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Dec. 6, 2021

E:37 Top M&A Entrepreneurs Podcast - Daniel Sweet, Sweetwater Partners - 3 Acquisitions

Daniel Sweet specializes in taking healthy Texas small businesses ranging from $1MM - $20MM in revenue, partnering with a management team and financing partners to build a plan to take the business to the next logical level.  Our specialty industries are Technology-, Energy-, and Construction related businesses headquartered in the Great State of Texas. 

00:00 Intro to Daniel Sweet.   Buy businesses in his / founders background 
01:36 How they, the partners started,  asking the question is there any reason why this M&A could not be done on a smaller scale. 
03:24  1000 different ways to finance the deals - 1st deal used SBA loan.  eLearning Company around $1 million in sales
05:00  How he found the first deal -  his personal warm network
05:42   How he assessed the opportunity - could he grow the eLearning company? 
06:47   What was blocking new sales in the eLearning company - only way he got new customers
07:00  What was multiple that they agreed on - 2 and change.   Nice set up.  
07:45   What salary was owner taking out of business - $100k plus distributions
08:05  How long he stayed on - SBA rules
09:17  How was ownership sliced up - equally?  
10:22 How did the "books" look, how clean/messy - was he lifestyle spreadsheet business - bank statements / tax statements only way to validate?
11:45   Did he see $5mm -$10mm growth opportunity 
12:45    Where are profits going?     When will profits be paid out to the owners?   What has happened since acquisition  - revenue trending at $2mm ++
15:45   Has Daniel found a system or perfect type of Professional Services firm to buy and build?
16:30  what is plan for the eLearning company hold,  grow and sell  - 2nd acquisition - where he found the 2nd acquisition,  how he finds his acquisitions
18:10  His 2nd acquisition - Sherpa Consulting - almost same opportunities as first acquisition - lots of cross selling opportunities  - rev was at $1.3 mm - lots of untapped fruit - customer concentration concerns - combined with eLearning no longer problem - how he financed 2nd acquisition - what he did with the legacy people
22:19  What was important to 2nd acquisition seller - really important
23:33  his 3rd acquisition - Oil Engineering firm Scada Systems - was doing $1.6mm in rev - what is upside potential with this 3rd company  - the Law of Supply and Demand in Oil world
28:00  Was 3rd acquisition profitable,  how old was company - financing deal stack - seller main concern - what was acquisition multiple ?
33:45  What do think growth potential in 3rd acquisition - what is that dependent on?
34:30  Acquisitions now doing $5mm boring business - what is next? 
36:36  What is structure of his acquisition company  - what is vision or annual acquisition goal  rules - goal for 2021  - what for 2022?  
38:26  How are they paying themselves - employee or equity law firm distribution partners - what IRR are they looking for?  - focus is on health of acquisition - low hang fruit - profitable result.
42:11  What a crucible of fire stress test taught him about his partners - risk tolerance - does each partner have equal veto power on deals - Doing B2B deals,  what B2C deals are they looking at?
45:30  What has he learned about himself through the acquisition process? 
46:59 is he working on a fund or partnering with a fund - becoming equity partners - rule- money will never control the company - no 51% funded deals - helping people they turn away.


Jon Stoddard: Welcome to the top M&A entrepreneurs. Today my guest is Daniel Sweet. Daniel, welcome. Daniel is actually driving today, so we only have him audio. Welcome to the show, Daniel.


Daniel Sweet: Thanks, Jon. I really appreciate it. I apologize for taking this driving. But this is how 2021 works these days, right?


Jon: Yeah. Well, actually, we're driving back in before everybody is home with COVID.


Daniel: Good point.


Jon: So, tell me a little bit more about your history with buying, selling, and acquiring businesses? Where are you in this?


Daniel: So we're a Texas-based company and we buy Texas-based companies. So what we did, we put together a group of myself and two others, and we buy businesses within our backgrounds. So for instance, my background is 27 years in IP. So we buy technology, one of the other partners has extensive experience in energy. So we buy within there, and the other one in 30 plus years and construction and so we buy construction companies, all within the state of Texas. And our reason for that is just that the network that we've built up in the state of Texas, for people to bring in as additional or replacement leadership positions, is pretty vast. So it gives us an advantage as a small company being able to put people we know, in place to be in charge of these companies.


Jon: Yeah. So how did you guys start this? Did you sit around at, dinner table one day, or did you guys work together and say, "Hey, let's start buying companies from a fund" or what?


Daniel: So actually, while I was working for Mega Global Corp, one of several, I actually started, I talked to some M&A guys that were there. And it was really interesting to me, I like learning stuff. And so I asked them, "Is there any reason this couldn't be done on a smaller scale?" Because I had done a lot of different positions within technology. I started out as a giant nerd. I got dared into sales, at one point did sales and sales management opened offices did all that. And I understand understood how we could build a business within a small firm. And their answer was basically, well, there's no reason you couldn't except for it's not worth the time and effort. Because they were doing billion-dollar deals. So okay, well, I'm smaller than that. So I started at a really small level with technology companies. And then, down the road, the company that I was working for, had invited myself and thousands of my closest friends to try something new. But they gave a nice severance package, I decided I was gonna pursue this full time. And two of my buddies that were in a similar situation, join with me in this and brought their experience levels, and were able to approach this together for slightly larger businesses. And after we got started, we just got hooked, this is so much better than living in the mega global corporation world for us.


Jon: And working for somebody else.


Daniel: Exactly, exactly.


Jon: So what are you talking about the size? Let me go back to this. Did you guys have a fund, put your pool your money together and say, "Hey, 33, 33, 33%?" How do we buy these companies with a leveraged buyout, so let's say?


Daniel: So, what we discovered was there were thousands of different ways to structure a deal. So we did have the money that we put into the deal. And we were just arranging what we would purchase based on each individual company that we bought. The first company we ever bought, we did the thing that is probably the easiest to do on your first company. And that is we use an SBA loan, we all went in for the 10% piece that we had to put in and use the SBA 10 years and low interest to leverage that up and got our first company.


Jon: What was that?


Daniel: What was the company?


Jon: Yeah.


Daniel: That was [inaudible] technologies.


Jon: Say that one more time. Sorry.


Daniel: I'm sorry. It's M-link technologies. eLearning company.


Jon: eLearning company. Cool. What kind of revenue was that doing?


Daniel: So they were doing right over a million a year give or take. Two million or three and nice margins because it was all in-house. It's a consultancy. So they're building interactive video training for Fortune two thousand companies.


Jon: Oh, interesting. How did you find that? Is that in your previous network of contacts?


Daniel: Well, actually, there was one guy who we partnered with on this deal, who was in our previous network of contacts. He spent his career in the eLearning industry, learning, and eLearning. And he had known the owner of this company for like 20 years, he was ready to retire. And he was looking for people to partner with who could bring the financial side of things. So that we could all approach it and take a company that was doing well through the pandemic because everybody has to do video trading now, and expand that.


Jon: So what were your thoughts when you first saw it said, "This guy's been doing it for 20 years, it's only a million bucks, is this the total addressable market, or is this just guy doesn't see how to take it to two to five to 10?"


Daniel: So with almost all of our companies, including this one, it's usually the ladder, so they get to a comfortable size for them, that gives them the lifestyle income you're looking for. And they maintain that size for a long period of time. And half of it is because everything has to go through the owner. So they have zero time left. And so they can't expand it because it relies on them. And half of it is because they're really comfortable with that side, they don't want any more of a management burden. Frankly, they're not very good at sales and marketing at all. And so they do what they do so well that all these customers keep coming back to them. So they stay in business. And they don't, they don't really want to grow in a larger because that would be too much of a pain.


Jon: So they're basically a fortune one thousand companies doing eLearning basically had to be saying no to a lot of potential prospects.


Daniel: Well, so again, the only way he got new customers was if somebody left one of his current customers went to a new place and said, "Hey, these guys are great." And then they bring him along. So he wasn't doing any real prospecting for the last 20 years.


Jon: Yeah. So what type of EBITDA or multiple did you guys settle along with that an eLearning company?


Daniel: So in this particular case, we were at a two and change multiple. And so it was a real nice setup. And the company itself was, again, set up for operations, very tight operations. But there was no real sales and marketing. So we can see where it could grow pretty rapidly after that.


Jon: Yes. So two multiple, that's actually a very reasonable price to it in it. What kind of salary was he taking out of the business? It sounds like a family-run business like a lifestyle business.


Daniel: Right. Right. So he was actually taking just over 100 out of salary. And then, obviously, the rest of the distributions.


Jon: He didn't stay with the business as a consulting or anything with the SBA?


Daniel: He did. We kept him on for three months, SBA has a limit of 12. If you're going to acquire through an SBA, you cannot keep the owner on longer than 12 months under any circumstances.


Jon: Right.


Daniel: So we kept him on for three months to do the transition over. And he was available by phone after that, but that worked out really well.


Jon: By that time, you figured out how to run a million-dollar business, there wasn't anything...


Daniel: Exactly. So I mean, it was the good news about businesses like this, is that more or less, it's business as usual. Because all of their business came from referrals and repeat customers. So if you stood around and did nothing, it would continue. Now, obviously, you've got debt payments in everything else to make, but it would be able to continue on on its own. So if you stood and stared at it, it wouldn't be bad. And then, when you have the ability, you can apply the changes. And the guy we had running the company was the person who had been the operations manager for 20 years, basically.


Jon: Yeah. Did you guys, the three of you, co-sign equally on the loan 33%?


Daniel: No, we were primary. And we had the guy in Dallas who brought it to us. And one of the other people that we partner with, were a small minority partner.


Jon: Was he kind of more like a sponsor share? Did he get a sponsor share of 10%, 15%?


Daniel: So he ended up at 19%. Just stay under the SBA window there. If you're 20% or above, your lifetime limit of five million or your concurrent limit of five million dollars for SBA is eaten into for 100% of the loan, regardless of what percentage you are. So he stayed under that limit at 19. And the other actually wanted to participate at 20. So they were both playing an active role, not a day-to-day role. But they were actively working with us to manage the company.


Jon: How did the books look when he turned them over to you? Were they, ready to go QuickBooks produced them in five minutes? Or was it, it's a lifestyle business, and I'll put my spreadsheets together when I get a chance.


Daniel: Did you talk to the owner before this?


Jon: I've seen it hundred times.


Daniel: That's exactly what it was. Yes. And it worked for him. Like I said, for forever. He did his books on spreadsheets. He was very, detailed, meticulous because he was a tech guy at heart. He handed him off to his accountant and said, "There it is, go to some of it." So,  ultimately there were no there was no application, really, there were no QuickBooks, there was nothing that was intended for financial transactions.


Jon: Yeah, there's a business I'm looking at right now. It's a translation business, Spanish, teach people Spanish. And it's been around for 10 years. So the eight drafts are great. SEO is great. The challenge is that he didn't keep any books over any year. So I said, "Look, we got to get your bank statements. I mean, I don't know if you're making money or losing money, and you commingling it with all your other projects here. So I'm not making an offer and not sending you any money until we see your bank statements." And that is being slow-walked.


Daniel: I can imagine. I can imagine. Yeah, the bank statements plus tax statements as the only way to validate that.


Jon: Yeah. So did you guys look at this business and say, "Hey, this could be a 5 million or $10 million business" and you knew exactly what to do?


Daniel: So the guy we partner with was the industry expert. And he was showing us the comparables for other companies. And it turns out the eLearning industry is really fragmented. So there's no real 800-pound gorilla there. So the growth through a combination of actually adding a sales team, and potential other acquisitions that we can add to it, just from other regions. The potential was at least 10 million over our hold periods, five years. So at least 10 million over five years.


Jon: Are you in the reinvestment stage everything, all cash flows go back into the business? Were you actually taking some kind of profits out where were distributions out as the owner?


Daniel: Usually what happens is the first year all cash flows end up going back into the business because of the expansions that we do. We spend all that money on growth. After that, we do a fraction of profits paid out quarterly to the ownership.


Jon: Okay. Yeah. And are you seeing that right now? By the way, what was the profit margin on an eLearning company? And the reason I brought this up is four or five years ago, I was trying to buy an eLearning company that had all its courses on Udemy. And it was doing 2 million a year 97% profit margin.


Daniel: Wow.


Jon: It was a cash machine. He put $5 million in his bank account.


Daniel: That's crazy. Well, so then, the difference with this company is that they're doing custom eLearning. So everything they do is a new creation. So that's the downside.


Jon: That's a Cody. Yeah.


Daniel: So IP is generally owned by their client. But it was still a 25% profit.


Jon: No, that's great. Yeah. So how long ago did you buy that? And where are you at in the results, planned results metrics?


Daniel: So that one we bought a little year ago, roughly. And we have spent all the money on growth, absolutely. So but we've had a surge in sales as a result of that. And so rolling into the new year, with all these works in progress, you've got billable milestones. So as we get into the new year, there is a huge amount of outstanding AR that we are now beginning to collect. So we're kicking it into gear for the second real full year, second calendar year anyway. And it's shaping up really nicely. We've got a lot of new clients. And there were a lot of delays from 2020 that happened in '21. But among these fortune 2000s, there were some of those projects that were delayed even further. So there's a number of projects that are coming up in '22 now, that are really nice for us.


Jon: Yeah. What are you trying to add revenue now, one year 12 months later?


Daniel: So we're pushing 2 million and this coming year, we expect that to accelerate pretty nicely.


Jon: Yeah. Have you guys figured out a system of like, "This is the best type of business, this rings the bell, let's not do that?"


Daniel: So we found a lot of not do that. Realistically, what we tend to end up buying, I don't want to say we specialize in this, but that's what we ended up buying seems to be mostly professional services firms, which I would not say, are a thousand times growth in a few years. That's not them. But we've gotten pretty good at getting the professional services firms up and running, and with a sales and marketing system in place, so that they can increase nicely over the period that we hold them. I might not recommend professional services to most people. But it just happens to be where our backgrounds are mostly.


Jon: Yeah. What's your plan for this? I mean, is it grow, let's say 5 million, keep its hold, keep it hold or buy and hold?


Daniel: So for this particular one, because it's so well positioned, for additional add ons, we're probably going to hold this much longer than the five year period, we've already added an executive coaching and leadership training company to it, that fits really nicely because they go after that same fortune 2000 buyer of training. So where one side is looking at leadership training, and improving the leadership behaviors that make their teams more effective. The other side is focused on generating skills and improving the skills of a much larger population of workers.


Jon: And where did you find that? Was that in the ecosystem of this eLearning company?


Daniel: So it wasn't we were constantly in acquisition mode. So we look at a ton of companies. We do a lot of networking, which is usually where we find these. And so we actually found this company that had been operating remotely for four years plus, so COVID was no big deal for them. They had already done that. And so, it was a company based out of Ohio, that we moved back to Texas, and put underneath M-link.


Jon: Yeah, what kind of was that? Revenue producing company profitable?


Daniel: Yeah, so they had been around, Sherpa coaching. And they had been around for 24 years, I believe. And it was the same thing, the couple that own them had fantastic at developing this training for Fortune 2000 companies. It had a process and a procedure and a methodology that worked every time. They were great about it. And they had set a specific limit that they didn't want to grow beyond because again, it's just those two runnings it. And that's as much as they wanted. But it's a fantastic company. They do all sorts of amazing training for these fortune 2000 companies that keep coming back because it works. It's just that they also didn't ever really do any real sales and marketing.


Jon: So do the customers overlap between the first company you bought and this Sherpa consulting?


Daniel: Beautifully, they do not. So there's a lot of cross-selling going on now.


Jon: Yeah. What kind of revenue was that do?


Daniel: Almost the same. I mean, they were at, I think 1.3 when we acquired them. That was in August. So, we're doing a number of things to increase the sales implement the systems. But they're doing really nicely. There's a lot of untapped fruit there. So, for instance, one of the largest automakers in the world uses them and has for 10 years for all of their leadership every year and they keep coming back. And so we bring on a fractional sales manager, and the fractional sales manager, one of his first questions is so, "When you went to all the other auto manufacturers with this, what did they say?" And the answer was, "Well, we didn't do that. We don't go on to sales. Sales come to us." "Oh, okay. Fair enough." So there's a lot of room for growth there that we're starting to tap into now.


Jon: Yeah, we're there dangers, like the risk of having too much concentration of customers? That usually happens when you have contracts with Fortune 500 companies, 50% of my business comes from GM.


Daniel: So there was a concentration of concern and that their top customer was, I believe I've seen a lot of companies since then, but I believe it was 30% of their business. Yeah. But when you combine it with M-link that diluted out and it wasn't a big deal anymore.


Jon: Interesting. How long have you been on Sherpa coaching?


Daniel: So that's been since August?


Jon: August. How many businesses have you acquired?


Daniel: So right now, we have acquired, this year, those two and one other. And we are scheduled to acquire one more business. It'll be in December before the end of the year.


Jon: Yeah. How did you finance the Sherpa acquisition?


Daniel: So Sherpa was a combination of lending and selling traditional lending and seller financing, primarily. So we did a structure that works for everybody with those two factors. And the owners were happy. And certainly, the so what we found is a lot of these employees that have aging old owners in the back of their mind, they're always saying, "Okay, what happens next,? They can't do this forever." So when we come in and buy the company, and put in new leadership, they're actually relatively relieved, because they can now see, "Well, okay, my job is going to continue." This thing can go on for a good long time. And they get pretty excited about the growth changes that we're planning on making.


Jon: Yeah, did they what was important to that Sherpa coaching owner? I mean, it was getting the right valuation from it, money upfront, or do they want $100,000 a year for the next five years? What were they looking for?


Daniel: So it was a combination for them. Really, what was important to them, we find this to be true in a lot of our acquisitions. What was really important to them is that they find people who understand their industry, who are going to keep their employees on, keep the company name going, and be able to take what they've done, and grow that to the next level. So, they want somebody to look after their baby, as I've heard it say because they've spent so much time with this, they don't want it to just be dissolved or absorbed and just taking the customer list, or they're looking for people to really take care of their business as one of the most important qualifications for somebody who's going to buy them.


Jon: Yeah, that doesn't change from a million-dollar company to a $500 million company.


Daniel: Well, I haven't done that deal yet. So that's good to hear.


Jon: Neither have I but that's what I've read. Yeah, so what was the third company that you purchased?


Daniel: So a third company is a SCADA company. So they do oil and gas pipeline networking. So they are primarily an engineering firm, where they do the design and consulting around SCADA systems, which was, I don't know-how. So a SCADA system is, think of it as a network for machines. So factories, pipelines, power lines, they all operate on, what they call an OT network that is separate from the network that you get an email and everything else on. Because if something goes wrong with OT, well, then you get the Colonial Pipeline situation. So it's specifically kept separate from major networks, and even the internet. So that, in this case, for pipelines, it can see where the oil is flowing, what the temperature is specific gravity. They can control the valves all throughout miles of pipeline. So it's a control system specifically for, think of it as a computerized device.


Jon: Yeah, so it's a software solution.


Daniel: Yeah, basically.


Jon: And how big was that in revenue?


Daniel: So in revenue, they were doing... So we just acquired them and there'll be 1.6 this year.


Jon: 1.6. Wow. Yep. You guys, interesting, I think you're your partner step off it goes, "Hey, now I think we need to get an O&G software solution to so I can have some contribution."


Daniel: Well, I mean, everybody's got a play, right?


Jon: So there's no overlapping O&G with the M league or the Sherpa coaching. But what's the potential with that?


Daniel: So, in my opinion, and lots of people do disagree with me on this one. But in my opinion, we're about to see a massive expansion of oil and gas-related projects. Now, that's not exploration and production, because they're very nervous on that side. Right now.


Jon: It's not what the Biden administration says.


Daniel: Well, so what every time the Biden administration speaks, I love it, because the price of oil goes up.


Jon: They released 50 million barrels from the reserve, and the price goes up to 82 bucks.


Daniel: Well, that's because now you've taken the reserves, we have that last there, several days usage, and you've gotten rid of them. So now you've got nobody's drilling new wells, you've got more demand than supply. You have regulatorily constrained people who want to develop more oil. And you've gotten rid of the last that we had in the tank. So now there is no control on price, and it's going to rise for a long time to come.


Jon: Gosh, you would just think that somebody would know a little bit more about that law called the law of supply and demand.


Daniel: Is that still something? Is that still something we observe today?


Jon: I heard it was a law, not a theory.


Daniel: So in the oil and gas world, if you're doing oil and gas services, the biggest determinant of how well you're going to do that year is what the price of oil is. And with the price of oil regularly rising, it's great for those businesses. In order for the price to go down, more supply has to come online. OPEC has said, "You know what? We've had enough of your shale nonsense. We've been spending out of our reserves for five or six years, we're going to go ahead and reap the rewards while we can." And in the shale world in the US, the drillers out there do not feel comfortable drilling because they feel like not without good reason that they're being targeted. So now you've got these operating wells that you've got to make life as long as possible. And you've got all these pipelines that must work because the option other option is you can truck out the oil or you can put it on a train, either way, has larger environmental concerns. And so all of the oilfield services companies that have survived 2020 competition is reduced because there are few of them. And now that oil prices are over $80 and going to spike from here. They're in great shape.


Jon: Yeah. So this $1.6 million acquisition, was that profitable?


Daniel: Oh, yeah.


Jon: And the guy that owned that, was he around for 20 years also or?


Daniel: Thirty-six.


Jon: Thirty-six. Interesting how you're finding all these companies where the guy is probably stagnant or just exhausted?


Daniel: Exactly. And we can breathe a little new like that.


Jon: Yeah. What was the financing deal stack there? What did that look like? How did you present that offer?


Daniel: So we went through a lot of things. This owner was blessed with two lawyers to help advise him. And that created a lot of complexity over time. We signed an LOI with him. And after his lawyers got through with it, it got more and more complicated. So in the end, we just said, "Okay, let's assume we just do an as-is deal right here, what's the price on that?"So now, that ended up being a combination of our money in bank financing, just effectively one single payment at a nice discount, because we were just doing it all upfront. But also, the other half of that is, this owner is going to stick with the company for three years to ease into retirement. And he's also going to effectively be mentoring his replacement for the next three years.


Jon: Did he keep a percentage of the company? Or was this some kind of seller financing or what?


Daniel: So, in this particular case, he didn't retain any percentage of the company. He is being paid on salary still. But again, his main concern is that it gets handed off smoothly, and the company continues to operate. So we found a really qualified number two for him, Lieutenant, who he is going to be mentoring for the next three years and offloading a lot of the stuff where he's the bottleneck, like statements of work. So that we can grow the business.


Jon: Was this person number two, in the company or outside the company?


Daniel: No. Again, this is somebody that was in our network. Because we have connections within the oil and gas world, we can pull them in and he is much younger and is the perfect replacement over time.


Jon: Yeah, what kind of multiple did you get on him? What he was asking before the cash discount? And what was it a different multiple, like a point or whole point or two points or something?


Daniel: So in the end, what he was looking for was really, again, to back up a second, a lot of professional services companies where there's no ongoing contract. So there's no ARR effectively at all. They'll go for between one and two times EBITDA or some version of EBITDA.


Jon: Yeah. Let me ask you about this. That is really low. And I used to be in software. So how old was this code at 36 years old?


Daniel: Well, so again, they're not developing code, per se, what they're doing is they design networks. So they stay up to date on what the industry is doing. They do a full design on our network that may go over like a third of a country. And they just stay up to date on what the latest standards are so that they can put in place this design for the network. And so for the last, as an aside for the last 20 years, they've been doing pipeline cybersecurity, which was a piece of what they did, because you got to protect the network. Ever since Stuxnet, it turns out, there are countries trying to get control of our infrastructure. So they have done pipeline cybersecurity for 20 years, which now it's a very hot commodity. Since the Department of Energy and the Department of Transportation has told all pipeline owners, you need a cybersecurity plan. You need a remediation plan, and you need to tabletop this thing, and oh needs to be done in the next 90 days now.


Jon: So is that a requirement and do you get any tax deductions on that? Because put that in place or it's just a new cap expense?


Daniel: So all of that is a requirement of the pipeline owners. So that means a ton of business for this company. Because there aren't many companies that have cybersecurity specifically pipeline cybersecurity skills. But the Department of Energy is forcing every pipeline owner since colonial to put these plans in place. So it means a ton of new business for this company.


Jon: Yeah, so it's more like it's an IT services firm to design a network, it's not software like pay monthly kind of deal?


Daniel: No, no. Okay. So they'll go in, they'll do a design for the supermajors, the majors, they'll go in, and they will even write the specs for the RFP and sometimes write the RFP for the hardware firms that are going to bid on this thing. So there's lots of SCADA-based hardware that controls all the pipeline and valves and everything along the pipeline, that are going to bid for this business from a super major oil firm. So this company does the design for the network to make sure it's secure. And then they do the RFP instead of the specifications. And then they'll also project manage the implementation if that's what the customer wants.


Jon: And your partner has the domain expertise in this particular niche. What does he think the company can be?


Daniel: So the biggest limitation on the growth of this company, is really the skill set. There are a lot of folks who know, pieces of SCADA networking. This company has some guys that have immense backgrounds in this area. And what the biggest limitation is we're gonna have to bring in younger guys or gals who have this skill set, but it won't be nearly as mature. And we have to train them up in everything they need to know. So that's the growth limitation is just the number of people with that skillset we can bring in.


Jon: Got you. So you've got now a $2 million M-link company, you got a Sherpa coaching company, and then a scatter O&G networking company, you're doing about $5 million in revenue now and all profitable.


Daniel: Exactly, that's how we buy it.


Jon: Yeah. What's next? Are you going to stick with a million-dollar average age 20 years old?


Daniel: That's not the intention. That's just what comes to us.


Jon: I love that boring stuff. Because you know that they're really tired. They're looking for a transition. They're exhausted and they're stagnant.


Daniel: Exactly, exactly. So next, we are actually approached by somebody in Houston, that has 20 years of experience in HVAC, and wanted to acquire his own company. So we've worked with him and some finance partners. And before the end of December, we'll have closed the first HVAC plumbing company for him. And then we're going to we're the plan is to do about a $10 million roll-up of additional small HVAC companies around Houston. And tack them on for this guy. So he's going to do the operations because he's our domain expert. We're going to identify and negotiate and by the companies that tack on, and we're going to grow this thing to a significant size.


Jon: Yeah, interesting. I did an interview with Adam coffee who buys 10 to $50 million HVAC companies around the country. Yeah. How is this [crosstalk]? Go ahead. Sorry.


Daniel: I'm sorry, HVAC in Houston. It's just a no-brainer. They're always profitable. Yeah,


Jon: Well, it's hot and humid.


Daniel: All the time.


Jon: Yeah. So what's the structure of this? Do you have a holding incorporation company at the top? And are these LLCs, each separate LLC or something different?


Daniel: So most of the HVAC companies are s-corpse, and then we have a holding company above them.


Jon: Yeah. What about the other software company? How do you have that setup?


Daniel: So we have both software companies are an S-corp with an-S corp holding company above them. So the idea is eventually when we do sell them, they'll all be combined together in the single holding company, and we'll sell the holding company.


Jon: Interesting. What are you trying to get this too, you have a vision for what size of revenue you want this to be?


Daniel: So we don't have a regular vision so much as we have an annual acquisitions goal. Because there are rules for our acquisitions, as in, they must be profitable, we have to be able to get them at a reasonable rate so that when we step into them, they're still making money. It has to have a customer base and all that. So we've got rules behind what we do. We just set a goal for acquisitions for the year. So this year 2021, our goal was four,  we're going to hit four. So good news there, with some new people on techniques that we're looking at, we're actually looking at eight for next year.


Jon: Yeah, why is this? Are you bringing a new partner is or as you just got a better deal flow?


Daniel: So we have definitely had better deal flow. And we're going to bring on additional analysts and salespeople to be able to go through that deal flow at a much rapid, more rapid pace.


Jon: Let me go back to this, how you guys are paying yourselves a distribution of profits? Or are you an employee of the corporation at the top? Or is it you guys, just, "Hey, here's the cash flow out of this business, or it's not cash flowing. Here's your share."?


Daniel: So I am an employee of Sweetview partners. And so as we put together each of these deals, in a lot of ways, it's a lot of a law firm model. But it's you eat what you kill. So we all have the opportunity to participate in whatever acquisitions we bring on. Usually, we each are buying in with our own funds. And the funds that come back, are based on the profitability that we spent that we payout quarterly.


Jon: Yeah. And are you looking for a specific number IRR number?


Daniel: For our own company, or for the portfolio in general?


Jon: Yeah, portfolio general.


Daniel: So again, there's no specific number we're looking for. We know that if we acquire healthy companies that have no idea how to do sales and marketing, and we apply additional leadership and infrastructure and fractional sales manager, fractional marketing manager to each of these when we buy them, we know they'll grow. So it's just a matter of time as to how much money they'll produce. So that's not a pressing concern for us? Well, I mean, certainly profitability is a concern for us. But we know if we do the right things for these companies, they're perfectly situated to grow. So again, we focus on the number of acquisitions we can do. And since all of our acquisitions have to be self-supporting and healthy, each one we acquire will mean IRR down the road. And we don't worry about what that specific target is for the portfolio as a whole. We look at these as individual companies and we have individual profitability targets, which will, in the end, bring us the money, we need to keep things running to keep us fed, going on cruises, all that fun stuff.


Jon: Yeah. No, it makes sense. I mean, I some funds or some groups that are companies, their criteria way they're cratering the IRR that they need. So they work backward about what that profitability takes. And maybe growth from a 1.6 to five is not as big as a deal to do that.


Daniel: So generally speaking, again, we have each company has to meet certain requirements and certain profitability goals. So the targets take care of themselves. What we look for is we look for focus on the key items that we can best produce profitability right now with this company. And those obviously keep changing over time. So we implement things. We relook, it's using operating systems of various sorts, we really look at what's out there, what's the best opportunity for us, we get involved with those next few items. There's always just way too much low-hanging fruit for us to go for when we first get in. So it's a matter of prioritizing low-hanging fruit. And we know if we go after it, profit will result.


Jon: Did you guys, your partners, did you learn anything about new about your partners that only show up after the crucible of fire about something going right, something going wrong, that you didn't see before? Or you guys old enough and been around long enough to say, you know?


Daniel: Yeah, any partnership, you're always learning about each other. You learn what people's real risk tolerance is, you learn how they approach hardship, you learn all these sorts of things. But in the end, the three of us have a really good mixture of skill sets and views. So we get a whole lot more out of the three of us looking at any given company, whether it's pre-purchase or post purchase than you do with any individual, and sure, do we sit around and argue about them. Yeah, we do. But in the end, we have a good enough relationship, that we're not looking to attack each other or we don't distrust each other. So you do have to have that trust. So that when the argument is over, we go, "Okay, well, that's how we're going forward. Let's move on."


Jon: Yeah. Does each one have veto power over that? Or as somebody who's ever stood up and said, "Hey, you know, we gotta go for this one? Because I know we can do this." And two other guys say, "No, I don't think that's possible to do." But they don't have any experience in that industry.


Daniel: Right, so we don't get involved in deals that we don't agree on. We haven't specifically, again, we're a small company. So we haven't put together a list of rules that says anyone veto means we don't do it. But in the end, if we can't convince the other partners to do it, then there are enough opportunities out there that we're all gonna agree on. And it's not worth creating the infighting among the partnership to go after a deal that we don't all want to do. There are lots of companies out there.


Jon: Yeah. And you're just looking in the Texas area. Well, you bought a wonderful while back down.


Daniel: Right. So we'll bring them back to Texas if we ever had already had a headquarters here. But we're looking for all of our companies to be based in and the companies are seated in Texas.


Jon: Are you going to look at any B2C companies that are all B2B type companies?


Daniel: So our focus is B2B companies generally. Now, there is always an exception. And usually, it involves guns these days. So lots of our people really like gun stores and shooting ranges and that sort of thing. Yeah. So if we do get involved in B2C, it's probably going to be something around that. But our focus is really B2B, I trained in six sigma. And we try and layout our rails and say, "Listen, if we stay within these guardrails, we know what we're doing and we will stay within enough of a lane that we won't get ourselves into such a bad situation that it will crater any given thing."


Jon: Yeah, circle of competence.


Daniel: Exactly.


Jon: Yeah. Have you changed any, learn anything from when you started and where you are today about, who you are, like, collared guy today, or what or just happier because of the what the risks I'm taking?


Daniel: So we are constantly learning and changing. Without that, I don't know that we would be able to keep doing this. But the reality is one thing that one of the partners keeps saying that people we're interviewing, we're doing some interviews right now is, are there stressful situations? Sure. Is there trouble? Absolutely. Is it potentially multiplied the more companies you get? Potentially, yes. But I would never trade this for any regular job ever again. I don't feel like I'm working here. We're just having fun.


Jon: Yeah, you're never going back to the ordinary world.


Daniel: No, I don't think they would take me.


Jon: Unemployable.


Daniel: Yeah, pretty much.


Jon: Good. So you've got another HVAC closing five deals in the hopper or even more than that next year? What's next? I mean, are you thinking about raising some capital to help you acquire these companies faster?


Daniel: Not really. So in looking into that, having your own fund is a special layer of hell, apparently. So what we tend to do is tend to partner with those companies. So we were talking to a guy who has fun he spent the last year putting it together. I think it's a $20 million fund now. And he cannot find a company to buy that meets their requirements for the sales life. So they're looking and they have a real difficulty finding companies that are either way overpriced or falling apart.


Jon: Yeah. And [crosstalk] the money or is he talking about acquiring the company for you?


Daniel: So we would become equity partners with them. So we've leaned into the neck [crosstalk] I'm sorry?


Jon: Controlling interest, he would become a controlling interest.? I mean, sometimes a file mandates that say, "Hey, we got on 51%."


Daniel: So we don't do that. Our basic setup is that the money will never control the company. So we develop very amenable arrangements, the agreements that we have, make sure that their rights are protected. But we don't do 51% funded deals. But, in this environment, it turns out that they've been good at raising money in a fund, which they have to deploy. Turns out that we've kind of lurched into being good at finding companies that are for sale that haven't been misled through advisors at this stage. And so the partnership works really nicely.


Jon: Yeah, it's like two matches right there. I mean, he needs confidence. And you may need money. Does he return the money if he doesn't find investments? Or is there some kind of sense of urgency?


Daniel: Well, there's always a sense of urgency when you can't find something to buy. Because the people who gave you money said, "I could have put it in the bank on my own. You better do something with them sooner I go take it back."


Jon: Exactly. Yeah. Well, Daniel, I mean, this is a great conversation, I really appreciate you sharing details about your deals and your deal flow, I really wish you the best of success on this.


Daniel: Thank you. I appreciate it so much. I appreciate you having me on. We always love talking to people about this. And, frankly, we spend more time talking to investors, and actually individual companies, who we will end up doing business with, in the end, not because we like them, just our situations don't match. And half of the fun we get to have now that we're not part of big companies, is we get to help everybody we talked to we get to push companies. I know an investor that does what you want, they're over there. Or I know of a company that you're looking to buy, it's over here. And we just create a community that really serves each other. And that's half the fun.


Jon: Yeah, you're a less compartmentalized entrepreneur versus being inside a company.


Daniel: Exactly.


Jon: Yeah. Well, geez, I want to say thank you very much. We've come to the end of our time, and I really appreciate you being a guest on the top M&A entrepreneurs.


Daniel: I appreciate it, Jon, thank you so much.


Jon: Okay, take care.


Daniel: All right. Bye-bye.


Jon: Bye.