Mike Day, welcome to Acquiring Minds. Thank you, Will. Happy to be here. Mike, after a career in corporate, first as an engineer, later as a manager, you decided to step off that track and into ownership by, what else, buying a business. We want to hear the story. Please start us off with some background on you, Mike. Sure. And just And thanks again for having me, Will. I really appreciate the this program. Great. Okay. So, I uh I grew up in the Houston area. Um pretty nerdy kid. I always liked LEGOs and tearing apart toys and things like that. So, I was always kind of mechanically minded. And so, and and math oriented. And so, um as I grew up, I decided engineering was the right field for me. I also was a real aviation nut. Um my dad is a retired helicopter pilot. And we would go flying in small airplanes. And so, I definitely wanted a career in aviation. Um and so, aerospace engineering seemed like a great path for that. Maybe professional piloting, something like that. But but aerospace engineering was what I ultimately decided. So, I went to University of Colorado in Boulder uh and got an aerospace engineering degree. And then uh was hired right out of school by Boeing. So, got to move to Seattle, which is where I still live. So, spent my entire post-college life here in Seattle. Uh and worked for Boeing in basically what was my dream job at the time. Um designing the cockpit, designing the flight instruments for the pilots on the Boeing commercial airplanes. So, that's exciting. Yeah. dream job, as you said, for a for a a kid who is engineering, math-minded, aviation-minded, first job out of school designing cockpits. I mean, it really is uh yeah, I mean, just to repeat what you said, it really does seem like a dream. Go Go Yeah. And so, that was that was great. Um although you know, aerospace is a very cyclical industry and so after 2 and 1/2 years or so, they went through a downturn and I and a lot of the young engineers that were hired got layoff notices. Some were laid off, some were found other positions, but um while when that happened, I went and found another job in the Seattle area in the industry from a mid-size company that makes uh airplane electronic avionics systems. Um and that was a pretty formative experience for me in the sense that I knew that the big company wasn't necessarily always going to protect me. So, I you know, I knew that this couldn't always last potentially. And working for that mid-size company was really great. I grew a lot there. I spent about 6 years there. Uh but then I felt that I had topped out uh in the small company cuz it had a very flat management structure, great people and great products, but I wanted more and um and so I went back to Boeing. I'd maintained my connections and uh they were starting an exciting new program called the 787 at the time. And uh and so I I went back and again had a wonderful multi-year uh experience there. In total, about 16 years with Boeing between my two stints. And so in my longer stint, went back to the cockpit design uh and then you know, matriculated up through management layers managing engineering teams, developing new products, um and then ended up transitioning into corporate strategy after a few years because I became more interested in the broader business. The engineering work, while exciting, was kind of the same thing over and over again. And I just became more interested in the business side of things. So, I up um becoming a corporate strategist working on some M&A and product development and things like that. And so, while in that job uh in order to grow they recommended my my mentors recommended that I get an MBA, which is something that I never wanted to do before. I I felt like after aerospace engineering degree, I was done with with school. That was hard enough. Um but by then I was interested enough in the growth that that I wanted to get an MBA. So, I did a a hybrid program offered by Rice University in Houston, where you work full-time and then you're attending mostly online but some on-campus weekend uh activities. And uh and so, while doing the MBA, I was introduced to the idea of search and ETA. And Mhm. That's where it took off. why did it resonate? You see it seems like you were doing great at Boeing and 16 years. Um on the one hand, one might say, "Well, yeah, time time for a change." On the other, one might say, "Well, if you were somebody who didn't like that environment, you probably would have stepped off it much sooner." So, what was it? Yeah, so there was a confluence of of events. I started school January 2019. This is the second my second year of school was during COVID. Um and then the company was going through struggles. You know, it's been beaten up a lot the last few years. At that time, um we had the the 737 Max crisis we were dealing with. Uh the industry then downturned, you know, during COVID. And um the outlook just wasn't great. You know, still great people working on great projects, but the long-term outlook had dimmed. And the second thing was as I was growing in my career I was feeling less satisfied with my contribution. I liked managing teams. I like to mentoring younger employees, but the grind of nonstop meetings and the corporate bureaucracy had really gotten to me and it sort of it just drained my enthusiasm for that kind of life. You know, people talk about looking up the hallway, looking at the people one or two positions above you. Yep. Uh and I did that, you know, senior leaders that I admired. I thought about that job which would be exciting and you'd have a lot of respect. Uh but what you traded for that, you know, long hours, tons of travel. Um and for what? You know, a nice salary, but money at that point was not a major motivation. So, that just kind of soured me on on um the corporate growth idea. And so when I heard about ETA, it was just a spark. You know, it just completely grabbed my attention. Mhm. And but in fact, you hadn't been somebody who'd been entrepreneurial before. The idea of starting a business or doing something entrepreneurial was not in your on your resume or necessarily in your DNA, if you will. That's right. I Over time, I you know, and then certainly in retrospect, I've been around people that were business owners and entrepreneurs. Um that type of entrepreneurship, but I never really thought about how I would achieve that. Um During these years of living in Seattle, my spouse, my wife has worked for a couple of different startups. So, I was familiar with that ecosystem. And um saw the grind that that people go through and the kind of um ideas and ego it takes for founders to succeed. And I know I definitely didn't have that. I didn't have some earth-shattering idea, nor really like the fire in the belly to start something. Uh and so the idea of buying something just wasn't even something I knew about. And how old were you at when you're in this hybrid MBA program, Mike? Yeah, yeah, I thought I'd be the old guy. I actually wasn't the oldest, but uh I started that program in my mid-40s. Okay. So, you are making the decision to pivot out of a long and successful career and do what will what will probably probably be what you do for the remainder. Be that 10 years, 20 years, or however long you choose. Um so, big decision and is there anything though that's drawing you to it? You're talking about what's pushing you away pushing you off of the corporate path, but but but is there any What's the What's the carrot to to to to the stick here? Yeah, yeah, absolutely. There are a number of of draws. The first one being control, control of your time and flexibility to do what you want essentially. That was probably the biggest appeal. Um my wife and I or my wife had been through a health scare a few years prior and that really was kind of a wake-up call for us to to just get out um YOLO, you know, make life happen and start to make our lives the way we want them to be. And part of that was figuring out how to be less tied to office jobs if we could. So, this was a major carrot was the flexibility um of owning a business that that that can bring. Secondly, you know, being a mid-career person or midlife person to to professionals and uh and we never had children. You know, we had invested prudently over the years and um and we're getting interested in real estate, you know, we had bought a couple of properties by that point. And the returns are good, you know, can be good, but are not it's a real long-term prospect. Sure. And when I started to see the numbers, the return that you should expect from a small business acquisition, it was really shocking and you know, motivating that at a minimum you should be seeing 20% return on your equity versus owning a piece of real estate that would never return that in one year. So, those people, you know, figuring out how to grow our wealth so that we can retire and achieve flexibility were kind of two big carrots that attracted me to it. Mhm. Well, those are good ones. And just for that quick math that you did for us, the 20% return on equity, that is assuming kind of kind of very crudely assuming you buy a business in cash for 5x. So, after 5 years, your your you're you're you're getting 20% every year. So, yeah. That's That's where That's where that was coming from? Yeah, and we can talk more about it, but that's the framework that I learned in in the MBA program and the way that the Jones School at Rice teaches it is not so much multiples, but more about a risk build-up. Some of your guests have talked about this, but coming up with the risk a build-up and the return you should expect based on the risk you're taking on with this specific business. But yeah, it's interesting to me that it's yeah, yeah. Okay. Well, well, and and let's just jump forward a little bit to say what your now role is at Rice, too, for a little extra context. What is that? Sure, yeah, I'm I'm a professor or a lecturer at the Jones School now. There are a few of us who support the program, the online program, um are the live session instructors. So, the students in the course uh watch asynchronous material from the lead professor, Al Danto, and then we fill in and essentially teach and have the the ongoing weekly conversations with the students. And this is the way to give back. The ETA course at Rice is Rice's MBA program. Yes, Rice's ETA course, which is called enterprise acquisition. And when most of us start the class, we think it's going to be about M&A, but it's really a small business buying. Okay, well, I want to hear uh more about the kind of risk framework that you you're you're saying is um somewhat different than the way that ETA or the napkin math is often taught. We'll return to that. So, let's hear about what you what's next in your story. So, you're turned on to ETA and what? BizBuySell? Yeah, yeah, so um let me let me kind of set the stage. So, we are um I start the ET ETA class in the summertime. Uh and we are on a vacation from our normal jobs, our 9:00 to 5:00 jobs. And uh but I'm still doing my coursework even though I'm on vacation. And um and just in the first section of the material, I'm just so energized about this whole concept of ETA and super excited about it. And so, I decided I'm going to take this time while I don't have to do my day job and just see what this is like. I'm really apply myself to the class using the framework as if this is what I'm doing, is searching, and see where it goes. And uh and so, yes, I started with BizBuySell, you know, the typical uh process. Quickly found the um you know, the local brokers in the Northwest who are big and and do a lot of deals and just started networking and and making introductions and learning more about it. But at this point, I was not I was pretty sure I this would be something I would eventually do, but I was not yet seriously considering leaving my job yet. Mhm. So, you start kind of going through the motions to get a taste. And did did does that then pull you down your search proper or or no? Do you pause and go back to work and what what happens then? No, absolutely. By the end of the week, I've seen enough even just with the limited listings and then um having networked with brokers who share listings that aren't directly on BizBuySell, uh I'm absolutely energized and and by the end of the week, I'm thinking this is what I'm definitely going to do. What what was it in the week that you liked? I mean, cuz you actually what you were doing was the the least fun part, the search, which nobody likes, talking to broker brokers. Was it just kind of envisioning yourself in these businesses that you whose SIMs you were looking at or you actually maybe you did like the mechanics of searching. What was it? Yeah, envisioning myself in the businesses, but also just seeing what was out there. When you start looking, it's just so fascinating how many different kinds of things, whether it's the obvious stuff like restaurants and car washes and laundromats to like a million different niche companies that that do a million things and that was eye-opening and just seeing all that possibility. The other thing I did was looked at um broker sites with closed deals. Sometimes often they'll list uh deals that they've successfully negotiated. And that was a way for me to see the types of companies that get transacted even if they weren't currently for sale, and that's how I also, you know, directed myself towards other brokers who had sold some of the types of businesses I would be interested in based on my criteria. Well, just want to call out your use of the word possibility there. I think it is uh one of favorite words and it so applies to the the epiphany of the possibility of buying a small business is is possibility itself. There's just so many um interesting corners in which you can explore. Okay, so keep going. So what how does your search start to start to seriously take shape? Yeah, so after I'm very fortunate. I'm a um I'm a one LOI and done person. The first real LOI I submitted was the business that I bought, but it took it took some time to get there. Also, over the following several weeks, couple of months, I um I was just using all my spare time to look at deals, continue networking, um start talking to banks. The light The nice thing about being in class was that I was already doing a framework. And the framework that we teach at Rice is a very uh methodical process. Starting with coming up with your criteria and what are you all about? And then, you know, coming up with your um we call them eliminators, but things that would that you wouldn't consider in a business. And then, you know, so I was just doing my assignments, but I was using them for real in my search. And so, that it was great a great motivator to just keep keep going with it. And um and so after a few weeks, I had three candidates that I thought were actually realistic. Uh and so, that was about the point where I'm starting to have serious conversations with my wife about, you know, I think this might be my next chapter. I might seriously consider pivoting to this and, you know, quitting the corporate world and starting to have those conversations. And I want to hear how she responded, but first, what were your your criteria and your eliminators? Yeah, so unlike a lot of searchers, well, I started with a geographic search. So, I we are very connected to the Seattle area. We love the nature and we have lots of friends here and so I wasn't considering moving. So, I I felt like anything within a few hours drive of Seattle was a possibility. So, from Portland, Oregon to the Canadian border was a geographic search region. Uh and then I Unlike a lot of searchers, I was not interested in services. Not home services, not SaaS, not anything that was kind of virtual. Because of my engineering interest and my love of anything mechanical, I wanted something that made a physical product. Ideally, you know, that we could brand as made in America and I just was really attracted to this idea of manufacturing and physical things that I could really get my hands on and dig into. Um and so that was the kind of businesses that I was looking at. And it was everything from um instrument manufacturers that make measurement tools to uh outdoor equipment, bicycles, uh people that provide parts to the aerospace industry and other industries. So, all over the place, but there's a lot of companies that do a lot of interesting things with physical products, which is what I wanted. So, that does then become pretty narrowly defined. You want a manufacture manufacture. I mean, that's what that That's what that is, of course. Yeah. Ideally, although for example, I looked at a a company that does home generator installations and in fact a fellow searcher ended up buying that business who comes to some of the events here in Seattle. So, that kind of thing is it? Is it Corey? that's right, Corey. I think you've talked to Corey. Yeah, yeah, Yeah. No, he hasn't been on the pod, but we've talked Oh, oh. offline and um he's has a an ad on Smith list uh for so he's trying to explain he is expanding to Portland, actually. And so he's looking for somebody to run to run that. That's right. So Yeah. And so that kind of thing more more than just a serve home services. It it's like a little more technical. Mhm. Mhm. Okay. Okay. And how did your wife react as this when you brought this to her? Very well. I have a great great spouse. We have a great partnership in that sense. And where we had come from was she had been the one for many years who had the riskier career. She took more risk and she worked in the advertising industry and then in startups here in Seattle. And so there were times when she left a company, did some consulting, whatever happened and we could use my health insurance, for example. So I always had kind of the stable corporate job while she had the freedom to do a little more risky things. But by this time in our life, she now had a more stable job with a mid-size company. And and so she was happy to it was your turn. Yeah, exactly. Mhm. Well, what you were about to embark on not to take away from the risks your wife had taken earlier in her career, but this is quite a bit riskier, I think, than than what she some of her stuff. Yeah, so we'll talk about things like personal guarantees later, but um yeah, in terms of the personal um risk it is arguably riskier than working for a startup because you're not personally invested in the startup in the same way. Right. But yeah, we will return to PGs cuz you're actually not somebody who is I think you have a a more understanding acceptance Uh uh uh uh of of the of the PG and the risk there. We'll get to it. Um okay. So, you got three uh candidates. What is Is it Do you want to talk to us about the two that didn't make it or should we just jump to the business you bought? Well, I'll say first that the business I bought originally was eliminated because it only has one market, which is the construction and home building industry, really. And I was I thought I was being smart by having criteria that that was um ideally you would serve not only a have a broad customer base, low customer concentration, but also have multiple industries as your customers. So, that you could sort of survive downturns. So, I had originally kind of eliminated it, um but then came back to it after convincing myself that the home the construction industry is pretty big. Mhm. But we can return to what that means in the la- that sub- subsequent to buying it, uh it hasn't been a great ride the last year, you know, broadly speaking, Mhm. uh because of everything that's happening in that in the home buying and selling space. But not happening is the case here. Yeah, exactly. Uh so so the two one of the ones that I was really interested in made a specific kind of instrument that um basically was a very the moat was intellectual property. And they had a design on a tool that measured a thing that pretty much everybody on Earth who needed to measure that thing would use. And so I was really excited about that. The challenge or or the thing that ultimately kept me from making an offer was that um well, the other deal was starting to go, but the seller was either a PhD or very uh skilled in that chemistry space. And he was the one going to like conferences and talking up you know, he was the expert. And I couldn't see a way that I could fully replace him. So, it was kind of a key man risk thing where you'd have to come up with a way maybe maybe he consults and he still is the face of it, but that was one of the biggest uh reasons why I didn't love that one. Plus, it was a little smaller in terms of uh revenue and SDE. Mhm. The second one I eliminated was um was more of a passion business. So, I I love the water. I love boating and and boats. And this was a shop that did um small boat kind of repairs and engine service and sold small boats and engines and associated parts and things. And um I was originally kind of thinking, "Well, do what you love." You know, be in the environment you like to be in as your job. But um two thing one was it wasn't uh generating enough cash flow. And secondly, was uh the again, the owner was pretty involved. Day-to-day, he was doing some of the work, some of the mechanical work. Uh and finally, I was worried that if you do the thing if your job every day is the thing that you like, you're going to start to hate that thing. And I didn't want to risk it. crazy. If you didn't say it, I was going to say it. Be- Beware turning your passion into your income. That's that really finally stopped that that path, yeah. Yeah. Yeah. But it it must have been tempting because I I mean, I know you said you like boats and boating, but I'm not sure you did say I know from the pre-call that you and your wife are out on the water. Boating is a big kind of hobby of your how you spend time. So, that that must have been quite tempting. Uh what a what a lovely compliment to the lifestyle you wanted, right? Exactly. Yes. Yeah, that was the theory. Yeah. Yeah. Well, good discipline. Okay, and so tell us about AST. Yeah, American Spray Technologies is a manufacturer American Spray Technologies. Yeah, American Spray Technologies is a manufacturer of large pumps. Uh these are conduction industrial machines sold to commercial contractors who need to apply thick heavy materials. Often drywall texture, that's the main market, but also fireproofing and um and certain kinds of paint and other thick products that are mixed in the machine and then sprayed through a very big hose for efficiency. Um so these are on trailers or mounted in box trucks. And um it's something I didn't know existed before I saw the the sim for the business. Well, of course I didn't either, but it also does sound like one of those where now that you described the application, it would seem to be widely used and therefore I would think that uh kind of a giant company, I don't even know the giant companies in construction hardware, but that that one of those big names would be already be a manufacturer of this product of which probably tens, hundreds of thousands are sold a year or at least being used a year. Yeah, you would think that, but as I as I learned in due diligence and now in operation um the big player is Graco in these kinds of paint and material pumps. Uh they're a you know, a large international company, publicly traded company based in Minnesota. And they sell similar machines and we do compete with them with a small portable product, but it's all portable. It's all small stuff that you could roll into Home Depot or out of Home Depot. Um, they don't make big trailer mounted Our machines are anywhere from 150 to 500 gallons of material. So, it's a very large machine. Um, so that prevents some of the offshoring and some of the, you know, possible threats like that, like being manufactured in a lower cost place. But also it's a niche. And so there really aren't that many um, of these machines across the country as you might imagine. There are a lot of the small machines, tens of thousands. Mhm. But it's a much smaller niche market for the big what we call spray rigs. And there are only um, currently really three manufacturers in the country that make them. Ah. Okay. So, I think it's too small of a market for a big a public company. Yeah. Yeah. And average order value or average cost of one of these rigs? Yeah, they're a big purchase. It's something in the order of 30 to 70,000 dollars depending on the size. So, it's a piece of construction equipment like like you would buy like a excavator or other tools that a contractor would use. Well, it is um, physical manufacturing. Um, it's got check that box engineering, you know, appeals to your engineering uh, proclivities. Um, you've already told us you didn't like that it's kind of served a single industry. What what other things to say about what you did or did not like? There are a lot of things to like as I as I started to dig into it. Um, it's been around a long time. This the the this company has been around since the mid-1960s. And in fact the seller had was himself a searcher although it wasn't called the search back then. He bought it. He was also in a corporate refugee from aerospace. He bought it in 1994 and owned it for 25 years. Um, and so that longevity was certainly appealing. Um, you know, when I started to look at this, you you hear the word texture and immediately most of us are turned off cuz you think popcorn ceilings, 1970s, thick texture. And a lot of, you know, if you do a web search around texture, it's how do you remove it? How do you scrape it off? How do you you know, that kind of thing. But as I dug into it, um, I realized that or learned that for large home builders and commercial projects, or apartment buildings, um, the vast majority of construction today uses a light texture to smooth out the walls before they're painted. It's just the the standard thing you do in most of the country. There are pockets where where they don't, but that and the fact that drywall, wallboard, um, it's a really boring, in a good way, part of the construction industry. It's such a benign material and it's kind of the perfect material for what it's used for. It's in every built space that you're in, for the most part. And there's not really anything that's going to disrupt it anytime soon. And so that those aspects really started to to catch my interest. And and sorry, Mike, to be clear, this would spray, so wherever drywall exists, but in a very large on a very large wall cuz you said that that this is not the portable. You guys don't produce the the portable version of this that would that that a home builder would do in the living room of a new home. What where give us an exact like a like a precise example, yeah. No, we do. We it's absolutely used in new homes and that's our main market. So this the portable machine it's it's a little bit counterintuitive, perhaps. We do make a portable machine on wheels that you can roll into a building, but that's usually used actually for like a high-rise or a place that's hard to access from the outside. Our main use case is in a new development, you can park our trailer in front of three or four new homes, start it running and the applicator can walk from home to home with the it's 300 ft of hose in some cases, and spray multiple houses in just a few hours with just a crew of one or two people. So it's a huge labor savings value proposition. And so new home construction is really the biggest market cuz they can knock out a new home in in a matter of hours versus the alternative, which is a much more manual labor-intensive process with a smaller handheld little sprayer um or in high-end construction, what they call smooth wall, which takes a lot of labor and is very expensive. Mhm. And to be clear, so this is a some it sprays a film a layer of something on top of drywall. So up goes the drywall and then the guys will spray using your product. Yes, yes. Spray using your product. Yes, that's right. They join they tape you'll see the tape joints, which is a paper tape, and then um they'll do a few layers of joint compound and then spray the texture, which is just another form of joint compound. It's all all of it all the material is this gypsum-based very benign ground up from the earth product. So it's pretty cool. It's not petroleum-based, you know, it's it's just a very boring sensible product. And so anybody who has home building experience who might be listening to this, would they instantly know what this is? Oh, yes. Yeah. Okay. Okay. So, this is really Okay, great. Well, it sounds really really interesting. Um but again, so that's your current market, but this does have other other applications. Your current market that you serve primarily, but it does have applications where Yes. substance needs to be sprayed in some kind of industrial strength way. That's right. And thickness, too. It's the the the innovation or the the niche is a thick material. And so, fireproofing that you'll see in a parking garage covering all the metal structure, that kind of flaky-looking stuff, our machines will spray that. Um log homes need chinking between the logs. That's a thick product that that our machine spray. Um deck coatings on certain navy ships. In fact, there's a small market for that that we are in. So, so any kind of thick product, but I should mention not things that need to be mixed. Like if you think about spray foam insulation, that's a much more complicated system that has to control heat and mix two chemicals together in a very precise way. And those are very very expensive specialty products. Ours is a much simpler machine. Great. Now, let's hear about the business of the business. What what it what did it look like in terms of um well, employees, but also revenue and and SDE margins all all of any of that that you can share, please. Yeah, for the the two years prior to the sale, um it was doing in the low three million in revenue and was returning about half a million in SDE. So, that was right where I wanted to be as a searcher. Um you know, that kind of sweet spot of of about a half a million SDE. And that's with 16-ish employees, 13 full-time, and a few part-timers. Um, and uh very importantly for me and my criteria was the management layer, which is rare at this size of business, but for me was worth additional value, um, that there was essentially a GM managing day-to-day operation. And the seller, uh, they always claim to spend little time in the business, but as I as I learned, he really was only spending a few hours a week on the business. So, those were kind of the key the key metrics I was attracted to. Mhm. And the GM being in the business was attractive for basically the obvious reason that you just have somebody there, so you can come in and have a backstop or start focusing on strategic stuff, working on the business, not in the business, all that good stuff. Um, was there anything W- W- was that one of your Was that one of your criteria or was it just a a nice-to-have and this business had it? No, cuz since I was searching a fairly broad I mean, even though it was a geographic search, I would I was considering businesses a couple of hours away or more, I it was very important that there was somebody running day-to-day so that I unless if there was a crisis, I'm happy to be there every day, but I I wanted to only have to be present part of the time. So, that was a very important criteria for me. Okay. But, were you envisioning your your time involvement in the business being less than full-time or you just mean boots on the ground, your own boots on the ground less than full-time, but you were going to devote your full-time to the business wherever you from either from home or on the ground. Exactly. I was expecting to make this my career and devote full-time, but just to have the ability to not physically have to be present and and everything that brings with it. Um all the interruptions and good things, but um it prevents you from working on the business. Where was it based after all? In the south part of the Seattle metro area. Um about 35 miles from home, but unfortunately through the worst traffic path between where I live and where where the business is. So, um that was not ideal, but certainly within easy driving distance. Great. And just say a little bit more about the sweet spot, 500,000 SDE being the sweet spot. Um I've often said on this podcast parroting others that if you can get it 750, 800 is the or is the sweet spot and the more the better. 500 to be the sweet spot while common, um probably is maybe a sounds a little bit lower for quote sweet spot than people are used to hearing on this podcast. So, what are your thoughts on sweet spot? How many times can I say that in a paragraph? Yeah, so that's a great point and in retrospect, maybe I would have now knowing what I know and and having been in this space a lot longer, I might have wanted to go bigger. I'm totally happy with my situation and that I didn't, but here's the some of the background additionally is um I was not intending to take on investors. So, I was somewhat limited in deal size based on what I had accumulated, what we had accumulated over the years through our investments. And one of the decisions my wife and I had made totally independent of this process was um we had purchased a investment condo investment property that was a condominium several years earlier and it it would generate a small income but it wasn't a good use of equity. The the return was pretty small. So we had already decided that we were going to sell that and purchase look for a maybe a triplex or quadplex or something with the idea being we could lever up to something that should produce a better return on our equity. While we were you know that plan had been in motion then I learned about ETA and started doing the research and discovered some of the benefits of bundling real estate in a deal and so my pitch to her was well what if we don't what if our investment property is an industrial building that's part of this deal and that's how we apply this capital. And so that the value of that and some of our savings was kind of limiting me and deal size without having to take on additional investors. Mhm. And you didn't want to take on investors because you didn't want to have to answer to anybody. Primarily yeah yeah exactly. I I liked the idea of total control um I had a business school cohort buddy who was ready to write a check who was really excited about my search. Um he was also doing a search and and so we that was a really useful sounding board cuz we talked through you know I shared with him my progress and and we talked through what it might look like what the terms might look like as an investor and he was great about being willing to be silent and you know all that but I knew that I would always in the back of my mind be thinking about not necessarily answering to somebody but every decision I make that affects the bottom line is going to affect somebody else outside of me. Yeah. And my just on back on the real estate bit, so you your point was that you this was kind of a way of positioning to your wife exiting the your current real your current condo but staying in real estate by buying a business that had real estate. So it was kind of like we're not getting out of real estate altogether. We'll still have a real estate investment. Um it'll just be bundled with this business that I buy. Is that Did I get that right? Partially. I I think I was pretty heavily It was more than a nice to have that real estate be part of a deal. Um not that we would get out of it or we the proposal was just we'd still have investment real estate. Rather than it being a triplex, it would just be an industrial space that my business would be the tenant of. Yeah. So it was just a different play, but but the intent was always to try to use most of those proceeds for a real estate part of the deal. And if if I did find a perfect business that didn't come with it, well then we would still go do something else in real estate with whatever was left. And and what is your what is the appeal of real estate? I mean just that's where you kind of you want to have money parked for long-term for long-term wealth building? For the obvious reasons. Diversity. Yeah. Yeah. And then when we talk about kind of risk um we that's a big piece of how I feel how I got comfortable with the deal and the downside um possibilities is let's talk about that now. Although actually first, what was the size of the business? What was it selling for? I don't think we got that. And how were you going to structure it? Yeah, so there's no price as a lot of um this was not a biz by sell type listing. This was a broker, you know, a private broker listing that I was um that I found through the process of networking with brokers. And so the SIM had the numbers and and you need to come up with a valuation. But luckily I was had just done that homework assignment and so I had my my uh my MBA style way to value. And so I came up with a kind of a pre-LOI proposal that included the real estate and the and the business together. And the um I had a purchase price right around 2 million. So about a 4x EBITDA. And what was your your MBA process for coming up with a valuation? It's interesting, you know, I I kind of take it for granted because so often my get the the price of the business is on the listing one way or the other. Um and but there of course are occasions where it's just this is for sale, bring bring us an offer. Uh and and certainly in larger transactions that becomes increasingly common. Um and so I'll get the question from listeners from time to time, how do you value a business? And I realize we we talk so much about multiples, we're doing we're backing into a multiple based on what the asking price is. But going forward and and you originating what you think the multiple should be and therefore the purchase price should be. We spend virtually no time on this podcast on. So Mike, how did you come up with basically 4x and how did you value come up with that multiple and come up with the real estate value? Please. Yeah, so the If you can condense it into 2 minutes. I'll try. Yeah, so this is this the standard method that we teach at the Jones School, but it basically comes down to cash free cash flow. You have to determine what is the business throwing off in free cash flow. And this is different than EBITDA or SDE because it basically it's it's the SDE but you have to subtract what it costs to replace the owner, whether that's you or whether you hire an operator. So, let's say uh SDE is 500,000. Um in my case, let's say the owner was working half-time, so we'll put in 500,000 for that. So, you're left with 450 of free cash flow. You also have to subtract um capital expenditures. What does it take to keep this business running? If it has equipment, vehicles, whatever. In my case, there wasn't really. It's a ni- nice thing about this manufacturing business is it doesn't actually have a a big capital component. Um and so that's your free cash flow number. Then you do a risk build-up to understand, you know, what you this money you're bringing to the deal as an investor, what could it get at the risk-free rate? What could it get in the equity market? You you build up to um a number and for a small business acquisition, the kind of industry standard is it should return at least 20%. So, that's starting at that five X multiple. Um and then you start to add risk. So, you assess the business for all the standard things. Um customer concentration, key man risk, uh you know, whatever. Just the the whole list and you sort of try to get you then inch that risk lever up and you may come up with then a specific company risk that's anywhere from zero if it's totally unrisky up to maybe as much as 20% if there's a lot of risk or it's turning into a turnaround. And so that range if it if it was much riskier um you would expect a 40% return total on your investment. And so that's only like a two and a half times multiple. Fascinating. So So let me just repeat back to you. You started kind of 20% minimum and that's already baking in the risk of just being in this asset class, this small business versus all these other places where you could deploy your capital that are far less risky like the stock market market index or what have you. So that's kind of the starting point. And then you as you as assess the additional risk particular to this business you kind of probably somewhat arbitrarily assign further risk pre further risk values to each of those items that increase the risk. And what that's doing is bringing that five five 20% that 20% number is going up or if we translate that to multiples, that five x number is coming down. The multiple is getting smaller. I.e. the purchase price is getting cheaper or less expensive to account for risk. So the riskier it is, the less you should have to pay. Very interesting. Um I mean it's totally intuitive uh but it is a different angle to to to come at this. Yeah, I I and I like it because it's not just a multiple and you're arguing about multiple. It is a feels like there's a little more um I mean it is it's not a total science. There is a lot of estimation. But it just feels like something a little more concrete that you're assessing the risks of this specific company, not that every plumbing contractor trades for three x. It's like this one has a management layer or it doesn't or it has 60% of revenue from one customer. You know, all those things should bump up or bump down this risk premium. Right. Right. Now, of course, what it doesn't take into account probably many things, but one that immediately comes to mind is supply and demand. So, the if a lot of people want to buy that HVAC business, that's going to push multiples up and that has absolutely nothing to do with the risk profile. That's just competition in the market for this asset. Um it doesn't doesn't really take that into account in any way. Correct. And what I would say about that is as we as the great Al Danto of Rice Business says is it's okay to overpay for a great business. In other words, you're going to make it up in the long run. And And another way to think about that that I like some of your guests have said is if you don't buy this one, the opportunity cost of letting all that SDE go by till you find the perfect one in 6 months or a year, it's going to have made up that difference anyway, potentially. Right. Right. Exactly. So, so yeah, everybody, if you're thinking about if you're negotiating between 3 and 1/2 X and 4 X with a seller, um and it remember what that half X that you're disagreeing about represents. It basically represents 6 months of SDE. So, if you don't buy the business, walk away, and another 6 months comes and goes, there you've you've kind of left that haven't earned that money that you would have otherwise. Um now, of course, the but the the other thing about multiples and what you pay for the business is it is it does inform the loan payments that you have. So, that's that's important to not forget as well. Um it's not just about the SDE opportunity cost. Go ahead. Yeah. So, so that all that being said, that's all great in theory. When I actually made the proposal to the broker pre LOI, she said, "That's great, but it's significantly below What? Yeah. what we'll accept. And so, um so I had to the great thing to me about there being a real estate component was I was able to kind of um I was able to basically increase the offer on the real estate more than I increased the offer on the business to make my in a way that made me comfortable, and I let the seller decide how he was going to allocate that. So, he was already going to accept the real estate offer I had made. Um but in talking with a buddy who's a commercial real estate broker, he gave me some um you know, kind of an estimated value that was a bit higher, and so I went up to that number. Which luckily it did appraise for. And that way we were able to meet in the middle. Otherwise, just buying the business alone I think I would have been pretty I would have been above my comfort level. I don't know if I would have gotten there, but um but that was another benefit of having the bundled deal. But there was one purchase price, right? That's right. Right. And so you increased you met his number by in your by in your own mind basic effectively raising the price of what of what you were paying for the real estate. Um and kind of that's how you saw it. And you let him on his side see it as you've just now increased the the business valuation by that much. Yeah, but it wasn't it wasn't in any way um shady because the bank and everybody I was very clear. I I broke down in the LOI the two components. This is how much I'm offering for this, this is how much I'm offering for this, and the deal terms. So, it wasn't um you know, he could have then turned around and traded it to somebody else and like, well, here's an offer. Can you beat the offer on the business, you know? Yeah. Yeah. No, not that you were manipulating, but it was kind of like he had his number and you figured out a way to to get to he had like a primary number he wanted to get to and you figured out how to get there for the package. Yes. And that is one of the key the core principles that is so important to these deals is understanding the buyer's needs and there's almost always a way to find some common ground. You know, it's the old adage of you name the price and I'll name the terms. There's there's often some way that that you can resolve the difference unless it's just totally wildly out of out of um you know, out of range, but that is also an advantage I think of a broker deal is a good broker slash inter- intermediary they're going to educate the seller. Their interest is in getting a deal done fast and so they will help the seller with the you know, expectations on price. Yeah. Yep. Exactly. Um have you said everything you want to say Mike about real estate and your kind of how it got you comfortable with risk and have we said everything you wanted to say about risk cuz this was a big feature of our of our pre-call, but maybe we've we've had everything or no? Um no, I think there's a a number of other aspects of this because now that I now that I teach this material, this is a a very big theme that comes up is people perceive acquiring a small business as sort of excessively risky versus a traditional job. And um and so just in my case the risk was really tamped down by having the the real estate component. And so, for example, if all I do is keep this business alive at the same level, turning along, you know, maybe I'm inching up uh to cover inflation or whatever, but I don't grow it at all, it still can pay the rent on the building. And so, at the end of however many years, it will have bought me this piece of real estate, which if I snap my fingers today and it was paid off or nearly paid off, we could have a com- comfortable retirement simply on the income of this commercial building. Yeah. So, to me, um you know, I'm I'm doing everything I can to grow abso- absolutely grow this business, um but as a kind of worst-case scenario, if it did go to zero, um I could lease the space to somebody else, and I I'd have a lot of problems to deal with if that happened, but I could lease the space to somebody else and and still make my loan obligations. Yeah. A- Another piece of this risk concept is that you do all this work to come up with criteria for a business, that all the, you know, recurring revenue, customer concentration, all the typical things, those don't change unless there's some huge shock or some major disruption in an industry, those are still true after you take control. And so, there's still intrinsic asset value to the business, uh which means that you could turn around and sell it again. And that that's something my banker, um said to me late in the deal when I was I might have been on teeth gnashing about some aspect or the PG or something, but um she said, "You know, we're not wanting to come take your assets and take this away from you. If you decide in 6 months that it's just not for you, uh we want to work with you to to re-market this business and get it keep it going. You know, they're they're not trying to bankrupt people if they can avoid it. And so those two things, the fact that I had a backstop with the real estate piece, uh and that unless I really messed up or something terrible happened, um the business will always have value. And I may lose money, yes, it might be significantly painful, but not so much that we couldn't survive. Yeah. Yeah, Mike, you know, you're the you're the second person to say um the point about you can resell the business if it's not for you in as many weeks. I think Rob Carpenter said it. His episode will have aired by now, but hasn't yet. Um he bought much smaller businesses, $200,000, uh in three cleaning franchise territories. But he still I mean his point was like this I'm doing, you know, I'm committed to doing this, but it it's it's not necessarily forever and ever and ever. And I it sounds like you kind of directionally are similar. Like you you you assuming things go well, you do intend and want for it to be basically indefinite. But it it's not maybe the marriage that it's sometimes held out to be, that it's that it's kind of a forever thing. Now, I'm I'm treading so lightly because of course we all agree that this should be taken extremely seriously. This is big boy stuff to buy a business and to get in there and operate a small business. We all know that and it I'll never tire of reiterating it. Um but there's a point in there, too, that's like maybe let's not overstate that assuming it doesn't absolutely collapse and go to zero. If you just find that you've just need to not do this, you can probably read the business probably still has a lot of value, especially if it's just basically chugging along where you bought it and you can turn back around and sell it. It'll be messy, you'll lose a couple years of your life, you'll likely lose money in all the transaction fees, but you're not going to be bankrupt, ruined, and you know, it's not going to be the nightmare that it's some now sometimes held out to be. Right. Yeah, knock on wood. And two other things in my case that were also that calmed me about it. One is there's a large installed base of these machines across the country and we sell parts and that's a significant not insignificant chunk of our revenue. And so there should always be kind of this tail of support. And so even if sales of new equipment tanked, there's the support and service element that we could survive on. And furthermore, because I have a GM running the day-to-day, if all I was in doing was in maintenance mode, then probably the best use of my time would be go do something else. So I could be a consultant back in aerospace or I could do something else just to pay my own personal bills in that in that um you know, in that scenario. Yeah. So so you actually think if if sales had collapsed, just the maintenance and repair, the business could have held on just on that revenue? Well, in a much smaller way. I mean, we'd have to you'd lose people and it would be very painful. Yeah, but it wouldn't go there. Got you. That's the other another aspect of this is I see myself almost as a steward rather I mean, I am I enjoy being the owner and that's my role and and I take it seriously, but because it's been around for 55 years, I don't want to be the guy that that destroys it. I I'm want to steward it as long as I can or as long as makes sense for me onto the next person because I don't see this industry significantly changing. You know, all the elements are there in terms of um the United States population growing and the need for millennials to buy homes and uh these macro things are good for this type of business along with the difficulty of finding construction labor. You know, we're mechanizing. We're bringing that efficiency value proposition to home building. Um all those things make it feel like it should always be you know, there should always be a market for this. Mhm. Mhm. Mike, before we get too far away from the the risk framework or the valuation framework. What did you call What do you guys call it at Rice? Well, it's uh um I mean, it's a cash flow based valuation. We do a risk build up. The risk build up and maybe I think that was Yeah. That was the word the term I was looking for. Just before we get too far away from that, also wanted to say that um what can be the reason I'm if a buyer is looking at a business which they likely are that already has an asking price attached to it, you can use this separately uh this your analysis, this risk build up analysis to try to see if the business is under or over priced. Now again, a lot of this is just going to come down to like like you found, it's just going to come down to seller emotions and market dynamics, but at least it gives you some some uh framework through which to analyze if something is over or underpriced. So, so it's um it's not just useful. It's not only useful in the case where you need to come up with your own valuation cuz the business doesn't have an asking price. Even if there's an asking price, you can kind of check their check their work uh by using this exercise. So, I really like it. Yeah, absolutely. It's taken 250 episodes to come up. Absolutely, yes. And I would absolutely encourage people to Yeah, to do that. And I do it as I look at Sims all the time. I use my same course material and I just plug in the numbers from from the business. Yeah. Yeah. And and of course some of it is is is intuitive and we do it without realizing it. So, if you're going if you're negotiating back and forth with a seller and they're saying 3.8 and you're saying, "Well, yeah, but you've got all this concentration over here, so I want 3.6." You're effectively doing this, but it Yeah. And I just to leave before we leave price, you know, price is a big deal, but again, the whole buyer-seller relationship, seller needs um is equally if not more important. And I So, in my case, I found out later. I've become friends with the broker and uh we occasionally meet up for lunch. And she did share that I was not the highest offer. So, the fact that my background and maybe the fact that I wanted to bundle the real estate um that combination maybe made it more attractive to the seller, but he could have sold for more. I don't know how much more, but um but so there's always other elements, you know, that's why it's so important to to understand what you're bringing to it and what the seller's needs are. Yeah. Yeah. And and so, just going back to your purchase price, you you said it was about 4x that you offered and then inched it up. Is that what it was? Via the real estate. So, I ended up paying 2.8 for the real estate. So, the total deal was about 4.8. Mhm. Okay. 2.8 million plus 2.8 2 million plus 2.8 million for the real estate. Got you. Which really helped my debt service because now the 7A loan bundled the real estate cuz here in a very expensive market, the real estate was more than half the value and so um I had a long amortization schedule and uh and that really helped debt payments in the beginning. Back when the rate was six six and a quarter, I think. But um so that was great in terms of the acquisition. It ended up really burning me as interest rates went up. Well, what Sorry, why did it burn you? Because it wasn't a fixed rate? Correct. Yeah, it's just a regular 7A loan with a variable rate that adjusts every quarter. Aha, okay. Important nuance that I hadn't um gotten before. So, so first let's let's back up. Thank you for calling that out. I can't believe I almost let that slip by, but reminder for the audience, if in a you're buying a business with real estate in a bundle and the real the valuation of the real estate is more than half of the total bundle, then you can amortize the entire loan over 25 years versus the traditional 10. So, that's a seriously decreased loan payment and very attractive. Um and but so okay, so that's point number one, great. But this important point you made is that that will almost because SBA 7A loans are typically variable rate, not always um but typically, your real estate is also going to be at a variable rate, which is not good in a rising real estate um a rate environment. And also and also an exception to the rule with real estate, where typically real estate are fixed fixed rate loans. Exactly. Yes, so I'm paying on that big multi-million dollar building by the end. I've since refinanced to conventional, but towards the end I was paying 11 and a quarter percent, and my annual debt service was like an extra six figures. It was over 100,000 more that I hadn't planned for that, um, you know, had just was coming out of my bottom line. So, it was very, very painful to have the real estate be under that variable rate. I couldn't have done the deal otherwise. I didn't have enough money to buy the real estate conventionally, so it allowed me in, but it was just a painful period when rates were going up. And and then the refinancing, how how did you Why were you able to pull that off later? And was it as simple as that? Or what what There must have been a road to that. Not easily. I mean, it took it took some doing, and one of my lessons learned is, um, I would use a loan broker the next time. Um, but the value of the real estate had appreciated over the three years. And so, I had more room to take out a conventional loan against and reduce the debt on the business. And then that same lender offered a new business loan at a fixed rate. And so, in the total package, um, I was able to reduce my total debt service and refinance, recap, you know. All because the real estate had appreciated nicely in three years. Right. So, when you see that equity build up, that gives you options, but you shouldn't you, listener, shouldn't assume that will happen. Potentially, that's right. Yeah. Okay. And the earlier you'd said that you got comfortable with a concentration in the home construction home building market. You gotten comfortable with that. And then I think I heard you say but actually now that I'm in it, I'm a little uncomfortable with it. What what is there to say there? Yeah, so I mean it turns out I was right in trying to eliminate businesses that are totally beholden to this market because the last year and we had COVID tailwinds, I should say. So you know, that 3 million my first year turned into um 4.2 or so. I mean significant growth the first year and then grew more almost to 5 million revenue in the second year, which was 2022. So um we had great COVID tailwinds. I was doing some things in the business, but mostly I just inherited great processes and people and um you know, I should say that the seller during his 25 years of ownership had done a lot of the things that you we suggest you do to a um unsophisticated business. He had digitized the drawings of for the machines and he had, you know, provide brought in a um kind of a business caliber accounting system and had processes and so I inherited all that and that was part of the value proposition and and paying a a higher multiple. Um and so that was all great. So I didn't have to do a lot to enjoy increasing revenues and um some nice tailwinds from that perspective. But now uh there was certainly a lot of struggles. We had a lot of supply chain struggles and other struggles during those 2 years, but in terms of revenue it wasn't difficult. Uh but subsequently 2023 and you'll hear this from people in home services and and other related industries to construction, it's just been flat. You know, it's just been um people are on the sidelines waiting. New home starts, which is the best metric I have for my market, are low, you know, are down and and flat because of interest rates. And so, there's just this waiting game that most people in this type of industry are in waiting for things to pick up again. And so, that's been difficult. So, we did have a we did go down about 10% 10 12% in '23 from '20 '22. But, you're still well above where you bought where the revenue was when you bought the business. Yes, but there's the J-curve to keep in mind. So, I'm also, you know, I've I made significant investments. I implemented health insurance, which the company didn't have. I'm investing in a new product, developing a new product line. Um, people were kind of were underpaid, you know, when I took over. So, I'm definitely in that J-curve trough, and it doesn't help that revenue is flat when you're trying to to grow. Yeah. Yeah. Well, it's funny what you said, Mike, about how um, digitizing the business and some of that some of that uh those things that we often searchers often will go in and do had already been done, and you paid up for that. Uh, where where some of the other stuff that's more expensive to do, like health insurance and properly paying everybody, he let he he let you to tackle that one. Yeah, pretty smart on his part. So, Mike, you you let let's just hear now, kind of stepping back, you were a guy who was in corporate for call it 20 plus years, and now you bought this business, what's it like? Maybe emotionally or the responsibility or, you know, what we hear that so it's so difficult and gritty and dramatic told a small business a small business and everyone underestimates that compared to the cushy corporate life. So, speak to to that. Was the the romance of this that you had been chasing when it made contact with reality? Did they agree or what? For the most part, yes. I mean it's in a good way. Um I've right away felt tremendous satisfaction, you know, from ownership, but I came into it from a very humble position, you know, no ego. In other words, coming in to learn, not intending to make any drastic changes in the beginning. And those first few months were really just a firehose of learning all the details and getting to know the business and the industry. Um and then, you know, just doing a lot of listening, getting to know the team, uh and that kind of thing. And that was hard. I mean, hard work, but a lot of fun. And kind of learning about this new baby of yours and all the little intricacies. And I like details. Um you know, I still I see all of, for example, the credit card transactions every day and I like to see, oh, this drywall guy in North Dakota bought this part. So, I like details. And and so, learning them was fun, but just very challenging and time-consuming there in the beginning. Um but this is a part of that I would advise a younger person um who's maybe interested in this path. Uh if you're in a corporate environment that offers leadership opportunities, advocate for those, even if maybe you're unsure that you want to be a leader. Because having a job as a manager with that level of mentorship and processes and an HR department, I think is really useful. And I think I've benefited greatly from having senior leaders mentoring me and having the processes of a corporation. So, that now being in my own company, I've seen everything in terms of what people, you know, all the people issues and how they're resolved and how you how you work through them in a big business culture. And and those processes are not always the right thing for a small business. But my comfort level was totally fine with managing people, uh being a leader, that kind of thing. So that piece to me was smooth and fun. And I hope would hope my team would say the same thing, but um yeah, so so that part of the transition was well-oiled because of my corporate experience as a leader. Well, such an important point, Mike, because I think that is probably challenge number one for most searchers is is the is the people piece. You know, these are people businesses and um it's messy and if you're inexperienced there, even if you are experienced there, it can be very very challenging. Um and and what about the other theme that comes up so often going from a corporate um office environment to a manufacturing environment, which is going to have a different culture? Yeah, I mean, it's definitely a blue-collar business. These are majority of the guys are turning wrenches or or welding and grinding all day. And um I already liked the idea of that. I had worked some with people in aerospace that were machinists and mechanics. So um you know, I can kind of relate reasonably well. But there are certainly things that you have to tread lightly on. Um for example, I do a monthly as a culture thing, I implemented a monthly barbecue where we just do hot dogs and burgers and we hang out together in a lunchroom for an hour. But I I can't remember how I decided, but um I felt it was important that it be on the clock because for somebody who's clocking in and out, they want to be in control of their time. And to me, I understood having been around people that punch a clock, break times, lunch times are are significant. You know, it's important to people that they're not beholden to the company during those those times. So, when we have our group meetings or our um you know, lunch, if it's a lunch and learn or a monthly barbecue, it's on the clock because I don't want people to feel like resentful that I'm interrupting their personal time. And that just is I think how a lot of um hourly workers might see it. All right, I just want to be respectful of that. Yeah. That's a that's such a great insight. And by on the clock, you mean they're being paid. That's right. Even if even if it's kind of ostensibly a chill session and everyone's just having having burgers, um they're being paid for that. That's right. Any other or any challenges about not specifically in the business, supply chain issues or what have you, but just going from middle manage corporate middle manager to a small business owner or just smooth sailing all day long? Well, other than the the business itself challenges that have been difficult at times, supply chain and COVID and stuff like that, no, the kind of personal cultural change has been totally great. Yeah, it's the flexibility um you know, the sense of satisfaction, uh that has just been totally fine. So, yeah, I mean that and that the evidence is Monday mornings I'm excited to get up and go to the shop. Yeah. Yeah. For example. And and Mike, you know, we we we've gotten a clear picture of you as somebody who is an engineer at heart. Uh could this business have been acquired by somebody who was not an engineer? The the the the technical aspect of putting out a pro- building a product um is it does it require your expertise in in, you know, natural talents or not? I think it's a nice to have. I don't think it was required. I think that's one of the things that swayed the seller about my profile. Mhm. Uh, that I was the right buyer. But, one thing that I've learned and that I advise people is whatever shortfall you have, as long as you recognize what it is, you can bring in talent to to help. You can always buttress yourself with experts, you know, contractors, that kind of thing. And for certain engineering tasks tasks, I do have um a couple of contract engineers that support me, for example. So, no, I don't think it had to be an engineer, but I think the owner the seller really liked that I was. And I'm enjoying it. That's where part of my satisfaction comes from is new product development and solving technical problems, that kind of thing. And so, you have the expertise to actually contribute to new product development, to read these Oh, yeah. plans, I don't even know what they're they're not blueprints, but the the the plans and Yeah. whatever, make suggestions and drawings and it's a more yeah, mechani- mechanically things work. I just like to dig into that kind of thing anyway. Um So, for sure, that's part of the fun the fun of it. Okay. I want Before we get off totally, Yeah. can we go back to the deal process for a moment? Yeah. Please. We're wrapping up here, Mike. So, if there's anything you haven't said you want to Yeah, yeah. Oh, good. You you go. Okay, so they say that there's all these at least a few things that are deal deal killers that'll crop up. And so, part of what I didn't finish saying, I guess, is that the total process from LOI acceptance to close was about 6 months. And that was not the intent. The intent was to do it in about 3 months, but after after LOI and initial due diligence got going, the lender that I had chosen to go with, um you know, all was going well, and sort of out of the blue after about 2 and 1/2 months just called me up, and in fact, I was on a plane then, so it was a voicemail, and said that this deal isn't going to work for us. Basically, we're done. And um so, I did it I was at your uh your lender webinar earlier, Oh, great. exact point came up, which is that is a risk of I won't name that lender, but um all sounded good from the sales guy, from the guy that tries to, you know, get the deals in the pipeline, um and never gave me an indication that this wasn't going to work or that there was a lot of risk. And so, after 2 and 1/2 months of all this work, I had no lender. And that could have easily killed the deal. But fortunately, um by then, I was almost at the end of the LOI period, but before fortunately, by that point, I think that then the seller and I had developed enough of a relationship and mutual trust that he gave me some grace to try and find um a better lender. Mhm. And that's what I had to do, and was able ultimately to do that. And I would I'll call out um Gulf Coast Bank. Uh they're a small business lender, and Connie Castaldo was the was my banker who who made the deal happen. So, that was really what stretched it out was having to switch lenders midstream, Um reset the process. Right. And so the So the takeaway is kind of First of all, realize that the front-facing folks at banks who are out there with the SBA loans and saying that they're going to give you a loan are sales people. Nothing wrong with that, but they are they're bringing in deals. They're not the ones They're not the the underwriters who are going to be really crunching the numbers and really really looking hard at your deal. So just recognize that dynamic that they're not the They're not the decision maker and they're looking to hit quota or whatever whatever their incentive structure might be. Again, nothing wrong with it. Just it's it's not totally clear necessarily to the to the naive eye what what's going on there. And you want to as early in the process of talking to a lender as you can really press to make sure that the people who will be the decision maker, the underwriters, the underwriting folks, are going to smile upon your deal. Yes, and I think now in retrospect, you know, I started out on this process doing the advice, which is talk to a bunch of banks. And so I talked to a bunch of regional banks in the Northwest and I got references from brokers on what bankers to talk to. And that's a lot of work and they all want to see a the deal and they all want to see your personal financial statement. Um and furthermore, you don't know if they close a lot of SBA loans without a lot of research. So I think in retrospect, one of my lessons learned with is that I would go ahead and use a broker the next time. And just let that person's expertise and contacts, let them shop the deal and me as a as a um you know, as a risk or as the borrower around and then we at least have a partner to get you through with the bank. And you do pay for that some I think some um sometimes you the borrower doesn't directly pay, but but you can roll it into your deal your deal fee at the end, the fee that the broker takes. But I would definitely take advantage of that next time. Well, and and to be clear, the way it's usually positioned is that the bank that you ultimately go with is is compensating the broker. Um now, I guess there can be some argument about that eventually that that makes its way to you lender. I mean, excuse me, you borrower. And then ultimately you're eating that cost and it's kind of tucked in there somewhere. But at least it's positioned as the banks pay, not you. You borrower. Right, yeah. That is how it's positioned, yeah. Yeah. Yeah. Yeah. Okay, great. Thank you for that call out. What else Mike? Yeah, yeah. The second deal killer was um a real around the note the seller note. So, the deal structure, which we didn't finish, was um that that that it would be like 80% financed, all of my equity from the condo sale would roll in as the cash, and then the seller was going to have a seller note of um forget what it was, roughly 12% of the deal. Oh, that was all fine and agreed to months before we actually got to the issue, which is the standby. And so, I my own naivety and um lack of communication from maybe the bank and the broker I don't know. I don't blame anybody in particular, but once the seller saw the actual wording of the standby feature, which is that the bank decides when you can pay the seller note, maybe after 2 years you can request to start making payments. Um he did just did not like that level of uncertainty. He he I think trusted me that I was going to do everything I could to pay his note, but um he didn't want a third party determining it, and I think maybe also saw that um yes, I'm the right person to take over, but there is risk that something could happen and the business wouldn't do as well, and the bank would say, "No, you you can't pay the seller note." So, we ended up having to do a late retrade to eliminate that in order to get to the finish line. So, I was able to um the deal would have died, I think, if if I hadn't been able to eliminate the seller note. And again on the theme of finding a way and and finding good terms, um we kind of split the difference where he accepted a small slight reduction in the purchase price, and I gave him a very nice um consulting agreement for 1 year that kind of paid about half of what he was going to have loaned me. So, because the SBA allows the 1 year, you know, consulting from the seller, um he he didn't actually have to be around, you know, it was sort of a declining consulting agreement where the for the first few months it was a lot more, and then it tailed off. But that way we were able to overcome this issue uh that otherwise would have killed the deal. Mhm. Great, Mike. And and to be clear on the full standby, what that means is that you don't actually the a full standby seller note is you don't pay it uh until whenever it is, 2 years, 5 years, right? And you're So, you're just you're just paying the bank back in those inter- whatever that time period is. And I I the bank can decide then the bank determines when you pay can start or could pay the the seller note. That was my understanding I realized. Yeah, that's my understanding. I'd be curious. I haven't heard from very many sellers of actually how it works cuz what once things are in motion it's kind of up to you to decide what to do but you do have to submit financials to the bank so it's in your best interest to be totally open with everything and I don't actually know how it would have worked in terms of requesting to make those payments. Yeah. Okay. Anything else? Yeah, if you want to talk just a few like kind of what would I what have I learned or or what would I do different? Sure. Um one small thing is the payoff date this almost was another deal killer but we got to closing we picked a date at the end of a month at the end of March on a Monday because of a pay you know that was when the payroll period started and we thought that would be the cleanest almost the end of the quarter and the beginning of the payroll cycle. And we signed everything and literally went to escrow millions of dollars are sitting in escrow waiting to be dispersed and the lender on the building wouldn't accept the payoff because they only accept payoffs in the first 15 days of each month of the year. So people blew all the attorneys were upset and people hadn't seen this before which subsequently I I've asked on SMB Twitter and and I think Heather Harrison was like yeah that sometimes happens but nobody in my deal had to heard of this and so we were in limbo for 2 weeks while everything got redrafted we had to have the signing party all over again. The seller at that point was taking a huge risk because I had taken over the business and I was the new owner but on paper you know he had not paid off his building loan yet anyway. So, we we had to redo everything. We got through it, but it was a huge hassle and and there's not something I've ever heard somebody talk about, but make sure you understand the lending the selling bank's payoff date. Yeah, great. What a What a irritating detail. Um another thing is the PG and the fact that again, mid midlife person, you've accumulated some assets, in our case some real estate, and a feature of the personal guarantee is putting liens on anything that you own, any real estate that you own. Your home and any other real estate, but only if it's if you have more than 20 or 25% equity. And subsequently, I've learned that if you open a home equity line of credit, even if you don't use it, then the bank doesn't consider that. As long as you go over their limit, you know, as long as there's not a lot of equity there, then they won't put a lien on it, which is um just a piece of paper, but it prevents you from having flexibility if you subsequently want to refinance a property or do home improvements or whatever. You have to Your bank your business bank, your SBA lender is now in a position on your property, and that's a hassle. So, I would have taken out home equity lines on all on my home if if I had known that ahead of time. Sorry, to be clear, you take out the home equity loan to protect against the SBA lender being able to have a lien against your property? Yeah, just because they they don't see enough equity there Right. to bother. Essentially. Right. Right. Okay. Because you So, you kind of convert all that equity to cash or to a loan to yourself. Or it could be a line of credit as far as my understanding even if you don't access it. It's just there's another bank in the way and they don't want to be third position. Oh. That's quite a tip. Yeah. So, I don't know if that causes other problems, but I know of other searchers who have done that successfully and I might try that if I did that again. Uh well, okay. Great. Great. At least to look into. Um yeah, and another another point on the PG um you know the unlimited aspect of of the PG is something I intellectually got my mind around and got more comfortable with when I think about um the fact that once you own the business, you're completely in control of everything. And the two bad scenarios are one is that something happens, you did your best, but you the business fails. That's one scenario. Another scenario is some kind of fraud where somebody builds up a bunch of cash um the SBA quote unquote isn't a magic pot of money. They're just backstopping the bank. So, when the actual lender gets all it can from that defaulted borrower, now they turn to the SBA who makes them whole. Well, those dollars are ours as taxpayers. We're paying you know, that's it's all probably only a few cents to each of us, but intellectually that is how I kind of part of the way I got comfortable with saying, "Okay, this is the right thing to do because we as a community are backing one another uh through this SBA program which which wonderful and and makes the US the best place for entrepreneurs, you know, in the world and um and anyway, so it's still uncomfortable in some ways, but that's part of the way way I got comfortable with it. Interesting. So so the backstop of the 75% that the SBA guarantees these loans to the lending banks is a the the giant American community supporting. It's our tax dollars one another. Great. Great. tax dollars. Well, that's a very wholesome perspective, Mike. Thank you. In this time of partisanship and Exactly. election cycle. I like it. All right. Um a few couple other things if you'll indulge me. Yeah, so uh the last kind of major learning is uh you know, we talk about it a lot in the space, but the stress and responsibility was something I didn't foresee. In other words, the Yeah, it's you understand this is all on your shoulders, but when you're actually day-to-day looking at your bank accounts, looking at your receivables, cash flow, payrolls coming, the bank payments coming, um maybe somebody's late, a customer is late in paying or whatever, that really is more stressful than I realized it would be, you know, in terms of sleepless nights and thinking about, "Okay, well, if by Friday this cash hasn't come in, you know, what am I going to do?" And always having a contingency plan is a way to to help with that, but it is much more stressful than than I would have imagined. And so that's something important. And I'm a very relaxed person. If you talk to any of my friends, I think you would you would hear that from them that I'm very easy-going. Um but I would caution people that this path is very stressful at times and um that's just it's a lot of responsibility when you have this team of people depending on you to pay them so they can pay their rent and feed their families and and all of that type of thing. Well, I'm glad you you mentioned it because because that was one of the things I was wondering about when I talked about how does it feel going from corporate to this? Um the the there's a psychological shift that occurs and it's certainly heavier on this side of things. Yeah, exactly. And I think uh an important so counterpoint to that is having advisors, having people you can talk to, you know, it's another thing that you hear often is it's kind of a lonely and so um some kind of peer group I would highly recommend. In my case the Rice Alumni Network uh sponsors MBA alumni peer groups of entrepreneurs and business owners. And for me that I joined one of those and that's a great um space, you know, to share these kind of stresses and provide each other advice and that kind of thing. So I think that's really important. And I lot of I know a lot of operators have said the same thing. Mhm. Yeah, absolutely. You hear it uh routinely. The the value of peer groups. Yeah, yeah. All right. Yeah, sure. Um and now the last thing maybe is uh kind of the Acquiring Minds community and how open and helpful people are. Um so for example, Casey Clark who was a guest of yours, he's the CEO of Cultivated Advisors. Sure. Yeah, early episode. Yeah, early episode. Um after his appearance, I reached out to them and ended up um signing up and I have a wonderful coach advisor {slash} um business advisor who who has helped us tremendously and I definitely recommend Cultivate as a small business focused consultancy that um has really helped with our sales process, implementing a new CRM, um helping me with cash flow forecasting and and a lot of other things. So. Oh, that's great. That's That's great to hear, Mike. I I hadn't I know Cultivate as a business itself is doing very successful is is very successful, is growing a lot. So, great to hear that. Thank you for sharing that. Yeah, my advisor is called Rudy Franco and he's he's a superstar. So, that's been a wonderful relationship to have. Um and just a couple other of couple other notes after Shiner someone was on, I think the first time Mhm. I reached out to him because I was going to be at a trailer or our main product line is delivered on a trailer and he sells trailers and so we met at a industry event and he's a great guy and uh actually owe him a follow-up cuz we might have some um ways that we could work together in the future, but another cool little connection through the Acquiring Minds uh ecosystem. I love it, Mike. I love it. I I I've said I said recently how I have this actually when we announced Minds Capital how we have this um that there are these connections that happen just like the ones you're describing that are kind of I'm completely unaware of, but I hear that they happen uh and it and it sure makes me feel good and it's kind of exciting to think that they're that it's sparking these connections and um and and not and not just um kind of peer and friend connections, which of course are valuable, but also actual, you know, commercial business being done thanks thanks to Acquiring Minds. So, that's great. Exactly. Yeah. Yeah. Are you Are you done, Mike? Cuz I I still got I still got an item or two. that was our main main item. great. Thank you for bringing so much so so much preparation to this. I really appreciate it. Um I only maybe only have really I really only have one other thing that I'll close with, which is what would you you are a little bit older than my typical guest. You're just a few years older than me, so we're we're similar there. Um what would you tell people who are mid-40s, mid-career about this path? Talk to talk to them for a minute. Yeah, I think that uh the main thing is it's not as risky as you might think. That seems to be the main hurdle holding people back. Uh if this is something a path that you think you would like to do, then you should absolutely dive in and and explore it. Um I think a lot of us where I was getting to the point in my career, I felt pretty trapped sort of in aerospace. I don't know that my skills were getting transferable to to other places. So it's almost like you feel penned in, hemmed in uh as you get more experience. And so the MBA was a step towards broadening myself. And then I didn't even know that it was going to lead lead to ETA. Um and so yeah, that that's the main thing is it's it's not as risky as you might perceive. Well, one thing that I will say about uh the the value of doing it mid-career is what you said earlier, that you have all this management experience. And that's something that a 25-year-old or 30-year-old or even a 35-year-old might not have. We hear of commonly that vets and people coming out of the military are well positioned for this because the military trains them in precisely that leadership. Um but uh uh uh corporate or commercial career, private industry career um doesn't necessarily or doesn't until later or doesn't as you said and unless you look you you raise your hand and you really you really reach for kind of management training and leadership training as you did, happily. Um so um so that that seems like it's been a great advantage for for you um that if you had done this 15 years ago you wouldn't have had. Yeah, absolutely. Managerial experience and just life experience, you know, a few gray hairs probably helps in the room with sellers, with banks, you know, with with people you're trying to win over and convince. Um you can be the right steady hand to successfully lead this thing. Uh which isn't to say you have to have gray hair, but I don't think it hurts for for this type of thing. Well, we'll leave it there, Mike Day. Uh really really great interview. Congratulations on buying AST and doing this pivot in your career and that it's going well. Not to say that it's been easy, of course. Um but you seem pretty content and even though there's a bit of a lull in the industry at the moment, I assume you feel that long-term prospects are consistent with your thesis. Yes, absolutely. Def- definitely excited about the future. And Mike, if people want to reach out, uh is there a way that you like them to do that? Email, LinkedIn? Sure, LinkedIn is is the best way. It's Michael Day, D E Y. And just a reminder, audience, that if you choose to reach out to Mike, please have done a lot of homework. Uh treat his time respectfully. This is a community where people help each other, but let's also make sure if we're asking for people's time that we are intelligent and respectful about doing so. No just picking your brain. Uh come with some some some strong questions and some pointed questions for Mike if you want to get him on If you ask him to get on the phone. Mike Day, thank you very much, sir. Great interview. Appreciate it. Thank you very much, Will, and thanks for everything you've done for the community. I hope you enjoy 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.