Would You Buy This Software Agency?
Michael Girdley analyzes whether a Canadian software agency is worth $3.9 million Canadian. The margins are good, but will the clients stay if the owner departs?
Good Morning!
Here are today’s highlights:
In the latest 21 Hats Podcast, the owners talk technology, credit cards, and anxiety.
The manufacturing boom is just getting started.
The labor shortage is still very much here for hotels.
For 46 minutes, Jack Stack and the Great Game of Business had a Trader Joe’s.
ACQUISITIONS
In his Deal Breakdown newsletter, Michael Girdley looks at a Canadian software agency that’s on the market for $3.9 million Canadian (3.6x profit, 1.9x revenue): “They build software for clients, and the clients pay them. At its core, this kind of business is often labor arbitrage. All the business and sales staff are usually located in the country where the business is based (Canada, in this case), but the labor is overseas. The agency has its trusted staff, systems to work with them, and a sales/customer service function. The customers get a trusted vendor and don’t have to cross a bridge too far regarding culture and work style.”
“It’s been around a while and has a good profit margin. That tells me they’ve probably got some good systems figured out, and the profit margin says they’ve probably got offshoring figured out.”
There are two types of agencies. Type one is a commoditized service like SEO, custom app building, or graphic design. Same deliverables across all the vendors. So, your competitive advantage is your relationships with your customers for the most part, so you’re buying yourself a job.”
“Type two, it’s an agency in a specific niche with specific expertise tailored to a problem type or industry. This is more attractive to strategic buyers/roll-ups or someone who owns other agencies. The value transfers to the new owner when the old one leaves the business.”
“This smells like a Type One, so that has me worried. If this business is based on relationships with the current owner, there’s a danger the customers leave at the sale, too.” SUBSCRIBE HERE
THE 21 HATS PODCAST
Managing Your Tasks, Your Credit Cards, and Your Anxiety: This week, Jay Goltz, Jaci Russo, and Sarah Segal talk about whether it’s finally time for Jay to enter the brave new world of task-management software. That’s, in fact, what his two kids in the business are encouraging him to do. As it happens, Jaci and Sarah have tried most of the project-management tools out there, and they kind of love them—but with one caveat: They can be a lot of work. Which is all Jay needed to hear. After that, we talk about the challenges of managing credit cards and points, and Jay explains why, after 40 years, American Express is no longer what’s in his wallet.”
Plus: the owners tackle a question posed by an entrepreneur with a very new startup: “When does the anxiety of a new business subside?” asks the newbie, which prompts some laughter and this answer: The anxiety subsides in the 42nd year, says Jay, who’s been running his business for 42 years.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
MANUFACTURING
The manufacturing boom is just getting started—especially in red states: “Democratic lawmakers passed two key climate laws a little more than two years ago, with virtually no Republican votes. Since then, companies have announced $170 billion in new or expanded factories and mining projects in the U.S. that would add around 200,000 new industrial jobs, according to data from Atlas Public Policy and Utah State University. The new industrial jobs would be for making products such as batteries, electric vehicles, solar components, electrical grid supplies and equipment, or wind turbines, as well as critical minerals mining, processing, or recycling.”
“Industry experts say Republican-leaning states are luring companies with policies such as easier controls over land development and lower costs for labor, taxes, or electricity.”
“Big winners include Georgia, which has seen $26 billion in investments announced in a little more than two years. In all, around $106 billion in factories and mines are under construction across the country, $91 billion of which have been launched in the wake of the climate laws.”
“An auto-industry production shift toward EVs has given rise to the so-called ‘battery belt,’ which spans from Michigan to the South. It is so large—around $139 billion announced in roughly the last 15 months (and following $33 billion announced in the two-year period before the climate legislation)—that it overshadows other emerging domestic supply chains.” READ MORE
HUMAN RESOURCES
Despite wage hikes, hotels are struggling with staff shortages: “Hotel owners have been on an epic hiring spree. Yet even after clawing back hundreds of thousands of jobs during the past two years, the industry is still light on staff and often struggling to adapt. Daily housekeeping for all guests, room service, and other amenities that were reduced or eliminated during the pandemic are still lacking at many properties. At the same time, hotels across the U.S. have held their daily room rates near all-time highs this winter, in part to offset the increase in wages to lure workers back. Hotels will collectively pay $123 billion in compensation this year, up more than 20 percent from 2019, according to the American Hotel & Lodging Association.”
“Some hotel owners now fret that a guest backlash could be building as smaller staffs can compromise the level of service and higher wages threaten to push the cost of travel even higher. ‘If we’re expecting empathy from consumers, we’re not going to get it,’ said Bob Habeeb, chief executive officer of Maverick Hotels & Restaurants, which owns about two dozen hotels, mostly in Chicago and the Midwest.”
“Habeeb expects he will need to increase wages across his hotel portfolio by 10 percent this year—a cost that will be passed in part on to guests. ‘Consumers are going to have to pay more,’ he said.”
“Workers are often hesitant to return to the hotel industry after the mass layoffs in 2020, said Chip Rogers, CEO of the American Hotel & Lodging Association. Many switched to other industries with big pay raises. Immigration laws are also capping the amount of seasonal workers the industry can hire.” READ MORE
FAILURE
Florida has had a surge in business bankruptcies: “A 51 percent year-over-year increase in Chapter 11 filings in the Southern District of Florida largely accounted for the spike in 2023, according to the latest court data. In the Middle District of Florida, an area that covers Orlando, business bankruptcies returned to roughly the same volume as before the pandemic, with Chapter 7 cases jumping 44 percent between 2022 and 2023. Chapter 11 reorganizations, on the other hand, are on par with the average volume filed in the Middle District since 2015, the data shows. Trenam bankruptcy attorney Stephanie Lieb flagged rising pressure on small businesses, in particular, indicated by a large increase in defaults on government-guaranteed Small Business Administration loans in recent months.”
“The SBA reported about $532 million in 7(a) loan charge-offs in 2023, a 14 percent increase over 2022 and 31 percent increase over 2020, according to the agency’s latest fiscal-year report. Bad loans charged off from the pandemic-era Paycheck Protection Program ballooned from $4.8 billion in 2022 to $10.6 billion in 2023, the data shows.”
“Businesses with thin profit margins, such as freight logistics and restaurants, have been more susceptible to the higher interest rate environment, she said. ‘There’s a squeeze there, and the Fed has signaled that they’re not budging in the short term,’ Lieb said.” READ MORE
REAL ESTATE
The warehouse boom is fading: “The e-commerce boom didn’t just change consumers’ lives, it transformed entire regions, turning backwaters into logistics-driven boomtowns. Now, some of those regions confront an uncomfortable question: What do you do when the boom ends? Nowhere is that question more pressing than in San Joaquin County in California’s Central Valley. A decade ago it had one of the highest unemployment rates in the U.S. Many of its workers relied on seasonal agricultural jobs. Relatively few had college degrees. Everything changed when Amazon.com opened its first warehouse in 2013. It touched off a land rush, with major retailers vying for space to fill online orders from the San Francisco Bay Area.”
“Today, the industry employs roughly 17 percent of the area’s workforce, one of the highest concentrations in the country. Amazon is San Joaquin County’s largest private employer, with more than 13,000 workers in 11 facilities, said Bob Gutierrez, interim president and chief executive of the San Joaquin Partnership, an economic-development group.”
“But transportation and warehousing employment has started to slip as pandemic-era splurges on consumer goods abate. Across the U.S. it was down 0.9 percent in January from the previous year. In Stockton, it was down 5.4 percent year over year in December, according to the latest available data from the Labor Department.”
“For years, bringing in more warehouses was the simplest, quickest way to expand the local economy, Gutierrez said. Businesses were clamoring for the space. The land was already zoned for industrial use. And there was the promise of new jobs and tax revenue. ‘I don’t think we really took the time to step back and say: What is our vision here? Is this what we want to be?’ Gutierrez said.” READ MORE
RETAIL
For 46 minutes the other day, Springfield was really excited about getting a Trader Joe’s: “When Trader Joe’s told a Springfield, Mo., newspaper on Thursday that it was opening a store there, shoppers rejoiced. ‘Springfield is getting so nice I may not want to go to heaven!’ a pastor, Tyler Padgitt, wrote on Facebook. But his elation didn’t last even an hour: The company apologized minutes later, saying it was actually talking about Springfield, Va.”
“Shoppers in Springfield, Mo., a city of about 170,000 residents [that’s also home to Jack Stack’s SRC and the Great Game of Business], have been asking Trader Joe’s, the grocery chain, to come to town for years. Nearly 4,000 people have joined a Facebook group that urges neighbors to fill out a store request form on the company’s website, which says there are “no guarantees, but being wanted matters to us.”
“Other major companies have also been slow to open a branch there, in part because of the geographical isolation created by the Ozark Mountains. Walmart, which has 11 stores in the city, is one of the few exceptions. Costco opened there only two years ago.”
“Thursday’s false alarm stoked the flames for residents who had asked for a store, and energized the Facebook group, called ‘Bring Trader Joe’s to Springfield, Mo.’ ‘Let’s turn up the heat,’ Mr. Padgitt said. ‘This is the moment where we might get Trader Joe’s attention.’”
“Even the city chimed in. ‘Hey @TJoesOfficial,’ the city of Springfield, Mo., wrote on X, ‘can’t we just talk about this a little bit?’” READ MORE
THE 21 HATS PODCAST: DASHBOARD
When Is It Time to Panic? Most businesses have ups and downs. This week, Tracy Bech, CEO of Starboard Collectives and co-author of the “60 Minute CFO,” offers some guidance on when to ride out a slow period and when to take action. Plus, she also talks about how she’s building an AI tool to help with financial analysis and when it makes sense to hire a fractional CFO.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren