E190: Brandon Knowlden Shares His Acquisition Strategy and Recent Success

[00:00:00] Ronald Skelton: Hello and welcome to the how to exit podcast today. 

I'm here with Brandon Knowlden and we were going to talk about his recent acquisition and maybe his exit there. I don't know what you can talk about on that one, but, we're going to share some stuff that you've done here recently and, how your strategy, is,a little different than others.

So, let's just start off with your origin story. Tell me a little bit about, kind of how you got into this space. It sounds like you've been an entrepreneur most of your life, like me. Um, kind of what got you into the entrepreneurial world and what got you into buying a company?

[00:00:28] Brandon Knowlden: Yeah, so it's kind of an interesting story. So my first job at the age of 13 was in my dad's manufacturing business in Detroit. I grew up in, North Detroit, Michigan. Was born in Salt Lake City. Bounced around the country a little bit, but then, landed in Detroit. And I don't know, I think that like with my dad, he was just, he just always working an angle in a really positive way, but he was a chemical engineer by trade.

He worked at General Motors and a bunch of, uh, different, suppliers for the big three. But, um, he just, you know, it's like we lived, we growing up, we lived on five acres and our house was on the front acre. And he realized that there was a corner lot that five neighbors went all the way down to.

And so just in his spare time, he just went and petitioned the other neighbors and said, Hey, let's get this rezoned. Let's cut the back three acres off of everybody's property. Let's get that rezoned and let's go to a developer and sell it. And so he was able to just, in his free time, just put together a deal worth about a half million dollars in the early nineties, that, that benefited every one of our neighbors.

And he started his own business. He ended up choosing to let that fail cause it was five kids in my family, big family. 

And it was single income. So after like three or four years of that, he folded that and went back to work. But the kind of beautiful kind of Phoenix rising from the ashes story was that really left an impression on me and my brothers.

So my brother Tim has a welding service in Detroit. My brother, John, he started a landscaping service that we converted into a tree company that then, he exited last year. Helped him a little bit with that, but that was mostly on his own. And then now, we just started a decking company. And when I say we, it's his company, but, um, with my background in advertising, I did all the branding for them. 

So fast forward a little bit after the age of 13, I went to school in Pittsburgh for graphic design. I spent 10 years in the advertising industry. I was doing TV commercials and, strategy and stuff like that for Porsche, Panera bread, Corona beer, stuff like that. And, I just got sick of making things that cost a million bucks, but lasted 30 seconds.

And so I kind of flipped that on the script 10 years ago and started making things that cost $30 and last a million years, ostensibly with creating things out of wood. And so that company, I ran for 10 years and just exited that, uh, about a month ago, December of 2023.

[00:02:59] Ronald Skelton: That's awesome. So you guys, you were doing, like you had a wood manufacturing facility of some sort?

[00:03:06] Brandon Knowlden: Yeah, so it started,

[00:03:07] Ronald Skelton: Wooden, wooden objects. What do you guys make?

[00:03:10] Brandon Knowlden: So we, we started out making, uh, well, it was custom furniture, but it was like kind of feast or famine. And It was like, if you were making, you weren't selling. And if you were selling, you weren't making just because of the size organization we were. And one of the things that I witnessed with my dad and my brother, cause he started his businesses before I started mine, was I kind of refer to it as fishing from the middle of the river.

If you're standing in the middle of the river and the white water comes, you're going to get swept away. And so like my brother, for instance, he worked 60 hours a week for 10 years. And it just was one of those things where like, I watched my dad get burnt out. I watched my brother get burnt out. And so I really wanted to make something that I could get out of the way of.

And when I started with custom furniture, that wasn't the case. And so very quickly we developed a product line. Housewares is kind of the industry definition of it, but it's, picture frames, key racks, nothing too exciting. We would do lobbies. We would do like, we got a job for a school that was a 30, 40, 000 table job. Some fun stuff, but for the most part, the bread and butter, the stuff that paid the meal, was really relatively boring.

So we had some novel solutions that, um, kind of got us a little bit of, press coverage and things like that. We were on CNBC, met Marcus Lamones, um, you know, stuff like that. But, for the most part, yeah, it's a 9, 000 square foot facility here in Chicago called Well Made.

[00:04:31] Ronald Skelton: Oh, interesting. Cool. It's funny as I, we have some similarities.

For what you're doing now is an area I want to work in and I've been working on. And I grew up, my father had a, a woodworking shop more than anything was a hobby. And then I developed the same knack. So right before we moved here, I had a small woodworking shop, probably 50 foot by 50 foot, you know, it wasn't huge.

And, I did all the woodwork inside of like our tiny home. We have,live oak, bar and countertops and, uh,that red oak,I guess it's red, red cedar or whatever, but it's kind of a reddish, core in the middle of it and the, in the grain and the outsides are whiter. So we do live edge.

I did both the, uh, the bar, the kitchen bar, that my wife's hobby table that's we, but all I did is put a live oak edge on a, senior sewing base and finish it out really nice. 

And then this tiny home had no hand rails or anything they kept for safety for the lofts. 

And I have kids. So I built a,I use four by four, uh, raw posts from the same red cedar and then the live, live oak, tabletops and made uh, basically guard rails up there and corrugated tin, like old rusty corrugated barn tin. 

So, uh, made those for that, but I've made all kinds of stuff inside of my little shop. But when we moved here, when I sold that house, I sold it to a house flipper who is,flips houses all the time. I said look for an extra few grand I'll just give you my wood shop because I can't take any of this stuff anyway. 

And he flips houses. So all my air nailers and planers and table saws, and like I had, like my table saws were not portable. They were the big commercial 220, you know, 14 inch blades. So I had the big toys.

[00:06:11] Brandon Knowlden: Yeah, that stuff is really fun. And what's funny is like my dad, so my dad, before he got into like before he, this is before I was born, but before he got into, chemical engineering, he framed houses in college. And so when I was growing up, that's probably where the entrepreneurialism started because he would buy kind of a defunct house and move the family into like one or two rooms and then spin up like a live in renovation.

I think they call it house hacking nowadays. But, um, yeah, when I originally put the wood shop together, it was kind of started as more of an outlet, but because of my advertising background, I had a pretty good aesthetic and there's a lot of disposable income in advertising so people started buying it. And my original goal was to just kind of have a side hustle with equipment as nice as my dad shop because he was in Detroit and I just, was never able to get home to use that shop.

And then within a couple of years, my shop was significantly nicer than his. And so that's kind of, I'm kind of coming emotionally to terms with the fact that I had a very, very nice woodshop. And, it's not mine anymore. It's kind of sucks.

[00:07:15] Ronald Skelton: Yeah. That's cool. So, what got you interested in buying and selling companies as far as like the mergers and acquisitions space? What made the shift?

[00:07:23] Brandon Knowlden: I mean, growing by like 5 percent a year, 10%, like some years we would have 20, 30, 40 percent growth, but especially when you don't know where it's coming from, you can double your business every year, but like, as you get, there's a level of exponentiality to it that makes it really difficult to sustain. And coming from the background of corporate America with my father also kind of doing one foot in blue collar, one foot in white collar type of jobs, I would say like I worked for like, um, you know, Kraft, Heinz and stuff like that. 

And like, uh,they grow by acquisition significantly. And a lot of those brands that are under their umbrella are brands that were regional that they went in and gave a national footprint. And so, you know, I think that the year I did the Harbour Club, which was just a couple of years ago, forgive me, I'm not sure if your podcast caters to any specific audience or whatever.

But when I did the, the Harbour Club it was primarily motivated by the fact that you didn't hear too much about, I want to say it was like Facebook, maybe Instagram, but I know Facebook, Oh, it's Facebook and Google. But like the year that I did the Harbour Club, one of those companies acquired like a hundred businesses that year. And another acquired almost 200. 

So just from those two companies alone, they did hundreds of acquisitions in a single year. And so my dad's a big mentor to me. And as I was talking to him, he said, you might want to consider growing by acquisition because then you can plan your growth. You can see it coming.

You can fold things in when it makes sense. You can grow vertically, you can grow horizontally, whatever you want to do. And that's how all of the big companies that you're servicing in your ad industry, that's how they all grew, a lot of them. And so, the hunt started with me trying to grow by acquisition. And a lot of people will try to grow by acquisition, like, like at the layperson level, you kind of think that you are just acquiring a business, maybe acquiring revenue. But, a lot of acquisition is done for different reasons. It's done for getting the clients. It's done for the systems and processes. It's done for the talent acquisition, for a general manager, whatever you might want to do. And so I realized that I could, you could kind of pick and choose. And so that's really what started me down the journey.

But then what I realized was that, it was a little bit of a distraction on my existing business based on what I was looking for. Cause we kind of developed a little bit of a novel approach to woodworking. But the other thing was that with the baby boomers retiring the opera, like I, you know, I was running a business that was doing a million, $2 million a year here in Chicago, but the opportunity to step in front of the rest of the line and not start a business from scratch, get exactly what I wanted.

And the potential I just, find a $5 million a year business or a 10 or a 20. And depending on my ability to negotiate and my access to capital or whatever, sky was the limit. And so, when I realized that, I realized it was time to sell my business, but I kind of wanted it to be a little bit more of like a job change in a sense.

So I pursued purchasing a business at the same time I was pursuing selling a business, which is not for the faint of heart, because those are pretty big tasks. And as I learned, I'm learning firsthand that was a little bit of an error on my part, but once you put something in motion, you put it in motion and it's, once you get a buyer, you get a buyer and you just kind of got to go with the flow. So,

[00:10:42] Ronald Skelton: Well, you got it done. It's like, it's a lot to take on. 

A lot of people, they get into the space and I was telling you this a little bit before the show, like they'll come to the meetings, they'll hang out with us. And like, yeah, yeah. I want to buy a business. It's like, cool. How many business owners have you talked to this week?

And they're like, well, two. And I was like, you're going to have to talk to more than that. Right. This is a game where it's a people business. You got to get out there and yeah, you got to shake the hands and you got to, have the conversations on zoom or at least, and, you're going to go through dozens before, before you, you'll find something that really works.

Some of that you can go through online and a lot of them you'll kick out before they even like, but you'll, you'll get the broker notes and the, CIM or whatever they send to you and you'll kick them out right then and then. And some of them, it takes a conversation to two to kick out, right? So, how many, so you, you've reached, go ahead. 

[00:11:27] Brandon Knowlden: I was just going to say, it's probably your next question, but like the deal that we're probably going to talk about most today is this sale lease back. Or as it's known in some circles of property split, but, um, to get that deal, it took me three or four months of looking. And I was looking at, I had different like target profiles, but it took me three or four months to find that business.

And for that specific profile, I looked at about a thousand businesses and had probably three or four dozen conversations and had it shortlisted to two, three, maybe four opportunities. And then this one, the economics just worked out such that, it was the one to pursue laying down the foundation for this kind of methodology and this kind of like investment thesis.

But, yeah, no, I looked at like probably almost a thousand deals, had dozens and dozens of conversations. I was, I was on probably a dozen calls a week for a couple of months. It was pretty arduous when I first got it going.

[00:12:22] Ronald Skelton: Yeah. And other people don't get that. This is a numbers game, right? It just is. Uh, you, you gotta get out there. You gotta talk to people. Not everybody you talk to, most of the people we talked to is not going to be a right fit for you. And a lot of them there, you're not going to be a right fit for them.

And then, but you, if you talk to enough. You're going to find the right fit. Where did you first hear about property split or sell lease black? Where did that concept come on, kind of hit your radar and make it something you wanted to look into and figure out?

[00:12:48] Brandon Knowlden: Yeah. So we know each other through an M and A group called the Harbour Club. 

And I was first introduced to the proposition of this structure in the Harbour Club. They call it a property split because what you're doing is because it's an M and A group, you're finding a business that owns real estate and you're splitting off the property.

So that was where I first got turned on to it. And the little untold secret within that community is that the rest of the world does not call a property split, a property split. The colloquial term, the industry term is a sale lease back. And so once I found that, then it began to open the floodgates on seeing what, um, the ability for me to like self educate and find the right people to build a team and stuff like that.

Once I kind of like learned a little bit more like the vernacular.

[00:13:35] Ronald Skelton: So for those of you guys that haven't put it together yet, what we're talking about is you find a business owner who has both the business and the real estate it sets on for sale. You acquire both. And it's usually in two separate transactions. So you put an option contract on the real estate and you buy the business and you can close simultaneously or close sometime after you take ownership or there's a multitude way of doing it.

But you're selling the real estate to usually an investment group or an investor who leases it back to you for a long term lease. And the beauty of this is, most of the time you can get a higher premium, you can get more for the real estate than the seller of the business could, because you can offer the investor something the seller of the business can't. And that's a guaranteed long term lease, uh,at a particular cap rate. Where the business owner, if these investors know the business owner is selling, then they look at a property and go, it could very likely go vacant or whatever until they, you know, as the buyer of the business, you have a, strategic invest, a strategic advantage with the investors that want to do the sale leasebacks.

So, there's a premium you can get on it. So in your, in your case, that premium was fairly nice. What was the structure of the deal?

[00:14:48] Brandon Knowlden: Yeah. So, and forgive me if I'm going to repeat some of the things you're saying, but, just like for the audience and things like that, before we get into the actual economics. The real, what you're, what you're doing is you're solving two problems at once as a mergers and acquisition person with a sale lease back because the value of the building is directly determined by the quality of the lease within it. 

And so a real estate investor is never going to want to buy a piece of real estate with a building that's for sale because It's super risky. And alternatively most m& a people are after a business only because of the increased complexity and capital exposure of buying the piece of real estate at the same time.

And so when you do both, not only do you solve both of those problems, but you can usually get a discount because they don't have to sell it to two people. They don't have to negotiate with two people, not two sets of lawyers. There's a lot of efficiencies in doing that, but at a fundamental level, what you're doing is I kind of look at it as like the Uber of commercial real estate.

And what I mean by that is like with Uber, what they're effectively doing from a business model is they're allowing you to extract the value of your vehicle from a long term standpoint and shorten that window to something that's relatively up front. And so the reason why I say that about a sale leaseback is because effectively what you're doing is you're extracting the value of a long term lease up front and you're giving that upside to somebody who has a risk profile where they are a long term investor.

[00:16:12] Ronald Skelton: And, in the situation, most of the situations, if you do it right, the seller is going to give you a discount on the property. 

The buyer is going to give you a premium on the property. In our case, in most cases, if the business can support it, one of the things they're going to look at is can you support the, the current, the current increased rents.

So long as you can support that and show them long term, you'd be a great tenant, you can get a premium on the real estate. And in many cases you can use it to pay down the owner. You can end up like in your case,you ended up walking with some cash too, right? You actually had a really decent transaction.

[00:16:46] Brandon Knowlden: Yeah. So the economics of the deal and,I don't want the, uh, like it'd be pretty rare that, this podcast would get back to the, the owners, but we're working with them the next several years, we've got a large seller note. And so, I want to do right by them and, and,just make sure that like everybody who listens to this, this was not, this is not me taking advantage or anybody taking advantage of a business owner.

What it does is it takes like, it takes a highly liquid asset, like a business and gives them a path out. And it also gives you the liquidity needed to take over a business because taking over a business is not inexpensive. The biggest thing that you're going to need to overcome is your accounts receivable reset.

And because this is construction manufacturing, a lot of our customers are net 90. And so unless you negotiate it as part of the offer, what happens when the owner walks away with the bank accounts and the accounts receivable, and then you take over and let's say you pay a million bucks for the business or whatever it is, but you have a run rate of $150, 000 a month, and you're going to be almost a half a million dollars in debt before money starts walking back in the door.

And so the beauty of this is we, the business was, was, just over a million bucks uh, $1. 2 million, but the building itself, they wanted 525 for it. And we actually came out of the gate and offered them 575. And I think they were really surprised by that. But that was a very strategic reason is because we knew we didn't have a pool of private investors and we knew they were going to find out about it.

Now that was a really uncomfortable conversation and our real estate broker told us he was going to exhaust his personal Rolodex before he listed it. So he just listed it and it actually ended up blowing up in our faces a little bit because the owners were represented by a real estate broker. And their real estate person came and said, Hey, do you guys know that your building just got listed for triple what you wanted for it?

And I don't think you guys actually authorized this. And I had to go back to them and say, Hey, you did, we signed an option agreement and we did do this. And by the way, there's a reason we offered you $50, 000 over asking prices because this was the strategy. And then we presented them with a budget.

But the really interesting thing was that we took a $525, 000 building, offered 575 for it, but then we sold it to an investor for $1. 5 million. And we were able to walk away, the deal, we basically, we got paid to buy the business for sure, but we basically walked away with, several hundred thousand dollars at close.

And so it wasn't specifically that me and my partner got to just shovel that in our pockets. But what that did was we didn't have to go to a bank for working capital. We had several hundred thousand dollars for the reset. We had capital investment. We were able to put the down payment on the business, everything.

We actually even hired our attorney's fees were like 75 grand. And the reason we chose an attorney that was that expensive, was because we were building the model to then go build this roll up and we're going to rinse and repeat. And so we knew that we needed really good legals. And so we have those now, but it was all funded by this first deal.

[00:19:52] Ronald Skelton: Right. So, and that's not uncommon. I work with a, a team of people that, it's a brokerage of a real estate broker, but all they specialize in is in the sale lease back. And I've had her on the show. And it's not uncommon for them to fund entire transactions with the sale of the real estate. Not every deal, but it's a lot more common than what most people would think. It does happen.

The deals are out there. So, tell us about the company you bought. It's an, it's in the wood business still, right? You're making, I think if I'm right, it's cabinet, cabinetry?

[00:20:25] Brandon Knowlden: Yeah. So it's custom cabinetry. It's custom cabinetry, which again, like I was saying, I was trying to grow by acquisition. And what it did was, they do case goods are basically cabinetry. It's referred to as like the carcass or the case. So they, they do case work and we were launching a line of vinyl record players in my business in Chicago.

And so we were looking for somebody that basically we could buy a cabinet shop that could do those for us. And then their business ended up being much more commercial and much more dynamic than kind of what we were doing. And we were in like, it sounds nuanced, but my business was solid wood production and their engineered materials like plywood and stuff like that, and melamine and stuff.

And so, it just ended up being, quite a bit different than what I thought it was going to be for like growth by acquisition. But to answer your question, it's a custom cabinet shop. They're doing about two and a half million dollars a year, 18 employee or sorry, 15 employees and 18, 000 square feet of manufacturing space.

[00:21:21] Ronald Skelton: And then, the goal here is that's going to be one of your cornerstones to a rollup strategy. You're going to buy other, uh, construction related businesses, or is it going to be other cabinet shops or what's the, the future acquisitions look like?

[00:21:34] Brandon Knowlden: Well, so, because I've got like a background in advertising and strategy, I've got kind of like a four part system that my partner and I have developed. And so it's acquire, stabilize, optimize, accelerate because you can't really do any of those things efficiently until the prior thing is done. Right.

And you obviously have to acquire it, but then you have to make sure the transaction is stable, that all the bills are getting paid and that the synapses are connecting. And then you look for the optimization opportunities of legacy businesses,where you have like, uh, archaic processes or lack of processes and then you begin to accelerate it.

So the first thing is that we're like, I actually kind of built a lot of that, like modality, in my existing business, but we are looking at either growing horizontally or vertically or both. And so a good example of that is that they subcontracted about a half million dollars in quartz countertops last year because they work with engineered materials only. And they do a lot of all street for,bank ads and booths and things like that for restaurants and things.

And so I know for a fact that one of their vendors, the upholstery person is retiring within the next few years. They actually already told them like, Hey, I'm starting to wear out. 

Like we're kind of winding down the business. And so my hope is once we get stable to actually probably go in and like start a conversation with the upholstery subcontractor this year. And then with the quartz business, there's a couple of them in the area where we'll probably start by approaching the existing vendors first, but then we'll probably acquire that person or acquire someone in that industry and then bring it in house. So we're probably going to go vertical. We're probably also going to go horizontal. And, we're basically going to use, we might go vertical just to then go horizontal or we might go horizontal and then spin off a second roll up and stuff.

So the future is bright, but also a little bit foggy. One thing that I can say that we're going to do is that, one of the main issues with the sale lease backs, is that you have to have a quiver of private investors if you're not going to put it on the market. And so what we really want to do is actually start our own SLB investment group where that would be a company of its own. 

And then we can have a group of investors that, that pool money together. And then they acquire the real estate and we acquire the business. And then every investor would actually get a capital event, for part of every acquisition. And so that would be like a clean, clear way to make it a closed loop.

[00:24:08] Ronald Skelton: Yeah, it would be. So you're going to set up your own kind of REIT, your real estate investment trust of some sort. Some entity that, you're going to raise capital with it or, and then, uh, use that to buy that or?

[00:24:18] Brandon Knowlden: I think so. I'm kind of flying the plane while I'm building it because I don't really, you know, I'm a blue collar guy and I'll be the first to admit it that I don't specifically know the ins and outs of what I'm doing. But for me, what's super fun about all of this stuff is it's, it's like a, I'm a big snow skier growing up in Salt Lake city. And one of the most fun things is that you have the chairlift down below and the chairlift up top, but every decision on the way down is yours. You can go on the bunny hill or you can go double black diamond and go over cliffs if you want to. And so those choices are ultimately yours, whether they're responsible or not.

But yeah, so like, I don't have like, I've got like a loose strategy, but I do think that, one of the things that's worked for me in my past is, my, my wife loves, uh, Tina Fey's autobiography. She's a big fan of Tina Fey and, she refers to her comedy journey with Saturday Night Live and some of the other stuff she's done as a yes and approach. Where you don't say no, because it shuts down people's creativity and creative thinking.

But it's a yes and so yes, we'll accept this, that, or the other, and we're going to do this. And so for me, it's a very fluid, malleable process, but I'm really good at, I'd like to think that I'm pretty good at developing systems and processes and what to measure and when to measure it and things like that.

And so I'm pretty good at licking my fingers, sticking in the wind and see which way things are blowing, you know? And so that, that's kind of been my approach, which has worked for me for better or worse.

[00:25:49] Ronald Skelton: I, there's two ways, I'm a real estate guy by previous trade. Mostly residential, but I delved into doing bigger deals before I went to this route. I was trying to funny thing is, is I hired a performance coach towards the end of my real estate um, you know business.

In my adult life, I started recognizing patterns like, okay, I've done this again. And I couldn't tell if it was because the industry was drying up or because I was being burned out. So I hired a guy who, it was a Robin mcdonough's trained coach. And one of the things he said during that is like you should play a bigger game. And so I flip a freaking house and like 30, 40 thousand dollars be wired to our bank account, and for the flip. And in the back of my head i'd still hear but you should be playing a bigger game. So I started analyzing the bigger game.

I started looking at like,big real estate transactions, apartment complexes and that type of stuff. I'll give you a, a hint in the two different ways. You can raise a fund or you can do a syndication, what they call a syndication. Both of them have the same underlying SEC structure you're going to need. It's a private placement memorandum.

So, to pull money together for more than one party to put into something that looks like real estate, you do need that ppm to keep you out of trouble for the SEC. Uh, so, that's the one thing I'll give you feedback there. And you could probably pull it off with some form of a syndication where you syndicate a group of investments for a holding co and do that.

But the fund structure would give you more rule, more levy into what you did with the money. You just have to set a, in your private place, a memorandum, and in the fund, you'd have a set of rules that you shared with the investors and long as you live by them, you can do it. And the cool thing for you and me and anybody else doing this is most of those private equity companies when they do, when they raise their money, one of their bylaws inside of Private equity says they don't own real estate.

They won't hold the real estate. They're not in the real estate game so they actually when they buy a company a lot of them can't buy the real estate because of the bylaws that they put underneath their capital structure they use to raise the money to start with. So a lot of them can't hold real estate.

Um, I'm really interested in kind of the, there's another thing you said,I listened to your interview on that Harbour Club. A lot of the guys on the show, I've taken Roland Frasier's course. I've taken Jeremy Harbour's. I've interviewed all the gurus. To kind of solidify my skill set in the early stages, I did a few of the courses. On inside of that, inside of that realm there, the communities are great.

And that's one of the things you're going to get out of those, like those different courses of the communities. But, what they don't share with you inside of that is like, I don't think either one of them has like a structure for your PPM, right? Like, here's what you're going to need to do if you're going to raise money from multiple places and stuff.

Most of those guys are trying to teach you how to do everything on a shoestring. There are plenty of avenues where you can almost get it done from a single source, family offices and that type of stuff. You could just start, you know, you're you've got the tenacity you need, right? Yeah, I can already tell by what you went through to get what you got done now. 

If you decided you lined up another 1 and you wanted to raise a single thing, you could start calling family offices and office, you know, the deal with real estate. A lot of those family offices, they hold real estate and I bet you could find a single investor for that without putting it on the open market. That's what a lot of these commercial brokers do that, do these sale leasebacks.

They've got teams of people who farmthose REITs. They farm real estate investment trusts, they farm family offices and stuff, and they figure out what their investment criteria is. So when you bring something to table like a sale lease back, they kind of know these 16, I have a, I have 200 investors, but these 16 are the ones that would be interested in hearing your story. And they know who to put it in front of. And a lot of times they'll, if the good ones will actually have a multiple bid scenario where two or three of the investors will make an offer for doing a sales lease back to you.

[00:29:34] Brandon Knowlden: That's really cool to know. Yeah. And again, it's it's not quite broken clock syndrome, right? Like I'm right more than twice a day, but like probably not much more than that, but like I have so much more to learn. And coming from the background, the blue collar background that I do, I'm very much more roll up your sleeves and get it done.

But the reason why we, this deal took 15 months to do. And that just kind of came with the territory. But what we were doing was we were like building the plan. And so I was okay to be very contemplative and slow about it. But the reality is, is that my partner and I, we have ambitions to build a $50 million plus roll up in the next five years.

And if we're going to do that, we've got to have a formula. We've got to build a network. And so what's fun is that, when every, everybody has ideas, but when you're able to execute on those ideas and see the returns that you forecasted, I feel like the first time you do that. It starts to get on people's radar that maybe you were speaking with like, Oh, these guys are kind of serious.

And then the second time you do it, it forms a pattern. Right. And so, what I'm hoping is that we can get into this business, realize some efficiencies, properly take control, work ourselves out of the day to day, and then maybe make a couple of acquisitions regarding some of their,go a little bit more vertical integration and then prove that model.

And then go to these people, but yeah, I have a lot to learn and I'll definitely have to catch up on a lot of these other podcasts, that you've recorded with some of these other experts because, um,I'm just a monkey with a wrench over here, just trying to, trying to turn screws. So,

[00:31:03] Ronald Skelton: One of the things I don't want to skip over and I heard you talk about in,you did an interview on the private network of, uh, the Harbor club, with Jeremy Harbour. And you were talking about some of the ways that you approach the conversation of seller finance with the sellers and the advantages for them.

And you said some stuff, I don't know if I just like the first time I had heard it or the first time I'd heard it presented the way you do. But what are some of the ways that you approach the concept of why a seller should seller finance part of the deal to you?

[00:31:33] Brandon Knowlden: Yeah, so that's a really good question. And it's definitely a bespoke solution that has to be engineered for a specific deal. 

But like some of the things that I've done in the past with some of these deals. You just have to, the first thing is that you need to understand that money is not always the most valuable thing to people. It's oftentimes their time or expertise or like I can't tell you how many businesses I've looked at where they had the money to do the thing that they wanted. They were, it was just dropping out of the bottom of the bucket because they weren't paying attention.

It's like literally, this business that I just acquired earlier today, I had a meeting with, um, our, our general manager, they're spending an average of $3000, well, an average of $250 a month on five gallon water jugs for the break area. And it's the middle of January and they're, they spent $170 this month on water. In the summer, they spent $500 a month. And a reverse osmosis system is $300 and it's $50 in filters every six months.

And I said, we can save ourselves two or $3, 000 a year by just ordering this thing and sticking it in the tap or whatever. And then they're paying the employees every week. And we're going to switch to two weeks. There's another three or $4, 000 in admin time I'm going to save every year and another $2, 000 in payroll processing.

So I just took a look at the situation with fresh eyes, and I'm going to save us six to $8, 000 this year alone, on stuff that I just observed, like walking the floor. So when it comes to seller financing to kind of answer your question, some of the mechanisms that I've come up with, they've really been born from listening to the problems the seller might have.

And so an example of that is that, and again, this is all just, everybody needs to know that this needs to be run by an attorney or a tax professional. This is not legal advice. This is just an M and A guy, um, out here, swinging for the fences, but a lot of this stuff lands. And so one of the things that's worked well for us, for example, is, if somebody wants you to put a large amount down or they don't want to hold seller financing or some of the things like that, one of the things that's caught traction with my audience has been most sellers are in their sixties, at least their fifties, but usually their sixties. And in the United States, the 401k max this year is $22, 500.

So this particular business has a husband and wife. And they're early sixties. So you take the 22 five, then you take a $5, 500 catch up contribution. And then because they're high earners, we can also work out something like a backdoor Roth or there's some other solutions out there. But what you do is you say, okay, so what you're getting, what we're going to do is we're actually going to lower the amount down, but by doing that and by you taking on a seller's note that'll buy us time to give you an employment contract where the majority of, or not the majority, but most of your salary is going to go to us maxing out your 401k. Giving you catch up, catch up contributions and funding your backdoor Roth. And maybe once they take over, they can't, there's, income limitations to the backdoor Roth.

But anyways, point being is between the husband and wife over a five year seller note, we were able to design a plan for them. That was going to be something to the tune of 250, 000 or $300, 000 tax free, because we're just going to shovel it into their retirement program. And so the reality was, that they wanted a huge chunk up front and we said, well, if we do that, you're going to just give a third of it to the government.

So if you're going to launder your money for through the government, awesome. Fine. But let me propose a strategy where if you guys trust me to run this business, then I can give you some mechanisms that will either be very tax avoidant, or we can actually turn things that don't generate any income for you right now into a cash producing asset.

So the second thing that I might want to share is one of the reasons why I focused on manufacturing businesses. Is because they typically have large capital assets, large investments in capital assets. So like you go to a machine shop and they might have a $300, 000 turret lathe or something like that.

Right. So they're going to have like a lot of equipment that's been fully depreciated, sitting on the floor. The business uses it, but it doesn't make any money. Or it doesn't generate any money itself, it makes product. But, the point that I'm making here is let's say you have a business that, has a million dollars in capital assets and they want $5 million for the business. So you take that million dollars in equipment and you say, pull that off the table. Now my offer is going to come in at $4 million. But what I'm going to do is I'm going to lease to buy that equipment from you at 5 percent interest, 6 percent interest, whatever somebody wants to charge. But what we're going to do is we're going to, we're going to advertise that over eight years, 10 years, whatever, for even numbers, who knows. And I'm going to pay you 5%.

And so what you did is you just incentivize them to take a longer seller note because you took the capital assets that are just sitting on the floor, not making anything but product, and you turn it into a cash generative asset because they're going to be getting interest on you the whole time.

And then by the way, you can write all of that off and you granted you could write it off if you bought the company or whatever. But, if you take a million dollars over 10 years at 5%, assuming the business can afford it, you actually just gave them the opportunity to generate, I don't know, 100, $200, 000 in additional sale proceeds by engineering your way into a longer seller note.

[00:37:11] Ronald Skelton: And it's a lot better, there's another option there. You can actually do sale leaseback of equipment. 

I have people that I know that's what they do for a living. And I haven't checked on the rates. Yeah, I haven't checked on the rates recently. But you know, before I moved here, probably two years before I moved here now.

Uh, they were running, and that's before the interest rate shot up, I believe. So they were running between nine and 22 percent. So, meaning that if you took, say, out of facility had two million dollars worth of equipment sitting on the floor, they might give you 80 percent of it.

So you're, you're at $1. 6 million worth of equipment and, you do a lease back, you're leasing it back, do a lease purchase back. They might hand you that check, maybe even less. Sometimes they do less than 80 percent of the current appraised value, but then you're going to turn around and pay, 18, 20, 21 percent interest on that until you pay that back off. It's credit card rates. They're extremely expensive. And, um, if you got stellar credit and a stellar business and everything else, you might get them down a little bit from that, but you just did it at 5%. Which is incredible to the seller because they get more money, and to you that you're not paying these, you know, extraordinary rates that you know, a sale leaseback, equipment lease back company would charge. 

And, uh, so I'm very familiar with that, but the rates are, they're outrageous. So I love what you did in that realm.

[00:38:36] Brandon Knowlden: No, I appreciate that. And the thing that you're doing and that I'm doing that shouldn't get lost on your audience is, it's very contextual to the conversation that you're having. And you really, that's something that I honed in my advertising career and you probably just honed over your career.

So it's a little difficult to do if you're a little wet behind the ears with this stuff. Just like sales and things in general, but the conversation wasn't. I want to pay you less. The conversation was, why would I give that money to the bank when I can put it in your pocket? So what you do is you change it from like, I'm a, I'm a curmudgeon that's counting my nickels and dimes.

And you say, unequivocally, unabashedly, my interest is your interest. And when you can align and as, as Jeremy, from our, uh, Harbour club experience, he says, kind of pulled your chair around to the other side of the table and get shoulder to shoulder rather than face to face. If you can see them on that level, and you can prove it, then I think that that's where you really make those breakthroughs. Because a lot of the stuff we're talking about, you kind of have to peel back the onion a little bit. 

And there's probably some private equity guys or some, like investment bankers or somebody that's going to listen to this podcast and I don't mean to like paint with a, with a wide brush and just say that everybody's the same. But I can't tell you how many people that I've spoken to outside the Harbour Club and some of the less traditional M&A routes, more like private equity and search funders and stuff like that. That when I talk to them, they say that they will put in an LOI without, don't read the CIM.

They'll never have a rapport conversation. They'll never have a site visit before like throwing out an LOI. They'll throw out a dozen LOIs a month knowing that they're only going to buy one and they're potentially tying this guy. So like, there's the other thing that we're doing here is we're taking a very human approach where the majority or a lot of private equity folks or family office people and again, like I said, I don't intentionally mean to paint with a white brush, but they don't have a very human approach. It's very spreadsheet. It's very analytical. It's very much about the numbers. And at the end of the day, half of our GDP, I think is the number, maybe even a little bit more, maybe a little less is produced from small businesses.

There's like 30 million small businesses in the United States. And whether or not you look down on a guy who runs a plumbing business if he employs 50 people and is doing 10 million dollars a year, that's a very legitimate business. And so the first thing you're gonna do to destroy his trust is, talk to him like he doesn't know what he's doing and that your spreadsheet is smarter than his 30 years of business experience. So I just want to back the conversation up again or just for a second and just mention that like, all of these conversations are very catered.

They're very tailored. Sometimes you just have to hold people's hands and make them feel heard because as a business owner yourself, how long have you, how long have you run businesses for Ron?

[00:41:32] Ronald Skelton: I am 52 in three weeks. I did my First business, basically mowing lawns. And I'm like, we had two people mowing with me or for me. We were doing dozens and dozens of them when I was like 12. I got told I was too young to work for my father. I literally pushed a push mower five miles into town. Cause we lived out in the country. So i've been doing it for a long time.

[00:41:57] Brandon Knowlden: So first of all, happy birthday soon. Um, second, um, my first business was, I think I was 16 years old. I only mentioned this because the statute of limitations I'm sure is gone, but this is all pre nine 11 all that crap. But, my first business, my nickname in high school was Golden Nolan, because my IDs were, I made fake IDs.

I made, just say quite a bit. But my first business was, uh, was making fake IDs and I made them for a lot of people. And so, yeah. I guess the reason why I'm saying that and like the lawn mowing business and fake IDs and all that stuff aside, you don't have to know what it's like to own a business to buy a business, but it sure does help.

And the highs are incredibly high and the lows are so lonely. When it's Thursday night at two in the morning and payroll is due tomorrow and you need $10, 000 or your people aren't going to eat, that is a very lonely place to be. And a lot of people think that like, Oh, you have a wife, you have a girlfriend, you can talk it through with them.

They can be kind of your emotional support animal. But the reality is that the people we love most are the people that we, we don't want to expose to that. And so there's a tendency with business owners to not talk about things. And so half of what I've seen on these calls, when you get past the introduction called, like people are doing a lot of intro calls, whatever. Half of what my calls are is a therapy session to let the owner talk about the stuff that his employees can't hear cause it's going to scare them to death.

That their husband or wife can't hear because they're going to get freaked out and tell them to go get a nine to five. And so, if you can understand that you can get somebody to sell you their business or give you a few points on the interest or, say I'll take a little bit of a haircut on that.

I mean, I was just in a conversation with it, with a true up with the business that we bought and they had like $30, 000 in equipment that they had bought between the time we made the offer and when we closed. And I said, Hey, look, this is a net tangible assets adjustment. And we actually don't want to pay for the labor associated with installing these machines.

And we don't think we should have to pay for sales tax because we bought all of your furniture fixtures, and equipment. We didn't have to pay for that. Which they could have very easily made an argument that like, yeah, but it's rolled in and whatever. But because I had a strong rapport with them, they said, well, you pay for the labor, but we'll give you the sales tax. Boom. Save 3000 bucks, just because I had a rapport with them and because I understood where they were coming from.

And so, it's extremely underestimated the value of rapport building. And, part of what we did with this acquisition, um, in,the Northeast was to spend a few months building rapport with them and then having them trust us.

[00:44:39] Ronald Skelton: I keep saying that we were actually working on a book that was titled, Not Two Sides. Basically rapport and it's about, you know, this isn't a numbers game. This isn't a, it's not you versus them. It's not really a negotiation as much or a poker game. A lot of people entered in these mergers and acquisitions deals.

They think it's a poker game where they got to put on their poker face and, bluff their way through these deals and it's not. It's a relationship. You've got to build rapport. You've got to get, not just report with the owner, but by time you close, you better have rapport with some of the senior staff and the, or build it quickly.

Then you need a rapport with the, you know, the bottom line employees. I actually can tell you, I, I stopped short of closing on a business because the business is a small business, 25 employees. The business owner said, Hey, I want you to meet every employee before you close. And so I went on one on one sessions and he couldn't make them all.

And those employees told me things that he should have told me. They really did. And by the time we got through with all the conversations, I had to go back to him and go, Hey, I learned a lot through that. I appreciate, I talked to everybody. I appreciate things. We, there's some things we got to fix before we move forward.

How do I put this? Cause I might've said their name in one of the other previous shows. You got to be careful. So there's some things that are regulation for HR and stuff that they weren't doing. And there's different regulations if you're under 50 employees and over 50 employees, but there's certain things you still have to do.

And,he would let it last for a long time, like workers comp and all kinds of stuff. And, uh, OSHA regulated, manufacturing facility, wouldn't have workers comp insurance for six months here and there. And we'd have to you know take people to hospital pay cash and try like there was just things going on that he didn't tell me. And that's a huge liability and I should have showed up in, but and we had a heart to heart because like look if you will falsify that in your document because I looked at my due diligence documents.

I've said if you'll falsify that to my due diligence documents, you'll falsify anything. I can't move forward with you. 

[00:46:30] Brandon Knowlden: That's a problem is where there's smoke there's fire with a lot of these people. 

And like, what you find is that most people, no matter what their business builds, there's some level of them building an ivory tower. And them thinking that their shit doesn't stink and they build kind of a moat and whatever, another analogy you want to use.

But, it was like in my manufacturing business. There was one time where we had 10, 000 units come in from Poland, where we were manufacturing our high volume stuff. And the manufacturing went really well, but the product was these two wooden pieces that had magnets that kind of pulled them together, the paint supplier didn't put the right amount of curing agent into them.

And so, whereas a typical wooden part would have not stuck together. The magnets basically clamped these things together. And so we had like 10 pallets of product. It was like $120, 000 order that were basically glued together because of the paint. And so I opened the first pallet in the first box and saw the problem on the first unit.

And then I opened a second box and saw it. And so I called the manufacturer and he's like, well, did you open all of the boxes? And I was like, look, there's 10 pallets here. First box, first unit and second box, first unit had the same problem. I'm telling you, man, where there's smoke, there's fire. We need you to replace this inventory.

And so if you're dealing with it, like that's one thing for like a tangible asset where it's kind of binary, like it either is or isn't working. But when you get into relationship, man, you also have to, that's a really good point that you raise is you have to have a, like my buddy, um, Jonathan Brown says, you gotta have a superpower to say no and turn away. Because if they're willing to lie to you on something as innocuous as like, if they can't see that you're going to talk to all of their employees and he knows that these things are out there, it's probably because he doesn't think it's that big of a deal.

And so what else is he willing to like, tell kind of like a half truth about. And so, yeah, there's, the reality is, is that you have thousands of businesses you can buy and they have one they can sell.

[00:48:30] Ronald Skelton: And they, to be honest, I still like the guy if he called me up and wanted something to help him. I just won't buy his business because he over, he overlooked it and his excuse or his story, I hate the word excuse. The story he had made up in his head was, well, I took care of it. There's no liability.

Everybody that got hurt during that time period, I paid 100 percent of the hospital bill. Like I covered their, you know, insurance premium. I covered everything. And I said, yeah, but there is state and federal laws that require you to be insured at a certain level. And if we ever got like, I don't know what, what else could happen because like during an audit or anything that we weren't, right?

And, uh, it's just one of those. And, how many other things are out there like that, that you, when you were struggling, you cut the corners on that you just, what made me stop short was, he made it look like in the, in the records. That the premium payments were going out. And, uh, we were still in the due diligence process.

So we didn't, we hadn't finished reconciling the bank statements to the, like the, the books. Which is something I kind of was lax on anyway back then, but now I'm really more interested in seeing, I want to see the bank statements and make sure they match with the, the accounting statements say.

You know, he, it showed a monthly contribution for workers home. Like I look back, cause I remember glancing at it. But, I don't think the guy had any books until his broker told him he needed them and he went back and created what he needed to create to sell it or somebody did. 

[00:49:54] Brandon Knowlden: That's crazy. Yeah. And you run into that a lot because like, it's like one of the strategies that I use to find these businesses are these online databases of like business brokers. Or sorry, not business brokers, but businesses themselves. And if you think about like most people now, you register a URL and there's like the, who is like the, I think it's ICANN where you can like drop the iron curtain and like you, you don't need to see who registered it.

But with the state,if you think about legal zoom, which most people do to register a business nowadays, they will have the registered agent so that it's there's one layer between you and the business owner. But all these businesses that are coming up for sale, they didn't have legal zoom 30 years ago.

And so you have a lot of people that that's just a little limerick about how you can find these people. But like a lot of these people, they design systems and processes decades ago. And if it ain't broke, don't fix it. And so you'll find a lot of people that, you know, this, this business we bought up in the Northeast, they do two and a half million dollars a year, and they had no inventory management for the whole history of the company. They literally just knew that more money came out than went in. 

And they were profitable. They make kitchen cabinets and the kitchen cabinets, like a bunk of plywood is, I think it's like 44 sheets or something like that, but it's four, four by eight, thigh high, whatever. Weighs maybe a thousand pounds, 800 pounds. 

They go through a couple of those a week and they don't have a forklift. They don't have a forklift because they've got a garage that has a classic car stored in it because that's what the owner had as a priority. So like there's things that you'll uncover if you take the time to have those conversations and don't shove your priorities or your prerogative down somebody's throat. 

But yeah, I mean, just kind of like,all of those things were sorted out and we still definitely proceeded with the business because the owners are absolutely fantastic, but, um, every now and then you run into something where it's not that the person was malicious, but negligence is a form of malice when it comes to M&A, because if you found out about that, you can do an asset sale.

So you're stripping the stuff out of one company and put it into another. But God forbid he did a share sale. Cause as soon as you know about it, there's some liability there. And if you're not doing the right, like legal structure or something that you do a share sale and you acquire the company and they come back to you, that could decimate the company.

And so, yeah, you gotta be, you gotta be, you gotta be on your toes about everything. There's a, there's just so many elements to M& A when you get into due diligence that, um, I don't know, you just, you just need time. It takes time. And most people trying to shove these deals, into like a four, six, eight week period. It's just, it's just unrealistic most of the time.

[00:52:30] Ronald Skelton: Awesome. Well, we're above the top of the hour here. What is one thing our audience can do, to help you move your game forward? Is there something that you need an employee you're looking for, or I don't, I don't know. What's, if you could ask one thing of the people listening to the show to reach out to you for, what would you want them to help you with?

[00:52:47] Brandon Knowlden: Yeah. So it depends. I would imagine that most of this audience are M and A folks versus like business owners. 

And there, there may be some business owners, but what I'm doing in my current strategy is building a rollup of custom cabinetry primarily, but also manufacturing companies. So if you know anybody doing above two and a half million dollars a year, preferably that owns their own real estate, I'd love to hear about it.

Geographically agnostic, definitely the United States, but, um, Midwest and Northeast is really where we're focused, kind of like Chicago to New York City, in the north. But, the other thing too, is that if somebody is looking to bird dog any opportunities and is trying to get into the M&A space and they want to joint venture with somebody who's honest and earnest and knows his way around a little bit.

About how to get these deals done, but they're just trying to break into the industry. We're looking for good team members that, that understand the mechanics of this stuff because in the roll up, we're trying to build an executive team and the model that we're pursuing is that we will negotiate the deals and wherever they come from.

But, we'll negotiate the deals and then we need to install operators and those operators will effectively eventually have equity. So there's, I know that that's a little bit of an amoebus answer to your question, but if you know anybody that's doing two and a half million dollars a year in the manufacturing space, we'd love to hear about it.

If you're somebody trying to break into the M& A space and need somebody with like a little bit of experience and some skin in the game, I'm your man. Also I'm just interested in meeting people that are passionate about rolling up their sleeves and generating generational wealth for them and their families.

Because, that's something that I'm, that I'm, I'm very passionate about. I've got some family members with some, some health issues and I've got a big family and I've got two kids myself, and so I'm trying to ensure our future. And if you're somebody who's willing to roll up their sleeves and do the same, then there's probably a conversation to be had there.

[00:54:49] Ronald Skelton: Awesome. We'll hang out after the, uh, hang out for a couple of minutes. I do have two different leads for you myself, actually. And, I know somebody who's closing today on a cabinet making company in Australia. And they're looking to do a roll up here, yeah, I know they're looking to do a roll up here in the United States.

So, uh, they're, in the cabinet making space. So they're in the same space. So you guys might be able to team up and figure out ways to share deals that don't fit. So I think um, that was good. I think we'll call that a show. How do people reach out to you if you want, Linkedin or what's the best way or an email address?

What do you want us to share with the audience so they know how to get a hold of you?

[00:55:24] Brandon Knowlden: Yeah. My website is brandonknowlden. com. K N O W L D E N. You can email me at bradon@brandonknowlden.Com. Or you can find me on LinkedIn. Just, um, search for Brandon Knowlden.

[00:55:37] Ronald Skelton: Awesome. Awesome We'll call that a show and hang out for just a few seconds.

[00:55:41] Brandon Knowlden: Thanks, Ron.