Dan Drake welcome to acquiring minds hey will thanks for having me Dan you and your wife had wanted to move to and settle down in a town that the two of you loved Bend Oregon so when you set out to buy a business you looked there but that was going to be something of a challenge Bend greater Bend is still pretty small I think 250,000 or so uh of the entire area but here you sit today owner of a business in and resident of Bend Oregon so let's hear how you pulled that off Dan start us off with some background on you yeah so resident as of four days ago so we just finally finally moved but I have on the business months we moved from Seattle Washington so that's almost Regional it's not a very large move so yeah I have been in account in in finance as a professional for the last 10 plus years I got my CPA out of college I worked for a big for accounting firm and the seven years since then I've worked in your typical Financial Planning and Analysis roles that compan is as large as a fortune 250 and as small as a tech startup which turned out not to be small but it did end up failing so I I learned a lot of of different things but it was always in even the tech startup was in a fairly tangible industry so Trucking logging Sawmills Electric utilities so most of the the work that I supported even though I was a blueco collar person was very much your Workforce that was your hardworking honest or Steel Toad boots type of people and I was fortunate enough to get out in the field a lot and I I really like those kind of things but Finance was definitely my my reason for being in my passion so that was kind of a good setup to where the story will go exactly good good combination there of of passion but interest and cultural interest carry on so my wife and I have been married for 7even years so we've been together for quite a bit we've moved already from the Midwest to Seattle so the idea of us moving again wasn't probably as daunting as it for some we weren't necessarily leaving any family behind um the area that we'll be talking about Central Oregon Bend is where we live is fairly close it's almost considered Regional it's about a 35 minute flight but it's a 6-hour drive so it's it's not something that's commutable per se but it's something that my wife and I have been visiting for seven years now so ever since mov to Seattle and we love it it's a smaller Community but it's growing it's thriving it's one of the fastest growing metros of its size in the US it's got a lot of people who are retirees moving in um it's got a great outdoor culture it's got a very supportive small business Network which I've found and I've really liked so it was it's been a place that has always attracted us and after being professionals having experience we started a family uh we're expecting our second here in a couple months we decided like hey this if if you're really want do this business acquisition thing this would be the place to look so that's what kind of launched Us in all of this and what about business acquisition itself how did that come on your radar why are you not still a CPA carrying forward in that on that the path that you were on yeah so I definitely have always liked working on more of the value creation the investing as a as a discipline as opposed to the the bread and butter like a lot of accountants are type A well okay the everything balances we we've got a great process it's rock solid I actually always found that was really boring so I've always really tried to find extracurricular activities in Deal support strategy all the things where you know you're closer an operation but there's a financial motive behind it and then you're creating value out of something I've always really liked that um for the last four years I I used that interest and did start investing in real estate so we got up to five rental properties and then each deal we did was larger and more complex so that definitely gave me a a very I would say dip your toes in the water feel for ETA but it definitely has some Core Concepts that overlapped so that absolutely gave me a lot of confidence to think about ETA as a path um I had some friends who've kind of been in different Investment Banking corporate development type roles um and then they had mentioned okay you know rolling up these smaller companies there's a lot of value it made sense to me and I ended up finding your podcast I think just searched for it and I listened to probably 10 in like a week and that was really a big oh okay this is great I kind of understood most of the language I had to Google what SD was but figured that out fairly quickly like okay just think I and then from there I just kept listening to different podcast I read the Bible by them build and started thinking about financing and then boom before you know it I'm like all right let's let's do this search and wow it's been a rush well Dan but let me just push a little bit more on the decision to do it um it sounds like you your taste for what how you wanted to spend your time basically was more strategic than it was being a CPA so you were you were looking for a change or it was inevitable that eventually you'd stop being a you know a W2 accountant and go off and do something because I I mean understanding your this appeal to you but still it's it's a big decision so I'm just wondering what the the Catalyst was to dive in yeah the Catalyst was becoming a father I think actually having like okay the flexibility is definitely one of the things that attracted me to ETA so our daughter's to so about a year and a half in my wife and I both had our maternity patern respectively and then we go back to the daily life and it just didn't seem like enough and that I think really put a lot of gas on the fire MH and we didn't know we were expecting when we started the search but we knew it was a possibility but that was a it was a big family kind of timing like okay the timing is right if we're going to expand our family let's get ready to move to bend this feels like the time for you to start your search so it was kind of a family establishment parallel was like our go and then we were fortunate I think the search the search didn't go as long as we expected which is great but throwing another kid so you know we'll take what we can get but it's definitely no shortage of balancing different things sure well perfect segue okay so you make the decision you're in you're based in Seattle at the time um and you're basically it sounds like you've got your heart set on Bend so we know that is you know kind of constraint number one or Criterion number one uh you want to be in Bend um share a few well on that point MH would you have considered anything outside of Bend and what were you going to do if you didn't find anything for literally years which could have happened yeah I I think after understanding the deal flow later on I entirely agree it could have happened yeah I think we were we're going to give it a try for probably up to two years mhm and keep on keeping on with what we had in Seattle we we could have gone for a little bit and we weren't necessarily in a huge rush but why not cast the line and see what you get yeah if we have gone longer than two years I think we would have had to do some sort of reassessment on what the way is to do this maybe it would be something like starting a franchise from scratch as opposed to to acquiring but there really wasn't a a plan B at a period of time it was give this a go if it doesn't work figure it out but we didn't have any sort of well if this doesn't work we're in a bad spot but we I think I just would have been a little impatient and Tred to get some sort of creative okay great well then beyond beyond geography now what were some of the other criteria so I I always think of the three criteria that are on this podcast all the time it's location industry and size so I I definitely was pretty aware that okay you definitely made your your most strict criteria on your region what I was looking for was something in the industrial or construction supply chain now I knew about Bend going in that that actually was a strength of that region so even though I went with I wouldn't say an ultra specific industry I I definitely paired it down a bit but I didn't say like oh it's got to be like some sort of Home Services Etc I did know going into that market that looking for something in the construction or industrial supply chain would probably be fairly favorable in present but it's still a smaller smaller region so I knew that made that search harder and then the third was I was looking at a purchase price of up to $2 million and then I was looking at you know SD that would fall into those arranges based on you know what its multiples were but realistically in my head I was looking for something around 300,000 sste 300,000 sste okay okay and and that would mean that half of that sece or more would go to your loan and so you were figuring that you'd pay yourself probably 100ish 125 because you need to have some money there for the jcurve and to reinvest in the business is that what was penciling how was penciling for you yeah so I was thinking if I could get to six figures we wouldn't have to really make any change in her family's lifestyle my wife has had a has had a great career she still has a great career and she retained her job she she works remote in finance so we had you know I had a back stop I had the yeah the confidence backing of my wife so we didn't need to have any sort of very large Financial near-term outcome to make this work so I kind of look at as an asset I'm like great so we don't have to stress we can really focus on doing this the right way be sure not to take outsize risk but we don't need to try to squeeze performance out of this thing you're one so anything in the six figures was going to give my family all it needs in terms of okay we're happy with where we live um having our second kid we probably not really going anywhere so yeah yep great and of course Bend is going to be uh more inexpensive than Seattle um of course I I suspect Bend prices it's probably every every native bendian I don't know if that's the word is probably complaining about real estate prices because I suspect that market is is hot with all the Seattle transplants and California transplants flooding the place in make you feel bad no we i' I've told my team like I'm sorry I'm part of the problem but your intuition is dead on yeah yeah every every kind of non- Coast I mean be it you know Boise or wherever uh you're hearing that a lot in a lot that's a great that's a great proxy too if you were to say like Boise to Ben like those are definitely similar cultures yeah yeah well on the SD number uh spoiler folks he Dan bought a a business with smaller SD let just shy of 200 so we're going to get there and and redo the math with the business that you did buy um so tell us that start telling us about that business tell us how you found it what your search looked like and and let's get into it yeah so I went back in my notes versus the preall um to make sure I had my listing sde Etc so I think I said something just shy of 200 I was fairly shy of 200 it was it it was 150 yeah it wasn't even that it was 140 oh really so okay I knew that going in that was something that I had a pretty strong disqualification about but with Ben's deal flow being fairly light so we I have to at least go in and see you you don't know what's under a rock until you turn it so I went and I visited uh reach out to the broker set up a time to visit the business and you know you can't make this up the I couldn't meet the owner because he unfortunately fell and had to go to the hospital W but I was in town so I was like okay well let's just do it it was marketed as Industrial Supply for mining logging and construction like okay and here's your SD located in in the middle of Bend I was like oh that's a good location okay great let's go check it out and went in met with the broker in the warehouse itself like it definitely it you know seemed a bit older seemed a bit outdated but you could tell like okay he walked in immediately to the building he like okay this really is in the middle of this town so that's that's good and then when I walked in everything was fairly organized and clean like it definitely looked like okay like this place is definitely a it's a business that runs it's probably not as modern for what I'm expecting but good feeling so then talk to the broker going over the SD and 140 just it wasn't it wasn't big enough to actually pay for any sort of Lifestyle after Debt Service you know all the different things about buying small that I talked about on the show back of my mind I was thinking about that the real estate was also own by the owner so I learned that after talking to the to the broker and of their sde not included you could do an addback $90,000 of rent was paid to himself annually so you're really looking at like a 230 if you buy the business so I sat there and I didn't really think I'd get traction but I was like hey I got to try it and I told the broker like hey I like this business it's just not big enough though for me to take the risk move my family down and buy this thing if we can buy the real estate with it that's different math um I had had an SBA Banker at the time and we went through buying a deal with real estate versus not doing a 25e amortization versus a 10 and I knew if we got real estate on the deal okay that's actually going to have a pretty similar like monthly cash outflow for Debt Service but then I could add in that rent so I'm like okay that's great I'm going to try to write an offer with that so I kind of did a pre Loi with the broker and then he gave me feedback that yeah they'd be interested in selling the real estate so then I drafted a full Loi sent it and it got accepted so it was a deal that I wouldn't have done without the real estate let's unpack that a little bit more on on adding in the real estate so understanding that $90,000 in rent was being paid to this real estate being paid to this landlord landlord was the owner so if you also become the landlord and owner of this real estate that 990,000 you can count as as money to the owner otherwise known as SD okay yeah but it wasn't presented as so I almost had to like make my own SD yeah yeah okay got that logic why though I think I heard you say that if you bundled in the SD and bought the whole package that your debt service would be the same how is that so I had a an SBA lender who I was working with before this and I really I really liked it I really liked him and we were going through different scenarios and what he was presenting to me is if if you buy a business without real estate and we go SBA it'll be a 10-e amortization a and this interest rate if you can buy a business that includes a purchase of real estate and this is all I believe through the 7A uh SBA 7A if you can get a deal that has real estate included we can get you a 25-year amortization at a lower interest rate so because of the purchase price of this building like it was still most of the price but lower interest rate and stretching out that ammer ation by so much it actually made what the monthly Debt Service would be in just sheer dollars with real estate at a real estate price or without real estate without the real estate price they made it the basically the same like monthly Debt Service and I was like okay great so my cash outflow for Debt Service is about the same but now I get this rent that I don't have to pay so that's really like net more free cash flow and I think having the real estate just made me feel safer about taking on that risk as well so amazing um that that sounds like a great enhancement to the deal just the point about the stretching the 10-year amortization on Purely the business if you just bought the business but lumping in real bundling in real estate uh it becomes a 25-year amortization I believe that's isn't that only if the real estate represents more than 50% of the total package it could your real estate represent more than 50% of the total package yeah it's not even close so that's why I'm probably not even aware of that limitation so our purchase price is like 80 plus percent uh real estate 80 plus sorry what is the 80 plus percent the business is 80 plus percent and the remaining 15% is the real estate other way around about 80% of our purchase price was the real estate oh okay yeah right so then it then it does make sense yeah so I didn't run into that 50% threshold to anybody even bring up to me because I was never even close to it so it's I can't confirm or deny but that sounds like it makes sense exactly right you weren't close to it in your favor you were so over the line and it was never even a topic of conversation got it super all right um a little bit more about the business so so how old how many employees um and just tell us a little bit about being a supplier is what are people doing day in and day out yeah so our business turns 50 next year so founded in 1975 and founded by the by the then owner three employees so that's two full-time equivalents but three total one is our warehouse manager one is an outside sales rep one is our accountant they all have tenure over 10 years so they've had a lot of established time with the business they're all experts like they they all know very much what they're doing how to do it which has been very helpful to me and I've learned a lot more about our business since so we would be if you if you considered us like an industry there's an acronym called mro it's maintenance repair and operations MH Granger would be like your largest public company comparison that would be where we fit into an industry we have a specialization that is is a differentiator in the fact that we carry a very wide range of electrical components for heavy machinery that are critical for uptime so when it when an excavator goes down and they need a new starter or alternator those things uh given how broad the age and specs and models of these different machines are in the field our key competency is we have a wide array that nobody else has and you can come in get your thing and get back up and running and then we kind of fit nicely into I think other guests have talked about in in manufacturing where if you are a small piece of your total customer spend it's a nice place to be because you're critical but you won't necessarily be scrutinized that's where we kind of fit into and that downtime equation what you'll spend on a critical electric component at the register versus what it costs you to be down for an extra day or two the math isn't even close so that's where where we fit in quite nicely and then we'll also sell other more standard maintenance supplies shop supplies kind of with that service model so we definitely um we would probably be called a dealer if you looked at a supply chain so our customers are busino business but we are the last touch point before its end use so yeah know it's good we have a lot of vendors we almost have as many vendors as customers I don't necessarily think that's good um but we're fairly concentrated so we have about 100 customers plus our kind of retail Agriculture and it's a we have a good customer base it's it's definitely uh there's there's some seasonality I'm just learning it and really how I've assessed it is our name of our game is Inventory management so that is you know two months in plus diligence that's what I'm I'm learning about the business and that's that's how I understand it but it's been in terms of a lot of other business businesses that I've worked in that are very capex intensive this business is actually like okay it's digestible to get into right away what do you mean in terms of learning it your learning curve um I have a lot to learn but my checkbook isn't as scared as say if I had to buy a bunch of new machines or equipment um with an inventory management business a lot to learn about what our customers need and our delivery models Etc but if the you know I kind of was prepared to maybe have something in manufacturing MH you would have you know the same things that you're your customer expectations Supply Chain management Etc and you'd have capex maintenance potentially huge outflows with this inventory management model I'm like okay well I get to take most of that piece out like if we spend money on it we can probably sell it is it at the profit we want not necessarily but that's I think been if there's like one thing that's helped me sleep throughout this whole process is as I got comfortable with this business I was like okay inventory at least that's some a risk that is fairly manageable interesting because it is I mean obviously inventory especially if your core value proposition is having inventory is having the things that your suppliers need that is why you are in business to carry the inventory so they don't have to um and your so your specialization your value prop is is inventory and it's also longtail inventory it's not just having you know like an e-commerce with you know a handful of hero products you just make you know you're constantly having to buy more as they go out the door but the ex you know the exact mix of what you're maintaining is not complex and here I would imagine it's quite complex having to know you know how many carburetors you should have in stock for 150 different models of you know whatever Vehicles I'm not going to try to name because I don't know their names sort of thing right and and let me let me tie that question where I'm going with that to all the just the the obvious question to ask here is your keyman risk so it's tiny business three people and while your three people are experts that's of course both pro and con Pro because it's a quality team you got con because if your warehouse guy walks out the door does anybody know how to answer the questions you know how to find the product that the the customer needs so I put all that on your plate something is I definitely assess as and this isn't necessarily keyman risk in terms of leaving uh it could be retiring yeah and I think that's entirely possible that we all are very happy working together very amicable but we still have keyman risk just because of of time and and it's time to go enjoy the rest of your life exactly so that's that's something that I think all all of our positions um including so our the owner is is staying on through almost the end of the year um and he himself is mechanically he's he's a genius I've been told by several of our customers nobody has a deeper knowledge than him so you know in my mind and how I'm thinking about the future is accepting like well we can't we can't replace that because I don't think anybody can so we have to use our our customer reputation and our our current service model to win going forward will be able to you know the other individuals in the business can help trouble shoot but I think unfortunately we might just lose that I'm going to try my best to to help find talent that can but that's a keyman risk that I think pragmatically I look at and like that's maybe not recoverable we'll do our best to fill in needed needed knowledge gaps but I don't think that's going to work now the other two individuals on our team the sales manager and the warehouse manager absolutely key man risk as well and and how I think about that is getting our team a bit I would say over resourced so that we can have a little bit of slack to fill those holes when they inevitably come up so that and then I've got a lot to learn too I hope to have at least enough working knowledge to cover any near-term gaps but I do want to be very cognizant of that's how I will become working in the business versus on the business so yeah no it's it's there it's h so I'll just without being too specific when I came into the business the average age of our employees dropped by about 15 years and I just you know you had one employee so that's kind of where we're at with retirement risk yeah yeah well the the good news Dan is if you when you figure this out and you crack the code of how to kind of somehow bake in the necessary knowledge into the organization rather than having all cooped up in the owner's head you have added a tremendous tremendous value to the to the organization and you emerge on the other side of that process with a far more uh valuable resalable if you ever want to do that um business so you know it's it's so the thing about these stories is so often that the flaws or weaknesses are also the opportunities and if you can if you can fix those things then you've added a tremendous amount of value um and really built Equity into what you bought um great and and uh So speaking of tiny team um and guys who are older than you bu a lot uh and you being the you know big city guy rolling into town um and the fourth wheel how's the chemistry how does it feel to to to be um the new boss of a very small team that's been working together for 10 plus years or so I've something that's probably not as common in in these deals is I met the team before we closed so there wasn't a day one speech that hey this is the new owner sold the business it was known that the business was on the market um Ben's a small town people talk so I think that was known by the employees for almost a year before I I made an offer and I wasn't expecting to meet the employees I tried to be very respectful and the broker and the owner just didn't have any like needed secrecy behind it and even encouraged me to ask and talk to the employees like okay well this is unusual but okay great like let's kind of use this as like almost like a diligence tool and that was a a really good thing for me to have is it added a level of diligence I was able to start that chemistry and kind of almost get a head start on day one activities by spending I know probably five or six days total with the with the two employees M um and then I guess if you include the the accountant but she was more kind of the data provider so I interacted with her uh quite a bit but in a different capacity so I was able to to talk to them and I've been fortunate enough to a lot of the jobs I've had like I've been out in the field and had my own pair of Steel tote boots been out in trucks you know been out in workers trucks going to harvest sites and you know all these things and I've always liked it so it wasn't my first time kind of getting out and talking shop so I was able to use some of that experience in my interactions but both the employees we just we got along well and it was pragmatic conversations like I could kind of tell right away like okay no this is this isn't any sort of okay let's uh make a good impression or let's be really abrasive it was it was just kind of realistic and you know here are the things that we don't have that I want to succeed in my role here are opportunities here are some things that are risks um but it wasn't overly negative overly positive and we were able to develop a really good rapport right away so you know I probably spent 10 to 12 hours with the employees before we closed and you know one thing that I I I tried to do I wouldn't call it an olive branch because it was it's something I genuinely want to do was I wanted to understand like okay what are the things that like you would want most important to you that would help you do your job better and what I what I tried to do is learn what those were and then like week one week two deliver that to the employees so I was able to do that they were pretty simple asks one was a like credit card for taking customers out to lunch and then the other was an inventory system POS system which I mean it's not done but I bought it so it kind of gave me a good opportunity to get off on a good foot and one of my favorite parts of that job is at the end of the day when the sales rep comes back and the warehouse manager is kind of wrapping up orders us just like bsing and talking about what's happening out in the field and that's probably the the part that I was like oh okay this is great um really like this team chemistry is good but yeah let's see I mean I'm two months in anything think it happened but so far it's been I don't want to be naive but it's it's been like a really fun place to and really fun people to spend time with but I think going back to your original statement like keyman Risk is just because it's fun doesn't mean keyman risk is not there well and Dan just on that point again did you when as you were getting to know the team even ahead of the the transaction itself were did you venture to ask about that hey guys uh how long yeah do do you anticipate sticking around or will you stick around or I don't I see I'm I I'm even struggling with how you how you would ask that delicately but did you venture to do so I did uh one was more ventured for and the other one was more um ventured for you yeah yes one came to me and I went to the other individual so and this goes back to the the pragmatic interactions that I could tell right away I was like okay this is not overly scathing it's not overly positive this is they're they're realistic about this this means I can probably I had a good feeling trusting what they were saying the sales manager second interaction we've ever had he's like hey I love what I do but you know I'm this old I'm not going to say what it what it was but he's like not sure how much longer I have just want to let you know so right away I'm thinking one of the first things you do if you do clothes in this business is you start searching for a like a sales rep so yeah was able to talk to him a little bit more about that and I was like hey understand like you've given your life to this business you need something that fits your lifestyle and if this doesn't like all the power to you and thanks for building this business to what it is would you be willing to help train somebody in the inter room and without without a pause he said absolutely so I thought in my head that okay like right away you're going have to start building out a Workforce if you close yeah um now funny enough we've continued developing rapport and I mean I talked to him almost every every day and I've asked him three or four times like okay like just let me know when you're going to retire let me know when you're going to retire he's like I get high on selling and I keep I want to keep doing this as long as I can so I'm not I'm not trying to retire anytime um you know he's him and I've have he's probably given me some of the best like strategic insight to our customer value proposition and our offerings and where to go next and he's got a ton of energy and I wanted to make sure to just kind of Empower him to to make decisions and he's told told me he's like hey I really like where we're going so I want to go as as long as I can go which still doesn't mean that that keyman risk is gone but I would say at least in the near term I'm feeling okay so then the other individual I just more straight up asked him and we had some Rapport developed and said hey like this decision is entirely yours but how long have you been here and how long do you want to be here um I think you've got great talent we want to keep you but if you have any thoughts on where you want to go now's your time and he very much Adam only said like no this job's been been good for me he worked in the trades beforehand so he doesn't go out in the field and do harm to his body his knees like he does like he used to so he likes that and it's worked for him so you know I can't take everything at a 100% face value uh he's also a lot less of a true retirement risk if you think about age so I didn't have that risk in the back of my mind but given his tenure and given what he said um you know most important thing I want to make sure he is enabled and happy to execute and then I hope that those things will solve the keyman risk as well as adding a little bit of slack functionally in our Workforce because these things will happen when and how I don't know but we'll want to be prepared before we kind of get into the more about the the future of your business the plans for it um there was a number of details to the actual negotiation and in um uh the terms of the deal and how it changed and how you benefited from that we've touched on the real estate component a little bit um but T talk talk us through that point where you offered and then got a counter offer that was actually sweeter than the original offer so I had mentioned I had a great SBA lender um I if I could say yeah I'd love to so it's Jeremy French KeyBank okay incredibly helpful had confidence in me um great at service also great at consultation and he is who I work with to get this deal prepared and to be backed backed by him when I go in and and finance the deal so in my initial Loi proposal the purchase price of the real estate in the business was going to be just under 2 million and it was going to be financed by an SBA loan and the interest rate at the time I think we were thinking was going to be just below seven so when I delivered that I got a counter two days later and said hey we like the terms of this this deal and the timing it makes sense we like it we would like to do seller financing on a 25-year note with a 5-year balloon um and they added just under $100,000 in price to the real estate so it just brought it to 2 million 50,000 so they did coun it a slightly higher price but they offered a interest rate of 5% so even with that higher price my monthly outflow was still lower and I went back to my my banker and said hey like I do really appre appreciate your help I just want to confirm with you because here's what my gut says this is a great deal versus what we have and he he said like hey I want to close this loan with you but don't turn that down like that's a that's a great deal so yeah they countered it a 5% interest rate um at a similar amortization structure and 10% down which is about what we like was the same thing that we did on the SBA side so and in return just wanted $100,000 extra dollars over 25 years yes yeah now it is a 5year balloon so right so technically it would be at the end of year five but I mean the way it's advertised and the way we're paying for it um and it wasn't even 100 it was like slightly the below that but yeah over that time period when I just looked at the you know comparable Debt Service between our offer and theirs as wow yeah no theirs is definitely better so we're going to take it but even on the point about Debt Service and I may be about to say two two things that are different but are actually the same anyway even on the this point of your debt service monthly Debt Service being low with their count Lower with their counter offer they also the the total purchase price of the business when you add in not just the principal the purchase explicit purchase price but all the interest you pay over the term of the loan that number would also be they'd also just in total get less money because at a lower interest rate and you add up all the interest it's probably going to be uh less than $100,000 um they're they're taking home less than even with an addition $100,000 than they would have with your first offer do you f oh probably yeah I you know I never even thought about that but yeah probably um you know and their motivations as as sellers were I would say way different than what a lot a lot of uh what we hear on your show in terms of you know we're looking for a retirement of Legacy um you know they had an explicit interest in providing some sort of income stream for their their children potentially so and then they also had an aversion to taxes so they love spreading things out as much as they could and I couldn't sit here and tell you like oh no mathematically I think if you do any reasonable like you know time value money that present value I couldn't tell you like oh no they're they're they're looking for the better deal I think they're just looking for what they wanted and what you know their lifestyle and maybe some conceptions about like oh but I paid less taxes so I went so I wanted to make sure to negotiate for what was important to them and what wasn't that important to me so yeah I definitely am not sure it was you know if you were to take that to like a true investment committee or a board of directors they would say that's the right move but it was a right move for them mhm and yeah that's uh I thought the deal was worked well and then I think one of the more important things that I didn't fully appreciate until later in diligence was not having a bank in diligence made things less of a headache um there were a handful of things that I think we'll talk about later in the deal that if there was a bank involved it would have made things a lot more challenging versus we were able to have I think more like face-to-face conversations like okay with this thing coming up here's how I think we should address it well let's let's we're going to get there in just a sec Dan so but let's let's put a pin in it until we do to be clear then you bought this business and real estate and and and the real estate is really more than 80% of the value here that's correct let's not forget for 10% out of pocket and then the seller financed the rest so you basically bought a seller finan business almost fully seller financed business no Banker your Banker Jeremy French of Key Bank said take the deal didn't try to get you to do the SBA loan and um and as we're about to hear that was a positive because there was a complication that a bank really would have hated that you were able to manage through but also as we know SBA Loans are quite onerous to get across the finish line so you got to skip that headache as well so what's not to like that's good um and it's also just a reminder thinking through like wait he just counter my seller just countered with an offer that feels better for me it's who was I think it was Scott Walton um who who recently just talked about the way they approach AC sellers in the negotiation is to really try to understand what the seller actually wants the Temptation is to haggle over price to haggle over some single number or you know two or three numbers around seller node percentages you know and and and final purchase price um but uh really trying to understand what their motivations are the motivations behind the motivations um is you know a far better way to approach uh a negotiation even though so so often we forget and your case here is a perfect example this seller who's already in his 80s so he's proba you know he's probably not optimizing for the most money for himself possible anyway because he's on the older side um had these other motivations that you eventually learned which is kind of income for his family yeah no that's that's a great Point um I had uh just for a different professional project before several months before I read a book called negotiate without fear and I actually referenced that book quite a bit in my Loi and further discussions and it just like you'd reference your podcast guest I thought about those things all the time like what's important to you what's important to them okay that's your contentious things price is usually that and then what's important to them not important to you and then the you give that that's that's what that book would tell you and then yeah what's important to you and not important to them you tell them that and that I mean that book actually I referenced it probably four or five times throughout and that helped substantially throughout making a deal that's going to work for both sides but it I think that was the the fun part of it was there was more creativity and okay well you don't have to just like focus on J Price like craft something that fits both parties well great negotiate without fear and so you kind of key takeaways is the the motivations you bucket them the motivations that are important to both parties the motivations that are important to you not to them the motivations that are important to them not to you and you have those three kind of buckets pretty clear yeah and yeah it was helpful because it was it it's straightforward enough that like okay that's that's how I should approach this and it for in this experience it just took a lot of asking of this mainly the sellers broker I think almost every time I had a phone call with them I was like okay so what's important to them is this important to them and then if everything was important to me I would state it explicitly Great Dan okay now to this thing that we've been hinting at that happened in diligence what is this thing that happened in diligence yeah so this is something that if this happened with the SBA lender MH uh this deal either wouldn't be done or I'd have either less hair or more gray hair so thank thankfully I don't when I got the diligence on or the original listing and the the financials for this business sales had peaked in 2022 they came down 6% in 2023 and I I wasn't necessarily originally alarmed by that the the SD numbers that I quoted were a threeyear average they weren't off of that 2022 high and going into let's see it was the LOI was accepted in April and I started diligence in May so on my first diligence trip I got year-to date April financials so I knew coming in I was like okay well sales are down 6% and you know there's a variety of reasons that Trend potentially could continue it could be the 2022 covid peak of so many things in construction when I got the financials back for 2024 year to date April they were down 20% versus 2023 which was down versus 2022 and immediately I looked at that said some four-letter words and started getting into kind of proforma p&l and Debt Service free cash flow situations and what I saw was hm there would not be a lot of cash flow left for me or if this trend continues I might be in a default position fairly quickly that's not good so I put together a fairly simple p&l with its projected Debt Service put it in a slide deck sent it to the broker and then we had a meeting so I said it to him like pretty pretty candidly he he was been a he was a great broker he was really good at being realistic and I would say had some good business sense compared to a lot of Brokers that I had I had dealt with in the process and it wasn't a long time to get to the punchline I said like hey if these Trends continue here's what this debt service is that we've agreed to do we really want to be putting my family in a default situation right away that's a risk he said he completely understood it was reasonable I said give me some time I'll come up with proposal so long story short because I probably spent three or four days trying to what's the best way to do this at the end of the day I kept the purchase price the same in my offer I kept the 5year balloon term the same in my offer and I said here's what I would like to do I still want to give you the same amount of cash over 5 years but as opposed to having a straight line every single month payment I want to start at a lower level and then each year ramp up and then what I will be doing is actually paying you more in year four and five so I'll just give some quick context so this is something you can kind of understand with math originally the loans monthly debts service was going to be $111,000 with this new proposal year one starts at $6,600 a month and then year five ends at $115,000 a month so what I really was doing was like betting on myself and then asking for more Runway near turn so and I would have other things like I'd have time for the the property to appreciate um since that's such a big collateralized piece of that loan but there's definitely more risk at the back end but my gut was the more kind of safety I have in the early years the higher my chance of success so that end up getting accepted it it makes sense Dan but one one thing that jumps out at me is particularly since you're now doing this negotiation without a banker and you guys can as use your word be creative do whatever you want really no rules right you didn't tie it to explicit to Performance you you you baked in a performance basically which is you know give you a lot of room in the early years and in the out years like you said you're banking on yourself you're betting on yourself to have grown into those heftier payments why not tie it to Performance so that it's you know basically risk neutralized at that point yeah no I I actually thought that thought that way so throughout my diligence process I had two really good mentors and friends that had Investment Banking experience um one of which actually had like pretty specific experience to my region and and business type um am I allowed to do a shout out for them they they were probably the the glue that really helped me so sh Nick colanero was uh a friend and Mentor I had in another professional life that we were still close but he had investment banking development experience he helped me a lot with the the cash flow projections and like your kind of valuation and then Brian oatway was also had that same experience and he had experience actually in my region buying similar sized businesses as a corporate development leader and those two I think really filled the gap for me not having an SBA diligence program they helped me do a lot of those things and when I was working with them I went through that earnout proposal and like we just kind of went back and forth like okay if we do this if we do that and we both kind of independently got to like this is going to be too complex for somebody who's a small business owner yeah so let's like what's the easiest way you could do this so that's why I went this route if real estate wasn't on the deal I wouldn't have been comfortable doing it but it did really make my year one and year two um you know that gives me a lot of room to succeed and I would say a good safety net that any like near-term stumble I've got a lot more grace period which will be nice well let's also talk about so year one year two uh and then you just mentioned year five is the balloon payment so we often hear balloon payments uh is are part of the structure of a deal um talk to us like we don't know what they are and with a spef this specific follow-up question do the borrowers you in this case when there's a balloon payment involved in an acquisition expect do you expect to pay that balloon payment no right you expect to refinance into a different loan right start us please go from there yeah that's a great question because even some you know really smart intelligent friends I've talked to about this like balloon is always something that wait what what's a balloon yeah you got to pay the whole thing so a balloon is is a structure where like your mortgage is 30 years and you pay the same amount for 30 years yeah a balloon payment it's got two key terms the amortization schedule would be like your 30 years on your mortgage okay you're going to divide these payments to interest and principal be 30 equal years of payments that exists for balloon payment or for a balloon loan for the amortization so when I said a 25y year amortization you have your okay let's assume you're going to buy this real estate and what would 25 annual equal payments look like with that interest rate great right okay so then here's the kicker it's a balloon what's that mean so when you get to the end of the balloon period in my case the end of year five um you actually owe what's left on the on the mortgage oh okay so if you pay your house down by $100,000 you bought it for a million now you've paid down 100,000 you've got 900,000 left at the end of year five okay you now owe $900,000 to the bank like whoa okay that's how do you do that at all like you got to pay the remaining balance principle right there right then and there so that seems pretty extreme but it's something that um you know I have some friends in the commercial real estate industry and Banking and it's something that I think I I gained a little bit of comfort with beforehand so I didn't have to like fully learn that concept but the the idea of like okay well yeah there's a balloon payment but you're probably just going to refinance it so I have two options one is the option that most people think about is you'll refinance with the existing bank I don't have an existing bank but I did work with the my SBA lender Jeremy on okay so what would we do in this you know balloon payment period you kind of walk through the options and even walk through options like well we could be in a cash out refi situation where we're actually handing you a check versus just refinancing the loan so I was like okay that's that's good to know um Let's cross that bridge when we get to it but there were you know viable exit strategies that way and then the other is not always common the broker made it clear to me that the seller may want to either extend this loan like okay as opposed to having a balloon balloon du will just like either extend the balloon term or like Let it go into a perpetuity now there's reasons why I wouldn't want that but the broker came to me and said like they're also interested in renegotiating the terms once we get to the balloon so I thought having multiple options was good who knows what I'll be looking for or what I'll want at that point but it is kind of an odd like expiration date in a deal it's like okay so now you got to figure out what to do with this in my case like 1 Point $7 million that you owe well it a few things so interesting to hear that the seller probably is also thinking that there will be some sort of non balloon event happen at five years and then so so then you wonder well why even why did they want a balloon payment to begin with why don't they just have it be a 25 amortization over 25 years no balloon payment right um so I guess who knows um but then the thing about balloon payments is it it feels like they are generally no one expects the balloon payment to actually be made as such I mean um by the borrower excuse me the the the the seller will get their payment at that time but the borrower never really expects to pay it the whole principal down at that time there will be some sort of like you just said the some of these a menu of options refinancing refinancing with cash out um so um it's you so you wonder what the purpose is and maybe it's just kind of kick in the can a little bit let's get these you know in general I mean like what is the purpose of balloon payments in general kick in the can a little bit let's get these five years done and then five years later we'll renegotiate the whole thing it feels like that I mean the joke in real estate right is lendon extend yeah it's like we did I mean most of the load is real estate so we're not way off base there but yeah it's like hey I'll pay you um but give me time okay interesting um all right well we've we've really covered the the the the acquisition itself anything more to say before we start kind of wrapping up and by talking about the future and how you feeling and Etc anything more on the deal and acquisition yeah I mean I think the the big things were covered with the with this like the actual like bread and butter okay here with terms years how we did it um closing itself was pretty straightforward not having a bank like diligence and closing actually felt a lot more like one one event um Dan you had that you had that moment this is now tell the moment where you bump into the person in the airport who knew the business that was a data point of one but it does it did feel like a signal from the universe yeah I think and I I can kind of talk about the before and the after because this is the same thread but it's it's a signal for the universe it's like immediately like okay that wasn't a blip this is this is real I'm very happy about this I ran into a somebody at the airport I was just waiting a baggage claim and I look at it he's wearing a company branded t-shirt and it's got person's crane service on it so I just thought hey I'll give it a shot Hey sir just curious do you buy from indust applied electric and immediately this guy with no no sort of context whatsoever oh Houston that's the seller's name oh yeah we we love working with this team they're they're great they can help us solve all these different like downtime issues and electrical issues that nobody else can do out here they've they've been really good for us why do you ask and then I had to on the fly like oh you know I'm thinking about maybe taking a job there or something like that so that was something that wasn't on my diligence plan but with you know no context no preparation that's a great data point um I've been out visiting customers that's what I've been probably spending about half my time doing now is is on the sales side so I've met eight of our top 15 customers and most of our customers without me asking will say your critical offerings for like electrical components in up time nobody else in the region has it period it does not exist so that's something that validates our value proposition um I expect our business is going to have a good floor because of that like We'll always have that Market at least in the near- term I don't know if that Market's big enough to attract competition um now we don't want to just sell those things we want to sell your broader shop and maintenance and parts to our construction and excavation customers but that just having that kind of reputation from our customers that like oh if you need this hard to find thing go there it just gives like a really good foundation like okay great yeah there's something that's always going to keep this there's there's a secret sauce that's always going to work we want more than just the secret sauce on the Big Mac but it's good to at least that kind of poured as a foundation so yeah that was the big thing in terms of diligence um that was a green flag another thing that was really helpful to me and something I think about a lot and why I've really liked I think just this ETA journey is it really for me it took a it took a village of people to help me so when I look at my list of my team and extended team in the diligence process and then now the team that we have at industrial applied electric our our distribution and uh parts dealer that's the the business we're in none of this stuff I could have done on my own I had great help from my my two mentors and friends um I used an SBA score Mentor I now have an uh Small Business Development Council Mentor locally uh my SBA lender was helpful and then I also had a commercial real estate individual who I didn't even necessarily pay but he just really helped me out with kind of evaluating like hey this property what are its uses what are its value I got an actual appraisal and was able to kind of talk strategically with the appraiser I got an environmental assessment was able to understand environmental risks and it was just a huge team of people that helped me tremendously I learned a ton I would not have been able to do this without them and it definitely it makes me think about just like always paying it forward and what's kind of fun about this business is like our job is to help people like if something breaks we help them fix it so that's kind of my full circle on okay there's so much that you can't accomplish without help but a good full circle is like well we can go help others build this region so that's what our customers are doing for like is they're actually building the region like that's what our value proposition is is to help those build Central Oregon well your your tagline on your LinkedIn is serving those building Central Oregon so I love that um and I know it's a big part of it um and it also reminds me that in our preall you'd said that just being in the community of Bend I I I I I gathered that it wasn't the constru Crews building Central Oregon but just the the town uh and the you know the everyday people being in the community was a big motivator for you as well I mean you're you're a couple who you know pulled up stakes from the big city and moved to a relatively small town to settle down so this is kind of your this is you m this is you starting a life that will go many years absolutely yeah so that's that's something that's really important to my family to myself and why I'm really happy that I was able to buy an establish business that has a reputation is being a part of the community is something that gives me so much energy and something that I want to do is be a part and give back and help serve said Community the business wherein I get to interact with individuals all around central Oregon and I hope to have even more interactions across this area um get involved as much as we can whether that's you know business philanthropy Etc but this is where we want our kids to go to high school are two and a half year old and are soon to be newborn so that's a there's a big value to why we came here and there's Great Value to the to the business we purchased because it does come with a great reputation fantastic well Dan let's close by uh thinking about the future strategizing a little bit um I don't know if you heard my episode with Matt durak who bought DHS equipment which is which is basically a supplier of construction vehicle parts construction parts I mean it sounds like a very similar business I know you've got a niche his might be broader um and his is his is uh DHS equipment was quasi e-commerce I mean they've got a website where they take orders but a lot of it is really just a kind of a funnel where eventually a customer is on the website and gives them but gives them a call and then it's it's a phone interaction um not sure you heard that episode but um you know it feels like the the workings of that business and the workings of yours are are quite different is the direction that you take your business that direction or something else or no change in Direction just growing just sales and just basically growing your footprint or what what's what what would you what does your ideal next five years look like yeah so I I definitely need to listen to that I have not listened to that podcast but that sounds incredibly relevant what my vision is is to focus regionally as opposed to e-commerce and expanding past Central Oregon at least near term um I think there's going to be reasons that we we kind of explore and foray to e-commerce but it won't be strategically it'll be more likely just to liquidate excess inventory M and you know maybe we find something that's not a substantial amount of effort that does open a new sales Channel but what we're focusing on is growing in in the region so that's Central Oregon that's not just Ben but there's five or six cities in that area we're focusing regionally first and what what we're most focused on is right now like the business will we write an invoice like we have to probably walk before we can crawl but I I do have kind of some near-term objectives and some longer term visions that I'll I'll speak to when we write an invoice to a customer it's handwritten we keep a white copy we give them a yellow copy and then we mail them a pink copy a month later so triplicate baby yeah with with a pen and a paper paper we don't have an inventory management system we don't have any sort of POS system that tracks sales that's the number one priority right now is counting all our inventory getting into a system allowing us to place orders electronically that will manage our inventory and those are the foundations for us to even give our regional customers an opportunity to order onine because right now uh our website is a picture of our warehouse it is almost entirely Word of Mouth in relationships so near term is just getting our inventory and offerings digitized so then we can start having an online presence for our existing customers and manage our inventory better and allow us to do even things like let our customers pay by like a as opposed to we write checks and we get checks for everything so that's that's really the near- term but inventory being our core competency like we have spent money on that um we're about halfway through counting we've got about 4,000 upcs counted we probably have about 7,000 to go so we we'll get there but that's the foundation but really longer term um and I've started doing this uh meeting with our top 15 customers to understand their needs there's a lot of offerings that our different customers have that we don't currently serve for a variety of reasons but I want to make sure that where we can serve different needs I would say profitably will do that so the really the midterm proposition so we're still thinking about focusing regionally expanding regionally is grow with our existing customers with new offerings that they want and then from there think about acquiring new customers I do know that there are customers that are some of the big players in construction that we don't have we do have luckily a lot in the region but yeah like right now I'm thinking about internally growing with our customers with new product offerings and then expanding into new customer Even in our same Industries it's probably where I start thinking about another Salesforce individual and I think I mean the Market's big enough I've kind of done some chat gbt Market size Etc the Market's big enough that if we do we could grow with our customers successfully there's enough meat there that I think we could definitely make this business 20 30% bigger but if we go expand into new customers originally I think that's how you start thinking about okay in five years double our sales is what I I believe is true just based on the size of the market and its growth so in five years I kind of did Peg that like all right double your 2023 sales but right now get your inventory sell sell to your existing customers and then start acquiring new customers after that I feel like I could be kind of getting distracted with like oh take over the world with e-commerce what else Dan anything that we didn't get to that you wanted to mention I don't think I would have done this without your show will well thank you like that's this is was a very important thing for me hearing other people's stories and people from all walks of life gave me the confidence to do this this is the kind of thing I think you'll read about or hear about but we'll sometimes feel like it's reserved oh it's got to be like a you know an investment bank or a big MBA or big executive Etc and hearing all your guests and I really enjoyed how the formats of the episodes were so much crafted around okay what's this person's personality experience and they're all different and you know some are really resonated with and others I mean it was good to actually understand like okay that's not either a I'm not into that space or I'm not into that style great I know that and then others find like oh okay this person's either similar to me or I like their style or I'm learning a lot about this it was really helpful so I do want to say thank you for putting the show out without listening to many many episodes I don't think I would have had the the confidence to go after this but your guests inspired me to do so well I appreciate that Dan um and I not only do I appreciate it and you Sayang it here but uh I also feel like you nailed what I try to make the the value prop of the podcast which is the stories so showing showing so many ways that this can be done and then also the variety that it's not a particular type and and making a point to have a lot of variety in terms of background and style of business and size of business and aspirations of the entrepreneur and etc etc um there the the paths are so varied and um and I'm committed to showing all those paths and so thanks for noticing really appreciate it yeah thank you that's that's the biggest thing I had was uh thanks for your help and without getting into detail this is the most engaging fun thing I've ever done to make a living two and a half two and a half months in this is I could go on and on about all the things I've Loved about it but it it's it's a lot of fun so that's that's my story in terms of two months in how's it going it's awesome it's not necessarily easy but it's a lot of fun oh that's I'm so glad you said that I should make that one of my questions give us a just before we close 0 to 10 on the fun scale or on the on the rewarding scale that was great Dan if people want to reach out who are not as far along on their path as you now are uh is there a way that you like that they do that yeah please so LinkedIn is going to be my best direct way to do it and then I'm going to say this so I have a so I have a reason to update our website um and then we are also our website is I AE bend.com so that is for me to build into something before this gets published and if not it'll be a fun little it'll be a fun Easter egg for your guests but yeah LinkedIn will be the best and uh you know pay forward in helping and giving experiences is is it's helped me tremendously so yeah I absolutely love doing those kind of things so thanks for asking that well I ae.com and remind us the the full name of the business so it's industrial applied Electric Industrial applied electric got it Dan Drake thank you very much sir congratulations on your acquisition and not only making an acquisition but doing it in the town that you had your heart set on you and your wife had your heart set on thank you will thanks for thanks for hosting me it's been an honor and thank you very much best of luck and thanks for inspiring me and so many others to do this thanks Dan I hope you enjoyed that interview make sure you subscribe to the acquiring minds Channel below we are now publishing twice a week so tons of new interviews and stories to come stories that will help you along your own path to acquiring a business