Host: 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. This episode is with Mike Yarmo from Mike's story is basically the nightmare scenario. You acquire a business for a lot of money, hundreds of thousands, maybe millions of dollars that you now are responsible, a loan that you're now responsible for, and what happens in month one. But the customers of that business that you just acquired start fleeing and your business, your new business starts cratering. Scary stuff, really. But Mike pulled it out, so there's a happy ending. Without further ado, here he is. Mike Jarmo, thank you for joining me today.

Guest: Thanks, Wilmer. Nice to be here with you.

Host: So, I want to talk about two things today. First, you are successful acquisition entrepreneur yourself. You and a couple business partners acquired a business in the food industry a few years ago and had a successful run with that. So let's go into that story. And then secondly, I want to hear about your own interest in, like mine, in spreading knowledge and information and enthusiasm for acquisition entrepreneurship. I think you see a lot of opportunity out there to do what you've done and are yourself interested in producing content and educating people. So we'll get into that at the, at the end. But let's start with your story. Why don't you give a quick intro of yourself now, what you do now, who you work for, your title, and then take us to the early inklings of wanting to buy a business with a partner. How did you guys decide to do that? What led you to that? So go ahead.

Guest: Awesome. Thanks, Will. Thanks for the introduction and glad to be here. I'm with you. I apologize to everybody but the hat. I'm in the middle of COVID lockdowns, so this is a lot more presentable than what's underneath the hat. So thanks for putting up with the Toronto Blue Jays here for the next 45 minutes or so. Yeah. So thanks. Well, I'm originally from Toronto, kind of half Toronto, half Chicago, but stuck here in Toronto for a lack of a better term due to Covid. Currently, what I'm doing right now is I'm a managing partner with a distressed PE firm called NewPoint Advisors. So we're kind of half advisory, half capital into distressed businesses and kind of the 10 million to $100 million range. So we'll take positions or work with banks or other private equity companies to come in and take these struggling businesses, turn them around and get them back on their Feet either back into normal banking relationships or eventually kind of hold them in our portfolio with an eventual plan to exit. I got the skills to be able to jump into distressed PE industry from kind of my previous experience running a, not a severely distressed, let's call it a near distressed Italian bakery distribution company that I acquired with a couple of partners several years ago. So I actually got scooped up. I was actually, you know, just a, just a corporate guy, you know, earning a six figure salary with an office and an office perks. I had been entrepreneurial in the past. I had done some, you know, kind of more side projects with always kind of an eye on getting back into entrepreneurship but you know, with a family and a mortgage, you know, just doing the corporate job. Yep, I had, I had been running a major food company, snacking divisions and we launched several new products into the market that had gotten me onto the radar of a, of a family fund who operated out of Ontario, Canada and out of, out of New York State. They were in the hunt for an acquisition to kind of tack on to some of their other businesses and they were specifically looking at distribution businesses that they could eventually kind of wrap into what they were doing. I had met them as I was launching products through this major food company, ConAgra Foods. I had been using some of their co packing facilities and kind of got fast friends with them as we were developing a business relationship together and you know, as we're sitting there having, having a meal, they were interested in, you know, what my future plans were and you know, I kind of told them that I was really looking at kind of getting back into entrepreneurship to kind of continue on. And some of the things I had been doing previous to, to my corporate experience and they said, you know, if you put some capital in and draw this, the short stick and basically be CEO of this company, we're actually looking at making another acquisition. It would be a good tack on for us and I think a good kind of next step in your career. We want you to put some capital into the business because frankly we want to see you have some skin in the game and work hard and not frankly just get up and leave the business when the times get tough. Why don't you come in? We've got a little fund together with another partner to buy this smaller distressed bakery distribution company. Why don't you come in and take it over and let's make something out of it.

[5:39] Host: So they had identified the target already.

Guest: They had identified a couple of ones and this one was the best, kind of the best Fit for everybody.

Host: Okay. And do you know how they. What their search process had been like?

Guest: Yeah, you know, they really worked with a lot of business brokers to kind of scour. Scour the market, given the fact that they had already, you know, some established footholds in place in the markets that this company did business in as well. It was an easier transition. But you know, for anybody kind of out there looking for a business to buy, you know, a broker is kind of a good, good first step. And frankly, we ended up dealing with a broker as that kind of middle person in between us on the, on the firm side and them on the, on the set. On the selling side.

[6:28] Host: You ended up working with this broker as you executed the acquisition of this company?

Guest: Yeah, the due diligence and all the, the acquisition process was run through. Through a broker. You know, frankly, there's a lot of things, especially when you're dealing with smaller acquisitions that a. You owner would have a hard time kind of detaching themselves from. I find with. Especially with acquisitions kind of below $25 million, you get extremely emotional sellers who have a hard time kind of stepping, Stepping away from. From the business or keeping the lid on from their, you know, from their staff that they are shopping the business around. So they often use brokers in that position just to be kind of that middle person to go in and do that type of work that they have a hard time emotionally attaching from.

Host: Sure, sure. Okay. Okay. So you were kind of recruited to be the CEO of this company, of this acquisition target, and to bring in some capital making you a partner. And so the deal was executed. Tell us a little bit about the company and then tell us what you learned right after acquisition. I mean, some of that prep that we talked about in our previous call around how reliable the revenue was coming into the company.

Guest: Yeah, so it's, you know, as I mentioned, it's a distribution company similar to like a Cisco or a gfs, if those names, or US Foods, if those names mean anything.

Host: It's.

Guest: They're bringing products in from manufacturing companies, warehousing them, and then shipping it off to hotels, restaurants, banquet halls. Any. Anybody who can't buy in pallet quantities, they need a distributor to distribute that. And this company's main source of revenue was Italian bakeries. So flour, yeast, sugar, you know, cornstarch, all those products that go into making muffins and croissants and cookies and anything you see at a, at your local bakery, bringing that in from a distributor and very heavy on the real Italian side. Of the business so heavily located in Ontario and New York state, kind of a cross border set up that these, these guys had. The company was, you know, let's call it 25 plus years old and had a, an owner who was really checked out, very close to retirement, really just coming in once a week. The. Okay, the lights are still on. Okay. All the bills have been paid. Okay. I don't really, I'm not really pushing the business. I'm not bringing in new products. I'm not doing customer acquisition. I taking price increases. None of those kind of tactful things that a more engaged entrepreneur or business owner would be doing. They really just. This guy really was just, just cashing it in. And those are actually, that's actually a situation we liked because that was. There were definitely a lot of tactful things that we could come in and fix in the business quite early on.

[9:30] Host: Sure, sure. That's kind of the ideal, I would think in many cases for many acquisition entrepreneurs.

Guest: Yeah. And you know, he wanted to sell really because, you know, I think he might have seen the writing on the wall more and more, you know, companies were getting kind of getting into this space from, you know, slow, slow moving market. You know, the food business really just kind of grows at GDP.

Host: Okay.

Guest: So you've got kind of 2 to 4% per year to grow with really kind of no barriers to entry. Anybody can get a truck, buy a pallet of sugar or a pallet of flour, drive it around. And that's kind of what was happening to this company was you had a lot of smaller guys who didn't want to work for the bakery anymore or work for their boss at another distribution company anymore, was coming in and trying to sell pallets of sugar or flour to these smaller bakeries. And you're watching that revenue kind of start to drop over time with no real adjustment to pricing or to the cost structure. So frankly, the checks of this guy was coming in and just collecting every week were getting smaller and smaller. And you just didn't have the willpower himself or frankly the next generation to pass the business onto. So that's why it kind of came up on the market for us to kind of snap up.

Host: You know, what's interesting is that I think for many people who are interested in acquiring a business, one of the red flags that they would see is declining revenue. Like that would be a red flag and you'd run away from that business. And recognizing that that's probably a crude analysis, obviously you guys felt that it was a crude analysis. Just because declining revenues declining doesn't necessarily mean it's a business that has no future. Quite the contrary. But how did you, how did you get comfortable with the fact that revenue was declining? Did you just feel like you could out compete these, these little, all these new market entrants Talk about that.

Guest: Yeah. And you know, again, when you, when you don't have an owner who's necessarily bringing a new product or pushing, pushing for more account growth or any, any of the other kind of tactful things to try to drive revenue, a price increase hadn't been taken in five plus years. Guarantee you the cost of flour and sugar had increased quite a bit in those five years. So it was as much of a margin squeeze, as much it was as a revenue decline. But the bakery business was actually growing. So we took a look at the entire market and said, okay, Italian bakeries might be not an increasing business, but bakeries in general are coffee shops. It was a fancy coffee shop on seems like every quarter now. Yeah, you know the, I used to work for Starbucks in my back, in my corporate days at their head office in Seattle. And you know, I'd done a deep dive into what the coffee shop business had looked like. And there were so many independent shops out there that I thought if I just picked up a small market share of even those guys, I can turn this business around pretty quickly and get that revenue back on track.

[12:39] Host: Okay.

Guest: So our thesis going into it was is there was a good base here. We had actually done a tour around of the bigger accounts. We've looked at that, you know, the 8020 rule and said, what are the top 20% of accounts doing? 80% of the business. Yeah, let's go talk to them, let's see if they're still willing to deal with non Italian guys. And they all kind of shook their heads, yeah, no problem, come in and we'll keep doing business with you. So we said, okay, at least we knew we can project our base of revenue and you know, let's hire salespeople, let's bring a new product, let's go out there and push for all that market share that this company never kind of gobbled up in the past. And again with that dynamic of increased number of coffee shops and looking for more new products, I thought we could out compete. And frankly we had the ability to bring in house product that some of these guys with one truck that's driving around didn't have the ability to pull in with the assets that were flexible enough to be able to pull in new Suppliers where the guy who was just going to the mill to grab pala sugar wasn't able to do.

Host: So size itself is an advantage.

Guest: Size itself, yes. And the assets like low docking trucks and the warehouse space and the capital and the relationships to be able to bring in. Because when you set up a new supplier relationship, you know, you're often required to buy, you know, a certain number of pallets. Well, that's a lot of working capital that you're tying up into the business. We have that capitalization to be able, what I thought, to out compete these guys on, you know, on a quick short term basis to get the revenue back on.

Host: Okay.

Guest: So a lot of the signals pointed to we were, we were going to do well.

Host: Let me ask you just drill down on this concept of going around to existing customers, existing clients, before you've acquired the business and saying, hey, we're looking at acquiring this business. Will you stay on that? Seems delicate. First of all, you're showing your hand to these guys that the business is for sale. That might immediately spook them. That might trigger them to say, no, we won't continue buy from you. And by the way, we're now going to go look for another vendor anyway because now we know the business is for sale. So how did you approach that? And if you could generalize your advice here, that'd be great.

[15:01] Guest: Yeah, you know, it's a part of the due diligence process. It was something that we did not want to do. We did not want to not have that head shake from these customers prior to actually signing that purchase and sale agreement. Because again, so much of the revenue was dependent on 20% of the customer base. If that 20% of the customer base went away, then the whole thesis around why we acquired this company in the first place kind of went away. Yeah. And we could have just set up a warehouse and bought trucks on our own without having to actually acquire this business. But that would have taken so long to get to that point that we thought the acquisition route was just smarter, smarter for us. We knew that the current ownership had a long term relationship and he was comfortable enough to show his hand to his customer base to say, hey, no guys, I'm well into my 70s, I've got no, no next generation to pass this on to. I need to move this business somehow. These are the guys to do it. And he actually did like kind of a really warm handoff to me. I was, I was not comfortable to, to put any money down on this business without having meet that customers.

Host: Okay.

Guest: Due Diligence is not just counting inventory and you know, checking invoices versus what's, what's in your ERP system. It's, there's that kind of soft touch with, with customers to make sure that you, you know, your projected revenue is as, you're as confident in it as you can be. So that was a definitive part that we put early on in the due diligence process to insist that we had to go meet some of these larger customers.

Host: And is that something that you think that your insistence on that. Of course, it sounds great in theory. Is that something that people should expect to push for in most deals or it's case by case? Some deals it'll be possible, others it won't.

Guest: If you're, if you're, if you're in a B2B and your customer concentration is high, if you're, if you don't get that headshake, if you're not under, especially if you're not under a contract because there's no contract in a food distribution, food supply relationship, it's really, you're only as good as your last, your last delivery. There's plenty of times, even after we took the business over, that if you can't get a, you know, a fill rate at 100% and a delivery on time, the customers are going to go find the next guy who can do that. So, you know, really, we knew that there was a risk here that, you know, if you're, you know, if your business has that type of dynamic where you're in a B2B, you have a high customer concentration and you have a, you know, not necessarily a contract. I would frankly insist on having those conversations during the due diligence process with your clients before putting any good hard earned money down. Because then your revenue projections and your budget aren't worth anything.

Host: Yeah, sure. Okay. Well, okay, so tell us what happened then because you did acquire the business even after all of these affirmatives from the existing clients. And what did you find?

[18:08] Guest: Yeah, well, little did we know that they were paying us lip service and all of a sudden we found sales dropping even quicker after we took the business over. We knew there would be a trend line slightly down after we took it, but it was much quicker than we thought it was. And it was coming from these top 20 customers, top 20% of customers. And we went around and they said, these one off guys that I'm explaining to you, these flour and sugar guys who are just putting stuff on the back of their van, they smelled blood in the water they knew a new vulnerable ownership team in without that long history had taken the business over. The chatter had gotten out into the industry and they started slashing and burning their prices and trying to kind of chase us away. Unfortunately, when you are bigger, your cost to serve is much higher. To take a product from your warehouse to the customer is higher when you have, you know, staff and infrastructure and you know, refrigerated trucks and, you know, a larger warehouse. So they were just basically undercutting us and we were actually starting to lose business pretty quickly. So for as much due diligence as you want to, as you want to do, there's still, there's still risk to, you know, to your forecasts.

Host: Yeah.

Guest: That you present to the banks and, you know, you present your investors. We thought we had done everything we could to say we feel this business is going to do X million next year based on our due diligence. But we were quickly realizing that we were going to fall way short of that and actually likely lose money if we hadn't done a pivot to the business.

Host: So that must have been quite a panic. Your stomach must have dropped when you saw this occurring.

Guest: Yeah, new CEO had put a fair amount of my net worth down into this company. I didn't have a long term relationship with my, with my business partners and they're, you know, they look at Q1 results under new, new ownership and say, hey Mike, what's, what's going on here? Your, your, your quarter look like, look terrible. What's going on?

Host: Yeah.

Guest: So, you know, I, you know, I knew that, you know, it was going to be a tough kind of Q1, let's call it shareholders review meeting, and realized that, hey, I can't fix this. I'm not gonna, I'm not gonna play that game where I'm going down to their levels of price points of I'm never going to make any money selling 15% below where I was currently selling. Margins are too tight in that type of business. We need to pivot. I put a plan together in terms of how to adjust this business quite considerably. Still try to utilize the assets and the internal company processes, but do a channel and a product change to try to get the company revenue growing again and get it back to at least what our projections were and so give

[21:13] Host: us the broad strokes of what that pivot looked like. More specifically, like what was the new business.

Guest: So we went basically in a nutshell from a Italian bakery distribution business into a frozen foods business. I took a look at the market and said, where Are their holes. Food distribution is a huge, huge, huge business because, you know, you can drive on the highway and you can see, you know, just tons and tons of food delivery trucks all over the place. I knew there was, there was a lot, a lot of business out there to be had. Where can I fit? Like if I'm not, if not, if I'm not a bakery distribution company, what am I?

Host: Yeah.

Guest: And I knew, you know, I knew frozen foods was actually likely a good next step for a bunch of reasons. Number one is the margins are quite a bit higher that cost to serve because it has to now be kept at a certain temperature. You have to have your trucks at a right temperature. The handling of frozen foods is very different than handling of flour, sugar, yeast. And finding staff to be able to sit in a freezer for two or three hours and pick product and get it ready for the next day shipment is a, is a very different proposition. And I think had scared a lot of other companies off not, not to necessarily get into it. So really you had Cisco and GFS kind of in frozen foods, but not really doing it to, to the best of their abilities. So I thought that's, this is where I want to go. Like if I, if I retrofitted my, my warehouse, my trucks all to, to be from, you know, temperature, you know, regular temperature zones at, you know, 72 degrees to you know, a negative, you know, let's call it negative 5 to negative, you know, 20 degree Fahrenheit temperatures. And then, you know, build a process so that I'm trying to minimize the risk of having people not want to sit in a freezer for two or three hours, I thought I could own the freezer. That was, that was my pitch back to my shareholders and back out to the, to the market. When I started selling this concept to every food and beverage manager, every chef or every banquet hall owner out in the, out in the world that I want to own your freezer. You've got it. You've got a produce supplier, you've got a meat supplier. Now I want to be your frozen food supplier. And then you have kind of, you kind of have the national guys, Cisco, gfs, all sitting on the, on the top being, being what's called a broad liner, doing kind of everything, nibbling and everything, but there is no specific frozen foods guy who can deliver you, deliver you everything that you need in your freezer. I wanted to be that guy. And that's the pitch I made to my shareholders.

Host: It's really compelling. I mean, punchy, it's like a political slogan or something. But I'm surprised that, I mean, it's not like frozen foods is a new technology. I'm surprised that somebody hadn't come along and colonized the space.

[24:08] Guest: It's a case where so a major broadliner who is doing frozen foods will have a very small portion of their truck dedicated to frozen foods. So they'll partition their truck out into a different temperature zones where a very small portion of that will be frozen, because it's hard to get one eighth of your truck as a freezing temperature and then a quarter of your truck at a refrigerated temperature, which would be more for fruits and vegetables and then the rest of it for your basic staples. So I thought doing the whole truck in one temperature would allow me to, A, distribute more efficiently and B, I can start bringing in more unique things because, again, the broadliners who were in the frozen food space only carried a very, like, tight line of products. And one way for a restaurant to compete with all the other restaurants up and down the street is have different unique things that they can't find at every other place. So I thought, if I can sell this type of product to this restaurant in a completely different line to another, to another restaurant down the street, then they didn't have to necessarily compete with each other when they were pulling from broadliners who they had to get the exact same ingredients and the exact same type of finished goods from these broadliners.

Host: Right, right. Makes sense. And all of this knowledge, I mean, obviously you're speaking now in retrospect, having done it all, but it sounds like you had a lot of knowledge already. I mean, you had this vision, you had this industry insight. This all comes, I assume, because this is why the investors wanted to bring you in as CEO, because you were bringing institutional knowledge to the table. Correct. And where I'm going with this is this sounds like something where an outsider to the industry really would have been up the creek in your shoes, but because you already had so much industry knowledge, you could pivot your way out of this through your own insights. So kind of tie this into. To address people who look at acquiring businesses outside of their core competency. Can you extrapolate your experience and apply it in terms of advice to them?

Guest: Yeah, I would say yes, yes and no to being an industry insider. I was not necessarily in distribution. I was more into manufacturing. The way I actually came up with the insights was not from institutional knowledge, was actually from going out and talking to the customers. Oh, I talked to. I probably talked to 200 chefs and restaurant owners and grocery store owners and food beverage managers, you know, as many as I can talk to. And I wanted to find out what they were struggling with.

Host: This was, this was after you had already acquired the business?

Guest: Yeah, this is after we had already acquired. And I knew that I was in a losing market. I figured out pretty quickly, like, I can't, I can't compete with, or I don't want to compete in the price and race to the bottom game. I want to margin this business up, not margin it down for more volume. Because frankly, if you're margining your business down, you're just working harder for the same amount of money. And that's not what I wanted to do. So I wanted to get the margins up to be a lot more sustainable so that we can reinvest in the business. And to find that insight, I asked every single chef, like, what, what are you struggling with? And more, you know, just sat there with a questionnaire. So I had like a defined questionnaire of what I was going to sit there and ask him. And every single one came back to me and said, you know, I'm not necessarily happy with my frozen foods business. So that's what, that was kind of the key insight for me. So I didn't, I might be able to kind of speak their language a little bit more by being in the food and beverage industry, but I didn't necessarily come up with that insight going into the business. It was really talking to customers and finding out what they, what they, what they're struggling with, with their current solutions.

[28:08] Host: And you were able to get all these people to sit down with you because they were your existing customers.

Guest: Yeah, I mean, you know, when you're talking to a chef, you're kind of running around with them while they're, while they're operating their kitchen. So I can imagine you're not necessarily sitting in an office, in a boardroom, or in a zoom call like we are. You're kind of chasing after them in a, in a kitchen. But I needed those insights. And they were, if I can solve a problem for them, they were happy to sit down and chat with me. And then frankly, when I did make that pivot, they were already aware of that something that I wanted to do and they were already kind of primed for it. So it was actually an easier kind of sell in to start transitioning the business over more into a frozen foods portfolio and away from an Italian bakery portfolio.

Host: So you could literally talk to a lot of the people that you interviewed who had said, my problem, what I, you know, the problem that I'm having is with my frozen foods, my freezer. And six months later, or however many months later, after you'd executed the pivot, outfitted your business, brought in these frozen food supplies, go back to these people and say, hey, you told me you had this problem, I've now fixed the problem. Can we do business with this new. Under this new, under these new terms,

Guest: I would actually take it one step further and say I kept them abreast of what the process, the progress as we were going through that transition. I tell them, hey, I just ordered a new freezer, a new industrial size freezer, like 10,000 square foot freezer. Hey, I just retrofitted my trucks and I would send them pictures and updates and give them that update, you know, message from the President Van Mawr update to say, hey, here's my progress. And almost like a grand reopening party to say, hey, you know, 15 days to go. I've got a little present for you, you know, you'll see me in 15 days in our kind of grand reopening. And then we just basically kind of drove around and just, you know, kind of reintroduced ourselves and sent out a little package to say, hey, we're a frozen foods company now, you know, we look forward to doing business with you and, you know, kind of owning the freezer.

[30:09] Host: Phenomenal. Phenomenal. And so fast forwarding, this worked, strategy worked, it worked.

Guest: I mean, we, you know, so we, you know, initially I had gone off and started doing the selling. I wanted to make sure that I understood like all the processes before, like developing a sales playbook and pushing it over to a, you know, to a sales team. But we got, you know, we had enough initial success, you know, so a lot of the work had been done on bringing in new suppliers. So I, you know, talked to hundreds of different frozen food suppliers who frankly were disenchanted or just disenfranchised from working with Cisco and gfs because again, they're carrying a very narrow type, type skew set. So they could never really launch what they were selling into certain food service markets because the bottleneck was a distributor. Now all of a sudden I'm saying, hey, now you can get it to market. Here I am. So, you know, had like a huge rush of different suppliers come my way. And, you know, I kind of had my pick the letters to who I wanted to list and who I wanted, didn't want to list. And we had tried to negotiate our best deals in terms of getting percentages off on cases or a growth program or as minimal capital as I could, as working capital as I can put out to bring in all that new inventory. So I tried to use that. Hey, I'm here. I'm solving a problem not only for my customers, but for my suppliers who couldn't get the products into market and try to leverage that into better supplier negotiation deals.

Host: Sure powerful.

Guest: But yeah, we got some pretty good responses and grew quickly, year one and after that first quarter of lousy results and started just kind of taking the profits in the business and kind of reinvesting it back into more headcount so that we can start exponentially growing.

Host: So let's put some numbers behind this. So you, what can you tell me about the business? How much business, how much revenue the business was doing in its previous incarnation when you acquired it, what'd you acquire it for? Anything you can talk about there?

Guest: Yeah, so the business, we're doing about 7 million. When we bought it, we bought it for kind of low sevens.

Host: Okay.

Guest: We more than doubled off that base that we expected to. Obviously we declined based on, you know, three to six months of, you know, having a, you being in a poor business plus a transition, but then doubled off that. Off that more. More than doubled off that base. And not only that, we were able to expand margin. So we're now, now we're in a product in a, in a channel that we have a unique product, you, a unique way of going, going to, to market because again, we're only a freezer truck. And it took, it did take a period of time because now since we had kind of stepped away from shelf stable products, we did have to discontinue some of our products. So it was really just getting that account growth up and up just in the frozen space. So we, as we decline our shelf stable products, we started increasing our frozen foods. But we were able to pick up enough new accounts such as like, you know, the Hilton chains. Was one of our, one of our big wins, sheriff. You know, we picked up the Sheridan, we picked up a whole bunch of grocery stores that we had never done business with in the, in the past. So it was a, it was a, it was a good, good tailwind that we had, we had been working on. And the, the margining up of the business and having a little more pricing power gave us a, gave us like a good, good niche to work at. We were in a lousy niche before.

[34:04] Host: And you said it was doing about 7 million in revenue and you, and you all bought it for low seven figures.

Guest: Yeah.

Host: Okay. And what. Can you talk about what the multiple was on earnings?

Guest: Yeah, it was about. About two times on earnings.

Host: Okay.

Guest: A very, A very tight, tight margin business. A very high, high amount of overhead. So I really haven't kind of talked about the cost end of the side business, but we felt that there was a lot of cost inefficiencies in the. In the company as well, that we could. That we could leverage a lot. Too much, Too much manpower, let's say. That was just constantly thrown at the business instead of technology.

Host: Sure.

Guest: So that was kind of another flip side of the coin as to why the earnings were so low given the revenue size. But the margins had been. Again, without the price increases for all those years. The margins had gotten quite terrible, which is again, kind of why we liked it.

Host: So you and the original. The investors who identify the opportunity saw this as a turnaround. You saw it as a turnaround not because you knew all the revenue was going to immediately dry up once you took ownership. That just made a bad story worse. But you still saw that it was basically going to need some sort of reinvigoration, reinvention. They saw it as a turnaround.

Guest: Yeah. Yes. So the goal was to buy it for two times earnings and sell it for five times. We didn't expect it to sell it when we did, but the goal was to get the revenue or the earnings up to a point where now all of a sudden more and more people want to get interested in this business. It gets to a size where you have a lot more larger companies starting to look at this, and all of a sudden they're willing to pay more. And all of a sudden the multiples on their earnings start increasing. So that was our thesis. At its current size, it was definitely just two, maybe three multiple business, depending on how of a strategic acquisition it is. If we got it to the size where we thought it would, we thought the margin multiple would increase, giving us that extra, extra tailwind and extra kicker.

[36:06] Host: Yeah, sure. Well then, so get into that a little bit more. Fast forward us to the end. Sounds like you were driving toward an exit, but the exit came sooner than you thought. Tell us that story.

Guest: Yeah, so we actually ended up doing some tack on acquisitions as well. So we had extra kind of capacity in our warehouses as we, as we grew. And there were, you know, there were areas of opportunity we felt in other temperature zones that were kind of kind of drifting back into our. Into our old company. Not an Italian bakery, but other kind of shelf stable products. Where we felt that the competition wasn't doing too well or there was a real kind of consolidation push between, you know, grocery stores and coffee shops and you know, hotels and all our kind of end customer base. They didn't want as many trucks coming to, you know, into their, into their loading docks as had been previous. So they were looking at consolidations. So we felt we should consolidate along with, you know, our, with our, with our customer base and started going on attack on acquisition. And again, this was a conversation we were having with customers to say if we, you know, if we, if we acquired this type of supplier to come on and this type, these types of lines, would you be willing to do more and more business with us outside of the freezer? So we owned your freezer, now we want to start, you know, owning that account. You know, everybody liked our, liked our service and we were hitting our key performance indicators. We were always hitting our 95% fill rates at a 95% window of time, you know, kind of a guaranteed window of time with the next day delivery. That was kind of our KPIs that we were always tracking internally as a management in the background. And so we said, okay, now's the time, time is right to start looking for ATT and CK on acquisitions. And again, there were a lot of smaller distributors out there that we felt we could get rid of a lot of their overhead. Didn't need their staff, didn't either. Their warehouses didn't need their trucks. We have the capacity. All we need is our book of business. Book of business and their supplier relationships. Let's bring that in, let's pull that inventory into our warehouses. And now all of a sudden we have more product going to our same customers or we have their book of business. They may be doing sales to accounts that we never dealt with. So all of a sudden, okay, now we have their book of business, we can start selling frozen to those accounts now.

Host: Sure.

Guest: It was kind of a win win. It was kind of a double edged sword with a lot of these tack on acquisitions where we can lower our cost of delivery by shipping in more to these customers. Customers wanted it because they liked us and they didn't want as many trucks coming in on a Monday morning where they're lining up outside. And then we got new relationships that would have taken much longer to get if we had not done the acquisition.

[39:16] Host: Sure.

Guest: So, you know, that was a period of five years. We actually weren't intending to sell, but we had gotten to a point and kind of got enough buzz in the Industry to say, hey, these guys are actually really good at, you know, the frozen business. And eventually had an offer from a larger distributor, you know, much, much bigger regional distributor than we were, who wanted to kind of basically acquire, acquire our portfolio and our capabilities. So that, you know, that was, you know, was, it wasn't out there looking for a sale. That was just, it was just something that kind of came to us. And I had been, you know, been the CEO for, you know, almost five years and you know, frankly, just a little tired, you know, turning a business around and kind of driving a new, building up a new market was never easy. So I said, yeah, okay, maybe the time's right, the offer looks good. Let's, let's, let's divest. So we, you know, we ended up selling it for, you know, 5, 5x of what we, what we acquired it for.

Host: 5x of what you acquired it for. And you, because the revenue had grown and the margin had grown, did you then get a better multiple than you'd acquired it at?

Guest: Yeah, yeah, because we hit certain earning earnings thresholds. All of a sudden the quality of earnings goes up a lot. You're much more bankable. Once we got to the size that we did, you can start doing asset based lending or get better terms with your bank. So all of a sudden your cost of capital decreases, your ability to finance growth increases. So there's a lot of benefits from scaling and hitting certain thresholds, like half a million in earnings. A million and 2 million are kind of like key thresholds to cross over when you're talking about your cost of capital. And I see it with my business that I do on today's basis is that you get a lot more, you become the prettiest girl at the dance as soon as you start hitting these thresholds to certain bankers. And that's really what we had done. And the company that acquired us said, hey, if we brought this additional revenue on, we can continue to decrease our cost of capital. And we just got a lot more attractive that way.

Host: So they could. Okay, so I'm clear because you were throwing off enough profit. You had not, I mean, enough earnings. The loan that the acquiring business needed to acquire you with, they had a lower interest rate because you were big enough.

Guest: That's right.

Host: Okay. And so can you put any kind of. Give the audience an example. So if you're at $2 million in earnings versus $1 million in earnings, what is, what are the other numbers that that affects and how does it affect them? Like specifically?

[42:00] Guest: Yeah, I mean, it's really around how much you can borrow to finance your growth and the interest rates that you can get. And then you start to become, you can start getting into more CNI type banking. You start to be able to broaden your perspective on how many financing options that you have as the bigger that you get. So some of the companies that I'm running today as we speak, I have very, very limited financing options because they're extremely distressed businesses. I've got just a few very high cost of capital type businesses. And then when you're not dealing with an Apple or a big manufacturer who has extremely sweet margins, which most businesses don't, every percentage in cost of capital decreases significantly impacts the valuation for your business. So if I can pay 5% of cost of capital instead of 20% cost of capital, that's basically the difference between driving an operating profit and not driving an operating profit.

Host: And we're talking now about the business's own cost of capital or the acquiring business's cost of capital?

Guest: Both. In both situations.

Host: Okay, okay, well why don't, I want to be aware of our time. We're at, we're at 10 minutes from 1, so why don't we. 1 o' clock my time. Why don't you tell, tell me about kind of the course that you're thinking about putting together, the content that you're putting out there, why you're excited about this space, what your vision is for other people getting involved in this space. Why don't you talk us through that?

Guest: Yeah, so you know, whether it's with my own capital or with my LP partners capital through NewPoint, you know, I've run dozens of distressed businesses. Currently the CEO for a distressed consumer packaged Good business out of, out of Rhode island right now that we're trying to turn around and get back on track. So I've got a kind of a deep reservoir of and write a lot on what I think is a very niche and really interesting part of the business. This is not something that you learn in necessarily an MBA in any MBA or any school course in terms of actually what a distressed business looks like and the tactics you need to take take in order to acquire and turn around a distressed business. There's a lot of unusual language and a lot of unusual processes that frankly you don't hear anywhere else. And you know, as I was getting more and more into the professional side of it rather than just kind of running it with my own capital, I realized that there was a huge gap there and there was nowhere really for where for me to go to kind of understand what a distressed business turnaround process looked like. I was kind of learning, learning on the job, you know, so I get a lot of questions on it, a lot of feedback. So I'm really just trying to meet, meet the demand that I see in the market is that a lot of people want to know, how do I do what you did, how do I go out and, you know, how do I source a distressed business?

[45:01] Host: Yeah.

Guest: What's the process to turn around? Because it is very process driven. It's not just, you know, coming up with a big brilliant idea to kind of pivot the business most of the time. It's just, it's a very kind of regimented process as to what, what the first, you know, the first hundred days looks like, what the first day looks like, and then what do you need to do kind of prior up to acquisition, those steps that you need to take to ensure that you minimize risk and you've given yourself the, the best chance you can get to actually do what I did and turn the business around and sell it for profit in three to five years.

Host: And the target market for this or the people who are clamoring for your information, what's the profile look like this for somebody, Is it somebody who has corporate experience like you did, maybe halfway through their career, have a little bit of money, they're somewhat financially sophisticated and they can go do that? Who are these people that feel equipped to go out and do what you did?

Guest: Yeah, I would say that, you know, it's anybody with, you know, either access to capital, who are able to raise capital, who are interested in buying, buying businesses. So it'd be more of a, and I would say it's several different markets who would be interested in what I've, you know, what I've got to say. It's, you know, somebody who's already, already got a successful business who wants to give this a try. Somebody like me, who has access to capital like I did with my, with my partners or with my own, my own balance sheet, who can go in and pool capital together and acquire a distressed business, or anybody who wants to enter, enter the PE industry either through, through a private equity firm or through, through, through accounting or the legal framework. There's a lot of, a lot of insolvency attorneys out there who don't necessarily understand the turnaround process. And I think they would benefit from my, you know, from understanding my process so that they understand both flip side of the coins as well.

Host: Okay.

Guest: If you're, you know, you're an MBA grad. Again, you're not necessarily taught this stuff at school and you're kind of looking for a career path and you want to get either into pe, either through a big accounting firm like a Deloitte or a PwC, or you have access directly to get into private equity. Being able to understand the process from a turnaround perspective can give you a leg up. Or again, you know, somebody with, you know, access to capital to be able to just go ahead and acquire a business. I think all three of those channels would benefit greatly from the process that has worked time and time again for myself and for my firm.

Host: And when you say access to capital, how much are we talking? Like, give me a range. I know that every case varies, but just kind of a strata here for people to get a ballpark.

Guest: Yeah, I would say my experience turning around businesses is in the 10, let's call it the 5 to $100 million top line. That acquisition really is dependent on the strength of the balance sheet and if the company is actually generating any cash flow. So I've seen companies being acquired for book value for $500,000 all the way up to $25 million. That was kind of the acquisition price range that I think my process hack, the capital stock would benefit for the most. So I wouldn't say this is a big, this is not a big turnaround type type scenarios.

[48:29] Host: Right. Well, this is all relative, right, to the big turnarounds, the big splashy ones that you read about. It's probably not. But if somebody hears the number, $100 million in sales, that probably seems like a big business to a lot of people.

Guest: But your acquisition price, I'm not Eddie Lampert here. Turning around Sears. This is turning around small to medium sized companies, which is probably. There's far, far, far more of those out there waiting to be turned around than Sears or JCPenney or Kmart.

Host: Sure, sure. So and you said acquisition prices from half a million to 25 million? Yeah, I would say, which maps to sales of 5 to 100 million all the way up to 100 million. Or excuse me, 25 to 100 million. 500 million. Cool. Okay. And where can people read the content that you're putting out? Mike?

Guest: Follow me on Twitter ichaelyaramo. You know, just. It's a simple, simple Twitter handle. You'll see my bio, my link for my substack account, michaelyaramo.substack.com okay, you can just sign up for, for my free newsletter and I'll be making the course material on Gumroad available in the very near future.

Host: So you're publishing a proper course in

Guest: the very near future? Yes.

Host: Okay. Excellent. Great. Well, this is super interesting, Mike. This is, as you said, I think it's considered an esoteric space, but there's probably a lot of opportunity there for those who have the curiosity in the initiative, just like you, I mean. So it's great that you're helping people understand that.

Guest: Yeah, I know from business school, from my perspective, I never learned how to negotiate a forbearance agreement. So there's a lot of unusual terminology out there that if you're just entering the space for the first time, will not mean anything to you. So I'm trying to make that less strange and a lot more familiar to people.

Host: Great. Great. Well, I thank you for your time. Thanks for being transparent and sharing your story. And I'll make sure to put your Twitter handle on this so people can contact you there. And, and also, everyone, don't forget to sign up for Michael on his substack.

Guest: Thank you very much.

Host: Great. Thanks.

Guest: Bye. Bye.