[00:00:00 - 00:05:08]

Host: More and more people want a business they can see and touch, drive to. That's part of what drew today's guest to his unusual acquisition. An escape room. Adam Welchel had already built an accounting firm from scratch to one and a half million of annual revenue.

22 people, fully remote, all on zoom. A good business, but abstract. As his daughter put it. What do you actually do all day?

The escape room came across his desk because Adam is also a business broker and this was his own listing. Seven rooms, 365,000 of revenue, about 105 of SDE, but running at only 7 to 10% of capacity. That last number is the thesis. Rent, staff and hours are fixed.

So nearly everything sold above that drops to the bottom line. Adam wants to go from 10% capacity to 15% this year. Then there's the tax angle. Adam was looking at a hefty 2026 tax bill of roughly $95,000.

So he negotiated that $108,000 of the purchase price for this business be allocated to Class 5 assets, the hard depreciable stuff. So he could then use bonus depreciation to create a first year loss that offset his 2026 income elsewhere. That offset was substantial enough to reduce his tax bill by more than his deposit to buy the business. So the net effect is the $35,000 he put down to buy the business would have otherwise headed to the irs.

Instead of sending it to Uncle Sam, he bought a cash flowing business with it. Adam made slides walking through that math. They're linked in the show notes. Here he is.

Adam Welchel, owner of Lakeland Escape Room. You've heard it plenty on acquiring minds that the deals you walk away from matter as much as the ones you close. What gets talked about less is what walking away actually costs. The deposits, the legal and Q of E fees, the months you'll never get back.

Well, in a webinar today, Thursday, a panel of Acquisition Lab members will unpack deals they came very close to acquiring but ultimately chose to leave behind. Moderating will be Tim Erickson, COO of Acquisition Lab and a former guest on this show. Among the topics today, the moment that each buyer realized the deal wasn't the right one. What diligence uncovered and how it changed the story.

What walking away actually cost in deposits, in professional fees and in time, how the buyers view these decisions with the benefit of hindsight. What they looked for afterward and what they eventually acquired. Expect candid stories about the signals that made the decision clear and and why passing on the wrong business can be just as important as finding the right one. The webinar is the deal I Almost Bought and why I Passed and it is today, Thursday, September 10, noon Eastern.

Link to register is right at the top of this episode's show notes or on the Acquiring Minds homepage. AcquiringMinds co. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith.

Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. The team at Pioneer Capital Advisory has started offering peripassu debt for SBA business buyers. That means they can help unlock up to $3 million of conventional debt on top of the $5 million limit of SBA 7 loans, so Pioneer can structure larger, more complex acquisitions. Listen to our story with Anika John for one of their clients who did just that, buying a $10 million business as a first time self funded searcher, the Pioneer team has closed more than 100 SBA loans, averaging timelines well below industry standards.

Founder and owner Matthias Smith and COO Valerie Stash bring over two decades of SBA lending experience. Matthias and Valerie have a full bench of analysts and associates who work your deals with them. A true deal team. Not just a single point of contact.

Visit pioneercap.com or click the link in the notes. Adam Welchel, welcome to Acquiring Mites.

[00:05:09 - 00:05:10]

Guest A: Thank you for having me.

[00:05:10 - 00:05:42]

Host: Adam. You bought an escape room business. Now this was opportunistic. You were not a searcher out there actively hunting for a business to buy.

Came across your desk as a business broker. You jumped. We'll get into it. But a big reason that you bought it was for the tax advantage you perceived.

This was novel, at least for me. I'd never heard somebody approach it this way. And we're going to get into that in time. But let's begin with some background on you first, please.

[00:05:42 - 00:07:50]

Guest A: Adam. Sure. So for the last 10 years I've been an accountant with a bookkeeping company and recently switched into lower market M and A. Basically just being a business broker.

And I got, I got into that through my network. But I built a a thriving accounting firm that specializes in closing the books once a month for more than 60 accounts. And our clients depend on monthly financial statements and good bookkeeping to keep the business going. I joke that I wanted to build the firm that would exist if the IRS didn't exist.

And we're the back office for the business owner, not just a compliance stop, you know. So if the IRS didn't exist, what kind of accountant would you want? That's the team I wanted to build. So that's been about 10 years now.

I think September will be 10 years. And it's been a fun, exciting, you know, amazing journey. We have 22 people on the team now and it gave me some freedom to explore more challenging work and I wanted to do, I knew I wanted to participate in acquisitions in some way. And so I ended up just networking with a business broker in town.

And we have initially started with, you know, should I be a business buyer? I know how to grow and organize people and systems. And he said, well, you could definitely get your hands dirty if you wanted to help me clean up the numbers and do recasts and normalize financial statements and help me with valuations and just get acquainted with the industry and then you'll see what, what, what I see. So I thought, no problem, like let me do that.

I'm working part time in my accounting firm and this is a very connected business in some ways, seeing the whole, the whole life cycle of a business owner going from startup to scale to grow to exit. And I've just learned so much in the last couple of years.

[00:07:50 - 00:08:07]

Host: Great, Adam, let me, let me follow up there. So you had built from scratch zero to one this accounting firm, bookkeeping primarily. Bookkeeping services primarily, yeah, over the last 10 years, 22 employees. And can you share revenue and earnings?

[00:08:07 - 00:10:08]

Guest A: Yeah, that's kind of part of the story too. You know, we started with zero. And I think it helps to understand my background. Before that I worked for IBM and I was on contract for KPMG.

So working with CPAs and working in accounting, Tampa office specifically. And so I was going to be moved to St. Louis, Missouri, didn't want to do that. So I decided to just end the contract, not renew it.

And my wife and I had two young kids and they were two kids under two, so you know how that can be. And we're looking at our options. And she's doing some bookkeeping. And I looked at what she was doing and I started following these legends like Veronica Wasek, Ben Brown, Hector Garcia.

People in this space know who they are. And Intuit had just purchased apps.com, which they boasted of a 500,000 cloud, 500 cloud based apps that could connect to QuickBooks online. And just having an IT background, I just, I saw an opportunity to build what I consider to be like a help desk for accounting and small business. And so before I go too long, you know, we grew every year.

The last seven years or six years we've been doing 25% top line. Growth maintaining 15% on the bottom. We'll probably end the year with 1.5 ARR. And so I look at revenue per employee.

That's a really important number for me. I have mentioned 22 people, but they're not full time. So we average 125. 125,000 per revenue per full time employee.

And the. I was looking at a 3. I was looking at 320,000 in SDE and a pretty substantial tax bill when this crazy idea popped in my head.

[00:10:08 - 00:10:34]

Host: Okay, so you grew this business from scratch to 1.5 million ARR. You started it somewhat out of necessity because this KPMG contract went away. You walked away from it because you didn't want to move to St. Louis.

And then you were in a tight spot and you were kind of exposed to the bookkeeping opportunity via bookkeeping work your wife then. Wife was doing.

[00:10:35 - 00:10:36]

Guest A: That's correct, yeah.

[00:10:36 - 00:10:45]

Host: And it just kept growing 25% year over year while maintaining 15% net margins. Which, by the way, that is the rule of th of 40, right?

[00:10:45 - 00:10:58]

Guest A: It's a. Yeah, it's a SAS term that people use to track. You know, it can be 20 on the top and 20 on the bottom. It can be 15 on the top, 25 on the bottom.

But the rule of 40 is you're growing top line and maintaining bottom line.

[00:10:59 - 00:11:09]

Host: Yeah. And that's kind of a. A rule of thumb for what you want. On the other side of that is strong.

On the wrong side of that is weak. And you were maintaining that it's not.

[00:11:09 - 00:11:19]

Guest A: I mean, typical accounting firms don't track that metric. It's just an interesting KPI that I found useful because we use a lot of, I treat it like a software company.

[00:11:20 - 00:11:25]

Host: Well, I noticed too that you, you refer to ARR, which is of course a very sassy term.

[00:11:25 - 00:11:26]

Guest A: Yeah.

[00:11:26 - 00:11:31]

Host: Do accounting firms refer to ARR and mrr or is that again you. You talking sas?

[00:11:31 - 00:11:38]

Guest A: I don't hear it a lot. I mean, we, we do talk about annual revenue, but I have contracted revenue because I have bookkeeping contracts.

[00:11:38 - 00:11:38]

Host: Yeah.

[00:11:38 - 00:12:25]

Guest A: Not only that, I resell certain software that accountants can resell. And I also participate in payment processing, which is not something accountants usually do. So I resell payments and other apps that depend on the accounting system. So I having this, it, you know, background.

I wanted to create such a sticky service that my customers never want to leave. And I, you know, not many accountants or bookkeeping companies have a help desk. Zendesk, Ringcentral, where we have six people that answer the phone. You know, 40 hours a week and communication is the biggest complaint in accounting.

And so just tackle technology and communication and you can outshine a lot of people very easily.

[00:12:25 - 00:12:46]

Host: Well, Adam, so obvious question, you know, I'm seeing all this success. You're speaking so intelligently about how you think about your business in the space that you compete in. Why are you get, wanting to get into acquisitions, as you put it? What, what was this concept of acquisitions that was luring you?

[00:12:46 - 00:13:42]

Guest A: I just don't know how to stop. And when you. My team was asking me to, to go play in another sandbox. I'm an innovator, I'm a creator.

And we built something that my team can, can run and maintain and it grows through wordmouth and through other marketing avenues. But I remember my operations manager, she's been with me almost seven years now and I'm the youngest in the company. So everybody that I've hired is older than me and way more experienced in the technical side of the business of delivering good accounting services. And I was the least experienced.

And we can get into how I handled that. I ended up enrolling some CPAs to, you know, keep, keep us on the right track. But I was, I've, I've got too much innovation in me sometimes. And my team was like, can you go, you know, play in some other sandbox and, and, and try some things over there just to whet the appetite?

[00:13:42 - 00:13:48]

Host: Because you were always tinkering with their, their stuff. Yeah. Okay, so they wanted you to tinker elsewhere. That's right.

[00:13:49 - 00:13:49]

Guest A: That's right.

[00:13:51 - 00:16:05]

Host: You know. Enzo Technologies as one of the leading IT managed service providers serving the search community led by Nick Akers, an acquiring minds guest who bought the 35 year old business. The team at INSO regularly works with searchers and their acquisitions. And one feature of acquired businesses that Enzo is seeing over and over is the need to implement cybersecurity promptly during the transition.

So many acquired small businesses either have glaring vulnerabilities, lack security best practices or both. That step one to de risk the deal you just closed should be addressing these issues. INSO is your full service IT MSP for post close stability. They assess your target, surface the biggest risks in plain English and give you a day one through 30 plan to cut exposure, prevent downtime and even find cost takeouts like bloated telecom bills.

Check out enzotechnologies.com I N Z O or email Nick directly at nickzotechnologies.com okay Adam, so you're, you've grown this business from scratch to 1.5 million. You are creative, you are tinkering with the business. Your team is respectfully like, boss, can you tinker elsewhere? You have seen exits occur via some, via your clients, some of your clients have exited.

You're intrigued by the concept of businesses being sold and I guess, bought. And so you have time on your hands because you've built this business which is running without your full time oversight. And so you, and so you start working with this broker who invites you to learn at his elbow and kind of just to see how it goes. And maybe you'll be a business broker, maybe you'll buy a business.

It was just kind of like a, you had time and this was something that interested you and you wanted to maybe take your career in that direction. Is that the, is that it?

[00:16:06 - 00:17:28]

Guest A: Yeah, there was a lot of like, this is a whole new interesting side of business. Having started one and grown it, I knew I could do it. I knew I could organize people and systems and, and processes. I was good with money, good with process and, and technology.

And so I'm not good with marketing. Horrible. It's, we've only grown through word of mouth. I've wasted a lot of money in marketing, so I would not be, you know, interested in, in a business that was, I would need a partner.

So. But I really came to the brokerage to help Chris with some of the volume of updating financials, doing recasts, evaluations, honestly doing light quality of earnings, not, you know, not attestations even just maybe what we call compilation. Just small. I'll dig through the file and I'll point out anything that I think is that the buyer would ask.

And that gave me a really good, my background gave me a really good perspective and he appreciated that insight. And so he said, hey, get your license. We'll work on every deal together. And I'd love to get some help.

If you really, if you really love this, there's a, there's a future here for you. And a lot of business brokers can't make it two years without a com, you know, without a paycheck. And I could. Yeah, so that was important.

[00:17:29 - 00:17:35]

Host: Yeah. Yeah. So. So you thought you might actually become a business broker for the long haul or indefinitely?

[00:17:35 - 00:17:36]

Guest A: Yeah.

[00:17:36 - 00:17:36]

Host: Okay.

[00:17:36 - 00:17:55]

Guest A: I thought, yeah, I'm in my mid-30s, I've got stable income. Every business that we, we buy or sell with our client is so unique and interesting and yeah, it's, it's intense. It's. There's a lot of personal relationships you build and it's, it's like nothing else.

[00:17:56 - 00:18:04]

Host: So you are learning the business of brokering. You become a broker and do you, do you sell any businesses?

[00:18:05 - 00:18:51]

Guest A: Yeah, machine shop, family owned 40 years. Embroidery business, family owned 40 years. A small painting company. And so I witnessed at least four transactions in my first two years.

So I'm coming up on my 24th. You know, my, my final two years. I say my final two years. Let me say it again.

I'm coming up on my second year as a business broker so I just had to have my post licensing exam and I got that done. So and yeah, it was like I said, low, low volume but high quality. Very rewarding process to see these sellers make that transition.

[00:18:53 - 00:19:00]

Host: And so the escape room business then comes across your desk and it grabs you. What about it grabs you?

[00:19:00 - 00:20:37]

Guest A: I looked at the operational leverage of it as a business broker. I was building a marketing campaign for it, building a sim, a marketing deck. And one of the things I highlighted to the potential buyer was these are fixed costs. You're open, you have a lease, you'd have some debt service.

You have seven full, not seven full time employees, but you have seven trained employees, seven escape rooms in here. And I started digging with the, with the sellers. I said, hey, what's your capacity? And we start looking at capacity.

And I said, well, what's happening? And they said, well, we're operating around 7 to 10% of our capacity and we're profitable. And I said, well, show me your best year. And so we went through the numbers and I just saw economics like that worked in its favor as an industry.

And so I called my CPA that I work with very closely and I said, have you ever sold a seat? Have you ever done bookkeeping or accounting for an escape room? And she goes, yeah, actually we just sold 10 in a roll up. And it was life changing for that family.

And I was like, what an interesting business. Yeah, that and my daughter and I go to these, we're fans of escape rooms. And, but that's what initially brought to my attention was one, it was my listing. Two, I had to get intimate with the numbers and start to position it as an attractive offer.

And during that process, the wheel started to turn.

[00:20:37 - 00:20:58]

Host: So to be clear, this business, the escape room that you're looking at is at about 10% capacity where there are, it's kind of a fixed cost, heavy fixed cost business. You got rent, you got people, you know the hours that it's open and those are fixed and everything above that the, is very high margin.

[00:20:59 - 00:21:00]

Guest A: Yes.

[00:21:00 - 00:21:18]

Host: And, and they're, they make money at just 10% capacity. So they've got another 90% of their slots across these seven rooms available to sell, which would be a lot of that, you know, that gross profit would be net profit 100.

[00:21:18 - 00:21:20]

Guest A: Yes. Yeah. Accurate, yes.

[00:21:20 - 00:21:47]

Host: And, and is there a demand problem that, that, that, I mean, that they're selling so little of their available capacity. I take your point that that that's all this headroom to grow into very, very profitably. But does it also say that maybe there's too many escape rooms or that the, you know, it's going to be a very competitive market or whatever? What does it mean that they have so much excess capacity?

That can be interpreted negatively as well, right?

[00:21:47 - 00:24:03]

Guest A: It sure can, yeah. There were a few things that I think caused the business to slow down. And of course you don't want to catch a falling knife. That's no place to be.

It needs to be a good business with potential and infrastructure. And so the escape room industry launched probably about 10 years ago and just like the SpaceX stock, you know, it blew up and then it does a market adjustment and it's just like SpaceX. Just like SpaceX. So, you know, it blew up and now there's been a market adjustment and it's been steady, but it is growing as an industry and franchises are getting into it.

They see the unit, I don't know if it's unit economics, but it's more about operational leverage. They see the fixed overhead and the predictable costs and then all of this capacity. And so this one was interesting. There was a franchise in town and that franchise only has four rooms.

We have seven. And what I noticed was there was actually a lot more group events, small businesses using this for networking or team building because we can fit 50 people in there. Seven rooms times seven people. That's very hard to find in escape rooms.

Now the downside for this particular listing was they had not installed a new room in over two years. And that's because the sellers had a change of life. Their kids got older, they were in college getting married. They just weren't putting enough, they weren't refreshing it.

In this industry you do have to refresh and so you have Capex. And I'll say one more thing. They bought a room from somebody else and that was their band aid for not having updated the rooms themselves. They bought a room that was really bad and they had to recover from that.

I think brand. It was a, it kind of tarnished the, the reputation a little bit because they marketed this brand new room and it was Awful. And that was the first thing I did was I ripped it out because it had already been retired. And so we can go into that later, but.

[00:24:03 - 00:24:06]

Host: Okay, so can you give us the numbers of the business?

[00:24:07 - 00:25:00]

Guest A: Yeah, at the time the business was doing 365, trailing 12 months and it was averaging 350. SDE was about 105 the last two years. It was 125 the year before that and 185 the year before that. And I'm going through this process of asking the sellers, why are you making less money?

Why are sales going down? And that's the story they gave me. And I felt confident that with the right people and we could, we could turn that around, we could put new rooms in, engage the small business community. I'm already well connected with the chamber.

I'm well connected with the downtown economic development committee. I'm, I'm already a networker. And it's been, it has not been the wrong decision.

[00:25:01 - 00:25:09]

Host: And also it was effectively running itself. What did the dynamic look like there in terms of the involvement it would need for.

[00:25:10 - 00:26:06]

Guest A: Good question. Of course, I had to ask the seller what they do every week. And it was about six hours a week of admin, which meant the employees were neglected. And when I got there, being a business broker and running an accounting firm, I can work from wherever I want to.

And I set up shop in the escape room and just worked from there for the first two months. Just getting to know the customers, getting to know the staff, having weekly check ins with the staff, having monthly company meetings and off sites and actually going to Escape Rooms as a team. I can send you the picture of nine of us going to an escape room in Tampa and just having a great time. And so the dynamics improved and they just, they had been checked out, so they were only doing admin for about five or six hours a week.

And you know, anything else you add to it is in theory going to improve the business.

[00:26:06 - 00:26:16]

Host: Yeah. Yep. And so what did you envision adding to it? You, you envisioned more involvement, but not that it would become your full time thing.

What, what was.

[00:26:16 - 00:26:16]

Guest A: Yeah.

[00:26:16 - 00:26:18]

Host: How did you envision the project for yourself?

[00:26:19 - 00:26:30]

Guest A: I envisioned, we had one. I would say we had one obstacle, which was room development. Are we going to buy rooms? Are we going to build them?

[00:26:30 - 00:26:41]

Host: What do you mean by buy versus build a room? I'm reminded that you. That you had this bad room that you said that previous owners had bought. What does it mean to buy a room?

[00:26:41 - 00:27:21]

Guest A: In the escape room industry, there's a Secondary market for either used rooms or people that's, that's their business. They sell escape rooms to escape room owners. And the, the, the, the, the value proposition is you don't have to spend time designing the electronics, the lighting, the audio, the aesthetics. We will package and ship a room in pieces.

You put it together, and you can be up and running in three or four weeks with a new, a new experience for your guests. And keeping a fresh escape room is the key to that growth and that success.

[00:27:21 - 00:27:30]

Host: How interesting. Yeah. So the escape room owners are not the designers of the puzzles, or they

[00:27:30 - 00:29:13]

Guest A: are in some cases, in this example, the listing, they were. They had built everything, and when they started to run out of gas, they bought one that was not a very good room. And I said, okay, well, the, if the economics are there, if the business is giving, you know, 110 SDE and debt service is 35,000 a year, could I put some money in there and put a new room in place for 30, $40,000 and see some, some uptick? So we're on the tail end of that process.

And we acquired it in March of 2026, and we spent. We decided to go down that road of, of building it ourselves. But not. I'm not slinging hammers.

I actually hired the Lakeland Community Theater staff. Their job is to build and design sets, lighting, audio, video. And so I went to the, the community theater director. I said, are your.

Between. Between shows? Are your set designers looking for things to do? And I gave him this vision.

He's like, they will love you. And so they, they're there whenever they're not working on sets at the community theater. They're. They're at the escape room.

And it's such a great fit because I cannot tell you the quality of these set designers who sometimes used to work for Disney. They used to work on the cruise ships, they used to work in theaters. They, They've been around the world and they know how to do things, but there's not an avenue for them to do this in many, in many places. So building escape rooms was the perfect fit.

Now we just had to bring in some puzzles, some other technology.

[00:29:14 - 00:29:34]

Host: So, Adam, the, the, so the economics were it does 365 or was doing 365 in revenue, about $100,000 of SDE. So those margins are what, 27%, 20, 30. Yeah. High 20s, I think.

[00:29:35 - 00:29:36]

Guest A: Yeah, high 20s.

[00:29:36 - 00:29:40]

Host: Yeah, yeah, yeah. And it's a small business.

[00:29:41 - 00:29:41]

Guest A: Yeah.

[00:29:42 - 00:29:55]

Host: And so, so there was other reasons to buy this as well. One of those Very personal. One of those. Very financial.

Elaborate on both of those reasons. That other. Other things that compelled you to do

[00:29:55 - 00:30:40]

Guest A: this for the personal reasons. When I started the accounting firm, I had started it with my kids in mind. Can I work from home? Can I be an involved dad and start a business and grow it?

And my daughter watched me sit on my laptop for the last 10 years. And one of our ways of going out and for our audience, who knows? I said two kids under two, and I'm only talking about one daughter. My wife and I did split, and she.

One of those was her daughter. So I still see my former stepdaughter very often, but when I talk about my daughter, I'm thinking the one that really, I spend the most time with, just to clear that up.

[00:30:40 - 00:30:41]

Host: Yeah.

[00:30:42 - 00:32:10]

Guest A: So she. She says, like, what do you do, dad? Like, you sit on a laptop all day. Like, what does that.

What does that mean? How do you make money? And so I've. I've heard a couple of your other guests talk about this.

This desire to look out the window and see something happening. Like Eddie, who was just on your show, and I don't know if I said his name right, but he bought the construction landscaping business and. And he was talking about how I like to see what I'm doing and see it, you know, something change, not just build a spreadsheet or. Or a slide deck.

And so this was a place that I was already involved in the business, in the community, but I didn't have a place to call home. This accounting firm is fully remote, 22 people on Zoom every day. It's so. It's so abstract and intangible.

This was such a cool way to be present in downtown. Wear a T shirt that people recognize. Hey, that's cool. Did you get that?

Yes. I bought the escape Room and, you know, congratulations. Let's host our next event there. Let's do a social hour.

Let me bring my team in for a team building event and just have a nice company outing. And so that was. That was that side of it. And then obviously being able to be there with my daughter and show her, have a.

Have a cool job for her when she's old enough. And she can run the escape room, she can be at the lobby, and she's learning communication skills. She can count money. She can learn accounting and basic small admin skills.

So it just seemed like a lot of cool things that not many people get a chance to do with their kids.

[00:32:10 - 00:32:15]

Host: Totally. Oh, boy. Wow. What a cool reason.

Okay, the less cool reason. Tax

[00:32:17 - 00:32:51]

Guest A: well, it just happens to, to also come with some tax advantages. And so that's kind of what I was talking about my pre show is that, you know, while I do brag on the tax benefits, it should never be the driving force, in my opinion, to buy a business. I hope nobody listens to this section of the podcast and says, okay, I have a tax problem. Let me go buy a business.

But if they listen to this part of the show and they think, well, there's some things I wasn't thinking about and they have better questions for their cpa, I hope that's a benefit to them.

[00:32:51 - 00:33:01]

Host: Great. Yeah. Understood. Qualification noted.

What issue were you confronting and how did buying this business help solve it?

[00:33:01 - 00:34:14]

Guest A: Well, I was closing out 2025 and I had this listing in front of me and I was already going to have quite a bit of adjusted gross income on my tax return and I was looking at a $45,000 tax bill. I was too busy learning how to be a business broker and enjoying, you know, life that I just didn't do enough of my own tax planning. And, you know, the, the case could be made that I'm solving this problem with the, with the wrong solution. But here I am.

I'm having fun. So I've got this $45,000 tax bill and I have a couple of closings that are going to close in 2026. And I know my accounting firm is growing, so I'm not going to get out of the situation next year. I'm going to be in a.

I'm going to have a higher tax bill. And so I was talking to Chris, I said, you know, if I bought this escape room, there's a lot of, you know, short, short life assets in here. I could write them off in the first year and, and I could basically acquire a business for nothing because I would, I would either pay the IRS or I can use this as a down payment for a, for an acquisition so we can unpack that. But that was.

That's what a joke turned into something real.

[00:34:16 - 00:35:29]

Host: Longtime acquiring mind sponsor Aspen HR is now part of Engage peo. Engage helps acquisition entrepreneurs, business buyers like you take care of their new employees and build trust from day one. Whether it's an asset or stock purchase, Engage provides a turnkey solution for payroll and taxes, hr, admin and technology, employee benefits, retirement plans, workers comp, and more. They're also always a phone call away, so you can receive HR guidance from licensed employment attorneys promptly as those inevitable people issues come up.

With Engage managing your people infrastructure, you as New owner of your business can focus on building relationships, operating the business, and driving growth. To learn more, contact Jenny thier directly at jthehr j t h e a r@engagepeo.com or click the link in the notes. First of all, the escape room, what was it selling for?

[00:35:30 - 00:35:31]

Guest A: We had it listed for 220.

[00:35:32 - 00:35:46]

Host: 220. Oh, by the way, that's quite a multiple. Now, that's probably because it was such a small business, but for a hundred thousand dollars of SDE selling for 220, that's a 2.2x. Is that.

Is. Is that just because it was so small?

[00:35:47 - 00:36:03]

Guest A: No, I mean, it was really a two. It was a two X. So, I mean, if. If I was.

If I'm misquoting the SDE, it was between 105. It was north of 105. It was not. It was not one.

It was not a 2.25 multiple. I know that. Okay, so it's been. It's been eight months since I really looked at all that.

[00:36:03 - 00:36:10]

Host: Okay, why were you guys selling it for 2x as opposed to. I mean, that's. That's quite low. Is it just because the business was quite small?

[00:36:11 - 00:36:46]

Guest A: Oh, as far, yeah. So it was a 2x because we knew that the. The buyer would need to put in a new room and just revive it. And if the.

If it's flat or slightly down, I just don't see you getting a lot of interest and, and such a unique business that we had a few good interested people, but for other reasons, they couldn't. They couldn't keep going through the process. And so I wasn't the first buyer. There were some people that were interested, but for other reasons, they couldn't close.

And so that's when I took the. Took the plunge.

[00:36:46 - 00:36:53]

Host: Okay, Adam, So it was 220 purchase price. And so what was your. How are you going to structure. How did you structure the acquisition?

[00:36:54 - 00:37:32]

Guest A: Yeah, so I got the SBA loan, and talking to the lender, we decided that it would be best if we added some working capital for the new room, because that was really part of the pitch that I made to them was that the financials showed every time you added a new room, revenue went up. So they wanted to make sure that it got done. So we did a $265,000 SBA loan. I put down 10% and I brought another 10,000 in closing costs and just other capital just to have.

So my investment was 35,000, and the sellers got 220.

[00:37:33 - 00:38:12]

Host: So. So to 20 purchase price, another 45,000 in working capital from the bank which was going to be, which is basically earmarked to go to a new room. But that was rolled into the loan. So your full project cost was 265.

Sellers got 220 of that. And then you, and then you put another 10,000 in plus the 10% of the 265. So that's 26, 5 plus 10 is 36, 5. So as you said, about $35,000 all in.

And that is then offset against the tax bill that you foresaw paying.

[00:38:12 - 00:39:16]

Guest A: Yeah, with the closings that we had at the brokerage firm and the already, you know, sde. I say SDE but AGI that the, that my tax return would show for the accounting firm. My accounting firm was already going to show projected 3:30 and I knew I had some closings. So if I was at a, an effective tax rate of 25% and I, if I had 400,000 in taxable income, then I know I'm going to have a 90,000, $95,000 tax bill.

If I, and I did some quick math. If I acquired this business for 35,000, if you structure the short term assets and the qualified improvement property correctly, then my tax bill goes down to 57,000. And so 57 +35 gets me to my same outlay of cash on my tax bill. Only this time I've acquired a cash flowing business with some potential upside.

[00:39:17 - 00:39:32]

Host: So it's kind of like as, as you put it to me. It was like I can either pay this $35,000 to the IRS or I can pay this $35,000 to acquire this business and have a cash flowing business on the other side of this. One seems better than the other.

[00:39:33 - 00:39:44]

Guest A: It seemed like a, a low risk. I mean there's always risk in acquisition. But I didn't see a lot of downside. I saw more upside than, than downside, put it that way.

[00:39:44 - 00:39:49]

Host: And get into the weeds a little bit more on equity that you put into the acquisition.

[00:39:49 - 00:40:30]

Guest A: Yeah, you don't write off your capital infusion. What you write off are the assets that you've acquired. And when you sell a business there's, there's something that happens before closing. I believe it's form 8594 that both sides have to agree to and that's your asset allocation agreement.

So there's seven asset classes that the IRS is going to ask you about. The buyer and seller have to agree on these. And if as a buyer I always, you always want Class 5 assets to be higher. As a seller, you always want Class 5 assets to be lower.

[00:40:31 - 00:40:33]

Host: What are classified assets?

[00:40:34 - 00:41:25]

Guest A: Class 5, Class 5 assets would be short term property, 5 year, 7 year, 15 year property, fixed, fixed assets. So not goodwill, not a non compete, not intangible. No trademarks, no websites, no. No names, physical tangible assets.

So FF and E chairs, desks, computers. So that's all class five property. And the IRS allows you, with the one big beautiful bill, bonus depreciation. You can take a first year deduction in the year that you acquire it with.

And I'm going to put an asterisk on this if you qualify. And so I looked at this, well, could I qualify for this? And I felt pretty strongly that I could.

[00:41:25 - 00:41:31]

Host: So, and what is the qualification? Who qualifies?

[00:41:31 - 00:43:17]

Guest A: Yeah, so you can qualify especially with something called material participation. So my, if I had a business partner and they invested in this business with me, but they're not active, they would not take that deduction and they would not be able to offset active earned income. But if I was materially participating in the business, like I said, I set up shop. I was talking to the employees every day.

I was doing the scheduling, the payroll. I was coordinating with the construction team to build the new room. And so I, I knew I could qualify for material participation. And that's important.

And that's, that's one, that's one aspect of it. And you would use that first year write off to offset active income. And so basically what I did was I projected that we would spend this much on the room. That's a first year full write off.

I mean I'm going to, I'm going to depreciate that in the first year. Now one thing that maybe the, the tax gurus that are listening, or at least savvy business owners who know somewhat a little bit about tax, you can't use a Section 179 to create a loss. But that's where bonus depreciation comes in. That's why it's called bonus.

Is that bonus depreciation? You can use it to create a loss in your business. And so that pass through loss went on and actually offset my commissions and my accounting firm income. So I effectively lowered my AGI by having this write off from the escape room in the first year of acquisition because I qualified for, I will qualify for material participation and some other things.

[00:43:18 - 00:43:30]

Host: Okay, you got the $35,000 in equity that you put in to buy the business. Did, did, did that count toward your income, against your income?

[00:43:30 - 00:43:33]

Guest A: No, it's, it's just capital that stays on the balance sheet.

[00:43:34 - 00:43:43]

Host: Okay, so it was the, it was the, it was the $45,000 acquisition of a new room that was, that was what offset your income.

[00:43:43 - 00:44:44]

Guest A: Well, I'm able to include that, but when we decided to, when we decided what the allocation of assets was going to be at closing, I asked for a hundred and I think I originally asked for 115,000 of Class 5 assets from the seller. They came back with 92,000. And the reason that's important is the higher I get that Class 5 asset class, the more bonus depreciation I'm taking in the first year to lower my adjusted gross income on my tax return. So that's actually, so here's the math.

I paid 35,000 cash. I'm going to tell the IRS that I'm offsetting my income by more than $100,000 because I'm going to take those fixed assets in the first year and use bonus depreciation to create a paper loss on that company. And that rolls to my personal income tax return.

[00:44:44 - 00:44:47]

Host: Back to the form, what was the form name?

[00:44:48 - 00:44:50]

Guest A: Yeah, the form is 8594.

[00:44:50 - 00:45:14]

Host: 8594. It's the asset. It's the way the purchase price is allocated. You business buyer and seller agree on this.

Negotiate this. It's a little bit zero sum because you want the amount allocated to asset class 5 to be higher. They want it to be lower for, for tax advantages in both directions.

[00:45:14 - 00:45:15]

Guest A: Right.

[00:45:15 - 00:45:55]

Host: So you negotiated it to be $108,000. And those are effectively hard assets in the business tip. Which is typically depreciated over 10 years. But because of the big beautiful bill, you're able to get so called bonus depreciation and depreciate them all as if they're just kind of one time expenses in one year.

So thereby reducing your, at the atom level, your adjusted gross income, your AGI by that amount, by $108,000. And on the other side of this, you actually now have an income producing business.

[00:45:56 - 00:46:11]

Guest A: Right. So even if we produced $30,000 in cash flow, the IRS looks at this business as a first year loss which offsets my other active income. That's, that's it in a nut. In a nutshell.

[00:46:11 - 00:46:17]

Host: Is there something I'm not seeing or some, or some, or some catch to this?

[00:46:19 - 00:48:01]

Guest A: I think the catch is if you bought a business that was in the air conditioning servicing business, H vac, right. You're going to have trucks, you're going to have equipment, you're going to have I mean, buildings don't qualify for this. Right. But fixed assets that are in this five to seven and 15 year category.

So there's categories within categories. Right. There's seven asset classes you have to agree to when you close inside class five. There's five, seven and 15 year property.

So it's similar to a real estate investor who wants to do a cost seg and reallocate his, his, his assets in that home and get bonus depreciation on those assets that he's acquired in that, in that property. But the kicker is you have to be able to say, I run, I'm involved in this business. This is, this is not going to be something that passive investors can take advantage of. I mean, if they have passive income, then they can, sure, they can take this and apply it against passive income and they would have passive loss to offset that.

My case was I had more active earned income than I wanted and now I'm paying taxes on a lot of it. And this was one benefit to buying this business was how I structured it. Again, I think I, you know, I would have bought the business either way. But the way that I saw the opportunity after acquisition was making sure I structured it correctly and that I followed all of the rules the IRS lays out for you so that you can use bonus depreciation in this business to offset other active income elsewhere.

[00:48:01 - 00:48:19]

Host: Maybe the catch, not really a catch, but is, is, is that it's a, this is a one time benefit, which is great, but to do it again you have to keep. But, but you know, arguably every time. Well, no, go ahead. What were you going to say?

[00:48:19 - 00:49:29]

Guest A: Well, eventually there's only so many activities you can have that you're actively involved in. Eventually the IRS may look at my, my activity in the accounting firm and they might say, you know, not all of this is active income. You know, you're, you're barely ever here and I haven't looked, I haven't explored what that would look like because it's an S corp and I'm on payroll. W2.

But the, the case can be made, I'm sure that eventually your active income converts to passive. So there's a guy that I talked to who acquires Med spas and the first year he, he goes in and he runs the entire Med spa for a year. And there's a lot of fixed assets in that business. And so he'll acquire it, turn it over and then put a GM in there.

And so his active income becomes passive in the second, third, fourth year. And so it is A, it's very niche, It's a very niche activity. I wouldn't even call it a tax strategy because there's, there's enough holes in it that you don't want to make that your lifestyle as your tax avoidance lifestyle. But there's, there's moments when this can work in your, in your favor.

And that's, that's where I'm at.

[00:49:30 - 00:49:36]

Host: Okay, so in, on the other side of the transaction, how has it gone? It was March that you closed.

[00:49:37 - 00:50:52]

Guest A: Yeah, we closed March. We are up year over year. I think that's just from being more involved and reaching out to small businesses and saying, hey, we have an escape room. Do you want to bring your staff?

Like that's all it took. We want to, I want to get, I want to go from 10% capacity to 15% in the first year. And our expenses don't, don't rise to the same degree as the revenue. So it's just, the gross margin just becomes exponentially better every time we outdo, you know, last year's revenue.

And so the room is almost done. Knock on wood. There's some, there's a whole different business running an escape room because there's technology and there's secret doors and latches and triggers and magnets and stuff that ironically, my dad is good at. That's a whole different story.

I grew up with my dad being a self employed business owner and he was in access control and low voltage, which is perfect for an escape room. So he was my other back pocket, you know, backstop. Hey dad, I need your help to automate some of these things.

[00:50:53 - 00:51:16]

Host: That's great. And, and the capacity, growing it to 15%, you feel like this, this excessive capacity is fillable. It wasn't a demand problem, it was just that the previous owners were not, were checked out. And so with just a little bit of hustle, a little bit of marketing, a little bit of reaching out to small business owners, you, you're, you've already move the needle significantly.

[00:51:16 - 00:53:19]

Guest A: Yeah. And, and honestly, there was also a, a re engagement problem. I looked at the CRM and they had 15% return. I mean they had, they had their phone number, their email, the, the room that they used and there was no re engagement.

So why not? Since you, since you already have your customer acquisition, you know, paid for, why not reach out to them and throw 10 or 15% off coupons once a month for this particular day of the week or this particular room? If you see it slow. And it's like that Tuesday night restaurant like can you do the buy one, get one or can you do something?

So there was just no effort. So it was really a hands off, I'm checked out kind of business for that owner. And I just felt like if we were to re engage existing customers, we, we did an audit on the Google my business profile and it had a ton of, a ton of holes in it. So a marketing consultant that I know very well has already seen uptick in SEO.

He built a few landing pages things to do in Lakeland. And that's the number one search term that produces escape rooms as a result. So people don't usually search escape rooms. They think they search things to do in Lakeland.

And so that's one of our levers now. So we have optimized the Google my business, the re engagement from existing customers, adding a new room, doing local small business outreach and hosting events and partnering with other venues that have my audience. For instance, there's a, there's a facility that hosts meeting rooms. And I said they're walking distance.

So I reached out to them. I said, hey, if you have a people, if you have people doing a meeting there, do they want to do a lunch break with me? Can we figure out a way to partner? So we've gotten one referral from that, but that was only, we've only started that a few weeks ago.

So I think that's another avenue to reengage the community around, driving traffic to us.

[00:53:19 - 00:53:23]

Host: And so where do you think you are now in terms of capacity?

[00:53:24 - 00:53:37]

Guest A: I think we're, we're close to 15. And I see, I see a, I mean I'd be happy with even 15 to 20. Just, we would do really well just with. Yeah, I mean if you get to

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Host: 20, you will have doubled the business.

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Guest A: Right, Right.

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Host: Yeah.

[00:53:41 - 00:53:54]

Guest A: And only increase my cost by the labor of minimum wage that is required to be there for those extra guests that need extra help. But it's, it's, the math is good on that.

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Host: Is it as good as you thought it was that every additional unit you sell, every room you sell above a certain point is almost sl. You know, it's just very high gross margin.

[00:54:03 - 00:55:10]

Guest A: Yeah, I would say a really good game master can run three rooms at a time. So if we had a group of 50 people, we have seven rooms. I'll put two, I'll put three game masters in there. One's sort of a floater, but I'll just, I mean we can dive into it.

If you got 49 people paying $38 a piece, that's $1,800. I do a massive group discount. So even at 60, 60%, not 60% off, but even with a 40% off discount, we're doing almost 1100, 1200 bucks. And for one hour I'm paying three people $15 an hour.

So I won't jerk my staff around like that. I'll pay them a minimum of three hours to come in if they have to take the day off to service this one large group. But 15 times 3 times 3 is $135. So it's 90% gross margin after our, our overhead is covered just with that extra staff coming in to help with that event.

[00:55:10 - 00:55:31]

Host: Yeah. So phenomenal. And on the point of capacity, Adam, so is it like a hundred. A hundred percent of your capacity would include like, you know, Wednesday afternoons at 3pm basically time slots where you're not really.

It's not. All capacity is not created equal. You're unlikely to sell a 9am Thursday slot ever, really.

[00:55:32 - 00:57:52]

Guest A: Right. Unless we do proactive outreach for small businesses to do specific things with us. So I would say our, our effortless, our effortless, you know, reactive type of sale starts at like 2 o' clock. And we'll have a sprinkle of reservations between 2 and 6pm and then the majority of reservations are happening after 5.

On the weekends we're open till 1am so Monday through Friday I can be there doing some admin work or actually I can work on my other businesses and be there and answer the phone and, and help some people book some events. But if I get a booking, I'm bringing in two or three game masters for the morning at 9 o', clock, 10 o', clock, and then they go home until 2 o' clock when we open again. So there is all this white space that is not being used and the numbers are insane. And we'll never get there.

We'll never get to 100% capacity. You've got seven rooms, seven hours a day that it could be used. Seven people in each room for each slot paying $38. I mean, that's a $13,000 a day, you know, which is, you know, three hundred and sixty five.

I mean, that's, the numbers are crazy. And that's a $5 million business. So it's not realistic to expect even 40% capacity. But if you can double the business to 20, that's a good day.

And then I have margin to hire a gm. And their job is community engagement, business development and managing staff and training Game Masters. And so we've already elevated one of our Staff whose minimum wage but now is getting a little bit more opportunity and got a small bump to do some scheduling, do some training, build the sop, how to reset this room, how to troubleshoot this particular widget. And now they have opening and closing checklists, they have apps that they use to track the cash till.

I mean we're just upskilling them and improving the business in ways that don't cost a lot of money. But it's more like sweat equity for me to put the business on rails that an entry level assistant manager can run.

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Host: And what about multiple locations? Is that something you're now thinking about once you get a GM in there? That's the obvious next step. Location number two.

[00:58:03 - 00:59:33]

Guest A: Yeah, there's a few non franchise escape rooms in the area. I'm going to the escape conference in Canada next week. I'll be in Canada next week for the escape room convention and the speaker there, he called me and we had this similar conversation about the economics of it. And he said, Well, I have four escape room locations, I have 18 puzzles, we'll call them puzzles for one hour experiences dialed in.

And when one room goes, when one facility kind of outruns that room and all the guests are kind of tired of it, he just picks up that room and installs another one and they switch. And so he's got 18 rooms that he can switch between four different locations at any time. And he never really in theory has to build a new room because he'll never. Some of these rooms can run seven years.

Our longest 10 year room has been here for, since day one. It's done over a million in revenue. So that one room alone produces $100,000 a year. And it's our scary insane asylum room.

And so when, when you find those rooms that do really well, you keep them and you just use them in other places. And so that's his, that's been his business model. Four locations, 18 puzzles and he rotates them. And so he's, he's sort of maintaining this business at this point and the, the major lift phase is over and he's doing quite well.

He's going to be speaking next week.

[00:59:34 - 00:59:55]

Host: So all of that is to say that a big, a big cost of the business is, is new rooms. When you have to do new rooms, the capex and you have to do that every year or every couple of years and you're in your average escape room business. And so there's a, a significant expense. And so he's figured out a way around that where he can Just recycle rooms to different locations.

[00:59:55 - 01:00:24]

Guest A: Not only that, not only that, but building them in such a way that they can be moved. That's an art by itself. Or recycled, reused. But, you know, am I going to buy more rooms?

That's to be decided. After listening to Jeff Homer's episode that you had on air with the music schools, it was tempting. He's done such an amazing job with that business and I don't know if I have that kind of appetite, though. We'll see.

[01:00:24 - 01:01:03]

Host: Okay, all right, well, let's, let's do sea. Adam, you talked earlier about how the escape room, escape rooms as a concept are about 10 years old. Like SpaceX, they surged and then kind of came back down to Earth. Like SpaceX stock, I should say.

Surgeon came back down to earth. But in the, but you do see a future. They're not in secular decline or anything. They're.

They're growing, albeit not like they were when they were the hottest trend. I mean, what, how do you think about demand for escape room as, as a, as an activity over the next 10 and 20 years?

[01:01:04 - 01:02:15]

Guest A: Well, I, I don't have a lot of market information that I can look at except for the franchises that still see this as a viable business. And so more franchises are being created, franchises are putting in new locations. So it, it's directionally looking favorable when I see larger businesses investing in the space. And the worst thing for our industry is a bad escape room because you go to one mom and pop shop that just doesn't quite invest in the aesthetics or the quality of the puzzles and it leaves a bad impression.

So I like when the franchises are actually putting out good experiences. It, it actually helps me because there's four. There's an escape room in my town, but they only have four rooms. As soon as everybody goes through all four, they want more.

And we have seven. And we're going to keep recycling the rooms every year. So I think it's actually helpful for us to have more better rooms in the industry. And that's what I see happening.

[01:02:15 - 01:02:29]

Host: And Adam, if you did have a Jeff Homer esque appetite, is the growth strategy here inorganic, meaning buying, existing, or is this a case where building could actually be more economical?

[01:02:29 - 01:03:32]

Guest A: I do think building could be economical. There's one step before that, I think, and that is the mobile escape room experience. Deploying, you know, 25 foot trailers and doing private events, festivals, parties, and seeing what markets respond well, and even renting that out to a third party, like almost building a food truck and selling a food Truck. You could build these micro businesses by building escape room trailers and either leasing them or selling them.

So there's different ways you could approach it. But I do think if I were to build another escape room, it would be through a brand new build. I don't know that I would acquire it. There's a lot of bad.

I don't know how to say this. There were a lot of things that I inherited that I wouldn't have done that way. And it. Sometimes it takes more effort to undo some designs than just to just start from scratch.

[01:03:32 - 01:03:38]

Host: Yeah. Interesting. Okay. What does your daughter say about her dad's new business?

[01:03:38 - 01:03:46]

Guest A: She wears the shirt with pride. She, she had her birthday party there and she just had a lot of pride.

[01:03:46 - 01:03:51]

Host: Good. Good man. Congratulations. Anything we didn't get to, Adam, we

[01:03:51 - 01:04:22]

Guest A: touched on a lot. I hope I didn't confuse anybody with the math and the, and the taxes, but just know that there's opportunities that might be deeper into your already existing acquisition that you can take advantage of. I think that's what I did. And I think the business is more fun because it's, it's tangible, it's in person.

It's. I can see it, feel it, smell it. I can be there, meet the people. That, that's not always on people's buy box.

[01:04:23 - 01:04:23]

Host: No.

[01:04:23 - 01:04:34]

Guest A: And I think that's a soft, soft skill. I'm not sure how to say it. A qualitative, yeah, you know, element that some people miss out on.

[01:04:35 - 01:05:33]

Host: Well, the virtual recurring revenue from. Done from the back of a laptop. No people or no direct management of people. No nothing.

Irl. These are all on paper, attractive characteristics of a business. And I myself, you know, would have optimized for that. But I hear more and more of my guests, it seems, talk about wanting to, to buy business out from behind the, the laptop.

And so I don't know, maybe it's me, you know, projecting or something, but, you know, I think we all are feeling that technology is completely run amok and there's an appetite for the tactile and that even comes in kind of business buyer tastes and the types of businesses people want to buy. I feel like I'm seeing more and more people say something like you just said.

[01:05:33 - 01:05:56]

Guest A: Yeah, I think you're saying it very well. And there's a lot of businesses that were built in person and a lot of businesses that could be bought that if you're willing to show up and see your customers and see your employees, not only can it be financially beneficial, it's just, it's just enriching and rewarding in ways that you don't expect.

[01:05:56 - 01:06:05]

Host: Oof. Perfect. Note to end on. Thank you for that thought.

Adam, Plug your accounting firm just because you got a lot of small business owners listening to this.

[01:06:05 - 01:06:30]

Guest A: Yeah, Axis Accounting and Tax. We're in Lakeland, Florida, but we have clients all over the country and all of our staff is all over the country. And yeah, we specialize in QuickBooks Online Small Business full cycle. We close, we close, you know, every, every account, every every month and deliver financials to your inbox.

So Axis or Axcess, Axis Accounting and Tax.

[01:06:31 - 01:06:33]

Host: Adam Welchel, thanks for coming on Acquiring Minds.

[01:06:33 - 01:06:34]

Guest A: Thanks Will. It's been a pleasure.

[01:06:34 - 01:07:18]

Host: Hope you enjoyed that interview. You don't forget to subscribe to the Acquiring Minds newsletter. We send an email for every episode with an introduction to the interview, a link to the video version on YouTube, and soon, key takeaways, numbers and more essentials from the interview. For those of you who don't have time to listen or watch it, subscribe at acquiringminds.co.

you'll also find all our webinars there on the website, both those we have coming up and recordings of past webinars. At this point, There are over 30 webinar recordings, a wealth of information on all the technical nitty gritty of buying a business. Acquiring Minds Co.