🔑#1 - On Learning

When I start a new business, or thinking of buying a business…I need to learn the topic quickly.

I go on an information binge diet, then I teach my business partner what I learned.

For example, recently I became curious with the sprinkler maintenance industry. Regulation requires commercial buildings to have, and maintain sprinklers. Sounds like a great business to be in.

Here’s how I get up to speed on an industry fast.

• Join industry-specific Facebook groups (example)
• Join online Forums and Reddit groups
• Find and listen to Podcasts (example)
• Reach-out to current owners, ask them to educate you on Pros & Cons of the business
• Find consultants for the industry, pay them hourly
• Speak with business brokers in industry

As I’m going through this process, I do a once-a-week call with my business partner to educate him on all I learned. He then asks me questions, and I realize what I don’t know…which takes me back to the research process above.

After 3-5 iterations of this I usually have a pretty good sense of whether I want to pursue a business, and why.

Warren Buffett has a fun quote on learning:

If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly.

In your day to day life, if you want to truly learn a concept find a way to teach, tutor or share your ideas with others (blog, newsletter, Youtube, call a friend…etc).

🔑Cool Business For Sale (off-market)

Last week I spoke with the owner of a Semi-Truck dealership. Let’s call him Jim (for confidentiality).

In just a few years, Jim has built a business that generates $44 Million in revenue per year and may reach $4 Million in cash flow in 2022.

About this industry

The used Semi-Truck industry is $13 Billion per year. This market is huge.

This industry is split between Heavy-duty trucks, medium trucks and light-duty trucks. Those heavy-duty trucks make up 50% of all sales.

When I think of macro trends, I think of the growth of companies like Amazon, Walmart, FedEx, Shopify…

The United States is not building a lot more train lines. So for a long time, Semi-Trucks will continue to be the dominant form of transportation.

Key financials:

2021: Net Income - $2.4 Million

2022: Q1 Net Income - $1.4 Million (growing fast)

Here’s how the business works:

A group of sales reps call dealers, brokers and trucking companies to find semi trucks for sale.

They sometimes fix up the trucks a bit, and resell the used trucks to dealers or trucking companies. This is called his “wholesale” business and makes up 85% of the revenue ($37.4 Million in used truck sales).

The other 15% of revenue is driven by selling new trucks at his single dealership location. This “retail” business does $8.25M of revenue (to understand the scale, you can compare that to a single location Taco Bell which generates $1.5M of revenue on average).

Retail is a higher margin, but lower volume sales (net revenue: $10,000 per sale).

The wholesale business is a lower margin, but higher volume sales (net revenue: $3,000-4,000 per sale).

By the way, on the wholesale side, a local lender finances all of their purchases. So there’s no cash coming out of pocket for the owner when they “buy” trucks.

Opportunity

Most branded sellers of SemiTrucks avoid the used market. So the big opportunity here seems to grow the used, maintenance, repair, and resale business.

How to grow it

→ expand independent dealership locations

→ expand the sales team

Given the speed of the growth, it seems like there is a lot of upside potential remaining in the business.

How I Would Structure This Deal

There’s $1M of inventory you would have to buy. Then, you pay 3 to 5x yearly cash flow for the business (let’s call it a $13 Million purchase price = 4 x 3 Million + 1 Million).

You can likely get a bank to lend 65% of the purchase price ($8.45 Million). Ideally, for the loan, you can get 1 year of interest only, followed by 4 years of principal and interest payments with a 5-year amortization period. If you find the right bank, you should be able to get 6-8% interest in the current rate environment.

Then you need to raise $4.55 Million of equity.

An LP will want to see you commit 5-10% of the equity ($225,000-$500,000) as your “skin in the game”. Then you should be able to raise the other $4 Million with a classic 80/20 carry structure. This means after LPs get their money returned, you can split every dollar after that 80% to LPs, and 20% to you.

Back of the envelope math:

Cash flow (handicapped): $3M per year

Interest payments per year: ~$600k

Principle payments each year ~$1.7M

Leftover cash flow: $700k per year

Not bad, but I would want to see at least $1 Million of cash flow per year after debt payments. That gives you a bit more cushion if things don’t go as planned. You’ll need to adjust the purchase price, structure or deal with the lender.

RISKS & Mitigators

There are some real risks in this business.

• as gas prices go up, logistics transition away from trucks to trains
• not much you can do here
• as demand for trucks drops off (post COVID spike), your sales may slow
• if you spend too much money buying a used truck, you will lose money on the sale
• you’ll need a senior leader who has spent 15-20 years buying and selling used semi-trucks. This is critical to the deal 🔑
• find a way to keep the owner around for a year, ideally up to 18 months as a close advisor

⭐️⭐️⭐️Did you enjoy learning about this deal? Please reply to let me know.⭐️⭐️⭐️ If enough people reply, I’ll find more cool businesses and keep doing these write-ups.

Subscribe for free to receive new posts and cool deals.

Have a glorious week,

~ Sieva

PS: Let me know if you want to see more deals like this.

‍