Host: Recession resistance is top of the list of criteria that many business buyers would like to have in the business they buy. Today's guest, Cody Ag was pondering this feature and what type of businesses had it. He thought, well, people always need food and food always needs to be safe. I bet there's a category of food testing and food safety businesses out there. Two weeks later, he sees a listing for Sierra Dairy Laboratory. It's a dairy products testing business and a remarkable coincidence. Needless to say, Cody ran after it and today owns it. Turns out there's more than just recession resistance to like about Sierra Dairy. While not wanting to jinx it, Cody feels like he found a great, stable business with high quality revenue. See if you agree. Here's Cody Ag, owner of Sierra Dairy Laboratory Big announcement everyone. I'm thrilled to finally Launch Smith List. Smithlist.com this is a platform for business owners to find operators and for would be operators to find amazing opportunities to lead a small business. To put it more succinctly, it's a job board for operators of small businesses. Why? Well, regular listeners of Acquiring Minds know that a business buyer's journey likely eventually entails hiring an operator or general manager or president or CEO. The title varies, the scope of that role varies, but the core concept is the same. Someone capable, ambitious, strategic to run your business alongside you or for you. Now that part's obvious. The less obvious bit is why I'd be promoting a job board on a podcast about entrepreneurship and becoming your own boss. And it's because not every one of you wants to acquire your own business. You listen to Acquiring Minds because you're attracted to the scrappy, dynamic world that is covered here episode after episode. You want in. You love the idea of leading and operating one of these businesses, but not as an owner necessarily. For whatever reason, you're not going to do a search and an acquisition. Maybe the timing isn't right. Maybe you don't like the idea of the deal making part of search. You just want to operate and lead a team. Maybe the personal guarantees too much risk for you or your family. Maybe you don't have the Runway to conduct a search. Maybe you want to buy your own business someday, but you want experience in small business operations first. I've learned, because I hear from you, that there are many reasons people are attracted to the world. Acquiring Minds shows them it's not solely about becoming an owner. So back to Smith List. There are really big opportunities jobs that owners in the Acquiring Minds ecosystem have available. For example, an entrepreneur needs an operator for a $5 million business they're under loi on or a current owner wants to change their role at the business they bought seven years ago and needs a president to take the reins. Or a sponsor is doing a roll up and needs someone to lead the platform business or private equity shop who buys businesses in the lower middle market and is always seeking talent to run those businesses, etc. These compelling opportunities abound, but they've been hard to find in one place and so Smithlist will be that place. Go to the site to sign up for job alerts and starting next week you'll hear me announce new roles as they're posted on the site on smithlist.com I'm really excited about the potential of this. There's a lot of value for all parties to helping owners and operators find each other. As always, I welcome your feedback, your ideas, and if you're hiring for an operator role, reach out willmithlist.com okay, on to today's episode. 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. An SBA loan broker, as opposed to a direct lender, doesn't work for a particular bank. Instead, the broker pairs you with the right SBA lender for your deal based on industry terms risk thresholds, then helps you navigate the process better than many lenders themselves do. Matthias Smith of Pioneer Capital Advisory is just such a broker. Matthias worked at two of the country's top 10 SBA lenders, so he's been on the inside of the SBA process and knows well the pitfalls and hurdles and how to avoid them. He struck out on his own to laser focus on the ETA and search space. Our niche is his niche. You'll see Mathias at all the ETA conferences. He's closed over 30 search deals since starting Pioneer in May of 2022, including some acquiring Minds guests. To learn more and get in touch, go to PioneerCapitalAdvisory.com or click the link in the notes. Cody AG welcome to acquiring Minds.

[5:57] Guest: Thank you Will. Happy to be here.

Host: Cody, you're about six months into your ownership of a food safety and testing business. So food that makes it to consumers shelves passes through your lab to get there. The business is in cow country, Tulare, California and and you moved to the area to buy the business. So let's get into it. Let's hear all about this background first, please Cody, tell us a little bit about yourself.

[6:30] Guest: Yep, perfect yeah. So grew up in Southern California, San Diego. Pretty much every guy in my family's sort of blue collar and, you know, worked in construction, you know, kind of most of their lives. And that includes my dad who, you know, effectively graduated high school and started working, you know, working with his hands. And so, you know, I grew up kind of out on job sites, you know, sweeping floors and hauling, you know, debris to, you know, from here to there and all that. So more or less, you know, fairly blue collar upbringing. You know, my, I would say my dad built, you know, reasonably successful, you know, business in San Diego. And I think growing up I kind of felt like I learned that you obviously need to work hard and apply yourself to kind of to be successful, but not only that, but learn how to run a business and sort of, you want to point yourself in the right direction. That makes sense. Chose to study finance and also started learning Chinese. So I, I, you know, when I went to College, this was 2010, China was this fast growing emerging economy. And you know, there's a lot of people writing about how it could be sort of the, you know, the superpower of the, you know, the 21st century type of thing. So, yep, I felt like, well, if I'm going into business, this, this couldn't be a bad language to learn a bit about. So I.

Host: Finance and Mandarin. Killer combination.

Guest: Yeah, that's right. And, and I end up, ended up living in Beijing for about six months my, my junior year of college. So it's pretty much my college experience in a, in a nutshell, I'd say yep.

Host: Great. And so to be clear on your interest about kind of learning how to operate a business, one of the things I recall you also saying from growing up was that you were exposed to really, well, really wealthy people.

Guest: Yeah, that's right. So, yeah, effectively. You know, the specific business that my dad runs is sort of like a single family, single family residential home builder. And you know, it's primarily building. If people know San Diego well, there's enclaves like La Jolla, Rancho Santa Fe, Del Mar. These are like some pretty high end, high end neighborhoods. And so people are building 5, 10, 20 million dollar homes. And so I just want to be clear where that my dad's not, you know, living in one of these homes. But growing up, we, you know, we worked on a lot of work on these houses. Yep. And, and yeah, it's just, it's just eye opening. Right. You see, it's just, I think anyone's natural instinct, if you see somebody that can afford to build a 20 million dollar house. You're like, how the heck did they get themselves in a position to do that? Right? And so it's, it's not just, I guess, you know, the takeaway was it's not, you know, it's not just waking up early at 6am Getting to work, like working your butt off. And like, do you like, is that plus doing it in the right way and kind of pointing your ship in the right, you know, before I was thinking of a good analogy like yesterday, it's like, you know, before we hit launch on the rocket, like make sure it's pointed, you know, to the moon and not sideways or something. Right.

[10:01] Host: So because a couple, a couple degrees of difference can, can matter a lot over the, over time. Yep, that's, it's a great insight because you can work really hard in life and even in business, small business, for example, and spin your wheels or at least not do as well as other people who are working no harder than you. So picking the right game is a big part of, a big part of things. So it sounds like you intuited that early on.

Guest: Exactly. Fast forward. Kind of. Post graduation, I just basically hustled my way into a job, you know, back in New York with JP Morgan doing investment banking.

Host: Now how do you turn your attention to search?

Guest: So I spent most of my time, J.P. morgan doing, covering these public REITs. I was, I also did a rotational program for one year in San Francisco where they, they sent me to San Francisco to work in kind of the technology group. And so I, I also was there and got to cover some, you know, semiconductor companies, software companies. The reason I mentioned that is when I was there, I had sat next to a guy, his name's Anthony Runko, went and got a coffee and he said, hey, I'm gonna, I'm gonna leave in six months and I'm going to go buy business. And so that was my first introduction into the world of search. And so I think that was 2018 probably. And so Anthony, he actually partnered with another guy named Eric Leach who also worked at JP Morgan. And so they went out and did a partnered traditional search together. And they actually just exited this last year and had a really big successful kind of outcome. So that's pretty exciting to see from, you know, soup to net, so to speak, going from working in a cubicle to being a multimillionaire. So, yeah, absolutely not a bad thing.

[12:02] Host: And how did it land on you when he told you he was going to buy a business?

Guest: I think like anyone says, it Just doesn't make any sense at first. You're just kind of like, how can you do that with no experience, with no money? Like, what do you bring to the table that would, you know, like, you

Host: know, I work next to you, Anthony. What. What do you bring to the table?

Guest: Yeah, yeah, but.

Host: All right, but you start looking into search, I guess this, this whets your appetite or piques your interest, and you look into it and take. Go down the rabbit hole. How does this first exposure to it become a serious path for you?

Guest: Most people don't last five years working in investment banking. It's usually, you know, two to three years and then you kind of move on to the next thing. So I was kind of thinking, what's next? Right. And I, you know, start the whole startup. The idea of a startup and just like sitting. Sitting down and thinking of a problem and trying to build a company around it just didn't. Didn't really, you know, resonate with me. And so, I mean, it made a lot of sense because I, I guess, you know, in investment banking, you're pretty familiar with, you know, you have this company here and you want to buy it and you're going to need to raise some debt financing and some equity and this and that. And so, you know, you like, fairly. It makes sense to me, I guess, just how I'd been trained and my brain was wired that you could kind of structure, you know, some kind of deal.

Host: So what did you do?

Guest: Well, started like everyone else, right? It's. You read the HBR Guide, you know, buy a small business, you know, buy them, build. I listened to, you know, quite a few podcasts and things and reached out to a lot of searchers basically had identified that the big two business schools that, you know, especially five years ago that were putting, you know, pumping out a lot of searchers were, you know, Stanford GSB and Harvard Business School.

Host: What happened with your applications to those schools? I like it, Cody. You learn what the best is and then you shoot for it. Good for you.

Guest: Yep. So applied. So I applied to. I'm trying to think of the years. I'm older than I'd like to admit now, but I think probably 20, 20, somewhere around there, applied to Harvard and to Stanford. I got interviewed at an interview invitation to hbs. And so for, you know, for those of you that don't know, basically at either of these business schools, once you get in an invite to interview, you have basically a 50, 50 chance to get admitted at that point. So, you know, the odds are like Reasonable, you know, reasonable chance that you know, you can get in. And so I got, did the interview, you know, waited, waited. End up getting wait listed which is like they literally write you a letter saying you're qualified to be here but we don't have a seat for you at this time, like let us, you know. So anyways, that was tough. Waiting, you know, kind of waited around and then ultimately got dinged, you know, didn't get, didn't get admitted.

[15:11] Host: This is for both.

Guest: That was for Harvard hbs. And so you get that close and you're like well you know, I'll probably give it another go next fall and, and reapply. Right. So did the same, same thing reapplied to HBS and gsb. I got it. Interviewed for both this time. Not just Harvard but Stanford as well. You do my interviews, don't get into both. I get dinged. Dinged by both.

Host: August Felker is a two time successful searcher. First with a traditional search fund. The second time around he did a self funded search. Today August runs Oberle Risk Strategies, an insurance firm with a dedicated practice group for searchers and acquisition entrepreneurs like you. If you've got a business under loi, Oberle will provide complimentary due diligence on that business's insurance and benefits program. A great no risk way to get to know August and team. They love helping searchers. They've worked with hundreds. Oberly is a specialty insurance brokerage for searchers by a former searcher. Check out oberly-risk.com O B E R L E- risk.com link in the show notes.

Guest: And so it, the more I thought about it, probably don't need an MBA to run a search especially if you want to do a, you know, self funded search. I will also mention with business school like I, I did have a bit of a chip on my shoulder about, you know, how much effort I had to put in to kind of, you know, make it into the seat of JP Morgan and sort of like the value of having kind of this blue chip resume and all that. You know, I will say I had a little bit of a chip on my shoulder about that and I wouldn't have minded just kind of having that, that stamp, you know, this sort of proverbial stamp of approval if you will.

Host: I will say that I actually think this is a good lesson selfishly for the audience because you did a search anyway, you didn't go to Harvard or Stanford. And one thing the audience, regular listeners will have heard me said is I don't want think people to think there, there is such an overrepresentation of people in search who've gone to name brand business schools. I don't want people to think that if you have not gone to one of those business schools, you cannot do this. Now you do also have investment banking pedigree, so you're not, you're not the perfect example because you are coming from a deep, deep financial roots. But, but still the fact that you proceeded to do this without, without going through HBS or, or gsp, let that be, let that be an example that you don't need to others listening don't.

[18:00] Guest: Yeah. So I, I was just gonna jump in quick, but I, I listened to the episode you did recently with John Wilson and I just found that to be an amazing story. Right. And he, you know, just kind of grew up around a trade and just kind of jumped in, jumped in to his waist in it kind of kind of thing and, and he's sounds like having a, pretty, in a, in a pretty good spot there, so.

Host: Well, great call out. Yes. And I think that part of the, part of the appeal of Search actually to me actually is that it's, I don't want to overstate this and suggest that it's, you know, totally egalitarian and open to everybody. Of course there are a lot of things that, about search that probably filter out people and they wouldn't be able to do it. Namely having a little capital certainly helps. There are, are people who do it with zero capital, but that would make it a lot, lot harder. And having financial chops does help get a deal done for sure. So those who don't know the first thing about finance have a bit of a, a learning curve ahead of them that you probably didn't. But with those two caveats, I, I, I, I feel like searches is, is actually this, this amazing path that it is pretty open to anybody with the gumption to really hammer at it.

Guest: So yeah, that, yeah, that, I mean that actually. Good, good point you make there. And one of the, one of the things I wanted to, you know, just in my, you know, feel like what I've learned so far and kind of just give my, my 2 cents to listeners is that there's no, there's no one background to need to have, you know, in order to do a search successfully. And then there's no, there's not a right size of a business and there's not a right industry. It's a very personal, I feel like, I feel like that's, you know, kind of a high level statement. But yeah, it's not, it's a very personal decision and you need to assess for example you know, with I'll just create like some, a fictional background but say like you know, don't come from you know, the investment banking finance world. You, but you have skill, you know, you're a skilled kind of tradesman. You know, maybe you you know, worked for you know, an H Vac business for five, 10 years and like can you go out and buy like a $400,000 SD H Vac business and do it successfully? Like probably. Right, right. You know.

Host: Well and the other thing is like that person is probably way better prepared to run that business than, than somebody coming out of Goldman Sachs hbs. So, so we, we, we also overstate the, the value I think of the financial background because it's most relevant getting a deal done and that is a big part of this. But it's much less relevant as you, as you proceed. Yes, knowing, understanding the language of business I. E. Accounting and finance helps be a better operator. But there's so much more to being an operator than, than that. And you can get away without knowing that as an operator as most blue collar business owners founders are, you know, very few of the, the original guys and gals who built these businesses have any financial literacy, excuse me, finding I should say finance. High finance literacy.

[21:29] Guest: Yeah.

Host: So, so anyway, and, and, and actually I, I'll want to circle back on that Cody, and ask you that question. Do, do you feel, to what degree do you feel your years at JP Morgan are helping you now as an operator? But, but we'll get there. All right, so where are we? You set out now to do your self funded search.

Guest: That's right. Yep.

Host: So what year is it and what, and what are your parameters look like

Guest: so fall it, it'd be fall of 2022. Fall of 2022. I you know, we had been living in New York for my wife and I for most of our 20s. I, I will mention by the way, so I met my wife in New York. She was a interpreter at the, the United nations and so like super successful girl. She you know, grew up in I'll say Eastern Europe I guess and, and moved to the US and you know, got a job there and so she's super successful and basically I wanted to do a search in California kind of closer to home and so I convinced her to leave her job and you know, I left obviously left my job. So we were kind of you know, burned the boats and all in all in, on, on this search basically. So I have to give her some credit for. Let me convince her to, convince her to do this because it's not an easy thing.

Host: Thank you wife. Shout out to you wife.

Guest: Yep, exactly. So anyways, yeah, fall of 22, basically starting a self funded search, have that built a cliche website, recurring revenue million dollars of ebitda, you know, California and you know, on my way basically. And so yeah, started searching. I'll say that, you know, something that was important to me in my search was, you know, at that time, right, late 22, going into early 2023, the Fed had just raised rates at sort of a unprecedented level. And if you read the Wall Street Journal or you watch CNBC or wherever you consume financial news, everyone's talking about is there going to be a big recession or not? And so the context of looking at small businesses, everyone had a record 2022 year of performance. And the question was, you know, of all these businesses I'm looking at buying. So I was fairly industry agnostic and then was looking kind of in the California area or you know, somewhere in a reasonable radius, close to family, you know, which of these businesses, you know, would, would do well during a recession. Right? Because if you're going out and using an SBA loan to buy a business, you got to service the debt. And you know, if you buy a business and the EBITDA halves like you're gonna, you're gonna find yourself in trouble real quick. Right. So anyway, so that was kind of top of mind for me, like which, which of these businesses I'm looking at is just going to be, you know, stable and can kind of survive. And I'll caveat because I was doing self funded search and I think a lot of your listeners know this. You know, when you're looking at kind of a self funded surge type deal, you basically capped how much you could pay for the business because you're going to be using SBA financing which, you know, the cap's $5 million. So can't buy a big business, right. You're going to buy a little bit smaller relative to a traditional search model. And you know, consequently, like the multiples you're going to pay be a little bit lower. And it was as a result I was not looking for this high growth, 50% year over year growth type company that, you know, would trade for, you know, eight times EBITDA or something. Right. You're looking at some kind of durable business that's been around a long time and maybe it's growing you know, 3% a year that, that works for the end of self funded search model. Right. So something like that, that durable and that I felt like I could step into and, and buy and yeah, kind of plus or minus million bucks.

[25:56] Host: And you didn't want a high growth because why?

Guest: Well, I mean if I could buy a high growth business for four times ebitda, I would, but they don't, they just don't trade, you know, they probably don't trade at that, that kind of multiple rate.

Host: So, so you were basically, you were price constrained as you know, many, everybody kind of is unless they have, they did a traditional search fund or have some kind of other backing. Right. So you've decided on a self funded search and you're geographically constrained. You want to be in California, closer to home or at least closer to home, not necessarily in the San Diego area where you're from. So tell us a little bit about the search and then how you found the business that you did.

Guest: Yep, perfect. Yeah. So I started the search fall of 22 and you know, if you talk to other searchers, everyone's got an opinion about whether you should just do it through broker channels or if you should try and do some cold outreach and you know, find a, find a business for sale kind of on your own. I tried both and I ended up, I ended up submitting 15 LOIs over a course of 12 months and all 15 were through broker deals. So just in my personal experience I had much better, obviously much better luck just getting deal flow through brokers. It's kind of, kind of funny, but I remember sitting down, you're always thinking as a searcher, like what is my criteria? What do I want? And you're always refining it and thinking about it. And I remember probably two weeks before this business got listed, I said to myself, and this is in the context of a potentially looming recession at this, at this point in time, like what, you know, what the economy is going to look like in six months. So you know, if there is a recession, what do people need? What, what are services and things that people are going to rely on no matter what, right? And it's sort of like, well, you need food, you need shelter, need water, just the basic human necessities, right? And I remember thinking, you know, if someone goes in a grocery store, I bet the food, like no matter what, somebody needs to make sure the food's safe. And I bet there's some kind of business out there that you know, is, this is doing testing and, and I said this is a true Story and two weeks later searedair Laboratory got listed on, you know, by Trans World, Trans World Business Brokers.

[28:25] Host: So you manifested this, it sounds like.

Guest: Exactly. So, so everyone, everyone close your eyes and you know, and wish Sierra Dairy

Host: Laboratory tell us about the business.

Guest: Yeah, so, so Sierra Dairy Laboratory was started in 1989 by a gentleman named Bill Hartman. He grew up in Kansas, you know, big obviously the kind of ag industry there is big. Went to Kansas State. He you know, got a bachelor's degree and then got recruited to come out to California and you know, to work in one of these dairy plants here in the, the California Central Valley. You know, did that for a few years and then just kind of had that, that itch to do, you know, his own thing. And so he set up just a little kind of one man dairy testing lab, you know, business and you know, kind of grew from there. So today, or at least at the time of, you know, when he was going to sell it, it's you know, roughly 25 person, you know, 25 person business works with most of the main kind of key dairy companies and you know, dairies and you know, in the industry, especially in California. So a lot of kind of blue chip customers. And, and what does that mean, Cody?

Host: Give us kind of the, the flow of, of here where you fit into the value chain.

Guest: So we do work with, with dairies for example. And the dairy is pretty simple, right? You're a guy with some land, he's got a bunch of cows, you know, they produce in milk and you want to, for a variety of reasons, you know, you know, you may want your milk tested. One of, one of the key tests we're doing is looking at bacteria levels which is just looking at, you know, how much bacteria is in the milk, which is kind of a proxy for quality and safety basically and the like. Really the primary reason you get bacteria in milk is, is if you're just not cleaning up after the cows and they have, you know, have kind of feces on the ground and they're stepping in it, that, that creates conditions for you know, for kind of bacteria get into milk. So just running kind of a clean dairy operation kind of helps eliminate all that. So but anyway, so we do you know, basically out getting samples from these dairies, right? And then, and then kind of how the industry works. You have some people who run a one off dairy. There are also dairy co ops where you have 300 dairies who are all part of this kind of, you know, think of it like opec, kind of like a Not a cartel, but, you know, they're kind of consortium, let's say they're kind of softer term. They're a consortium, a dairy consortium. And, you know, so sometimes our customer is the co op itself. And so we're getting one off samples from all of the dairies that are in the co op, Right?

[31:24] Host: Yeah.

Guest: And then on top of that, you've got dairy plants. And so raw milk will last about 48 hours from when it comes out of the cow to when, you know, it'll go bad. And so you need very quickly to be able to get milk out of a cow and turn it into a food product. Right. And so kind of littered throughout this California central valley here, there are a lot of plants where you're making any kind of dairy product. You know, ice cream, cheese, consumable milk, yogurt. I mean, the list goes on, basically. And so we're also at, out at these plants picking up samples as well. And so just to give you a sense the size of our operation, we're doing around 600,000 tests a year. Um, and so we're doing, you know, we're getting ice chests.

Host: What is that, 200 a day, give or take?

Guest: No, no, it'll be in the thousands. Yeah, so we're doing thousands of tests. Thousands of tests a day. You know, so we have a lot of, a lot of igloo ice chests and, you know, an ice, an ice machine working, working around the clock to keep things cool. So,

Host: and so the, so obviously there's capex in this business. There's, there's a lab which is key to the functioning of the whole thing. And we'll, we'll get to that. And I guess real estate, we'll, we'll also get to that. But before we do the g, give us some more numbers around the business. You said 25 employees. Can you give us a sense of revenue profitability? Yeah, let's, let's start there.

[33:04] Guest: Yeah, So I, I, I would say 25 employees. You know, I would just say, like, in terms of size of, of the business, you know, in order for me to buy it, I had to use up a good portion of the SBA, you know, the SBA kind of lending limit, which is, which is $5 million. So it used up a good portion of that. And then the way I structured the deal was kind of a, you call it 75% of the purchase price was, you know, SBA financing, and the remainder was kind of a combination of equity and, you know, seller, seller, paper. Okay, so, and then I would say, you know, kind of margin profile like, you know, really like pretty strong margins. Yeah, I'm, would love to share more with the audience, but I'm, I'm just being coy, you know, for a couple different reasons. But you know, good kind of healthy margin profile kind of, you know, better than you know, a distributor, you know, that's doing 10% for example, let's say.

Host: And just for the regular listeners should have a sense of what good and bad margins look like. But single digit margins would be considered very tight. There are business industries that have single digit margins and survive, but Those are tight. 10% is distributors still quite tight. Mid teens you start getting a little roomier but still kind of still considered on the tighter end of the spectrum. 20 or high teens. 20 is kind of where a lot of small businesses sit. So that's, this is very imprecise but kind of consider that an average or, or a good median. Like we're, you know, we're, if you got there, that's you're fine, you're good and you shouldn't expect a lot more. If you can get north of 20, you're into pretty good territory. Those would be considered roomy margins. 30 would be a really high margin business. Is that, did I get that right? Would you say, Cody?

Guest: Yeah, that's right. Yeah. So we're sitting, we're sitting in good,

Host: you know, the good territory north of

Guest: 20 and the good, good territory there. Yep, exactly.

Host: Great. Great. And what would you say about the quality of revenue? I've decided to stop asking about recurring versus not because that's an, a crude way to think about it. It's really the quality of the revenue a business has. How, how good or bad quality is your revenue.

Guest: That's pretty high quality. It, you know, it's not as, it's funny like when you, you have to actually double click into recurring revenue and then start to. It's not as simple as like black or white, like recurring or non exacting. Right. So but I can describe kind of how the, you know, our business is like we have a lot of our customers we've worked with for decades where you know, every day or every week we're doing the same work for them. And we've been doing that for, you know, since before year 2000. So we have a lot of longtime customers that we can rely on to kind of keep, you know, keep coming back and using us, you know, for the, for the service. So it's a pretty stable. And that was sort of, sort of one of the real, you know, yeah, selling points. Things I liked about the business was just how reliable and kind of durable the business had been kind of over a long period of time.

[36:27] Host: Well and, and going so, so that plus the recession, recession resistance. So it's, it's kind of, you are tightly coupled with demand for dairy which probably doesn't fluctuate very much or maybe at the margins it does, but let's call that a pretty, a pretty, a pretty constant demand regardless of the macroeconomic environment. And your piece of that is, you know, safety. You know, that's how. So you're very tightly coupled to it because milk is only all milk producers or dairy producers are going to have to go through somebody like you. So, so pretty recession resistant. And these very long standing contracts where there's just basically a constant flow of milk that you need to test. So so while it isn't it, while it isn't pure contracted revenue, it's very, very reoccurring to the tune of decades. So and by the way, pretty high margin. So this is high quality revenue. This sounds like a very sturdy, high quality recession, recession resistant, decades old business. I'm liking it a lot.

Guest: Yep. No, I, I text friends and investors every day, or not every day, but pretty often. And I, I pinch myself like I, I feel like I really. And I'll say knock on wood, but you know, it's a, it's a great company with a really good reputation and there's a lot to, you know, a lot to like about it. Right. Kind of like a. That's actually one of my questions on my initial question list for the seller was, you know, how did this build business perform? You know, in like 2008, 2009, you know, kind of when, you know, when we had the last big recession. And he's like, you know what, Cody? That was the best year we ever had really. And the reason is the price of milk was through the roof and, and people were just milking what he's like in his words, people were milking anything they could milk, you know, just to, to sell at that price. And so I, I actually also ran. So that was, that was good. Right. And then I was able to get revenue data from him dating back to probably 2,000 on the business. And I ran kind of a like a regression of the business's revenue against the price of milk, the average price of milk in that year. And it's basically non correlated, which I found very interesting. Which is. Yeah like no matter the price of milk, like while, you know, like, he did. He did well in this one year. But, like, if the milk. The price of milk goes down quite a bit, you didn't really see, like, a huge drop in. In volume that you're getting from producers because, you know, whether. Whether the price of milk is 10 bucks or, you know, 30 bucks, like, if it's coming out of the cow, you're still gonna process it. You're still gonna get something for it, right? Like, so you still need to test it. So it's.

[39:25] Host: Well, yeah, except, I mean, the question there would be, I think, two things. First, like, but that also suggests, I mean, pricing power that you have pricing power. And typically there's pricing power when there's not a lot of competition. So do you not have a lot of competition?

Guest: We have, yes. So one of the. This is kind of another nice thing about this industry and the company is it's, you know, it's regulated, so you need. You need to have the right kind of certifications in order to do the testing. And so that's kind of a. You know, I don't want to offend our landscaping business owners out there, but, you know, anyone could go buy a lawnmower and show up at a house and mow the lawn, but not everyone can go get certified by the FDA and elap, which is like the water certification board, to do this testing, then buy all the equipment, and you actually have to. Have to know how to do it. You know, it's like, it's pretty difficult to just have somebody come off the street and try and compete with you. And so our two primary competitors are actually like, basically large multinational corporations. One is Eurofins, which is a publicly, publicly traded company that does a billion and a half euros of EBITDA a year. And then another is called Moreau, which is a French. French company that, you know, also. Also big company kind of all over the world. And, you know, on one hand, it sounds scary, right? When your two biggest competitors are like, these big companies, and you think, well, maybe they could muscle you out of, you know, out of work or whatever. But that's sort of why people come to us as we're this nimble. This kind of smaller company where you, you know, you get a test. If you have a question on the result, you can call us and we'll pick up the phone and we can talk you through it. And. And whereas at these other companies, it's like you get a. It's like calling Verizon. You know, you want this, press 1. If you want that, press 2 and you know, if you're a dairy farmer you're like what the hell? Like why can't I just like talk to a freaking human about, you know, my test result?

Host: Yeah.

Guest: And so that's kind of our, where we differentiate ourselves relative to our competitors is we're a bit more nimble. You know, kind of high quality of service where you can reach out and chat with us and, and then always just having, you know, providing good test results. Right. Minimizing as many errors as you can. It's easier to do that when you're not running, you know, thousands and thousands person type organization.

[42:06] Host: So yeah, one of the other things just about your relationship to your customers the, the dairy producers is how where on their list of expenses you fall how high. So you know, where you know, the always the nice strategic place to sit is to be an essential cost of your customer but a low cost of your customer so that when time gets exactly get tight for them, they, they go down the list of their biggest expenses and they may never get to you. They're going to try to negotiate with their bigger suppliers or their bigger vendors sooner. So where do you sit on that list? Are you a big expense for a dairy producer or not such a big expense?

Guest: Yeah, so we're kind of high, high value and high value service to the customer but low cost which is a good, obviously a good place to be. And that's where yeah, for some of your listeners, if they're kind of in the wheeze of like private equity backed companies that have done very well, there's a, there's a business called Transdigm which makes like aftermarket airplane, airplane parts basically. And so you know, if you think of like an airplane and you know, providing parts to you know, to go on an airplane, like you don't want to be the person that's building the motor because that's like a big expensive piece of equipment. Right. And then they're like if you wanted to reduce your costs as an airplane manufacturer that's probably the first place you'd go. Right. But if you make the seat belt on the plane doesn't cost much and also like you want the seat belt to work and function properly because it's like a pretty important thing. So kind of similar thing here we provide a super important service and it's a microscopic, it's, it's, it's a very small cost relative to their operations because they got, if you're one of these big dairy co ops, you know, you're running these huge Plants. You have like the trucking expense of like moving all this milk everywhere is enormous. You obviously have to pay the farmers for the milk as well. So there's a lot of other costs for our customers that, you know, we're not the first place they're gonna go when. When they're. When they're looking to. To clean up their piano a little bit.

Host: Well, what's not to like? And. And now one. One thing that can be challenging for a searcher who finds a business that he or she likes is where that business is located. This is in California. So you. That's. That's awesome. You wanted to be in California, but you did have to move for the business. Tell us now about the decision to do that where you live. And, and maybe bigger picture, like this is so entwined in. In it. In its market of cow country here. Like, does this mean that you and. And your selfless wife are going to be here in this. Need to be in this town for the long term or just during a transition or what? Give us a picture of that.

[45:16] Guest: Yeah. So the business. So I'll just. From the start. So the business is located in Tulare, which for those of you, most of you listening won't know where that is. It's a town In California, about 30,000 people. And as the. As the seller of the business described, to me it's the Mecca of dairy in the United States. So it's like, I think Tulare county has the most cows.

Host: So are you guys there for the long term or for the duration of your ownership of this business?

Guest: I would say, I mean, we like the area. It's new. We. You have no idea, like what, you know, where your life's going to take you in five or 10 years. But at least at this point in time, I don't, you know, we're close enough to family. I don't see any reason to. To want to. Want to move. But, you know, I will say this like, I. We haven't touched on the team and stuff that we have in place, but I probably could live anywhere I wanted and this business would probably do just fine without me. So.

Host: Perfect segue, Cody. So. So let's. Let's hear about that team in another one of the strengths of the business. And then I want to. We got to get in the weeds here and a few you more about kind of the terms of your actual deal, which people will have an opportunity to learn a lot from. So what does management look like at this business? Why is your team so Strong that you actually might be able to run this thing from zoom over zoom.

Guest: Yep. Yep. So the seller. So Bill. Bill Hartman, the. The gentleman who started the business, he, you know, reason for selling, he's 68 and wanted to kind of, you know, just fully unplug from the business. And he knew that, you know, going back five or 10 years, he knew that he would know, want to sell the business someday. And I think he said his accountant advised him that he should try to remove himself as much as possible from the operations of it to make it kind of more sellable, basically.

Host: Sage advice and.

Guest: Yep. And so he sort of slowly just passed on responsibility to, you know, other employees of the business and, you know, especially to them. Natalie. Natalie and Melinda kind of who help run the lab. Help run the lab here. Natalie works more kind of on, you know, she's more interfacing with a lot of the employees daily and doing sort of like HR functions and is really focused on customers. She knows, basically knows everyone, it seems like, kind of in the area sort of thing. And then Melinda is sort of like our technical guru who does. Does a lot of the compliance stuff. And, you know, if any equipment breaks down, she's. It's not her first rodeo on getting it fixed sort of thing. So. So I rely heavily on. On those two, you know, in order to keep the place going. And. And that was obviously in kind of underwriting the deal, important to, you know, make sure that, hey, like, you know, do you like me? And, you know, see yourself kind of staying on and wanting to work here, you know, going forward. And so there was a little bit of courting and getting to know each other and all that ahead of time, you know, prior to closing.

[48:37] Host: So, Cody, I don't know if you saying do you like me? Was kind of capturing the essence of the process, or did you actually ask that? I actually love that question. Did you ask that?

Guest: I wouldn't say I directly asked them, do you like me? But I mean, I definitely asked them. I just told them, like, if you have any concerns about me, like, buying the business and coming in and you, like, you not wanting to work here, just tell me. And I just won't, you know, I just won't buy the business. Because we know, we all know that this probably won't, you know, probably won't work without. Especially the two of them. This business is super important to them. It's their life. Melinda has worked here since. Since Bill basically started it in 19, you know, early 90s. She's worked here since the early 90s. So like, the business is kind of her baby as well. And, you know, same with Natalie. She's worked here for decades.

Host: Let's talk a little bit about the, well, the transaction terms. You've already shared what you can, but there was a little bit of. It was a process to buy this business.

Guest: February of 2023, the business got listed. I manifested this business into, you know, into biz by sell and, and yeah. Anyways, spent a couple weeks, spoke with a seller. You know, the. They, you know, put out an offer that I felt, you know, should be competitive, but it was also something I could, you know, finance and get done. And yes, made an offer probably on like a Friday, Saturday, Sunday, goodbye. Don't hear back from the broker. Money goes by still down here and, you know, starting to feel a little more nervous. And then I think by Tuesday he, he said, hey, we're, you know, we're gonna go with another, you know, another party on, on, on the deal. And I love this business. This was the best business that I had seen in my search. And so that was, you know, it doesn't, doesn't feel good to see something like this slip away. And I remember telling some of my other searcher friends and, and you know, you know, other friends and former colleagues just talk about the business. And I think one of my, one of my now investors, his name's Dino, Dino Sawayam. And he's like, Cody, you like, stay in this thing, you know, these, these deals can fall apart and you never know what can happen. So why don't you just, just go submit another loi on it right now? Like, you know what, increase the price a little bit and see if, see if anything happens. And so I unsolicited just bumped up my offer price a little bit. And the broker calls me and goes, hey, I'm glad you reached out because, like, this thing looks like it's kind of falling through with this original, you know, this original party here. And so, you know, kind of just said, hey, you know, hang tight, but it may, it may come back on market.

[51:37] Host: So, boy, did that investor earn their, earn their salt.

Guest: Yep. Yep.

Host: That was great advice. Fantastic.

Guest: So yeah, you, you could see Dino, Dino Sawai. He's on, he's on Twitter or X and he's got a lot of good, he's got a lot of good advice and content. So. And he, he was, was an investor in the, in the business, so I think very, very highly of them. But anyway, so yeah, effectively what had gone on, they, they'd Gone under loi with a strategic buyer, you know, company strategic.

Host: So. So one of these other two giants.

Guest: Not one of those two, actually, but another lab business that, you know, owns 100 labs across. Across the country, but didn't do a lot of dairy testing specifically, but other kinds of food testing and. And other testing verticals as well. And, you know, I don't know. I only know what I've been told. So I don't. I don't actually know the truth, but at least what I've been told is they came down and looked at the business, and they said. And so part of. Part of the deal was the owner, Bill, owns the business and the building. He wanted to sell both. It's kind of like a package deal. And this, you know, this. These guys flew down and said, actually, we don't. We don't want to buy the building. We only want to buy the business. And we want to buy the business, and then we want to put everyone, you know, an hour north at this other lab. We have an hour north. And that, you know, didn't work, obviously, because Bill wanted. He wanted to retire and he wanted to sell the building. And then, you know, for Natalie and Melinda, who, you know, they worked here their entire lives, all of a sudden, and all the other employees, like, all of a sudden, this guy is saying, hey, you're gonna need to uproot your lives and your family's lives to go, you know, work at this lab up there. And so that didn't work for them. And so, yeah, anyways, it just didn't, you know, didn't pan out for obvious reasons.

Host: And so you. So you were hanging around the hoop, as we say, and you increased your offer, and you were willing to buy the real estate, keep it in Tulare. Tulare. So that makes you. That all of a sudden makes you a very appealing buyer now, having kind of seen what the other offer was out there for the seller. So how does it go with the seller?

[54:11] Guest: So, frankly, we had a great relationship. Bill, I. I found him to be. You know, you hear all these horror stories about people with bad experiences with, you know, with sellers and, you know, all kinds of personality complexes and changes and. Or, you know, they changed their mind perhaps about whether they wanted to sell or not. But Bill, you know, Bill's pretty committed to. To selling, and. And he was a fairly good sport through, you know, through most of the process, so no big complaints. We. I did have to.

Host: We.

Guest: We did have to revisit price. You know, once I had gotten into More financial diligence. We did have to revisit price and, you know, thankfully, Bill was kind of amenable to, you know, making something happened that kind of, you know, worked for both of us.

Host: So revisiting price, was it significant? Can, can you share what the offer. Well, I guess you, you said you were.

Guest: Yeah, I could say it was.

Host: Didn't max out the SBA loan, but we're in that direction, so we can.

Guest: Yeah.

Host: And can you tell us what the multiple was?

Guest: Yeah, it was more than. Yeah, so the. Well, I can say the, the price reduction was more than 10% of the purchase price, which was, you know, which was significant.

Host: Yeah.

Guest: And the reason that we had gotten into that place is, you know, the seller or the broker rather had put together some preliminary financials and just none of the add backs are substantiated. And so, you know, as, as a buyer, you're going, well, if you're telling me that you're know, this EBITDA or this sd, this cash flow, if that's true, this is what I can pay you. And then obviously you're, you know, you get in there and you know, like, really get in the weeds of, you know, what, what numbers look like and,

Host: you know, and so were you, were you very kind of spelling out what your logic was to the seller, to Bill, and so to soften the blow of the retrading, like, talk us through that a little bit.

Guest: Yeah, I mean, I will say, you know, Bill, Bill was a great seller, but I, I'll give myself a little bit of credit as well because I, I was trying to coach, I was trying to coach him through the whole process of like, you know, once we're under loi, these are all the steps we need to go through to get to closing. One of them is we're going to commission this quality of earnings report, which is essentially, you know, a CPA or kind of a, you know, an accounting firm is going to come in and make sure that these numbers are what they say they are. The reason that's important is a lender is going to give me a certain amount of money based on what those numbers say. So we need to figure out a, are these numbers true? And, you know, and kind of go from there. Right. And so, and so we basically were working with him on this quality of earnings process and kind of going like, hey, here's what the number is right now. Is there anything we're missing or did we capture that? Right. And so I tried to make sure that he felt like very included in that process. And he even knew what the results of the quality of earnings report were. And so it kind of just bring them along with us and, and then it. Eventually we got to the point where like, you know, this is just, I've just, you know, I can't get a bank to lend probably on what I offered. And I personally don't feel comfortable.

[57:45] Host: What you initially offered before you.

Guest: Yep. Yeah, exactly.

Host: So you say to them, you've explained to them how banks are going to think about this. They're going to look at the, the Q of E quality of earnings, and you're like, I, I can't. I mean, at this price, even if I wanted to pay this, a third party who's going to be invested in this, namely the bank isn't going to lend at this value.

Guest: Yeah, exactly, that's right. And so I, yeah, I will say a few days went by, we didn't talk and I know he was not thrilled about it, but, you know, ultimately was, you know, pretty good sport. And we ended up agreeing on kind of a revised, you know, purchase price. And I mean, I may have, I think I attacked, I think I upped the seller note interest a little bit, just as a little. Throwing a, throwing a bone a little bit on, on that, for example. So we, you know, we kind of revised structure a little bit and you know, reduced the price and ultimately came, came to an agreement. And then from there, basically after the races where we, you know, kind of got legal going and started drafting, you know, drafting, you know, purchase documents and all that. And, and then I got my, my equity raise process going and kicked that in full gear.

Host: And the investors, these were people you found on Twitter.

Guest: So this, this may sound pretty crazy to everyone. I, I would say over half of my investors I met on X or on Twitter in the last 12 months. Yeah. So it's a pretty powerful, you know, powerful kind of medium of, of exchange or, you know, place to meet people. Yeah.

Host: Yep. Well, you're, you're not the first. So not, not surprised to hear that actually. And just Cody, going back to how you kind of held Bill's hand, for lack of a better phrase, do you feel like that it was something specific to your deal or do you feel like that's generalizable advice that really kind of walking the seller, assuming the seller has never done this before, walking the seller through the incentives and how all the parties interact with is something that you tell basically any searcher to, to do because it sounds like it was successful in your case and key Key to the success of the deal.

[1:00:07] Guest: No, I think it's. I mean, you should. There's no reason not to be. I mean, assuming everyone's acting in good faith, you should always just be as, you know, communicate as kind of straightforward as possible. And, you know, it's in everyone's interest. Right, Because I'd rather just talk about upfront, all the potential, because there's certain things you just know are going to come up at some point. You know, like one of the kind of nuances of getting an SBA loan is the seller has to sign a subordination agreement where they're saying, this seller note you're giving me is subordinate to the bank. So if something bad happens, the bank is, you know, in first position, right, to kind of recover any losses. And some people don't have that conversation up front. And then you get to a week or two before closing and you put that paper in front of them, and they're like, I'm not signing that. You know, I want. I want my money. Right. So. So just small examples, like, you know, that's just one example. But any, any of those sorts of things where you can eliminate surprises, the better. And I actually had, I mean, I had something like that, which caused a little bit of issue towards closing on mine, where I. I ultimately had to end up personally guaranteeing the seller note on. On my deal. And in the loi, it clearly stated that the note, the note is unsecured. So, you know, I thought that it was pretty clear that I shouldn't have to personally guarantee it. But, you know, we basically, we were two weeks before closing, and it created a huge hurdle. And ultimately, you know, it's. It's sort of. It's like, well, if I'm personally guaranteeing all this SBA debt, what's another, you know, couple hundred grand of seller note that's already supported?

Host: Is that unusual? Cody, I should know this. If seller notes are typically personally guaranteed,

Guest: I think depending on who you ask, they. They tell you that. I don't think it's unreasonable to ask, but it, you know, it's also important negotiations. I think different people would have different opinions on it. But. Okay, if you, if you think about it, you're already personally, personally guaranteeing the SBA debt and then the seller notice subordinate to the bank. So in the event, you know, the worst happens, the bank probably takes anything anyways, and then they would just tell the seller that there's nothing, even though it's guaranteed there's nothing there. Right. So, yeah, I don't know. So anyways, it's, it's not fun. But once you, I don't really even think about it anymore. Like once you get to closing, you know, you're just, you're thinking about running the business and, and all that. So it's not, it's not something that's a real big burden for me, I think.

[1:03:00] Host: Well, your point about the subordinate, the seller note being subordinated to the, the bank's loan is. I have heard that blow up deals where the seller was caught off guard by that, hated it and yep, tanked the deal. So great point that something like that should be communicated early and often now, now talk to us a little bit about the real estate here. Well, first of all, yeah, let's do real estate and then let's hear about assets of the business. I mean, in a lab, I think lab, I think lots of equipment. Was that actually, is that actually the case? But first, real estate.

Guest: Yep. Yeah. So, so I bought not only the business Seared Air Laboratory, but also the, the building where the lab here is located. And so we have two, it's basically two buildings and a parking lot. It's roughly 10,000 square feet in size. So like pretty sizable operation. You know, this, this building, if it was in San Diego or Los Angeles, would be worth much more than the business because we're here kind of in, in cow country, as you described it. It's, it's the business. The way, kind of the, you know, the way it sort of pencils out is the business is worth, let's call it 60, 30. Yeah, it's a, you know, 60, 65% of the purchase was business purchase related and then the remainder was kind of allocated to the real estate.

Host: Okay. All right. And that means that you have the blended, the blended loan. Walk people through that for the uninitiated.

Guest: Yeah, so, yeah, so this is kind of a cool, cool aspect of the sba. So if you're getting an SBA loan and you're buying a business and the building, and the business is the majority of the purchase price. So greater than 51%. The way the bank will look at that is they'll look at the total purchase price that you're offering and they'll go, and then they'll go get an appraisal on the building and then they'll look at the differential between what you're paying in total and the appraisal on the building and kind of come up with like a sum of the parts of what you're paying for.

Host: Right.

Guest: You Know, for the business and the building. Right, the business, you know, the alley. And then basically they'll apply that percentage, you know, between the business and the building. So in my case, you know, 65% of the loan is related to the business and, and then the 35 to the building. And so you, you get a 10 year amort. 10 year amortization, meaning the loan is due in 10 years on, you know, on the business portion and then you get 25 on the real estate. And so when you kind of blend that all together, I basically get a 16 year, you know, term loan on the business, which is higher than the 10, the 10 year amortization that, you know, most people would get if you're just buying a business alone. And.

[1:06:16] Host: Yeah, so, so most, most listeners, most guests won't have real estate in their deal, although it's not terribly uncommon. And so they'll do 10 years. They'll, you know, we think of the SBA 7A loan in terms of these 10 years. This is a way to, so your final loan, this blended 25 year amortization for the building, 10 year for the business. But you still have a single loan payment that's amortized over 16 years. So they basically did the math to consolidate it into one single loan, 16 years. So yeah, better terms or better amortization schedule. So basically lower, lower monthly payment, obviously, which is, which is great. Now that's when the business is 51% or greater of the total purchase price. In the case where the real estate is 51% or greater, what happens? Which was not your case, but if it had, it had.

Guest: It's not my case. It's been a little while. I'm like six months removed from the nuances of all this. But my understanding is that if you're buying both and the, and the real estate is 51 or greater, that you can get a 25 year term on the entirety of the loan. So you get a 25 year term loan, which, which would be pretty cool. So if, you know, if you can, if you could find a situation where you can, you know, the building's worth 2 million bucks and the business is worth 1.999 or whatever. You know, there's some pretty interesting things that can happen as a result of that because the term of the loan's so long, so your payment will be pretty low on the, you know, on interest, the neighborhood and all that.

Host: As, as a guest recently said to me, whose interview hasn't aired at that point, it's essentially like you're Mortgaging the business, I mean 25 years is close to the standard US mortgage of 30 years. It's like you've mortgaged a business which is even more incredible than the already pretty incredible 10 year tenure AMS that we get from the SBA 7A loan. So that's amazing if you can get it. That is quite rare. But, but I actually have a guest who coming up, different guest actually coming up who did was able to get that. So thank you for that. Now we're going to be wrapping up here in just a second, but a couple, couple still things I want to hit. Cody, in our pre call, one of the terms you used that I actually hadn't yet heard and then I one of these situations where I then proceeded to hear it everywhere but, but I hadn't yet was ebitdar. Ebitda. EBITDA with an R at the end that are being rent. So earnings before all of the things plus earnings before rent and it's a. So tell us what that is, what EBITDAR is and why it's used.

[1:09:04] Guest: Yep. So typically when you're looking at buying a business, you are referencing EBITDA and, and you know, if you're buying a business, typically you're going to be, you know, have a landlord and you have a rent expense. Because I'm buying the business and the building, I basically don't have to pay rent. Although, although technically every month I have two entities and I'm kind of running cash back and forth. It's all, it's all owned by the same people and stuff. So effectively don't have, you know, don't have a rent expense. And so if you're a bank looking at, you know, how much, you know, how much debt could you put on, you know, this, this deal, the bank's gonna look at EBITDAR because you basically it's ebitda and then you don't have the R because you don't have any, any rent being paid. So in the context of basically looking at you know, just how much money is the business bringing in, you know, every month, every quarter, every year, EBITDAR is sort of more relevant to the bank. And so in some of the materials I send to my investors, I'm I'm sending out here's EBITDAR and here's ebitda. You know, an EBITDAR is important because that's basically how much money did we bring in this month relative to how much our debt services. And then EBITDA is relevant because you know, our, our Peers, you know, other labs, for example, in industry, you can go look at what their EBITDA margins are. And so if you want to compare your business relative to other businesses in the lab space or other industries, for example, your EBITDA margins are going to be more relevant. So in the context of Sierra Dairy Lab and the fact that I bought the real estate, we're kind of looking at both of those metrics.

Host: But sorry, you'd want to use EBITDAR when comparing your business to the performance of other businesses in the same, in the same industry.

Guest: No, I would say even, I would say ebitda. Ebitda because, you know, most like Eurofins is a big public company that, that's a lab, you know, lab business and they're going to be reporting EBITDA and if you go look in their filings and so you can go see what their EBITDA margins look like. But, you know, I don't have that rent expense. And so it's not as relevant because, you know, I don't have rent expenses. So my, the actual money I'm bringing in is higher than what my EBITDA would be because that rent expense is not really, you know, it's not really a rent expense.

Host: Great. And so to the lab. So was there a lot of Capex in this business?

Guest: I would say reasonable, you know, reasonable amount. Reasonable amount of amount of capex. You know, there's some expensive equipment definitely in the lab here and you know, it's a recurring kind of expense to service it, maintain it, to buy new equipment as well. But with that said, you know, when I'm referencing EBITDA and I think a lot of people when, when looking at other small businesses as well, basically the EBITDA that I'm. The margins and all that that we kind of described that sort of in it, you know, includes most of the capital expenses that I'm incurring every year. And so you'll, you'll see a lot of small business owners, they probably expense, you know, certain items that if you're running a big public company would probably get capitalized and included as like an asset, you know, on your balance sheet. So anyway, I would say, yeah, so I would say yeah, like moderately capital intensive. But, you know, it's fine to have Capex as long as, like you're. As long as your ebitda, as long as your ebitda less capex is you, you know, maintenance ebitda, less maintenance Capex is a re. And you still have a reasonable margin after that, then you know, it, it, it's okay, right? Yeah, so, yep. So that's the right. We're still, still making good money after, you know, after, after all that.

[1:13:24] Host: For the capital that you brought to this deal, you used your 401k. You did not use robs, which is the typical method that my guests who need to access the capital on their 401k do use. So you know, we don't, we. If you take money out of your 401k just straight, there's often a bit, I mean there is a big penalty. The idea with the 401k is that it sits in there until retirement. So talk us through your decision to do that.

Guest: Yep. Well, yeah, if you listen to, I think this Dave Ramsey guy, he's a popular like personal finance guru. He probably wouldn't approve of, he probably wouldn't approve of this. But so I, I did use basically all the funds for my 401k to kind of contribute an, you know, an equity check to, to, to the deal. And so yeah, you do incur kind of a, you know, one time withdrawal penalty and then it's also a taxable event because you have a lot of pre tax dollars in the 401k. And so I did, I did have to obviously incur the penalty. However, the way that kind of the deal came together is I bought it, I bought it obviously end of October. So I operated it November, December, basically two months of operating history. So you know, not much time before we had to file taxes. And then you know, kind of working with my accountant, we elected to bonus depreciate all of the equipment that we have at, you know, at the lab here, which is approximately a million dollars in value. And so you can bonus appreciate 80% of that. So it created a pretty big taxable loss for the year. And because, you know, I bought the business and have it structured as an LLC or a partnership, basically we're able to take that big loss and then apply it to, you know, my share to my personal, you know, my personal return. And so it resulted in not really having to pay, you know, any, know, any kind of tax on, on the, the dollars that I withdrew. So it, and this is not tax advice and by the way, just, just telling you how it worked out for me. So it wasn't as, as big of a, a drain on the, the amount that I pulled out as you know, maybe it would in a different situation.

[1:15:44] Host: So but it, it sounds like you didn't plan it that way. It was just happily working with your accountant you saw that you could, you had this opportunity and grabbed it. What does bonus depreciate mean?

Guest: Bonus depreciate is effectively, you know, say, for example, say you have a million dollars of equipment over, over the, you know, over time that equipment gets used, it becomes less valuable. And you know, the US Government allows you effectively to, you know, for any kind of capital asset to basically write as an expense, you know, that you know the value of that asset depreciating over time. And you know, for whatever reason in the US you're allowed to elect to depreciate 80% of equipment in just kind of, you know, year one of you owning it effectively. And so in my understanding, encourages people to outlay money to, you know, purchase, purchase assets and equipment, you know, as opposed to paying taxes. So.

Host: All right, Cody, my last question is to circle all the way back to your, the topic where we, you know, discuss the relevance of finance experience or going through an, going through an MBA program, a business, business school to actually being an operator. So the, in your case, those five years at JP Morgan being really in the belly of the investment, you know, the investment banking beast. How relevant do you find that experience to your, your, your day to day as an operator now not doing the deal, but as an operator?

Guest: Yep. Yeah, I would say as you mentioned, doing the deal, pretty helpful as an operator, I would say less useful, but still useful, I suppose. You know, I mean at, at the end of the day, any business, it's revenue, less expenses, you know, equals profit. And so like, like having an understanding, like how to track all that and feel like you kind of have a pulse on the business, I think is, it's obviously pretty important. So I think having a background there, you know, in finance, that's been helpful, but definitely on the people side, you know, when you, we have, you know, close to 25 employees, I'm not, I'm not relying on any of my investment banking skills for really any of that. That I think my ability in doing that comes more from having grown up around a small business or you know, having played, you know, football through college and you know, working, you know, you're working in kind of a team setting and, and you know, encouraging one another and you know, anyway acting in some, some kind of leadership form in one way or another. So I would say in terms of dealing, you know, managing, managing people, I draw on that, those experiences more in my day to day and then, and then the actual technical aspects of how to run a dairy lab, I mean that's totally, I have Zero experience with any of it. And so I'm, you know, every week I learn a little bit more, you know.

[1:18:58] Host: And how are you treating that, Cody? I mean, how very common theme of the podcast. Buying into a business that one knows nothing about industry that one knows nothing about. This is pretty technical. The, the, the end work, the end service being delivered is very technical. And in fact the whole point of a lab testing business is that they're that there, the room for error is really, there isn't much room for error because you are, you are basically the backstop of your, your clients making errors or letting bacteria slip in, into their milk or whatever it is. So you're really the ones who, who are, you know, checking, checking the clients and therefore need to be, you know, pretty, pretty tight on this stuff. So how do you think about learning this business and you know, the extent to which technical know how is something you're going to want to, to accumulate?

Guest: Yep. I mean I would, I would say I probably, I mean I probably could get away with not delving into a lot of the technical stuff just because the, the business is of a certain size where you know, I, I, I probably could get away with not with not knowing too much about the like, specifics of this test or that test and the methods and all that. But it's something I do want to learn and it's, it's, I mean I would just say it's a process. It's unreasonable to expect that in six months you're all of a sudden going to be this dairy wizard, but just by spending time in the lab every day you just learn a little bit, little bit at a time and you just keep, I, I think of it like it's this giant canvas which a bunch with a bunch of dots and every day all of a sudden like one of the other dots gets connected and you know, it's starting to, it starts to make more and more sense as, as time goes by. So um, I like that and yeah, I mean maybe I always think like, well I, I should know more by now. But you know, I also don't want to try and beat myself up too much about, you know, you know, not knowing, you know, don't know what I don't know. So keep, but we're keep moving in that direction and one of, one of the cool kind of first things, you know, people say don't change too much about the business, you know, the first three, six 12 months, one of the first kind of big changes or things we're going to do is implement a lab erp, basically like a software system that you bring a test in, goes into the system and then it lives there and then the results are there. The report gets created automatically. You take that report, you can ship it directly to the customer from this portal, for example. And so I'm going to be pretty heavily involved in getting that up and running. And so that'll be a good way to force me to really understand, you know, step by step how does, you know, how does each test work and how do our processes work.

[1:22:06] Host: Yeah, exactly, exactly. Not to mention, hopefully a huge boon for efficiency at the business 100.

Guest: Yep, yep. So that's one of the, this is one of these classic paper based, you know, somebody comes in, print the paper, write the, you know what you want and then that goes here, Somebody, you know, writes out another paper and then you know, there's, there's a lot of paper get moved around and, and all that. So one of those, one of these classic businesses that can use a little, just some, some technology upgrades.

Host: Yeah. Yeah. Well that's great. That's the low hanging fruit. Yep. Cody, anything we didn't touch on, didn't talk about that you wanted to,

Guest: you know. Yeah, I would just hit on, you know, for everyone, just think really hard about, you know, if you, if you're interested in buying a business, think about what your skills are, you know, in, you know, the type of business that you, you feel like your skills could match up to or like in my case, maybe you don't know a ton about the industry you're buying in, then assess to make sure that the business can still function and run without you having some of that, you know, more technical knowledge. So yeah, just I, I think no, no right or wrong way to, to approach it. And you know, if you were gonna, and also if you were debating, you know, buy, I would say going into my surge, I would say I'd rather buy a bigger business that was maybe slightly lesser quality. But now looking back, I would much rather buy a super high quality business that was maybe on the smaller side because I think it's gonna just make your life a lot less stressful.

Host: So your, my napkin math makes me feel like yours wasn't a small business. I mean it's 25 employees employees. You, you know, the acquisition price was getting into that five million dollar range. So you know, at a three or four multiple it seems like there was there, there's some good SDE there. So it doesn't feel like a small business. Were you suggesting that it Was.

[1:24:16] Guest: No, it's not, it's not small. It's not small by any means, but just, you know, we're not, we're not like, we're not doing $2 million of EBITDA, for example, right? Or $3 million of EBITDA. You know, it's not a few millionaire to that.

Host: Okay.

Guest: Yeah. You know, it's not, it's not like we're getting in the tens of millions kind of thing, which you see on occasion, you see self funded searchers kind of pull down a bigger deal and you know, it's, it's just basic math, right? If you buy a $15 million business at you know, four or five times EBITDA, like, and you know you own a majority of it, if you could just keep the thing going for, you know, that period of time, like it turned, it can turn into a pretty exciting financial outcome. So anyways, that, that like on the face of it, that makes sense. But once you're actually in the seat, like, you know, if a business is that big and you could buy it for that low of a multiple, it's probably because, you know, there's probably a reason for it.

Host: And so you've, you've ultimately thought that your end of the market feels great. High quality, but small.

Guest: Yeah. And I, I have other searcher friends, so I, I, it's kind of funny how this works, but it's, as a searcher I feel like you develop these like searcher cohorts, like almost if you were doing your MBA and you started out, you know, if you start your MBA or you started college or high school and you're starting, you know, you're starting searching at the same time as, you know, maybe four or five other people and you sort of develop this like bond and friendship that's kind of unique. And so I, some of my other searcher friends who I started searching with, some of them are still out searching and we're, you know, we're just always chatting about like these types of decisions like what about this business? It's pretty big, but you know, it has like some customer concentration and like a lot of new construction folk, you know, a lot of new construction kind of centric business. And versus there's this other like really cool like maintenance, like recurring necessary like niche maintenance service business. But it's like kind of small and you know, like I would prefer to buy that smaller, really cool like business that's you know, kind of more high quality. And then the goal is just like, all right, well how do we how do we grow this thing fast, right?

Host: Yeah. Great. Cody, if people want to reach out, how do you prefer they do that?

Guest: You can Find me on LinkedIn.

Host: Just

Guest: my name is Cody C O D Y A G E E. I think I'm also on X or Twitter. I think my handle's Cody W A G there can email me cody splitboundcapital.com so always happy to chat with any searchers. I did hundreds, probably, you know, 100 kind of intro calls with all kinds of investors and searchers and people in the ETA community before I, before I did this. So happy to, happy to do the same.

[1:27:13] Host: Awesome. Take Cody up on that, folks. Cody ag, thank you very much for coming on and sharing your story. Congratulations on getting a very high quality business, what seems like a very high quality cool business.

Guest: Perfect. Thank you. Sa.