Cody AG welcome to acquiring minds thank you will happy to be here Cody you're about six months into your ownership of a food safety and testing business so food that makes it to Consumers shelves passes through your lab to get there the business is in Cow Country uh tari tari California and you moved to the area to buy the business so let's get into it let's hear all about this background first please Cody tell us a little bit about yourself yep perfect yeah so uh grew up in in Southern California San Diego um pretty much every guy in my family is uh sort of blue collar and you know worked in construction uh you know kind of most of their lives and then that includes my dad who you know effectively graduated high school and and started working you know working with his hands and and um so you know I grew up kind of out on job sites you know sweeping floors and Hauling you know debris to you know from here to there and all that so um more or less you know fairly Blue Collar upbringing um you know my I would say my dad built you know reasonably successful uh you know business in uh you know in San Diego and I I think growing up I kind of felt like you know I learned that you obviously need to work hard and um you know apply yourself uh to kind of you know to be successful but not only that but learn how to run a business and you know sort of you want to point yourself in the right direction that makes sense chose to study finance and um and also started learning Chinese so I I you know when I went to college this was 2010 China was this fast growing emerging economy and you know there's a lot of people writing about how it could be sort of the ne you know the superpower of the you know the 2st Century type of thing so yep I felt like well if I'm going into business this this couldn't be a bad language to to learn a bit about so I finance and Mandarin killer combination yeah that's right and uh and then I end up ended up living in in Beijing for about six months uh my my junior year of H college so it's pretty much my college experience in a in a nutshell I'd say y great and so to be clear on your interest about kind of learning how to operate a business one of the things I recall you also saying from growing up was that you were exposed to really really wealthy people yeah that's right so yeah effectively you know the specific business that my dad runs is sort of like a single family uh single family residential home builder and you know it's primarily building people know San Diego well there's enclaves like La Hoya Ranch Santa Fe delmare these are like some pretty high-end um high-end neighborhoods and so people are building 5 10 $20 million homes and so uh I just want to be clear with that my dad's not uh you know living in one of these homes but growing up we you know we worked on a lot of these houses yep and and uh yeah it's just it's just eye opening right you see it's just I think anyone's Natural Instinct if you see somebody that can afford to build a $20 million house you're like how the heck did they get themselves in a position to do that right and so it's it's not just I guess you know the takeaway was it's not you know it's not just waking up early at 6 am. getting to work like working your butt off and like do like it's that plus doing it in the right way and kind of pointing your ship in the right you know before I was thinking of good analogies like yesterday it's like you know before we hit launch on the rocket like make sure it's pointed you know to the moon and not sideways or something right so because a couple a couple degrees of difference can can matter a lot over the over time yep that's it's a great Insight uh because you can work really hard in life and even in business small business for example and spin your wheels or at least not do as well as other people who are working no harder than you so picking the picking the right game is a big part of big part of things so it sounds like you intuited that early on exactly fast forward kind of postgraduation I just basically hustled my way into a job you know back in New York um with JP Morgan do in by some baking now how do you turn your attention to search so I spent most of my time JP Morgan doing covering these public reads um I was I also did a rotational program for one year in San Francisco where they they sent me to San Francisco um to work in kind of the Technology Group and so I I also was there and got to cover some you know semiconductor companies software companies um the reason I mentioned that is when I was there I had um sat next to a guy his name's Anthony runko ween got a coffee and he said hey I'm gonna I'm Gonna Leave in six months and I'm going to go uh buy a business and so that was you know my first introduction into the world of Surge and so I think that was 20 2018 probably um and so Anthony you know he actually partnered with another guy named Eric leech who also worked at JP organ um and so they went out and did a partnered traditional search uh together and um they actually just exited this last year and had a really big successful kind of outcome so that's pretty exciting to see from you know soup duts so to speak going from working in at cubicle to being a multimillionaire so yeah absolutely not a bad and how did it land on you when he told you he was going to buy a business I think like anyone says it just doesn't make any sense at first you're you're just kind of like how can you do that with no experience with no money like what do you bring to the table that would you know like you know I work next to you Anthony what what do you bring to the table yeah um but all right but you start looking into search I guess this this wets your appetite or pequs your interest and you look into it and take go down the rabbit hole how how does this first exposure to it become a serious path for you most people the last five years working in Investment Banking that's usually you know two to three years and then you kind of move on to the next thing so uh I was kind of thinking what's next right and I you know start the whole startup the idea of a startup and just like sitting sitting down and thinking of a problem and trying to build a company around it just didn't didn't really you know resonate with me and so I mean it made a lot of sense because I I guess you know in Investment Banking you're pretty familiar with you know you have this company here and you want to buy it and you're going to need to raise some debt financing and some equity and this and that so you know you like fairly it makes sense to me I guess just how I'd been trained and my brain was wired that you could kind of structure you know some kind of deal so what did you do well I like started like everyone else right it's you read uh the hbr guide you know buying a small business uh you know buy them build I listen to uh you know quite a few podcasts and things and reached out to a lot of Searchers I basically had identified that the big two business schools that you know especially five years ago that were putting you know pumping out a lot of Searchers were uh you know Stanford GSB in Harvard Business School what happened with your applications to those schools I like it Cody you you you you learn what the best is and then you shoot for it good for you yep so um applied so I I applied to I'm trying to think of the years I'm I'm I'm older than um I'd like to admit now but uh I think probably 2020 somewhere around there applied applied to Harvard and to Stanford um I got interviewed at an interview init a to to HPS um and so for you know for those of you that don't know basically either of these business schools once you get in an invite to interview you have basically a 5050 chance to get admitted at that point so you know the odds are like reason you know reasonable chance that um you know you can get in um and so I got did the interview um you know waited waited end up getting weight listed which is like they literally write you a letter saying you're qualified to be here but we don't have a seat for you at this time like let us you know um so um anyways that was tough waitting you know kind of waited around and then um ultimately got dinged you know didn't get didn't get admitted this is for both that was for Harvard um HPS and um so you get that close and you're like well you know I'll probably give it another go uh next fall and uh and reapply right so um did the same same thing reapplied to HPS and to GSB I got it interviewed for both this time not just Harvard but Stanford as well um you do my interviews don't get into both I get dinged dinged by both and so it the more I thought about it probably don't need an NBA to run a surge especially if you want to do you know self-funded surge I will also mention with business school like I I did have a bit of a chip on my shoulder about you know how much effort I had to put in to kind of you know make it into the seat of JP Morgan and sort of like the value of having kind of this blue chip resume and all that you know I will say I had a little bit of a chip on my shoulder about that and I wouldn't have minded just kind of having that that stamp you know there sort of proverbial stamp of approval if you will I will say that I actually think this is a good lesson selfishly for the audience because you did a search anyway you didn't go to Harvard or Stanford and one thing the audience regular listeners will have heard me said is I don't want think people to think there there is such an over representation of people in search who've gone to name brand Business Schools I don't want people to think that if you have not gone to one of those Business Schools you cannot do this um now you do also have Investment Banking pedigree so you're not you're not the perfect example because you are coming uh from a a deep deep Financial Roots but but still um the fact that you proceeded to do this uh without without going through um HPS or or GSP uh let that be let that be uh an example that you don't need to that others listening don't need so and I I just GNA jump in quick but I I listened to the episode you did recently with John Wilson and I just found that to be an amazing story right and he you know kind of around a trade and just uh kind of jumped in jumped in uh to his waist in it kind of kind of thing and and he's sounds like having a pretty in a in a pretty good spot there so well great call out yes and I think that part of the part of the appeal of search actually to me actually is that it's I don't want to overstate this and suggest that it's you know totally egalitarian and open to everybody of course um there are a lot of things that about search that probably filter out people and they wouldn't be able to do it um namely having a little Capital certainly helps there are people who do it with zero Capital but that would make it a lot lot harder uh and having Financial chops does help get a deal done for sure so those who don't know the first thing about Finance have a bit of a a learning curve ahead of them that you probably didn't y um but with those two caveats I I I I feel like searches um is is actually uh this this amazing path that is pretty open to anybody with the gumption to really Hammer at it um so y that yeah that I mean that actually get good point you make there and one of the one of the things I wanted to you know just in my you know feel like what I've learned so far and and kind of just give my my T sense to listeners is that there's no there's no one background to have you know in order to do a search successfully and then there's no there's not a right size of a business and there's not a right industry uh it's a very personal um I feel like I feel like that's you know kind of a a high level statement but yeah it's not it's a very personal decision and you need to assess for example um you know I'll just create like some a fictional background but say like you know don't come from from you know the invest in banking Finance world you but you have skill you know you're a skilled kind of Tradesman you know maybe you you know worked for you know an HVAC business for five 10 years and like can you go out and buy like a $400,000 SD HVAC business and do it successfully like probably right um right you know um well and the other thing is like that person is probably way better prepared to run that business than somebody coming out of Goldman Sachs HBS uh so so we we we also overstate the the value I think of the financial background because it's most relevant getting a deal done and that is a big part of this um but it's much less relevant as you as you proceed yes knowing understanding the language of business I.E accounting and and finance helps be a better operator but there's so much more uh to being an operator than than that and you can get away without knowing that as an operator as most blue collar business owners Founders are you know very few of the the original guys and gals who built these businesses have any Financial uh literacy excuse me fin I should say Finance High Finance literacy um so so anyway and and and actually I I want to Circle back on that Cody and ask you that question do do you feel to what degree do you feel your years at JP Morgan are helping you now as an oper but but we'll get there all right so where are we you set out now to do your self-funded search that's right yep so what year is it and what and what do your parameters look like so fall it'd be fall of 2022 um fall of 20122 I you know we had been living in New York for my wife and I for most of our 20s I I will mention by the way so I met my wife in New York uh she was a interpreter at the the United Nations and uh so like super successful um girl she U you know grew up in I'll say Eastern Europe uh I guess and uh and moved to the US U you know got a job there and so she's super successful and U basically I wanted to do a search in California kind of closer to home and so I convinced her to leave her job and you know I left obviously left my job so we were kind of you know burn the boats and uh all in all in on on this search basically so I have to give her some credit for um letting me her to convince her to do this um because it's not not not an easy thing so yeah um thank thank you wife shout out to you wife yep it's exactly so um so any yeah Fallout 22 basically starting a self-funded search um you know have that you you know built a a cliche website you know recurring Revenue million dollars of iida you know California and you know on my way basically um and uh so yeah started searching I I'll say that you know something that was important to me in my search was um you know at that time right late 22 going into early 2023 the FED had just raised rates at you know sort of a his you know unprecedented level and you know if you read The Wall Street Journal or you watch CNBC or wherever you consume you know financial news like everyone's talking about is this is there going to be a big recession or not you know and so you know the context of looking at small businesses everyone had a record 2022 uh you know year of performance and the question was you know of all these businesses I'm looking at buying so I was fairly industry agnostic um and then was looking kind of in the California area or you know Somewhere In a reasonable radius close to family uh you know which of these businesses you know would would do well during a recession right um because if you're going out and using an SBA loan to buy a business you got to service the debt and you know if if you buy a business in the iida havs like you're going to you're going to find yourself in trouble real quick right so um um anyway so that was kind of top of mind for me like which which of these businesses I'm looking at is just going to be you know stable and can kind of survive and um I'll caveat because I was doing self-funded search and I think a lot of your listeners know this um you know when you're looking at kind of a self-funded search type deal you basically Capp how much you could pay for the business because you're going to be using SBA financing which you know the Cap's $5 million so um can't buy a big business right you're going buy a little bit smaller relative to a traditional search model and you know consequently like the multiples you're going to pay be a little bit lower and anyways as a result I'm not was not looking for this high growth 50% year-over-year growth type company that you know would trade for you know eight times e or something right you're looking at some kind of durable business that's been around a long time and it's growing you know 3% a year um that that works for in the self-funded search model right so um something like that that durable and that I felt like I could step into and and buy and yeah kind of plus or minus million bucks of you didn't want a high growth because why well I mean if I could buy a high growth business for four times Eva I would but they don't they just don't trade you they probably don't trade at that that that kind of multiple rate so um so you were basically you were price constrained as you know many everybody kind of is unless they have they did a traditional search fund or have some kind of other backing right so you've decided on a self-funded search and you're geographically constrained you want to be in California uh closer to home or at least closer to home not necessarily in the San Diego area where you're from so tell us a little bit about the search and then how you found the business that you did yep um perfect so I started the search fall of 22 and you know if you talk to other Searchers everyone's got an opinion about whether you should just do it through broker channels or if you should try and do some cold Outreach and you know find a find a business for sale kind of on your own uh I tried both and I ended up I ended up submitting 15 Lois over a course of 12 months and all 15 were through broker deals so just in my personal experience I had much better obviously much better luck um just getting deal flow through Brokers it's kind of kind of funny but I remember sitting down you're always thinking as a Searcher like what is my criteria what do I want and you're always refining it and thinking about it and uh I remember probably two weeks before this business got listed you know I said to myself you know and this is in the context of you know a potentially looming recession R don't know if at this at this point in time like what you know what the economy is going to look like in six months so you know if there is a recession what do people need what what are services and things that people are going to rely on no matter what right and it's sort of like well you need food you need shelter need water just the basic human Necessities right and I remember thinking you know if someone goes in a grocery store I bet the food like no matter what somebody needs to make sure the food's safe um and I bet there's some kind of business out there that you know is this is doing testing and and I this is a true story and two weeks later sier da laboratory got listed on uh you know by trans World trans World business brokers so you manifested this it sounds like exactly so so everyone everyone close your eyes and uh you know and wish Sierra der laboratory tell us about the business yeah so um so Sierra da Laboratory was uh started in 1989 uh by a gentleman named Bill Hartman he grew up in Kansas um you know big obviously the kind of a industry there is Big um went to Kansas State he um you know got a Bachelor's degree and then got recruited to come out to California in uh you know and work in one of these Dairy plants uh here in the the California Central Valley you know did that for a few years and then just kind of had that that itch to do you know his own thing and so he set up just a little uh kind of oneman dairy tesed lab uh you know business and um you know kind of grew it from there so um today or at least at the time of you know when he was going to sell it it's you know roughly 25 person you know 25 person business um works with most of the main kind of key Dairy companies and you know dairies and uh you know in the industry especially in California so a lot of Kind of Blue Chip customers and um and what does that mean Cody give us kind of the the flow of of here and where you fit into the value chain so we do work with with dairies for example and uh the Dair is pretty simple right you're a guy with some land he's got a bunch of cows uh you know they producing milk and um you want to for a variety of reasons you know um you know you may want your milk tested one of one of the key tests we're doing is looking at bacteria levels uh which is just looking at you know how much bacteria is in the milk uh which is kind of a proxy for quality and and safety basically um and like really the primary reason you get bacterian milk is uh if you're just not cleaning up after the cows and they have you know have kind of feces on the ground and they're stepping in it that that creates conditions for um you know for you kind of bacteria get into milk so um just running kind of a clean Dairy operation kind of helps eliminate all that so but um anyway so we do you know basically out getting samples from these dairies right and then um and then kind of how the industry works you have some people who run a one-off dairy there are also Dairy co-ops where you have 300 dairies who are all part of this kind of you know think of it like OPEC kind of like a not a cartel but you know they're kind of consor let's say softer term they're a Consortium a dairy Consortium and you know so sometimes our customer is the co-op itself and so we're getting oneoff samples from all of the dairies that are in the co-op right yeah um and then on top of that you got Dairy plants um and so raw milk will last about 48 hours from when it comes out of the cow to when you know it'll go bad and so you need very quickly to be able to get milk out of a cow and turn it into a food product right and so kind of littered throughout this California Central Valley here there are a lot of plants where you're making any kind of dairy product you know ice cream cheese consumable milk yogurt uhan the list goes on basically and so we're also at out at these plants picking up samples as well um and so just to give you a sense for the size of our operation we're doing um around 600,000 tests a year um and so we're doing you know we're getting ice chest 200 a day give or take no it'll be in the thousands yes so we're doing thousands of tests thousands of tests a day uh you know so we have a lot of a lot of igloo ice chests and uh you know an ice an ice machine working uh working around the clock to uh keep things cool so um and so the so obviously there's capex in this business there's there's a lab which is key to the functioning of the whole thing um we'll we'll get to that and I guess real estate we we'll also get to that but before we do the G give us some more numbers around the business you said 25 employees can you give us a sense of Revenue profitability yeah let's let's start there yeah so I I I would say um 25 employees uh you know I would just say like in terms of size of of the business you know in order for me to buy it I had to use a a good portion of the SBA um you know the SBA kind of lending limit which is which is $5 million so it used up a good portion of that and then the way I structured the deal was kind of a um you call it 75% of the purchase price was you know SBA financing and uh the remainder was kind of a combination of equity and uh you know seller seller paper okay so um and then I would say you know kind of margin profile like you know really like pretty strong margins um uh yeah would love to share more with the audience but I'm I'm just being koi you know for a couple different reasons but um you know good kind of healthy margin profile kind of um you know better than uh you know a distributor uh you know that's doing 10% for example let's say and and just for the a regular listeners should have sense of what good and bad margins look like but singled digigit margins would be considered very tight there are business industries that have single digigit margins and survive but those are tight 10% is Distributors still quite tight mid- teens you start getting a little roomier but still kind of still considered on the tighter end of the spectrum 20 or High Teens 20 is kind of where a lot of small businesses sit so that's this is very imprecise but kind of consider that an average uh or or a good Med in like you know we're if you got there that's you're fine you're good uh and you shouldn't expect a lot more if you can get north of 20 you're into pretty good territory th those would could be considered roomy margins 30% would be a really high margin business is that did I get that right you would you say Cody yeah that's right yeah so we we're sitting we're sitting in good uh you know the good territory north of 20 the good good territory there yep exactly great great and and what would you say about the quality of Revenue um I've just decided to stop asking about recurring versus not because that's an a crude way to think about it it's really the quality of the revenue um y a business has how how good or bad quality is your Revenue it's pretty high quality it you know it's not as it's funny like when you you have to actually double click into recurring revenue and then start to it's not as simple as like black or white like recurring or non non recurring right um so so uh but I can describe kind of how the you know our business is like we have a lot of our customers we've worked with for decades where you know every day or every week we're doing the same work for them and we've been doing that for you know since before year 2000 so we have a lot of longtime customers that we can rely on um to kind of keep you know keep coming back and using us uh you know for the for the service so um it's a stable and that that was sort sort of one of the the real you know yeah selling points things I liked about the business was just how reliable and kind of durable the business have been kind of over a long period of time well and and going so so that plus the recess recession resistance so it's it's kind of you are tightly coupled with demand for dairy which probably doesn't fluctuate very much or maybe at the margins it does but let's call that a pretty a pretty a pretty constant demand regardless of the macroeconomic environment and your piece of that is you know safety you know that that's how so you're very tightly coupled to it because milk is only all milk producers or Dairy Producers are gonna have to go through somebody like you um so so pretty recession resistant and these very longstanding contracts where there's just basically a constant flow of milk that you need to test so while it isn't it while it isn't pure contracted Revenue it's very very reoccurring to the tune of decades so and by the way pretty high margin so this is high quality Revenue this sounds like a very sturdy high quality recess recession resistant um decades old business I'm liking it a lot yep no I I text friends and investors every day or not every day but pretty often and I I pinch myself like I I feel like I really um and and I'll say knock on wood but you know it's a it's a great company with a really good reputation and there's a lot to um you know a lot to like about it right um kind of like a uh that's actually one of my questions on my initial question list for the seller was how you know how did this business perform you know in like 2008 2009 you know kind of when you know we had the last big recession and he's like you know what Cody that was the best year we ever had um and the reason is the price of milk was through the roof and um and people were just milking what he's like in his words people were milking anything they could milk uh you know to to sell at that price um and so I I actually also ran so that was that was good right and then I was able to get Revenue data from him dating back to probably 2000 the business and I ran kind of a like a regression of the business's Revenue against the price of milk the average price of milk in that year and it's basically non-correlated which I found very interesting which is that yeah like no matter the price of milk like well you know like he did he did well in this one year but like if the milk the price of milk goes down quite a bit you didn't really see like a huge drop in um in volume that that you're getting from producers because you know whether the whether the price of milk is 10 bucks or you know 30 bucks like if it's coming out of the cow you're still gonna process it you're still going to get something for it right so you still need to test it so it's well yeah except I mean the question there would be I think two things first like but that also suggests I mean pricing power that you have pricing power and typically there's pricing power when there's not a lot of competition so do you not have a lot of compet comption we have yes so one of the this is kind of another nice thing about this industry and the company is it's you know it's regulated so you need you need to have the right kind of certifications uh in order to do the testing and uh so that's kind of a you know not I don't want to offend our our landscaping business owners out there but you know anyone could go buy a lawn mower and show up at a house and mow the lawn but not everyone can go get certified by the FDA and uh elap which is like the water certification board to do this testing then buy all the equipment and you actually have to have to know how to do it you know it's like it's pretty difficult to just have somebody come off the street and try and compete with you um yeah and so our two primary competitors are actually like basically large multinational uh corporations one is one is Euro fins which is a publicly publicly traded company that does a billion and a half Euros of iida a year and then another is called Maro which is a French French company that um you know also also big company kind of all over the world and you know on one hand it sounds scary right when your two biggest competitors are like these big companies and you think well maybe they could muscle you out of you know out out out of work or whatever but um that's sort of why people come to us is where this Nimble kind of smaller company where you you know you get a test if you have a question on the result you can call us and we'll pick up the phone and we can talk you through it and and uh whereas at these other companies it's like you get a it's like calling Verizon you know you want this press one if you want that press two and you know if you're a dairy FR you're like what the hell like why can't I just like talk to a freaking human about you know my test result um and so that's kind of our where we differentiate ourselves relative to our competitors as we're a bit more Nimble um you know kind of high quality of service where you can reach out and chat with us and um and then then always just having uh you know providing good test results right um minimizing as many errors as you can uh it's easier to do that when um you're not running a you know thousands and thousands person type organization so yeah one of the other things just about your relationship to your customers the the Dairy Producers is how where on their list of expenses you fall how high so you know where you know the always the nice strategic place to sit is to be an essential cost of your customer but a low cost of your customer so that when time gets times get tight for them they they go down the list of their B biggest expenses and they may never get to you they're going to try to negotiate with their bigger suppliers uh or their bigger vendors to sooner so where where do you sit on that list are you a big expense for a dairy producer or not such a big expense yeah so we're we're kind of high high value at high value uh service to the customer but low cost which is a good obviously a good place to be and that's for for some of your listeners if they're kind of in the we with like private Equity back companies that have done very well there's a there's a business called trans dime which makes like aftermarket um airplane airplane par s basically and so uh you know if you think of like an airplane and you know providing parts to you know to go on an airplane like you don't want to be the person that's building the motor because that's like a big expensive piece of equipment right um and then they're like if you wanted to reduce your costs as an airplane manufacturer that's probably the first place you'd go right um but if you make the seat belt on the plane doesn't cost much um in also like you want the seat belt to work and function properly because it's like a pretty important thing so um kind of similar thing here like we we provide a super important service and it's it's a microscopic you know it's it's it's a very small cost relative to their operations because they got if you're one of these big Dairy co-ops you know you're running these huge plants you have um like the trucking expense of like moving all this milk everywhere is enormous um you obviously have to pay the farmers for the milk as well so there's a lot of other costs for our customers that you know we're um not the first place they're going to go when when they're when they're looking to to um clean up their Pano a bit well what's not to like and and now one one thing that can be uh challenging for a Searcher who finds a business that he or she likes is where that business is located this is in California so you that's that's awesome you wanted to be in California but you did have to move for the business uh tell us now about the decision to do that where you live and and and maybe bigger picture like this is so entwined and in in it in its Market the of cow country here like does this mean that you and and your uh selfless wife are going to be here in this need to be in this um town for the long term or just during a transition or what give give us a picture of that yeah so the business so just from the start so the business is located in tuler which um for those of you most of you listening won't know where that is it's a town in California about 30,000 people and uh as the as the seller of the business described to me it's uh the mecca of dairy in the United States uh so it's like I think toer county has the most cows so are you guys there for the long term or for the duration of your ownership of this business I would say um I mean we like the area it's new we um you have no idea like what you know where your life's going to take you in five or 10 years but um at least at this point in time I don't you know we're we're close enough to family I don't see any reason to um to want to to want to move but uh you know I will say this like I we haven't touched on the team and stuff that we have in place but I probably could live anywhere I wanted and this business would probably do just fine without me so perfect segue Cody so so let's let's hear about that team in another one of the strengths of the business uh and then I want to we we got to get in the weeds here and a few you more about kind of the terms of your actual deal uh which people will have an opportunity to learn a lot from so what does management look like at this business why is your team so strong that you actually might be able to run this thing from zoom over Zoom yep yep so uh the seller so Bill Bill Harman the the gentleman who started the business he um you know reason for selling he's 68 and wanted to kind of you just fully unplug from the business and he knew that you know going back five or 10 years he knew that he would you know want to sell the business someday and um I think he said his accountant advised him that he should try to remove Mo himself as much as possible from the operations of it to make it kind of more sellable basically Sage advice and yep and so he sort of slowly just passed on responsibility to um you know other employees of the business and um you know especially two of them uh Natalie Natalie and Melinda kind of who helped run the lab help run the lab here Natalie Works more kind of on you know she's more interfacing with a lot of the employees daily and doing sort of like HR functions and is really focused on um customers she knows basically knows everyone it seems like kind of in the area sort of thing and then Melinda sort of like our technical Guru who does a lot of the compliance stuff and um you know if any equipment breaks down she's uh it's not her first rodeo on getting it fixed sort of thing so um so I Rely heavily on on those two um you know in order to uh keep the place going and and that was obviously in kind of underwriting the deal important to you know make sure that hey like you know do you like me and you know see yourself kind of staying on and wanting to work here um you know going forward and so there was a little bit of courting and getting to know each other and all that um ahead of time you know prior to closing so um Cody I don't know if if you saying did do you like me was kind of capturing the essence of the process or did you actually ask that I actually love that question did you asked that um I wouldn't say I directly asked them do you like me but I mean I definitely asked them I just told them like if you have any concerns about me like buying the business and coming in and you like you not wanting to work here just tell me and I just won't yeah I just won't buy the business because we know we all know that this probably won't you know probably won't work if with without you especially the two of them this business is is super important to them it's their life Melinda's worked here since since Bill basically started it in 19 you know early 90s she's worked here since the early 90s so like the business is kind of her baby as well and um you know same with Natalie she's worked here for decades let's talk a little bit about the well the transaction terms you've already shared what you can um but there was a little bit of um it was a process to buy this business February of 2023 the business got listed um I manifested this business into uh you know into Biz by cell and and U yeah anyways spent a couple weeks spoke with the seller um you know the the you know put out an offer that I felt you know should be competitive but it was also something I could you know finance and and get get done um and yes subm an offer probably on like a Friday Saturday Sunday goodbye don't hear back from the broker Monday goes by still down here and you know starting to feel a little more nervous and then I think by Tuesday he he said hey we're uh you know we're going to go with another you know another party um on on on the deal and uh I love this business this was the best business that I had seen in my search um and so that was you know doesn't doesn't feel good to see something like this slip away and uh I remember telling some of my other Searcher friends and and um you know you know other friends and former colleagues just talk about the business and I think one of my one of my now investors his named Dino Dino SAA and uh he's like Cody like stay in this thing you know these these deals can fall apart and you never know what can happen so why don't you just just go submit another Loi on it right now like you know what increase the price a little bit and see if see if anything happens and so I unsolicited just bumped up my offer price a little bit and the broker calls me and goes hey I'm glad you reached out because like this thing looks like it's kind of falling through with this original you know this original party here um and so you know kind of just said you know hang tight but it may it may come back on Market so boy did that investor earn their bur their salt yep yep that was great advice fantastic so yeah you you could see Dino Dino sa he's on he's on Twitter or X and he's got a lot of good he's got a lot of good advice and content so and he he was an investor in in the business so I think very very highly of him but uh anyway so yeah effectively what had gone on they they they had gone under Loi with the Strategic buyer you know company so so one of these other two giants not one of those two actually but another lab business that you know owns a 100 Labs across uh across the country but didn't do a lot of dairy testing specifically but other kinds of food testing and and other testing verticals as well um and you know I don't know I I only know what I've been told so I don't I don't actually know the truth but at least what I've been told is they came down and looked at the business and they said uh and so part of part of the deal was the owner Bill owns the business and the building he wanted to sell both it's kind of like a package deal and this you know this these guys flew down and said actually we don't we don't want to buy the building we only want to buy the business and we want to buy the business and then we want to put everyone you know an hour north at this other lab we have an hour north and that you know didn't work obviously because Bill wanted he wanted to retire and he wanted to sell the building and then you know for Natalie and Melinda who you know they worked here their entire lives all of a sudden and all the other employees like all of a sudden this guy is saying hey you're going to need to uproot your lives and your family's lives to go you know work at this lab up there and so that didn't work for them and uh so yeah anyways it just didn't you know didn't pan out for obvious reasons and so you and so you were hanging around the hoop as we say and you increased your offer and you were willing to buy the real estate keep it in toari to Larry um so that makes you that all of a sudden makes you a very appealing buyer um now having kind of seen what the other offer was out there for the seller uh so how does it go with the seller so frankly we had a great relationship U bill I I found him to be you know you hear all these horror stories about people with bad experiences with the you know with Sellers and you know all kinds of Personality complexes and changes in or you know they change their mind perhaps about whether they want to sell or not but Bill you know Bill is pretty committed to uh to selling and and he was a you know fairly good sport through uh you know through most of the process so U no big complaints we um I did have to we we did have to revisit price um you know once I had gotten into more financial diligence um we did have to revisit price and um you know thankfully bill was uh kind of amenable to you know making something um happen that kind of you worked for both of us so revisiting price was it significant can can you share what the offer well I guess you you said you were yeah I can say didn't max out the SBA loan but we're in that direction so we can yeah and can you tell us what the multiple was yeah it was more than yeah so the uh well I can say the the price reduction was more than 10% of the purchase price which was you know which was significant yeah uh and the reason that we had gotten into that place is you know the seller the broker rather had put together some preliminary financials and just none of the ADB backs are substantiate it and so you know as as a buyer you're going well if you're telling me that you know this iida or this SD this cash flow if that's true this is what I can pay you um and then obviously you're you know you get in there and you know like really getting the weeds of um you know what what numbers look like and you know and so were you were you very kind of um spelling out what your logic was to the seller to Bill and so to soften the blow of the ret trading like talk us through that a little bit yeah I mean I will say you know Bill Bill was a great seller but I I I'll give myself a little bit of credit as well um because I I was trying to coach I was trying to coach him through the whole process of like you know once we're under Loi these are all the steps we need to go through to get to closing one of them is we're going to commission this quality of earnings report which is essentially you know a CPA or kind of a you know an accounting firm is going to come in and make sure that these numbers are what they say they are the reason that's important is a lender is going to give me a certain amount of money based on what those numbers say so we need to figure out ay are these numbers true um and you know you kind of go from there right and so um and so we basically we're working with him on this quality of earnings process process and kind of going like hey here's what the number is right now is there anything we're missing or did we capture that right and so I tried to make sure that he felt like very included in that process and he even knew what the results of the quality of earnings report were uh and so it kind of just bring them along with us um and uh and then it what eventually we got to the point where like you know this is just I just you know I can't get a bank to lend probably on what I offered and I personally don't feel comfortable what you initially offered before you y yeah exactly exactly so you say to them you've explained to them how banks are going to think about this they're going to look at the the Q of quality of earnings and you're like I I can't I mean at this price even if I wanted to pay this a third party who's going to be invested in this namely the bank isn't going to lend at this value yeah exactly qu that's right uh and so I yeah I will say a few days went by we didn't talk and I know he was not thrilled about it um but you know ultimately was uh you know pretty good forward and we ended up agreeing on kind of a Revis um you know purchase price and I may I may have I think I tacked I I think I up the seller note uh interest a little bit just as a a little throwing a throwing a bone a little bit on on that for example so we you know we kind of revised structure a little bit and you know reduced the price and ultimately came came to an agreement and then from there uh basically off the races where we um you know kind of got legal going and sort of drafting you know drafting you know purchase documents and all that and and then I got my My Equity raise uh process going and kicked out in full gear and the investors they were people you found on Twitter so this this may sound pretty crazy to every everyone I I would say over half of my investors I met on Ax or on Twitter in the last 12 months uh yeah so uh it's a a pretty powerful uh you know powerful uh kind of medium of uh of exchange or you know place to meet people yeah yep well you're you're not the first so not not surprised to hear that actually and just Cody going back to how you kind of held Bill's hand for lack of a better phrase do you feel like that it was something specific to your deal or do you feel like that's generalizable advice that really kind of walking the seller assuming the seller has never done this before walking the seller through the incentives and how all the parties interact is something that you tell basically any Searcher to to do because it sounds like it was successful in your case and and indeed key key to the success of the deal no I think it's um I mean you there's no reason not to be I mean assuming everyone's acting in good faith you should always just be as you know communicate as kind of straightforward as possible and um you know it's in everyone's interests right because I'd rather just talk about upfront all the potential because there are certain things you just know are going to come up at some point um you know like one of the kind of nuances of getting an SBA loan is the seller has to sign a subordination agreement where they're saying the seller note you're giving me is subordinate to the bank so if something bad happens the bank is you know in first position right to kind of recover any losses and some people don't have that conversation up front and then you get to a week or two before closing and you put that paper in front of them and you're like I'm not signing that um you know I want I want my money right so um so just small examples like you know that's just one example but any any of those sorts of things where you can eliminate surprises the better and I actually had I mean I had something like that which caused a little bit of issue towards closing on mine where I I ultimately had to end up personally guaranteeing the SE note on on my deal and in the LOI it clearly stated that the note the note is unsecured so you know I thought that it was pretty clear that I shouldn't have to personally guarantee it but um you know we basically we were two weeks before closing and it created a huge hurdle and ultimately you know it's it's sort of it's like well if I'm personally guaranteeing all this SBA debt what's another you know couple hundred grand of seller note that's already sub is that unusual Cody I should know this if seller notes are typically personally guaranteed um I think depending on who you ask they they tell you that I don't think it's unreasonable to ask but it you know it's also a point of negoti I I think I think different people would have different opinions on it but okay you know if you if you think about it you're already P person guaranteeing the SBA debt and then the seller note is subordinate to the bank so in the event you know the worst happens the bank probably takes anything anyways and then they would just tell it seller that there's not even though it's guarantee there's nothing there right so I don't know so anyways it's uh it's not fun but once you I don't really even think about it anymore like once you get to closing you know you're just you're thinking about running the business and and all that so it's it's not it's not something that's a real big burden for me I think well your point about the subord the seller note being subordinated to the the banks uh loan is I have heard that blowup deals where the seller was caught off guard by that hated it and yep tanked the deal so great point that something like that should be communicated early and often now now talk to us a little bit about the real estate here well first of all yeah yeah let's do real estate and then let's hear about assets of the business I mean in a lab I think lab I think lots of equipment um was that actually is that actually the case but F first real estate yep yeah so uh so I bought not only the business uh SE laboratory but also the the building where the lab here is located and so we um have two it's basically two buildings and a parking lot it's roughly 10,000 square feet in size so like pretty sizable um operation um you know this this building if it was in San Diego or Los Angeles would be worth much more than the business um because we're here kind of in uh in cow country as you described it uh it's it's h the business the way kind of the you know the way it sort of pencils out is the business is worth um let's call it 6030 yeah so you know 60 65% of the purchase was business purchase related and then the remainder was kind of allocated to to real estate okay all right and that means that that you have the Blended uh the Blended loan walk people through that uh for the uninitiated yeah so yeah um so this is kind of a cool cool aspect of the SBA so if you're getting an SBA loan and you're buying a business and the building and the business is the majority of the purchase price so greater than 51% the way the bank will look at that is they'll look at the total purchase price that you're offering and they'll go and then they'll go get an appraisal on the building and then they'll look at the differential between what you're paying in total and the appraisal on the building and kind of come up with like a sum of the parts of what you're paying for right you know for the business and the building right the business you know the all and then basically they'll apply that percentage you know between the business and the building so in my case you know 65% of the loan is related to the business and and then the 35 to the building and so you get a 10year amward 10 10 year amortization meaning the loan is due in 10 years on you know on the business portion and then you get 25 on the real estate and so when you kind of blend that all together I basically get a 16-year uh you know Term Loan um on the business Which is higher than the 10 the 10 year am ation that you know most people would get if you're just buying a business alone and yeah so so most most listeners most guests won't have real estate in their deal although it's not terribly uncommon and so they'll do 10 year they'll you know we think of the SBA 7A Loan in terms of these 10 years this is a way to so your final loan this Blended 25y year amortization for the building 10y year for the business but you still have a single loan payment that's advertised over 16 years so they basically did the math to consolidate it into one single loan 16 years so yeah better terms um or better amortization schedule so basically lower uh lower monthly payment um obviously which is which is great now yep that's when the business is 51% or greater of the total purchase price in the case where the real estate is 51% or greater what happens which was not your case but if it had had it's not my case um it's been a little well I'm I'm like six months removed from the nuances of all this but my understanding is that if you're buying both and the and the real estate is 51% greater that you can get a 25 year term on the entirety of the loan so you get a 25 year Term Loan which um which would be pretty cool so if you know if you can if you could find a you know situation where you can you know the building's worth 2 million bucks and the business is worth 1.999 or whatever um you know there's some pretty interesting things that can happen as a result of that because the term of the loan so long so your payment will be pretty low um on the um you know on interest and air and all that as as a guest recently said to me whose interview hasn't aired at that point it's essentially like you're mortgaging the business I mean 25 years is close to the standard US mortgage of 30 years it's like you've mortgaged a business which is even more incredible than the already pretty incredible 10year 10e AMS that we get from the sba7a loan so that's amazing if you can get it that is quite rare um but uh but I actually have a guest who uh coming up different guest actually coming up who who did was able to get that so um thank you for that now uh we're we're going to be wrap it up here in just a second but couple couple still things I want to hit Cody in our preall one of the terms you used that I actually hadn't yet heard and then I one of these situations where I then proceeded to hear it everywhere but but I hadn't yet was ebit Dar ebit D ebit with an r at the end that R being rent so earnings before all of the things plus earnings before rent and it's a and so tell us what that is what ibar is and why it's used yep so um typically when you're looking at buying a business you are referencing ebit dah uh and and you know if you're buying a business typically you're going to be you know have a landlord you have a rent expense uh because I'm buying the business and the building I basically don't have to pay rent although although technically every month I have two entities and I'm kind of running cash back and forth it's all it's all owned by the same people and stuff so effectively don't have um you know don't have a rent expense and so if you're a bank looking at you know how much you know how much debt could you put on you know this this deal um the banks can look at eidar because you're basically it's IID da and then you don't have the r because you don't have any any rent being paid so in the context of um basically looking at how you know just how much money is the business bringing in you know every month every quarter every year iaar is sort of more relevant to the bank um and so um in some of the materials I send to my investors I'm I'm sending out here's IIT Dar and here's IIT da you know an IIT Dar is important because that's basically how much money do we bring in this month relative to how much our debt service is and then IID is relevant because you know our our peers you know other labs for example in the industry you can go look at what their Evena margins are and so if you want to compare your business relative to you know other you know other businesses in the lab space or other Industries for example your EA margins are going to be more relevant so um so in the context of s Dair lab and the fact that I bought the real estate we're kind of looking at both you know uh kind of both of those metrics but sorry you'd want to use ebit Dar When comparing your business to the performance of other businesses in the same in the same industry no I would say e I would say eban da EIT dah because uh you know most like Euro fins is a big public company that that's a lab you know lab business and they're going to be reporting ebit da and if you go look in their filings and so you can go see what their eitaa margins look like um but you know I don't have that rent expense and so it's not as relevant because um you know I don't have rent expenses so my money I'm bring in is higher than what my EIT da would be because that rent expense is not really you know it's not really a rent expense great and so to the lab so was there a lot of cacks in this business I would say reasonable you know reasonable amount um reasonable amount of capex um you know there's some expensive equipment definitely in the lap here and you know it's a recurring kind of expense to service it maintain it to buy new equipment as well but with that said you know when I'm referencing iida and I think a lot of people when when looking at other small businesses as well basically the iida that I'm the margins and all that that we kind of described that sort of in you know includes most of the capital expenses that I'm incurring every year and so you'll you'll see a lot of small business owners they probably expense you know certain items that if you running a big public company would probably get capitalized and included as like an asset you know on your balance sheet so um anyway I would say yeah so I would say yeah like moderately Capital intensive but you know it's fine to have capex as long as like you're as long as your e as long as your EA less capex is you you know maintenance IIT less maintenance capex is a re and you still have a reasonable margin after that then you know it it's okay right yeah so um yep so that's the right we're still still making good money after you know after um after all that for the capital that you brought to this deal you used your 401k you did not use robs which is the typical method that my guests to need to access the capital on 401K uh do use so you know don't we if you take money out of your 401k just straight there's often a big I mean there is a big penalty uh the idea with the 401K is that it sits in there until retirement so talk us through your decision to do that yep uh well yeah if you listen to I think this Dave Ramsey he's a popular like personal finance Guru he probably wouldn't approve of he probably wouldn't approve of this but um so I I did use uh basically all the funds for my 401k to kind of contribute an you know an equity check to to the deal um and so yeah you do incur kind of a you know a one-time withdrawal penalty and then it's also a taxable event because you have a lot of pre-tax dollars in the 401K and so um I did I did have to obviously incure the penalty um however the way that kind of the deal came together is I bought it um I bought it obviously end of October so operated it November December uh basically two months of operating history so you know not not much time before we had to file taxes um and then you know kind of working with my accountant we elected to bonus depreciate all of the equipment uh that we have at you know at the lab here which is approximately a million dollars in in value um and so you can bonus appreciate 80% of that um so it created a pretty big taxable loss for the year and because you know I bought the business bus and have it structured as an LLC or partnership um basically we're able to take that big loss and then apply it to you know my share to my personal you know my personal return and so it it resulted in not really having to pay you know any um you know any kind of tax on on the the dollars that I withdrew so it um and this is not tax abison by the way um just just telling you how it worked out um for me so wasn't as uh as big give a a drain on the the amount that I pulled out as you know maybe it would in a different situation so but it it sounds like you didn't plan it that way it was just happily working with your account and you saw that you could you had this opportunity and grabbed it what does bonus appreciate mean uh bonus depreciate is effectively um you know say for example say you have a million dollars of equipment over over the you know over time that equipment gets used it becomes less valuable and um you know the US government allows you effectively to um you know for any kind of capital asset to basically write as an expense you know that you know the value of that asset depreciating over time uh and you know for whatever reason uh in the US you're allowed to elect to depreciate 80% of equipment in just kind of you know year one of you owning it effectively um and so in my understanding in enes people to outlay money to you know purchase purchase assets and Equipment um you know as opposed to pay taxes so all right Cody my last question is to Circle all the way back to your the topic where we you know discuss the relevance of Finance experience or going through going through an NBA program a business business school to actually being an operator so the in your case those five years at JP Morgan being really in the belly of the invest you know the investment banking Beast how relevant do you find that experience to your your your day-to-day as an operator now not doing the deal but as an operator yep yeah I would say as you mentioned doing the deal pretty helpful um as an operator I would say less useful but still useful I suppose um you know I mean at the end of the day any business it's Revenue less expenses you know equals profit and so like having an understanding like how to track all that and uh feel like you kind of have a pulse on the business I think is it's obviously pretty important um so I think having a background there you know in finance um that's been helpful uh but definitely on the people side you know when you we have you know close to 25 employees I'm not I'm not relying on any of my Investment Banking skills for really any of that that I think my ability in doing that comes more from having grown up around a small business or you know having played you know football through college and you know working um you know you're working kind of a team setting and and um you know encouraging one another and you know any acting in some some kind of leadership form in one way or another um so I would say in terms of deal you know managing managing people I draw on that those experiences more in my day-to-day and then uh and then the actual technical aspects of how to run a dairy lab I mean that's totally I have zero experience with any of it and so I'm you know every week I learn a little bit more uh you and how how are you treating that Cody I mean how very common theme of the podcast buying into a business that one knows nothing about industry that one knows nothing about this is pretty technical the the the end work the end service being delivered is very technical and in fact the whole point of a lab testing business is that there that there the room for error is really there isn't much room for error because you are you are basically the back stop of your your clients making errors or letting bacteria slip in into their milk or whatever it is so you're really the ones who who are you know checking checking the clients and therefore need to be you know pretty pretty tight on this stuff so how do you think about learning this business and you know the extent to which technical knowhow is something you're going to want to to accumulate yep I mean I would I would say I probably I mean I probably could get away with not delving into a lot of the technical stuff just because the the business is of a certain size where um you know I I I probably could get away with not with not knowing too much about this like specifics of this test or that test and the methods and all that but um it's something I do want to learn and it's it's uh I mean I would just say it's a process it's unreasonable to expect that in six months you're all of a sudden going to be this Dairy wizard um but just by spending time in the lab every day you just learn a little bit a little bit at a time and you just keep I I think of it like it's this giant canvas which a bunch with a bunch of dots and every day all of a sudden like one of the other dots gets connected and you know it's starting to it starts to make more and more sense as as time goes by so um I like that and yeah I mean maybe I always think like well I I should know more by now but you know I also don't want to try and beat myself up too much about you know you know not knowing you know don't know what I don't know so keep uh but uh we're keep moving in that direction and one one of the cool um kind of first things you know people say don't change too much about the business you know the first three six full months um one of the first kind of big changes or things we're going to do is Implement a um like a lab Erp uh basically like a software system that you know you bring a test in goes in goes into the system and then it lives there and then the results are there the report gets created automatically you take that report you can ship it directly to the customer from you know from this portal for example um and so I'm going to be you know pretty heavily involved in getting that up and running and so that'll be a good way to force me to really understand you know step by step how does you know how does each test work and how do our processes work so yeah exactly exactly now to mention hopefully a huge Boon for efficiency at the business 100% yeah yep so it's one of the this one of these classic paper based you know somebody comes in print the paper write the you know what you want and then that goes here somebody you know writes out another paper and then you know there's there's a lot of paper getting moved around and uh and all that so one of one of these classic businesses that can use a little just some some technology upgrades yeah yeah well that's great that's the lwh hanging fruit y Cody anything we didn't touch on didn't talk about that you wanted to uh you know yeah I would just hit on you know for everyone just the think really hard about uh you know if if you're interested in buying a business think about what your skills are um you know in and you know the type of business that you you feel like your skills could match up to or like in my case maybe you don't know a ton about the industry you're buying in then assess to make sure that the business can still function and run without you having some of that you know more technical knowledge so yeah just um I I think no no right or wrong way to to approach it and um you know if you were gonna and also if you were debating you know bu I would say going into my search I would say I'd rather by a bigger business that was maybe slightly lesser quality um but now looking back I would much rather buy a super high quality business that was maybe on the smaller side um because I I think it's going to just make your life a lot less um stressful so your uh my napkin math makes me feel like yours wasn't a small business I mean it's 25 employees you you you know the acquisition price was getting into that $5 million range so um you know at a three or four multiple it seems like there was there there's some good SD there so it doesn't feel like a small business were you suggesting that it was no it's it's not small it's not small by any means but just um you know we're not we're not like we're not doing $2 million of IA for example right or $3 million of IA you know it's not to that okay yeah you know it's not it's not like we're getting in the tens of millions kind of thing which you see on occasion you see self-funded searchers kind of pull down a bigger deal and you know it's it's just basic math right if you buy a $15 million business at you know four or five times Eva like then you know you own a majority of it if you could just keep the thing going for you know that period of time like it turn it can turn into a pretty exciting Financial outcome um so anyways that that like on the face of it that makes sense but once you're actually in the seat like you know if a business is that big and you could buy it for that low of a multiple it's probably because you there's probably a reason for it and so you've you've ultimately thought that your end of the market feels great high quality but small yeah and I I have other Searcher friends so I I it's kind of funny how this works but as a Searcher I feel like you developed these like Searcher cohorts like almost if you were doing your MBA and you started out you know if you start your MBA or you started college or high school and you're starting you know you're starting searching at the same time as you know maybe for or five other people and you sort of develop this like Bond and friendship that's uh kind of unique and so I some of my other Searcher friends who I started searching with um some of them are still out searching and we're you know we're just always chatting about like these types of decisions like what about this business it's pretty big but you know it has like some customer concentration and like a lot of new construction fol you know a lot of new construction um kind of centric business and versus there's this other like really cool like maintenance like recurring necessary like Niche maintenance service business but it's like kind of small and you know like I would prefer to buy that smaller really cool like business that's you know kind of more high quality and then the goal is just like all right well how do we how do we grow this thing fast right yeah great Cody if people want to reach out how do you prefer they do that uh you can find me on LinkedIn just the um my name is Cody c y a g um I think I'm I'm also on a or Twitter I think my handle Cody W AG there um can email me Cody spit Mountain capital.com so all right always happy to chat with any Searchers I did hundreds probably you know a hundred kind of intro calls with all kinds of investors and Searchers and people in the ETA Community before I before I did this so happy to have they do the same awesome take Cody up on that folks Cody AG thank you very much for coming on and sharing your story congratulations on getting a very high quality business what seems like a very high quality cool business perfect thank you all 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