The Business Inquirer #163
Sharing a 3PL in Oregon, a digital marketing agency, and a kayak & outdoor recreation retailer in Texas.
Hello Friends!
In this week’s issue:
🛒 Retail & eCommerce - 1 listing
💼 Online Service - 1 listing
🏡 Main Street - 1 listing
⚒️ Tools & Resources
💡 How I Can Help
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🛒 Retail & eCommerce
Kayak & Outdoor Recreation Retailer - $3.0M
Launched in 2019
Based in the Houston, TX metro area
Sales are 70% e-commerce, 20% dealers, 10% walk-ins;
Revenue: $4M
Profit: $800k
Margin: 20%
Multiple: 3.75x
💬 Quick Take
This could be an interesting opportunity for someone interested in outdoor sports and recreation. At the same time, I have a lot of questions and concerns about this listing. Its quick growth boosted by the pandemic might not be sustainable long-term, especially as consumer habits normalize. The recent shift to local manufacturing and the owner’s decision to retire raises questions about the timing and motivations behind the sale. Valuation also seems elevated for this type of business.
✅ What I Like
Diverse Sales Channels
With a mix of ecommerce, dealers, and walk-ins, the company has several growth opportunities.
Manufacturing Control
By bringing manufacturing down the road, the company gains better control over production quality and costs, a strategic move for maintaining competitive advantage.
High Average Order Value
An average order value of over $600 indicates a premium product range and a customer base that values quality, enhancing profit margins.
Established Customer Base
A large database and repeat customers are positive, but the nature of these repeats needs clarification.
Recent Expansion in Facilities
The investment in six unique kayak molds and additional equipment supports scalability and the ability to innovate product offerings.
Ecommerce Strength
A strong online presence capturing 70% of sales aligns well with current retail trends and broadens customer reach beyond geographic limitations.
❓ Concerns
Seasonal Demand Variability
The need for temporary employees in summer indicates seasonal fluctuations in sales, which could affect cash flow predictability.
Elevated Valuation
The valuation at nearly 4x cash flow is steep for a company with only five years in operation, particularly one benefiting temporarily from a pandemic-driven surge.
Limited Business History
Founded in 2019, the business lacks a long track record, complicating accurate long-term performance forecasting.
Post-COVID Sustainability
The boost from increased outdoor activities during the pandemic may not represent ongoing demand.
Strategic Shifts and Timing
The recent move to US-based manufacturing combined with the owner’s retirement could indicate underlying challenges not immediately visible.
Customer Repurchase Rates
Given the durable nature of kayaks, the significance and frequency of repeat purchases may be overstated.
Economic Sensitivity
High-end recreational products often see sales dips during economic downturns, as they are considered luxury items.
💼 Due Diligence Questions
Pandemic Sales Impact: What percentage of the growth can be attributed to the pandemic?
Repeat Customer Analysis: What is the exact nature and frequency of repeat purchases?
Supplier and Manufacturing Costs: What are the cost implications of the shift to US manufacturing?
Owner’s Reasons for Sale: Why is the owner retiring shortly after investing in local manufacturing?
Product Lifespan and Market Saturation: What is the typical lifespan of your products, and how does this affect repeat business?
Supplier Agreements: Are there any long-term contracts with suppliers, especially for materials used in kayak manufacturing?
Intellectual Property: Are the kayak molds patented or otherwise protected from replication by competitors?
Employee Turnover: What is the turnover rate of full-time and temporary staff, and what measures are in place to retain key employees?
Product Liability: Have there been any significant product liability issues or recalls in the past five years?
Market Analysis: Can you share a recent market analysis report that includes competitor analysis?
Customer Feedback: What feedback mechanisms are in place, and what has been the customer satisfaction level?
Inventory Management: How is inventory managed during off-peak seasons to prevent overstocking?
🚀 Growth Levers
Enhance Online Marketing: Leverage digital marketing strategies to maximize the reach of the strong ecommerce platform, focusing on SEO and social media engagement.
Product Line Expansion: Introduce new products related to outdoor recreation to diversify the revenue streams and reduce dependency on kayaks.
Strategic Partnerships: Form partnerships with outdoor influencers and communities to boost brand visibility and credibility.
Loyalty Programs: Develop a customer loyalty program that encourages repeat purchases through discounts and exclusive offers.
Sustainability Practices: Implement eco-friendly materials and processes to attract a broader base of environmentally conscious consumers.
Big Box Retail Strategy: Develop a tailored strategy for entering and succeeding in big box retail stores, including specialized product lines or exclusive offers.
🙋🏻♂️ The Buyer
Experienced in Ecommerce: Ideal for a buyer with a strong background in online retail management, able to optimize and scale the existing ecommerce operations.
Strong Marketing Acumen: A buyer who understands brand development and multi-channel marketing will thrive, given the brand's established presence and potential.
Interest in Outdoor Recreation: Passion for the industry is crucial, as it drives innovation and deeper understanding of customer needs and market trends.
💼 Online Service
Digital Marketing Agency - $250k
Launched in 1989
Fully remote
Targets healthcare, education, professional services
Revenue: $464k
Profit: $145k
Margin: 31%
Multiple: 1.72x
💬 Quick Take
This digital marketing agency offers a compelling acquisition opportunity with a 31% margin and a reasonable valuation of 1.72x cash flow. The agency’s longstanding reputation, consistent retainer fees, and high-profile client base in the healthcare, education, and professional services sectors highlight its stability and growth potential. However, reliance on a few high-value clients and the potential for market saturation are concerns that need careful consideration.
✅ What I Like
Long-Standing Reputation
Established in the late 80s, the business has a solid reputation and loyal client base.
Consistent Revenue Stream
Stable retainer fees averaging $15,000 per month provide a reliable income base.
High-Profile Clients
Serves mid-size entities in healthcare, education, and professional services, indicating quality and specialization.
Organic Leads
Established reputation and long-term relationships generate consistent organic leads.
Award-Winning
Recognition and awards enhance credibility and market positioning.
Remote Operations
Fully remote setup reduces overhead costs and offers flexibility.
❓ Concerns
Client Concentration
High reliance on a few key clients could pose a risk if any major client is lost.
Owner Transition
Potential challenges with the transition if the current owner has significant client relationships.
Project-Based Income Variability
Project-based income can be unpredictable, impacting cash flow stability.
Economic Sensitivity
Dependent on clients in sectors that can be sensitive to economic downturns.
💼 Due Diligence Questions
Client Breakdown: Can you provide a detailed breakdown of the client base and retention rates?
Contract Terms: What are the terms and lengths of the existing retainer contracts?
Owner Transition: How will the transition of client relationships be managed post-acquisition?
Revenue Sources: What percentage of revenue comes from retainer fees versus project-based work?
Staff Details: Can you provide details on the current staff, their roles, and retention rates?
Technology Stack: What technology and tools are currently in use for service delivery?
Client Acquisition: What are the primary methods used for acquiring new clients?
Market Position: How does the agency differentiate itself from competitors in the market?
🚀 Growth Levers
Expand Services: Introduce new digital marketing services such as SEO, content marketing, or social media management.
Client Diversification: Expand into other sectors beyond healthcare, education, and professional services.
Strategic Partnerships: Form partnerships with complementary businesses to cross-sell services.
Upsell Opportunities: Develop and implement upsell strategies for existing clients to increase revenue per client.
Digital Transformation: Invest in the latest digital marketing technologies to stay ahead of competitors.
Content Marketing: Increase content marketing efforts to attract and engage new clients.
Referral Programs: Implement referral programs to leverage existing client relationships for new business.
🙋🏻♂️ The Buyer
Existing Marketing Firm: An existing firm looking to add a profitable, well-established agency to its portfolio.
Experienced Marketer: Someone with a background in digital marketing who can leverage industry knowledge to drive further success.
🏡 Main Street
3PL (Order Fulfillment) in Oregon - $1.3M
Based in Multnomah County, OR
12 FT employees;
Revenue: $1.7M
Profit: $545k
Margin: 32%
Multiple: 2.4x
💬 Quick Take
This 3PL order fulfillment business boasts a strong recurring revenue model with impressive customer retention, having two major clients since inception. The company's selective customer approach ensures long-term, profitable relationships. However, dependency on a few large clients and potential challenges with lease obligations warrant careful consideration. This business offers substantial growth potential for a buyer with a strategic vision.
✅ What I Like
Recurring Revenue Model
The business enjoys a stable and predictable income stream from subscription-based clients.
High Customer Retention
Two major clients have been with the company since its inception, demonstrating strong client satisfaction and loyalty.
Diverse Revenue Streams
Besides fulfillment and logistics, the company also generates revenue from ecommerce and storage services, diversifying its income sources.
Cross-Trained Staff
Employees are versatile and can cover multiple roles, ensuring operational continuity during absences.
Low Owner Involvement
Current ownership’s limited involvement suggests that the business is well-structured and could be run semi-autonomously.
Facility Ownership Option
The option to purchase the facility provides flexibility and potential long-term cost savings.
Scalability
The business has already expanded its space, indicating room for growth and the capacity to handle increased demand.
Proven Market Position
With a decade of experience, the company has established itself in the 3PL industry.
Strong Financial Performance
The business has a healthy margin and significant cash flow, indicating efficient operations and profitability.
❓ Concerns
Client Concentration
Heavy reliance on a few large clients poses a risk if one decides to leave.
Lease Commitments
Current and additional lease obligations may be a financial burden if growth does not meet expectations.
Market Competition
The 3PL industry is competitive, and maintaining market position requires continuous innovation and customer service excellence.
Scalability Challenges
Further growth may require additional investment in facilities, technology, and staff.
Dependence on Key Personnel
The loss of key employees, especially those cross-trained, could disrupt operations.
Logistics Complexity
Managing logistics and fulfillment for multiple clients can be complex and requires robust systems and processes.
Limited Geographic Reach
Depending on the location, the business might face limitations in serving a broader market without additional facilities.
💼 Due Diligence Questions
Client Retention: What is the breakdown of revenue by client, and what are the terms of the largest clients' contracts?
Lease Terms: Can you provide detailed information on the lease terms for both the current and additional space?
Staff Turnover: What is the staff turnover rate, and are there any key employees critical to the operation?
Technology Infrastructure: What logistics and fulfillment software systems are in place, and how up-to-date are they?
Growth Projections: What are the historical growth rates, and what are the projections for the next 3-5 years?
Market Position: Who are the main competitors, and what are the business’s competitive advantages?
Client Onboarding: What is the process for onboarding new clients, and what are the associated costs?
Facility Condition: What is the condition of the current facilities, and are there any required upgrades or maintenance?
Contingency Plans: What contingency plans are in place for disruptions in operations or supply chain issues?
🚀 Growth Levers
Enhance Technology: Invest in advanced logistics and fulfillment software to improve efficiency and customer service.
Marketing Campaigns: Implement targeted marketing campaigns to attract new clients, emphasizing the company’s strengths and unique value proposition.
Geographic Expansion: Consider opening additional facilities in new regions to expand the service area and client base.
Value-Added Services: Introduce additional services such as custom packaging, kitting, or enhanced storage solutions.
Operational Efficiency: Continuously improve operational processes to reduce costs and increase profitability.
Partnerships: Form strategic partnerships with ecommerce platforms or other complementary businesses to increase referrals.
Customer Feedback: Regularly gather and act on customer feedback to improve service quality and satisfaction.
🙋🏻♂️ The Buyer
Operational Expertise: Experience in logistics, fulfillment, or a related industry to effectively manage and grow the business.
Client Relationship Skills: Proficiency in building and maintaining long-term client relationships to ensure high retention rates.
Technology Savvy: Understanding of logistics and fulfillment technology to drive efficiency and innovation.
Team Leadership: Ability to manage and motivate a cross-trained team, ensuring smooth operations and employee satisfaction.
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⚒️Tools & Resources
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Search Fund Coalition - community for the Entrepreneurship Through Acquisition ecosystem. Monthly events and meetups for acquisition entrepreneurs.
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