60:33]
David Bridgeforth
We've at least gotten it to a zero dollar valuation.
- [60:37]
Marvin Carlo
You're right.
- [60:37]
David Bridgeforth
On a multiple basis.
- [60:40]
Marvin Carlo
Right. Let's say you, you're ROI positive on $400.
- [60:44]
David Bridgeforth
Exactly right. That, that's exactly right.
- [60:47]
Marvin Carlo
Okay.
- [60:48]
David Bridgeforth
It's at least worth $400 at that point. We can agree on that. Yeah.
- [60:52]
Will Smith
And, and do you merge it with.
- [60:54]
Marvin Carlo
So what's its relationship to Tampa?
- [60:56]
David Bridgeforth
There is again another shout out to my business partner, David, who's now allowed me to be in a separate partnership, which he's not involved in, by the way. I don't know if the audience caught that fact. Right. And, and obviously going to be devoting a significant amount of time there, which means I'm not devoting time. Not that it needed it, but again, it's a pretty big hearted move to be like, yeah bro, go for it. Yeah, I'll keep running this and you go handle that.
- [61:29]
Marvin Carlo
Especially when there's strategic synergies to be had. One would think from this acquired business they're in the same industry. No.
- [61:37]
David Bridgeforth
Yeah, but I think really, absolutely none that these kinds of businesses are extraordinarily regional. And, and the uplift that you might get from some sort of back office on integration is. Is effectively zero. It really is zero. So. So, yeah, we get it turned around. We. And we kind of get it on a decent trajectory. And then our biggest customer calls and says, hey, by the way, effective today, we're outsourcing all the work. But you may have noticed that you didn't get your normal order from us today. The reason is we're outsourcing. We have outsourced all of that work to Mexico. And not only did you not get a order from us today, you will get no further orders from us unless we have an emergency.
- [62:31]
Marvin Carlo
Wow.
- [62:32]
David Bridgeforth
So seems to be.
- [62:33]
Marvin Carlo
That seems to be a theme in your acquisitions.
- [62:35]
David Bridgeforth
Yeah, it seems to be a theme in my acquisition. So. So we start praying. And fairly quickly, this customer that we've been trying to land for ever shows up on a Friday afternoon and says, can you help us? We're. This is a major aircraft manufacturer or supplier. We are lying down. The losses are being measured in millions of dollars an hour.
- [63:03]
Marvin Carlo
Wow.
- [63:04]
David Bridgeforth
And we need you up running and qualified by Monday morning or people are going to start getting fired.
- [63:14]
Marvin Carlo
Wow.
- [63:15]
David Bridgeforth
So I got with my GM and we worked 48 straight hours across the weekend. We got a MER. You know, one of our vendors came in on an emergency basis over the weekend to run panels for us, and we were. We were functioning on their parts 8am Monday morning.
- [63:35]
Marvin Carlo
Which sounds like it was a transformative.
- [63:38]
David Bridgeforth
It's absolutely transformative. Absolutely.
- [63:40]
Marvin Carlo
Can you put some numbers behind?
- [63:42]
David Bridgeforth
What, like, oh, this was a $2 million a year account, probably.
- [63:47]
Marvin Carlo
Wow.
- [63:48]
David Bridgeforth
Yeah. No, it was huge. It was absolutely huge. I mean, it didn't solve our customer concentration problem, but.
- [63:53]
Marvin Carlo
Right.
- [63:54]
David Bridgeforth
Yeah. But put it this way, if you've ever been on an airplane, you have used these people's products. So it's. It was fantastic. So then at that point we decided, you know what, it probably does make sense just from an EBITDA perspective, to merge these two businesses together.
- [64:18]
Marvin Carlo
And by that you mean having combined, EBITDA means they.
- [64:22]
David Bridgeforth
The.
- [64:23]
Marvin Carlo
There will be margin. Higher. Higher multiple.
- [64:24]
David Bridgeforth
Higher multiple.
- [64:25]
Marvin Carlo
Selling them as a package.
- [64:26]
David Bridgeforth
Selling them as a package. That's right. So.
- [64:29]
Marvin Carlo
And are you starting to think about.
- [64:30]
Will Smith
Sell selling or are you just.
- [64:32]
Marvin Carlo
Just preparing for some eventuality?
- [64:34]
David Bridgeforth
Yeah, no, not a bit. It's just my, My business partners on the Dallas operation, you know, I think want to be able to take a Step back. And my business partner in Dallas, in. My business partner from Tampa is considering moving back to Dallas. And so there's just a bunch of kind of external factors that suggest we should put these two things together. If I knew. If I had known how fraught that was going to be, I probably never would have embarked on it. But nonetheless, we did eventually get through. You know, in the tradition of every deal has to die three times before it succeeds, we did get these two companies merged together. And that happened, I guess, at some point in 2018, probably early 2018. Okay, so at this point.
- [65:31]
Marvin Carlo
So what is the combined EBITDA at this point?
- [65:34]
David Bridgeforth
North of $3 million.
- [65:36]
Marvin Carlo
Okay.
- [65:37]
David Bridgeforth
Or probably right at 3 million. Just slightly north of $3 million, you.
- [65:43]
Will Smith
Were going to say.
- [65:44]
David Bridgeforth
And so there was a publicly traded company at, coincidentally based in Fort Worth that was also in, not powder coating, but in a related metal finishing space. And they'd executed this. They and another competitor had basically rolled up the entire space. So all of these operations were owned by one of these two companies. Growth had had plateaued because there was nothing else to buy, that it wasn't something that was growing organically. And so they had lots of cash on the balance sheet and were casting about for adjacencies that they could grow in. And they'd landed on powder coating, and they bought one of our competitors sort of north of Dallas. And my business partner comes in one, David, comes in one day and says, you know, we should talk to those guys and just see, you know, because we're kind of competing for a lot of the same stuff, and we should just. We should have a conversation with them. We ought to just at least get to know our competition. So through our network, we got a meeting with the senior vice president responsible, drove over to Fort Worth, sat down with these guys, and one thing sort of led to another, and we basically walked out of the meeting with them saying, we'll send you an NDA. You send us some financials, and we might be interested in doing a deal. So this is late fall of 2018 at this point. And sure enough, kind of over Christmas break, a term sheet shows up. It's a 7x multiple.
- [67:22]
Marvin Carlo
Yeah.
- [67:26]
David Bridgeforth
And we kind of get the ownership group together and go, not sure we're going to do a lot better than this in the foreseeable future. And everybody agrees. And so we signed the term sheet.
- [67:46]
Marvin Carlo
And Marvin just on the numbers 7x multiple on, call it 3 million EBITDA. So that basically 20, 20, $21 million offer.
- [67:53]
David Bridgeforth
Exactly right.
- [67:54]
Marvin Carlo
And of that $3 million EBITDA. We've got Tampa, we've got Dallas. Tampa is, is, is what? How much of that?
- [68:01]
David Bridgeforth
At this point? They're about 50. 50.
- [68:04]
Marvin Carlo
Okay, so a million and a half of that EBITDA comes from the business that you guys bought. Rob's sba. We unpacked that. The other half of that EBITDA you got for free, effectively.
- [68:15]
David Bridgeforth
Exactly right. We got for free. I mean, at this point, I think we've got $2 million left on the note. So yeah, I think there's $2 million of debt on the balance sheet for a, you know, 21. 20 million, $21 million EV company that has a combined 500,500 and $500,400 worth of equity in it.
- [68:42]
Marvin Carlo
Incredible.
- [68:43]
David Bridgeforth
Yeah.
- [68:44]
Marvin Carlo
So you take the deal. We.
- [68:47]
David Bridgeforth
We took the deal. We did take the deal.
- [68:49]
Marvin Carlo
Amazing.
- [68:50]
David Bridgeforth
So I think the last thing to say all about, about all of that is because of the Robs and because we'd incorporated our original businesses of C Corp. And because through this merger we'd preserved the C Corp. We're now sitting at the end of all of this with a, with a C Corp. With qualified small business stock that. That is eligible for a section 1202 exemption, which means that each individual shareholder that has owned their stock for at least five years is exempt from capital gains tax on the first $10 million of gain. So B, nobody paid any cap gains tax on this dude.
- [69:42]
Marvin Carlo
So if. Exactly. And so what that amounts to is call it $4 million of the 20 would have been capital gains.
- [69:52]
David Bridgeforth
Exactly right.
- [69:53]
Marvin Carlo
So $4 million to you guys, you investors, equity holders that you pocketed that would have otherwise gone to Uncle Sam.
- [70:02]
David Bridgeforth
That's right.
- [70:02]
Marvin Carlo
And that's qsbs for everybody. That's what, that's how it's. At least in my world, how it's qualified commonly.
- [70:08]
David Bridgeforth
That's right. Yes.
- [70:09]
Marvin Carlo
Qsbs. So very significant tax savings, tax shielding. Totally legit, totally well known, well documented, and in fact it's there, as I understand it, to incentivize entrepreneurship, small business. Exactly. This sort of stuff.
- [70:25]
David Bridgeforth
Yeah, it's there to.
- [70:26]
Marvin Carlo
And now you did.
- [70:27]
Will Smith
You guys didn't engineer.
- [70:29]
Marvin Carlo
You weren't forward thinking or were you on planning for qsbs? Because now so many people that I talk to are thinking about their exit and how to make sure they adhere to all of these, these rules to qualify for qsbs. But I also hear stories, and I think yours is one correct me, where people kind of fell bass ackwards into it.
- [70:50]
David Bridgeforth
Oh, and I fell bass ackwards into it. Like literally somebody along the way said oh, by the way, if you do this, then in the future you can do a section 1202. And I just logged it like. And it was only at the end that I was like, I Wonder what that 1202 thing is.
- [71:20]
Marvin Carlo
That was literally, that was like a million dollar offhanded comment.
- [71:24]
David Bridgeforth
This person said to you a million dollar offhanded comment. That's exactly right. That's exactly right. So, so. And I guess the only other thing to say about that is we in our particular case never suffered any double taxation penalty.
- [71:41]
Marvin Carlo
Say more.
- [71:42]
David Bridgeforth
Well, that, that's the knock on C Corps, right? Is that, that you're going to get double taxed.
- [71:47]
Marvin Carlo
Right.
- [71:48]
David Bridgeforth
But I think in a, in a closely held C Corp, you, you know, and maybe it's just because you know we had assets and depreciation and all of that kind of stuff for long periods of time, but we, we never had to pay tax at the corporate level and at the personal level because.
- [72:07]
Marvin Carlo
The business wasn't actually EBITDA positive. I don't understand.
- [72:11]
David Bridgeforth
When David and I, when David and I owned it, we just had depreciation to cover it for a long, a long period of time. And then, and then, and we had enough depreciation to cover paying off the loan. And I think after that we just increased our salaries.
- [72:31]
Marvin Carlo
Huh.
- [72:32]
David Bridgeforth
So I mean it wasn't that we didn't pay tax, it was that we didn't pay double tax because we do weren't doing distribute. You know, again it was just the two of us and so we just bonused it out through, so we paid ordinary income tax on it.
- [72:45]
Marvin Carlo
Gotcha. Gotcha.
- [72:46]
David Bridgeforth
Obviously the more investors, as soon as you take on investors that probably goes away because now you are doing dividends and, and other sorts of distributions and things like that. So again, it's not for everybody and it's not a perfect solution. But what I will say is you, you do see on the, on the private equity side, a lot of deals being set up as C Corp's in order to take advantage of this 1202 and in their cases, I think the calculus is the, based on the hold period and the other financial dynamics, the what we will, the what we will pay in corporate tax is significantly less than what we will save in capital gains tax. And so they're just sort of doing some tax arbitrage.
- [73:38]
Marvin Carlo
Yeah, yeah, it's a great call out. And we, and we see that a lot actually at Mines Capital as well. It Definitely in the lower middle market. Among independent sponsors, private equity, the QSBS opportunities seems top of mind for a lot of people now. But they, but I shouldn't say top of mind. It seems sort of like a lot of people are coming to it for the first time. So. So I don't know if it's new. People are kind of like newly aware of it. But it seems like if you know, you know, and if you don't know, you know, you better be studying up on it and making sure you can take advantage of it sort of thing. But.
- [74:16]
David Bridgeforth
Yeah, so exactly. Right. I think there's just so much more information out now. I mean, I want to say that the attorney that, that, that did the deal had not done a 1202. And this is a. I mean this is a big market M and A attorney. Right?
- [74:35]
Marvin Carlo
Yeah.
- [74:36]
David Bridgeforth
So.
- [74:37]
Marvin Carlo
And so do you see it in deals pretty commonly? I guess. You just said you see private equity not.
- [74:42]
David Bridgeforth
And I, I honestly, I don't see Robs or 1202 in deals. The, the re. I don't know why I don't see robs because I talk to people about it. You don't see 1202 because people don't. If you don't set it up right on the front end. I mean, again, the only reason we got into this is because we did a robs. The robs required a C corp and therefore we were a C corp. Otherwise we would have been an S corp or an llc. And at that point, you're out, you're done. And just to be clear, again, check with your attorney. But it is my understanding that an LLC that files as a C corp still doesn't qualify. You have to be a. Incorporate as a C corporation in order to qualify for 1202. That's my understanding.
- [75:31]
Marvin Carlo
Mine too. Yep.
- [75:33]
David Bridgeforth
Though.
- [75:33]
Marvin Carlo
So indulge me on your. What this did for your kind of personal. Your personal returns on, you know, the number you started with and the number you ended with. Can we, can we play that game?
- [75:46]
David Bridgeforth
Yeah. So I put in 250,000 plus one $100 and I at the end, I own 37 and a half percent of.
- [76:01]
Marvin Carlo
The deal of a 20 that sold for $21 million.
- [76:05]
David Bridgeforth
Yeah. 20 or 21. Yeah.
- [76:06]
Marvin Carlo
Well, congratulations. I know it's the debt.
- [76:09]
David Bridgeforth
Yeah. But.
- [76:09]
Marvin Carlo
Yeah, minus the debt. Yeah.
- [76:10]
David Bridgeforth
Yeah.
- [76:11]
Marvin Carlo
Right. Congratulations.
- [76:13]
David Bridgeforth
Thank you.
- [76:13]
Marvin Carlo
What a run. Yeah. Wonderful story. And, and Marvin actually now just rewinding a little bit to before the acquisition, the sale you had effectively improved, turned around two powder coating businesses.
- [76:27]
David Bridgeforth
Right.
- [76:27]
Marvin Carlo
Were you. Were you Kind of at some point were you thinking that there would be strateg to that expertise that you'd built? Should. Did you guys contemplate going out and rolling up powder coating businesses or, or buying more or looking for other distressed ones? Because you know, how many people can say they improved or turned around two powder coating businesses? I mean, you had some real expertise at this point, right? Or do I overstate it?
- [76:54]
David Bridgeforth
No, no, I mean I, I think that, I think that when we, you know, when. Certainly by the time we finished up at, you know, I mean, I guess is demonstrated by the fact that in 45 days we were able to go from a pretty significant monthly loss to a turnaround. We, we did have some expertise in, in powder coating and metal finishing. Again, going back to what fits you. You know, one of the blessings and curses of my personality is that I just get bored really super easily. And so 10 years in the same business was at least three times longer than I'd ever managed to stay in anything previous to that. So in answer to your roll up question, this was exactly the strategy of the company that acquired us. And, and we stayed as employees of that company for some period of time with the goal of executing that strategy with them. And, and we were pretty excited about it. But I think what we learned is that this type of business is extremely regional because the transportation costs begin to get prohibitive. Right. So again, remember, you're, you're, you're putting paint on primarily metal parts. Right. So your customers are local metal fabricators, machine shops or metal vendors, stamping houses. And your customers are also primarily, you know, or your customers are all local. And if you get beyond, call it a 150 or 200 mile radius, the, the diesel cost per part starts being prohibitive. Yeah. And so kind of like we, you know, you said, well, obviously you're going to roll these things together and get these back office synergies. Well, you, you don't really. And then if, and also all you can really do is roll up these local markets. So maybe you can roll up dfw. There's maybe five powder coating operations that you might want to roll up. So it's not like H vac, Right. It's not like plumbing, it's not like electrical, it's not like landscaping. It's not like all these other.
- [79:30]
Marvin Carlo
It's B2B, whereas those are, many of those are B to C to C.
- [79:33]
David Bridgeforth
But, but there's that a bad thing? No, I think my point is it's hard to roll up five. Right.
- [79:39]
Marvin Carlo
It's it's too small a market. There's not enough fragmentation.
- [79:43]
David Bridgeforth
There's not enough fragmentation that. Exactly right. There's just not enough fragmentation. Interesting. And there's not a significant amount of inter regional synergy so that you could just say, hey, I'm going to go buy one of the top three in the top 25 markets. And the back end. And a couple of people have tried that. And the, the, the theory there is, hey, there are these large players make it up. Boeing. Right. General Motors, whatever. These, these companies consume significant amounts of metal finishing services. And so you could say, hey, we're gonna pick the top 25 cities that have automotive, you know, automobile plants. Yeah, we're going to go buy a powder coating operation in every one of those.
- [80:44]
Marvin Carlo
Yeah, exactly right.
- [80:46]
David Bridgeforth
And that's been explored. No one's done it successfully yet so far as I know. So.
- [80:52]
Marvin Carlo
But, but sometimes the roll up opportunity is not, is not actually back office efficiencies or any of that. It's simply expanding the geographic footprint so that you go from a single regional, single region player to a multi region player.
- [81:09]
David Bridgeforth
Yeah.
- [81:09]
Marvin Carlo
And you've also been rolled up EBITDA as well.
- [81:12]
Will Smith
So.
- [81:12]
Marvin Carlo
And in fact, Sam Rosati, who's been on the podcast was, did a commercial fencing roll up. I don't know a ton about it or what the strategy was, but essentially they started in Florida market and then they had, they acquired commercial fencing across the Sun Belt. And so they were this intra regional player and a private equity firm came knocking. And so again, I don't want to pretend I know what their strategy was, but it feels like what we're talking about, that's simply the, the expanded footprint makes it a more unique offering to a larger outfit that would, they'd want to buy you for that reason.
- [81:52]
David Bridgeforth
And I think in, in the case of, you know, sort of metal finishing in general, whether it's, you know, galvanizing, powder coating, electroplating, anodizing, etc. Etc. That if someone was to pursue a strategy, it would have to be a strategy like that where you would, you know, get one in 10 different metro areas. Yeah, but even in the, even in fencing, which by the way, almost all fencing is powder coated. Just as an aside, you know, what it sounds like they did was they sort of expanded to adjacent geographies. And, and so what I can tell you is with respect to powder coating, people have tried. No one has done it successfully. So that means one of two things. Either it's an untapped opportunity, so somebody really needs to go for it or it that has some inherent flaw that I'm not able to articulate make it a really, really bad idea and I'm just not smart enough to know why.
- [83:02]
Marvin Carlo
Yeah. So yeah, very interesting, Marvin. Anything else that we didn't talk about? You want to plug your firm again or your, or what you do.
- [83:16]
David Bridgeforth
So let me just. So. Yes. So. So the firm is called Rain Catcher. We're a lower middle market investment bank that does primarily sell side representation. And I'm happy to connect with searchers, I'm certainly happy to connect with business owners who want to sell their business, whether searchers or otherwise. And I'll give you my, my, my professional email address to put in the show notes. I, I'm also on LinkedIn though I don't live there. So apologies in advance if you get a, a response that's somewhat delayed but just Marvin Carlo KLW at on LinkedIn and then I can, I'll give you my Ring catcher email for the, the show notes.
- [84:02]
Marvin Carlo
Super fascinating run. Career making.
- [84:05]
David Bridgeforth
Obviously it was a, it was a, it was a really wonderful ride. My, my friend Jim said to me at one point, he's like, you know, we bought in 2005. We went through the 2007-2011, you know, whatever. He's like, Marvin, no matter how bad it ever got, not one time did I ever wake up and go, damn it, I could have gone to Goldman Sachs. And I never one day while I owned it, woke up and said, man, I wish I was back in corporate America.
- [84:40]
Marvin Carlo
So say, I think that speaks for itself, but indulge me and say a little bit more. You just really liked being an entrepreneur. You really liked the, the small, gritty business. I mean, it was just, it suited you.
- [84:51]
David Bridgeforth
Yeah, I think, I think that's where I want to park it. So I, and this is just my opinion, I think that, that there are certain people who are just built to be owners. And if you're one of those people, you just can't stand anything else. And if you're not, then I, again, just my opinion, I would think long and hard before you make this leap because I do believe that you've got to be wired for it. If this is just a spreadsheet exercise, I think you could end up pretty miserable and in the worst case, sort of not successful. But if you just sort of known in your bones that you had to own a business since you can basically remember, and if you're just absolutely miserable working for someone else and watching them get the equity value that you're creating, then don't hesitate. Just, just jump right into the deep end and you're. You'll figure out how to swim before you drown. I promise. You'll be fine.
- [85:55]
Marvin Carlo
I love it, Marvin. What a great place to park it. What a well. Well put. All right, well, we'll, we'll have all of that in the show notes and I thank you for the story, sharing it with us, being such a good storyteller. Great interview. Thank you, Marvin.
- [86:10]
David Bridgeforth
Thank you, Will. Great pleasure.
- [86:13]
Will Smith
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