with Erosion control services business · Erosion control services business
LenderHawk analysis. Not affiliated with or endorsed by Acquisitions Anonymous.
The hosts see the erosion control company as a solid, profitable operator in a necessary niche, but likely priced above what normalized free cash flow and concentration risk would justify.
A contracting business can post 70%+ gross margins and still be a mediocre acquisition if capex and concentration swallow the free cash flow.
Customer concentration matters more when the top accounts are all tied to one construction cycle and one geography.
If normalized earnings jump sharply year over year, buyers should test whether the change came from true operating leverage or a one-time structural shift.
A business with three younger founders may still be transferable, but only if key customer relationships are institutional rather than personal.
Lenders will underwrite the normalized earnings base, not the seller’s best-year EBITDA, especially when prior-year EBIT was far lower.
Businesses that require local relationships can be strong buys for a buyer already in the market and weak buys for an outsider.
High revenue growth does not offset weak transferability if the customer base is concentrated and the operating model is labor-heavy.
A deal can be attractive only for a buyer who already has the right geography, relationships, or operational experience to preserve revenue after closing.
When to use: Use it when a business depends on local market relationships or founder-led sales.
The erosion control business reported $13.9 million of estimated 2021 revenue and about $2.5 million of estimated EBITDA.
Mills summarizes the teaser financials for the Southeast contractor.
Revenue grew from $6.3 million in 2018 to $8.5 million in 2019, $9.7 million in 2020, and an estimated $13.9 million in 2021.
The hosts compare the company’s recent growth trajectory.
The top five customers account for about 65% to 70% of revenue.
Mills flags concentration risk in the erosion control business.
The company has more than 115 clients and operates from three locations in one state.
Mills describes the operating footprint and customer base.
Capex runs a little over $500,000 per year and includes seeders, pickup trucks, skid steers, and trenchers.
The hosts discuss why EBITDA overstates free cash flow.
Gross margin is around 74% to 75%, with EBITDA margin near 18%.
Mills notes the company’s unusually strong margins for a contractor.
The 2020 EBIT figure was about $215,000, far below the 2021 EBITDA level.
The hosts question whether the earnings jump is fully normalized.
For the marketing agency, revenue was about $15 million in 2017, $52 million in 2018, $15 million in 2019, and $105 million in 2020.
Bill and Mills reverse-engineer the teaser and realize the business is highly cyclical.
The agency projected only about $31 million in revenue for the current year after a $105 million election-year spike.
Mills hypothesizes that the business is tied to political advertising cycles.
Underwrite this contractor on normalized free cash flow instead of headline EBITDA.
Why: Annual capex is large enough that EBITDA materially overstates distributable cash.
Push hard on where customer relationships actually live before assuming the business transfers cleanly.
Why: The founders may be the real reason large builders keep sending work.
Stress-test any business that has a big growth jump by asking whether operating leverage is real or just a timing artifact.
Why: A one-year spike can hide weak underlying earnings power.
Demand a lower price when top customers are concentrated in one geographic construction market.
Why: The revenue base is vulnerable to a single regional downturn.
Treat marketing agencies with huge year-to-year swings as highly seasonal or event-driven businesses until the underlying driver is proven.
Why: Election-year or campaign-driven spend can disappear fast in off years.
Require meaningful seller rollover if the seller wants to stay involved after closing.
Why: Continuity without skin in the game leaves the buyer exposed to misaligned incentives.
Mills cites a similar business serving track-home builders where competition was limited and the operator could run many homes in parallel for a few builders. He uses it to show that contractor-like niches can be excellent when the customer base and market structure are favorable.
Lesson: A niche contracting business can be very strong if the operator has local relationships and a limited competitive field.
The hosts infer that the agency’s violent swings in revenue likely match election cycles: huge spikes in even-numbered years and sharp drops in off-years. That pattern makes the company look far more concentrated than the customer list suggests.
Lesson: Indirect concentration can hide inside an agency business even when the formal customer list looks broad.