From Real Estate to Manufacturing: One Entrepreneur's Journey to Acquiring Undervalued Businesses

Joe Zilkowski recently made the transition from real estate investing to small business ownership, acquiring two businesses at remarkably low multiples. In this interview, he shares the details of his journey and the lessons learned along the way.

Background in Real Estate

Joe's entrepreneurial spirit emerged early on. In high school, he posted handyman ads on Craigslist, charging $20-25 per hour for odd jobs. This continued through college, where he met his future business partner.

After graduating in 2020, Joe and his partner began investing in real estate. Within two years, they had acquired 130 rental units. However, the cash flow wasn't as substantial as they had hoped, with each partner bringing home around $5,000 per month in a good month.

As interest rates began to climb in 2022, deals became harder to find, and their previous strategies for preserving capital were no longer viable. This led Joe to consider other opportunities.

Pivoting to Business Acquisition

Exposed to the concept of buying businesses through podcasts and social media, Joe decided to explore this avenue. He began his search on BizBuySell in 2022, looking primarily at businesses in warmer climates like Florida, Texas, and the Carolinas.

Joe's criteria included:

• Purchase price up to $1.5 million
• Minimum of $300,000 in cash flow after debt service
• $100,000-$150,000 in seller's discretionary earnings (SDE)

After reviewing about 150 businesses over six months, Joe came across a restoration company franchise opportunity in Central Florida.

First Acquisition: Restoration Company

The restoration company consisted of two corporate-owned territories that had been established for 7-10 years. Key details included:

• Purchase price: $515,000
• Annual revenue: $1.6-1.7 million
• Seller's discretionary earnings: $500,000 (Joe estimated $350,000-$400,000 to be more realistic)
• Equipment value: Approximately half of the purchase price

Joe acquired the business using an SBA loan with a 10% down payment and 10% seller financing. The process took longer than expected, closing in May 2023 instead of February or March.

Challenges and Learning Experiences

Upon taking ownership, Joe faced several challenges:

• High volume of daily calls (100-150) from operations managers, technicians, and customers
• Difficulty managing two locations 2.5 hours apart
• Hiring and subsequently letting go of an operations manager
• Understanding the intricacies of the restoration industry
• Managing cash flow with upfront commission payments to plumbers and delayed payments from insurance companies

Second Acquisition: Wood Veneer Manufacturing Company

After selling the restoration business in February 2024, Joe began searching for a larger business with more established systems and management in place. He came across a wood veneer manufacturing company in Wisconsin:

• Listed price: $1.595 million
• Annual revenue: $11-12 million
• Average SDE: $800,000
• Years in operation: 20+

Despite the attractive financials, the listing had minimal information and no photos. Joe reached out and discovered a well-established business with consistent performance, even through economic downturns.

Deal Structure and Closing

• Final purchase price: $1.4 million
• Structure: 10% cash down, 10% seller note, 80% SBA loan
• Included $2.6 million in inventory (an additional $1.6 million for only $50,000 more)
• Valuable equipment worth over $1 million

The closing process was smoother than Joe's first acquisition, partly due to using the seller's existing bank for the SBA loan.

Key Takeaways from the Manufacturing Business

1. Industry knowledge is crucial: Joe is learning the intricacies of wood veneer manufacturing from the previous owner.
2. Customer concentration can be a concern: The top customer accounts for 40% of revenue, with the top 3-4 customers representing 80%.
3. Understand the industry dynamics: The wood veneer industry has undergone significant consolidation, limiting options for both suppliers and customers.
4. Retain key personnel: The previous owners' daughter stayed on as a manager, providing valuable continuity and expertise.
5. Recognize the value of existing systems: The business has a custom-built ERP system that works well for their specific needs.
6. Cash flow advantages: The business benefits from favorable payment terms, receiving payments from customers before having to pay suppliers.

Lessons for Searchers

1. Don't overlook older listings: Joe found his second business by revisiting listings that had been on the market for over 30 days.
2. Understand the motivations of the seller: In this case, the sellers prioritized their employees' well-being over maximizing their sale price.
3. Take advantage of the seller's knowledge: Joe is spending significant time learning from the previous owner to understand the nuances of the industry.
4. Consider using the seller's existing banking relationships: This can streamline the closing process and potentially lead to better loan terms.
5. Look for businesses with strong, established systems and processes: This can make the transition smoother and reduce the need for immediate changes.
6. Be prepared for unexpected challenges: Even seemingly straightforward businesses can have unique aspects that require adaptation and learning.

Joe's story demonstrates that with persistence, thorough due diligence, and a willingness to learn, it's possible to find and acquire undervalued businesses with significant potential. By leveraging the knowledge of previous owners and retaining key personnel, new owners can successfully transition into unfamiliar industries and continue to grow and improve the businesses they acquire.

Article created from: https://www.youtube.com/watch?v=py4mabdP6b8