My guest on this episode is Reg Zeller. Reg worked in corporate engineering roles for many years before deciding to leave and do his own thing. His own thing ended up being rolling up foundry businesses through his holding company CaneKast, with five companies acquired so far. These companies are very hard to acquire and operate and Reg spends a lot of time sharing why most buyers can’t acquire foundries and why he’s best suited instead.
Over the course of this episode, Reg and I talk about how foundries operate, how he looks to acquire others, finding your strengths and leveraging them, some of his operations playbook for new foundries, and drinking too much coffee.
Live Oak Bank – Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle market companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.
Hood & Strong, LLP – Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected].
Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and Employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.
My guest in this episode is Reg Zeller. Reg worked in corporate engineering roles for many years before deciding to leave and do his own thing. His own thing ended up being rolling out foundry businesses through his holding company, CaneKast, with five companies acquired so far. These companies are very hard to acquire and operate, and Reg spends plenty of time sharing why most buyers can’t acquire foundries and why he’s best suited instead. Over the course of this episode, Reg and I talk about how foundries operate, how he looks to acquire others, finding your strengths and leveraging them, some of his operations playbook for new foundries, and drinking too much coffee. Enjoy.
Good to have you on the podcast, Reg. We were just talking about caffeine as something to get off. I’d be curious to hear a little bit about how much coffee you’re drinking during your corporate days and what was it like to quit cold turkey?
Great story. So we had this job. It used to be a 6:00 AM to midnight, six days a week, few hours on Sunday, and I would get home and I could not sleep. I’d be staring at the ceiling. Finally talked to the doctor like, “I think there might be something wrong with me.” So we go through everything and he’s worried something major’s wrong. We start talking. Finally, we get to the point. He’s like, “Well, how much coffee do you drink?” I was like, “I only drink two large coffees a day at a local coffee place next to our work.”
He goes through. He asks a few questions about it. Effectively, without getting into too many details, he’s like, “You more or less are drinking two full pots of coffee a day. Maybe it’s time to back off a little bit.” But I didn’t think about it, like four shots of espresso and whatever else and a regular coffee. Suddenly, you’re drinking the equivalent to 24 cups a day. So I was, “If that can fix it, I will definitely figure out a way to stop.” So I just stopped the next day and went through three weeks of pure misery where I tell everybody it felt like a canoe was being driven through my forehead.
But after four or five, six weeks later, all of a sudden, all kinds of crazy amounts of energy came back, don’t drink coffee, and now my friends joke that nobody wants to see me caffeinated. So we stick to mainly tea and a little bit of decaf coffee because I still love the taste of it.
I would imagine that, especially after a while of drinking that amount of coffee, it probably just becomes a habit. You might not even do it just because you’re tired. You might just do it because you’ve always done that. That’s what you do.
It was exactly that. I’d go in the morning. I’d stop there, typically be the first person practically, would have my four shots of espresso and 16 ounces of coffee in one cup. And then sometime after lunch, that midday lull in the afternoon, go over and get a second one. Do the exact same thing every day for I don’t even know how long, probably nine, 10 months at least of that. So lesson learned.
So you quit for a while, but then you drink tea now. So do you have like a little bit of caffeine here and there? Do you get place a limit on yourself?
Yeah. I’ll feel it. It’s kind of a interesting situation where if I’ll ask for a decaf espresso or something after dinner, my wife and I are out. If the couple of times where they’ve said it’s decaf and it’s obviously not, I can almost feel it coursing through my veins. I feel a little bit like The Incredible Hulk when I’m like, “Okay, I guess I’m not going to get very much sleep tonight, check.” But if I do, I’ll certainly indulge in a little coffee early in the morning, but it has to end by 9:00 or 10:00, maybe one cup.
I love nitro cold brew. So that’ll be my if I’m really tired or I’m, okay, I’m going to do this at 6:00 in the morning and hopefully the half-life is well out of my system by 10:00 or 11:00 that night.
Yeah, certainly. Can you tell us more about your corporate work before you started buying manufacturing businesses?
So I started, I think I’ve learned it’ll be traditional searching, but I had nothing or no idea what it was. But started out with electric engineering degree, went through numerous different companies. I think the easy way to say it is that I was a corporate mercenary. That’s the politically correct way to say, that if you’d pay me more money and it’d be an interesting job, I’d probably go do it. So went from four big Fortune 500 engineering, manufacturing-type firms, and so from engineering into manufacturing to operations, a lot of marketing, business development, M&A, and then ended with a general management job of probably about 400 million, somewhere around there, in sales annually.
So it was the last job. Two reasons why I left, one is I had the team that was in the Middle East. So if people aren’t familiar, Friday and Saturday is their weekend. They’re kind of that eight hours ahead. So go to bed on Saturday night and at midnight Saturday going into Sunday, the Saudi Arabia team would start. So my work week started at midnight on Sunday and it would end when the West Coast was done here at sometime around 6:00, 7:00 at night. So it was a lot, a lot of long hours. You only get about 36 hours off when there wasn’t something going on. Putting hundreds of thousands of miles on an airplane a year.
I actually enjoyed it. I loved the business development, the M&A, actually running a business. It was great. The biggest problem was I just ran into a terrible boss near the end. The easy way I tell everybody, I know the exact day I started looking for a business and it was August of 2016. The boss called me and was trying to get a hold of me on a Saturday, and he couldn’t because I was out in the middle of the lake with a bunch of my buddies where there was no cell phone service.
I’d get in each place we’d stop into that’d have Wi-Fi, I’d collect the information. I’d write him back, et cetera. And then he called me at 5:00 AM on Monday morning and said, “Hey, we have to have a discussion. You didn’t tell me you were going on vacation.” I was like, “Vacation? What are you talking about?” He’s like, “Well, you were gone on Saturday. I couldn’t get a hold of you.” I was like, “Wait. I have to tell you when I’m going to be gone on Saturday now?” He’s like, “Yeah, if you ever do that again, you’re not going to be working for me.” It’s like, “Okay, got it. Good to know. I’m going to go do my own thing now.” So it was an easy way to get pushed out of corporate.
Yeah. How’d you get started? What did you do as you started to think about leaving corporate?
I honestly had no idea what was doing. That’s the easiest way to say it. Stumbled onto bizbuysell.com, ended up talking with a few brokers. Literally, had almost nobody that I knew that really had purchased a business. I knew a lot of folks from my background. I worked at Honeywell in the HVAC department. I worked at GE and Schneider/Square D for electrical distribution. So I knew a lot of electricians, plumbers, folks like that. I knew a lot of people from when I grew up that their parents had started businesses or their grandparents, that type of thing.
But I knew nobody that had done what I now know is ETA, so I just stumbled into it. I think you and I mentioned this before, but even from, I don’t know, maybe five months ago, six months ago, I had no idea what ETA was, have no clue. I still probably can’t tell you exactly the details of how search fund works and the Stanford stuff and whatnot. I just started looking for businesses, started networking, asking some people, “Hey, who do you use for a lawyer? Who do you use for an accountant?” And randomly came across this business.
A broker knew I was looking. They, being the sellers, they, in October of 2016, they came in and put a business up for sale. It got listed randomly on BizBuySell. I clicked on it, walked in there. It was the first business that I’d ever toured as part of looking at buying one. It was the only one. It was a foundry. I’d never stepped foot in a foundry before. I just had run other businesses and started researching it. Did the same thing I did in my M&A corporate career-type thing and was, okay, let’s take a look at how easy is it to get into the business. How sticky are the customers?
And then went through their financials and some of the things they had for it. Would it be customer concentration and the age of the people, all the things you traditionally think about looking at from a quality of business and submitted an LOI. Had no idea what that was. I found the banker and he said, “Hey, there’s a person for reference. I think he’s a really good small business lawyer.” So went and contracted out with Tim. He said, “Yep. We should create an LOI. Here’s what we need to do.”
He walked me through what that process was and then the next step. January 31st, I owned a business. I can tell you I had absolutely no idea. Kind of walked in on January 31st thinking, “Am I really about to drop well into seven figures here on a business?” And had no idea what I was doing four months ago and that answers that. We’d just been looking for a long time. It just amounted to didn’t find anything that made sense to me at the time to go buy. And then this one just everything fit perfectly.
When I tell that story, they think it’s absolutely insane that I’d never been in a foundry before. I knew nothing about the industry. I had not seen any other businesses. Didn’t have a banker or a lawyer or an accountant at the time. I don’t know. I just figured it out so far. I can tell you, I really wish I’d had things like your podcast and some of the stuff that, like Owned and Operated, the other books that everybody has. I had no idea. Just I’ve made every mistake imaginable since then doing it because just stumbled in and did terrible things one after another.
What were the first couple mistakes you made?
Arguably, some people would say buying a business, but no. The easy ones that we did, we made really bad decisions around how to generate new business. I’ll make this a simple version of this. We had probably a decline. Business was declining 7 to 10% year over year for the last four or five years. So we built that in. We didn’t think. I thought the industry was going to stay there. So it was just a matter of going to figure out how to get the business. So I didn’t spend hardly any time in the business, whatsoever.
I just trusted that the people were able to run it, and that’s kind of what I was told when I bought it. That was a really bad mistake because I realized as soon as I turned on the spigot of new business, which happened probably within about six months, the operations just, it went just crazy. We could not figure out how to get out of our own way. I didn’t know really that much about the business because I was out just trying to generate new business. I wasn’t spending any time in there.
Then we went out and said, “Okay, we’re going to figure out a way to bring a lot of new business in by that first summer.” So remember, we’d purchased it in January, end of January, but I actually didn’t start working in the business until the middle of March. Tell that story in a second too. But then we got into the middle of summer and we told customers, “We’re going to shut down for two weeks. We have to do a bunch of maintenance that hadn’t been done.” And then, all of a sudden, just a flood of orders hit. So we pulled in customers because we didn’t do a good job of managing the process.
We pulled in orders from probably the middle of July through early August. We worked a ton of overtime, cost me, I don’t know, tens of thousands of dollars probably, in June. And then we had no work in July. So we had probably eight weeks. I mean, we’d lost easily $100,000 in that first year just because I had no clue how to run operations, how to explain to customers exactly what we were doing, that they didn’t need to worry about a lot of these things. I just kind of relied on the team. Coming from corporate, that’s very typical.
I think you come from a big company, like a General Electric or anybody else, you just have a ton of talented people and there’s a lot of people to back those talented people up. It’s kind of next man up mentality. You just don’t have that in small business, and I had absolutely no clue. The simple things that I thought of that a team could handle without even a second thought were things that we had no idea of. So realized very, very quickly that it could not be nearly as hands-off, needed to rebuild a leadership team and really figure out how to get things running quickly, especially once there was growth.
So backtracking just a little bit, can you explain what a foundry is, what types of products they create, equipment they use, how they generally do business? What’s their model look like that, sort of thing?
The really easy way. Most people, first of all, don’t realize we even have foundries in this country. But it’s a 5 or 6,000-year-old industry, really, and very little has changed. Conceptually, what you do is there’s a few different ways that you make a mold, what they call it. But really what it amounts to, the easiest way to do it is that you have a mold that you just pack sand around what they call a pattern. When you remove the pattern from the sand, you have more or less a hollowed-out shape of what you want to eventually make as your final product.
In our case, we’re non-ferrous, which means without iron, so mainly aluminum foundries, but we also have brass, bronze, zinc. But really, you just heat up metal to, if it’s aluminum, call at 1400 degrees. You take that 1400-degree molten metal and pour it into that hollowed-out shape that you’ve just created. After you let it cool, take that part, finish it up, and send it to a customer. So there’s a lot of different ways you can do it. You can use, instead of using sand, you can use different, like metal, which they would call a different process.
So whether you’re using a green sand process or whether you’re using something more complex, that’s out of steel, you can use gravity to create the part versus high pressure. So there’s a lot of different things that you can do. But in reality, nothing has ultimately changed in 5,000 years. It’s just heat up metal, pour it into a shape, and you have a part.
So is it mostly one-time customers? A customer needs this one part one time, or are most of them every so often they submit an order for a new part or they are constantly submitting parts? What’s the end of the spectrum for most people?
So our business is very much the recurring revenue model. So we have, from a turnover standpoint, we have virtually none. It depends. You’ll have some customers that have been with our company. So the initial company was formed in 1944. There’s been four customers that started with this company in 1944. Three of them are still with them. So you have everywhere from that to, we have one of our largest customers right now walked into my office three years ago with a drawing on a cocktail napkin and said, “Hey, I need you to make me this,” so it kind of everything in between.
But typically, you’ll have some folks that’ll buy 50 or 100 parts a year, maybe really large complex stuff. You’ll have other folks that an individual part, they might buy 10,000 of them and spend well into seven figures per year with us. It’s all over the spectrum, but we tend not to be a shop that does one off. None of the facilities that we have are. We’re much more on the recurring revenue. I do not like project business just because I think it’s just a lot easier, less risky business that you’re not constantly having to go generate sales. It can be more lucrative on the other side, but it comes with a lot more complexity and a lot more issues that we tend not to want.
Absolutely. So you talked about operations being a challenge at first. Can you talk about how you started wrapping your arms around the business and figuring out how things worked and streamlining certain processes and whatnot?
Yeah. I bought a second one and then hired a president, who’s actually awesome. He’s the one that operates because I realized through this process that I’m terrible at it. I listened to John on this, John Wilson, talking about kind of StrengthsFinders and he would teach a class on strengths. Then he’s realized that he’s figured out a way to double down. That’s exactly what I did. I did my best to keep, I would say, basically things operating. I mean by basically operating, it was we made a list for our managers and everybody’s seen it. It’s on the top of my Twitter feed.
It’s pasted all over every single one of my facilities that health and safety of our employees, it’s taking care of the customers. It is creating quality products, delivering those quality products on time, and then worrying about profit. And from there, I just help walk through the team of saying, “Every single decision you make, go through this process. Don’t think anything on that. Make sure that we’re taking care of customers, first and foremost, and everything else will work.”
We just had to create very specific roles and responsibilities. We’ve had to do that now. We’ve purchased five, technically. Every single one, we’ve had to go in where it’s been there was a supervisor/manager/foreman, depending on the specific titles they had and they would run those places with an iron fist. Sometimes it was owners. Sometimes it was other people they’d hired. But all of those folks had retired and as soon as it went to the next generation, there’s no clear roles and responsibilities. There’s no way of handling this.
So you have to be very specific and say, “That person has to do that job.” And then you make sure you’re measuring whatever that job is. That’s the only way to do it. But honestly, I did not do a great job at that. We did not do a great job at operating until our president came on. It would have been a little over two years ago now. He’s done a phenomenal job, comparatively speaking to me, of making sure that we get everything going.
And how’d you find him?
He and I worked together back in our corporate days. There’s probably a handful of people and he was at the top of the list and said, “If I ever go do something myself or ever have an ability, you will always be the first person that I would hire to come in and run things.” So that took a little bit of convincing. They were originally from Brooklyn. I worked with them up in Connecticut. They’d moved down to the suburbs of DC. He was ridiculously overqualified for what we did, but I knew as we scaled and grew, that he would be the perfect person to help us go figure all this out.
So I think probably most of the time he wants to kill me, but at the same time, it works out best. We’re very, very opposite and very complementary. I think you’ve probably read a lot and seen a lot of people that have tweeted about that or talked about that, and that’s so key. It’s unbelievable. The CEO job, figuring out how to put together these deals, understanding the strategy and where we’re going, he helps me talk through some of that stuff and kind of vice versa.
I help talk him through some of the execution stuff just so we’re all on the same page, but kind of figure out how to set the strategy and then go execute the strategy. We have very clear roles. I try not to step on his toes because every time I step back in operations, it’s not going to end well. It’s just terrible.
What do you look for in a new foundry business that you’re thinking of acquiring? And then what is your model for after you acquire the business, here’s what we want it to look like and function?
It’s a pretty simple rollout strategy. Looking back on it, you could say hindsight is 2020. Or if we were rewriting history, you’d say I really had a great plan. But what we learned is that we have two very different types of customers, one customer, very large Fortune 500-type companies where we might be selling them 10% of their parts, that real tail end of the skew of parts where they might have a $10 million project and they’re buying $30,000 worth of parts from us. That situation is great because they know that we need to deliver products for them, and I know because I’ve been their boss’s boss’s boss’s boss back in my corporate days, that you’re not going to screw up a multimillion-dollar project for $30,000.
So we don’t argue about price. As long as we build quality products and deliver on time, they don’t care, for the most part. Then there’s the other customers, the ones that I mentioned, like the guy who walks in with a drawing on a cocktail napkin. Those folks, we love them, small businesses, local. What they really want is to be within a three or four hour drive of a facility. So they want to be able to get up in the morning, drive, see their part’s getting made, talk to people, shake hands, have lunch. They’ll get back in the vehicle and be home by dinner.
Those folks, when you’re three or four hours away, it makes it really easy. So we realized, hey, the big strategic or the big corporate customers, we can ship to them anywhere in the country. They don’t really care. But from a rollout perspective, then we really look at it and say, “All right. From, roughly speaking, the Rockies to the East Coast, we want to be within 90% of castings.” That’s what a foundry makes, technically. It’s called a casting. So we want to be within 90% of casting buyers from within three or four hours from the Rockies to the East Coast.
So just drew a bunch of concentric circles on the map and said, “All right. Let’s go figure out roughly in each of these areas.” If you believe the Foundry Society’s statistics, there’s about 780 of those in the country, and so we’ve talked with somewhere around 600 of them. We got a good idea in each one of those markets who’s interested in selling, who’s going to be passing it along to the next generation, et cetera. But then once we zero in on an area, if we find somebody, we’ll go through all of the process of saying, “Okay, what is their reputation with customers? What is their reputation with vendors?”
That’s where we actually go figure out. So we understand specifically what we’re looking for from a different type of foundry processes. It needs to be non-ferrous, et cetera. That’s kind of a simple part of it. And then it’s really about just understanding how they operate, how they do business, what people think of them. There’s a lot, a lot of those 600 that we are absolutely not interested in purchasing because you have to overhaul the culture and the good ones. The bad ones are, you just can’t. Maybe you can. I just don’t know how to do it.
Either way, it’s just so much work even in the good ones to make sure they go forward, that we just specifically try and figure out within that. So everything will be six or eight hours away. We just go figure out what their reputation is. And then it’s just years of work. I mean sometimes they go really quick. Sometimes we’ve been talking to people for 30 months or something to do acquisitions.
So when you think about looking at a new region, are you looking at ones that are directly adjacent to regions you’re already in? And then, within that, how do you choose area or a city? Do you want large metros? Do you want the secondary metros? What areas do you look for?
Here’s a really easy answer for you. We currently own two in the Minneapolis area, one in a suburb of Kansas City, and one in New Hampshire. So while I’d love the adjacencies, we kind of skipped the middle part of the country, which we didn’t exactly mean to. We were also talking with some folks in more of the middle part in the country, and then those ended up falling through last summer. So we’re still redoing a few of those. We’ll probably end up still doing some of those deals as well. But it’s really more for us.
We look at what we want and what we need to do from a quality of place. Because we know we can ship product for any Fortune 500 company, it doesn’t really matter, we know that we’re still covering that area. The only thing is that we just want to make sure we don’t get too close on certain areas. So we won’t buy and leave one in, I don’t know, Iowa, let’s say, or Wisconsin, because it’d be too close to the ones we have in Minnesota. But beyond that, we know we’re going to fill in all those holes eventually anyway. So it’s really just finding the right deal, the right owner, the right quality of facility, et cetera.
Who are you typically buying from?
Normally, it’s second or third-generation folks. The grandparents started it in the ’40s or ’50s. The dad tended to grow it. Now the kids either don’t want to have a part of it or the kids somewhere, that second generation has said, “Hey, we’re in our 60s or 70s,” which has been three of the five we’ve purchased have been in their 60s and 70s. They just had family that didn’t want to take it over. Their workers weren’t able to take it over. So we’ve purchased everyone on that type of a deal. Two of them are through brokers. And then the other three were off-market deals.
Do you integrate these companies in any way, or do you leave them very decentralized and each of them operate fairly independently from the rest?
Two parts to this, one, historically so far, we’ve left their names alone because these companies are a lot of times have been from the ’40s and ’50s, the local casting buyers know them, those small companies. There’s still some brand identity and certainly brand value. So we’ll leave those, initially. I think now we’re starting to go through that in my head just because of I think of what we’re doing with websites and SEO and PPC. As we’re starting to do a lot more interviews, my holding company is becoming more and more prevalent and gaining a brand.
So I think going forward, we’re going to start to brand. CaneKast is the name of our holding company. So it’ll be instead of Ermak, the name of our company in Minnesota, it’ll be CaneKast Minnesota or CaneKast Ermak, same thing. Superior’s the one in Kansas City. So we’ll pick names that’ll be CaneKast something, I think. On the other side of it, the operations, we want to 100% put in our way of doing things. So we have a certain ERP we integrate very, very quickly. We put everybody on the same bill-pay system, the same payroll system.
The person I mentioned, the president of the company, well, he’s actually going to be passing this portion of his job off. But he runs daily or weekly operations meetings to start the pulse because what typically has happened in these places is that we’re getting out 50 to 100% more product per person in the facilities that we own than the ones that we’re acquiring. That’s part of the way that we’re able to acquire it is that we can really, really ramp up production pretty quickly in some of the things that we’ve done.
So that’s been a model is that it’ll take us, I don’t know, 60 to 90 days maybe, but very quickly. There’s been some of them we’ve probably put on as early as 30 days. It really depends on the specific business, how well they’re running. So the one we acquired was using Excel and notebooks practically and on printed paper. That one was moved over within 30 days. The other ones that we’ve had that have had full-blown ERPs running really well, one of them I think we ran for like seven months that way, just until the end of the year. And then we just made a clean cutoff on December 31st.
But it becomes our operations very quickly. It just depends on the level of our operations. But eventually, everything becomes combined on common systems as fast as possible and then run by a back office team. We use a controller. We use a single president, like I mentioned, to run everything. And then we have a director of operations that plans everything for him. So the local team, they literally just need to go execute on a plan put in front of them. They don’t need to worry about what they need to do for ordering materials or billing customers or planning production, et cetera.
It’s just the pulsing call that they run and then how we actually have the execution done locally to … I keep saying this too much, quality products on time. It’s just a habit. I’ve said it now for so long that it’s just a bad mantra, I think, or good, depending on how you want to look at it.
I love it. So how does this all affect the price you’re willing to pay for that sixth, seventh, eighth foundry business now that you have a playbook? You know you can increase production above whatever the company is usually producing. So how much does price matter today versus maybe for your first or second business?
So we have a really simple process, and I talked about this a little bit before. I think you and I talked about it last week, or whenever it was. It is almost impossible to buy a foundry these days. There’s a few reasons for that. One is that it is really hard to find the talent that you need, the knowledge base. As we moved products, we being the US, moved products overseas in the ’80s, ’90s, 2000s, et cetera, all of this talent left. So if I think about when I graduated with engineering degrees, nobody was going into manufacturing or very minimal.
So a lot of this talent, you think about folks like plumbers, electricians, HVAC guys, all of those people, I mean you need a lot more of them. But just like the skill shortage there, it’s even worse, and a foundry is 120 degrees when you’re working in it. So not only is it a skilled trade that is very hard to find, it’s also a very hard job to do, so really hard to find workers. Your true knowledge base, the engineers of the world, what we really need to make things work as we automate more and more, that skillset just doesn’t exist.
So when I purchased the first one four-and-a-half years ago, we had some people that were still knowledgeable. But now I can tell you almost every person probably over the age of 60 that are these guys that could still run these facilities. I couldn’t tell you a single one in their 40s or 30s that could do it. So it’s interesting. I know that was a long explanation to get back to this, but we go in with a really simple answer of, “We’re going to pay you, roughly speaking, depending on how good your business is, three times earnings plus inventory plus real estate.” That’s pretty much it.
You keep it all the short-term cash, AR, AP. We will take everything else as of day one. So if they have a lot of customer concentration, that three times may end up as two and a half. If it’s a perfect business and they have got the people that are able to run it, low customer concentration, minimal variability over the years, it might be 3.2, 3.5. But it’s a pretty simple version of how we’re doing it, and they’re not very large. You’re not getting one of those that’s doing two million in SDE and two million EBITDA, depending on … Those just don’t exist.
You have foundries that are doing probably 3 to $700,000 a year. And then you have founders that are doing $10 million a year. We’re a very, very rare one. We’re probably, I would guess, less than 5% that fit anywhere that’s not a giant corporation that’s anywhere between 1 and $10 million in EBITDA a year.
That’s pretty impressive. With a lot of your folks who have been around a long time and are really talented, how do you begin to get their knowledge before they retire? How do you get their knowledge into those folks who are, like you said, 30s and 40s and get them trained and pass that skill along?
We do two main things for that. One, we make process documents. We’re doing that better. Let me say we’re trying to do that much better. So every single detail of how you make that product, from the temperature you want the metal to how you need to prepare the sand to how fast you need to pour it, anything you can imagine, we put into a process document so that every time that order comes up, it’s a card you can print. Every single person along the line can see that process document of exactly how to make it. That tends to be one of the interns or engineers or something following along, writing it all down, checking it, going back, modifying, seeing it run the next time, et cetera.
The other way we do that is especially because this is such a hard job, those folks that are once they get into their 50s and 60s, we tend not to want them to do the actual real 10 hours of 50-pound curls in a 120-degree foundry. So those are folks we quickly try and put into kind of a non-working supervisor role. So they make sure that everything is happening. Their pure job is to train somebody. So they more or less stand over top of the folks that are doing their job and say, “Pour it this way, not that way,” and, “Oh, did you do all these things to prepare the metal?” Or, “Have you done the steps that we talked about that are on that process document?”
And then if something doesn’t turn out right, they’ll go in there and they’ll show them like, “Hey, here’s the end result because you didn’t do this.” So we try and get as much of that knowledge not just on paper, but also verbally communicated and actually physically shown to the other workers that are there.
So when you collect these process documents, are they just in Google Docs or Word documents, or do you print them out in a book that you give to everybody? How do you disseminate that information, those documents?
Right now they get printed out. They’re just Word documents somewhere in a server, whatever server somewhere. But when they print any of the work orders out, anything that’s going on, it’s just something that gets stapled to the rest of it so they see it. Over time, and this is part of the process as we convert from the old school to the new school, eventually that will all end up on monitors, iPads, tablets, whatever it might be that are readily available for these folks. So that’s going to be the major change as we go forward is that everything becomes less and less paper.
And then obviously, things can change in real time. But today, it would just be a simple hand it out ahead of time. There’s pictures, words, whatever it might be. So that before an operator would run a job, they will take a look at that and say … There’s a part that says, “Here’s the three key things. You have to do this part. If we don’t do it this way, it’s going to misrun. So make sure every time you check that the temperature is 1430 before pouring or whatever it might be. So there will be the general process docs, but there’s also the very top of it is the one, two, three key items, especially if they’re difficult parts to make.
Bringing new folks into your business, are you happy to bring in folks who have not worked in a foundry before and you’re willing to train them from zero to expert, or how does that work?
The simple answer is yes. If I could hire people that knew this, I would love to, but I don’t have that luxury. It really depends on the type of person. So at, let’s say the blue-collar worker level, 100% these are folks … We literally had a guy start last week that told us right away. He’s like, “I don’t have a high school degree.” Like, “Don’t worry about it. It’ll probably help us. All you got to do is follow along, man. You’ll be perfectly fine. We’ll train that up. No problem.”
Those guys, we’re not talking bad wages with overtime and once they grow. I mean these guys are making 80 to 100 grand a year, so it’s a good job. It’s a hard job. There’s no doubt. On the other side, the more the white-collar side, honestly, the foundry background doesn’t really matter. It’s great if we have it, but there’s so little of it. For us, we will then send them to training. The foundry institutes have Green Sand 101 or Aluminum Melting 201, that type of stuff. There’s other folks that we can get trained.
We use a lot of outside consultants. A lot of this industry operates through vendors. So as soon as one person becomes really good, suddenly a vendor is going to hire them to make them a salesperson and send them into add value so that people start buying their products. That’s whatever we need to do. But that’s one of the things we had to learn very quickly is that outside consultants, other experts, vendors, et cetera, we need to leverage them very, very quickly. Because if not, you don’t really have the science in the … I mean you certainly do. There’s the Teslas of the world and what they’re doing with die-casting right now that’s mind-boggling as they’re doing it.
That’s a whole different level. That is not the folks we’re talking about. What we have is really people that if you don’t get them in and get them the science and get them to understand, which is really hard, admittedly, on the blue-collar level. You need to have your supervisors and managers that understand the true physics and engineering of heat transfer and, “Hey, if we don’t insulate or do this, it’s going to misrun because we’re cooling metal off.” Try not to get into too much jargon here but, conceptually, what it amounts to is it’s just applying the tech principles that they have to foundry.
Someone came out of an industry that’s bending metal. They’ll understand the same principles. It’s just they have to apply that to a foundry industry. I mean not only are we happy to teach it, we have to teach it. There’s no other option for us.
Yeah. You kind of alluded to it, but there’s different degrees of automation that we talked about previously. I’d be curious. What are the different tiers of automation that you’ve seen in foundry businesses from the Tesla level down to the second or third generation type of business that you tend to acquire?
The ones that we acquire are normally zero automation. This has been what the president of our company, he coined a term that we had, museums of death, essentially, where we went and visited, where when we started moving products overseas in the ’80s and ’90s, these folks were buying these fully-automated lines and spending millions of dollars and then trying to compete on price still. They didn’t have to. It wasn’t necessary. But they didn’t realize it, so these museums of bad decisions where they just couldn’t afford it, they literally could not afford to pay for the machines they bought to try and stay competitive.
So that’s kind of the first. You rarely see a lot of automation, if any, in the facilities that we typically acquire. As you start to step into it, so we’ve started automating essentially all of our facilities. So we’re mainly doing it with one and that’s just because the one in Minnesota is the oldest one right now. It’s just the most mature of the time that we’ve spent with it. So we’ve already started to put in automation. We’ll continue to put in more automation.
My goal is for our high-run products through there that we can run that as a lights-out foundry, meaning that essentially robots, cobots, automated equipment, et cetera, is loading, unloading, and you can turn the lights off at night and get there in the morning and a bunch of parts are processed. So it’s much more difficult to do on the actual foundry side, certainly much, much easier to do on the finishing side. Entry-level automation in the foundry business is probably $250,000 to half a million dollars.
Part of it though is that you then need to hire your engineers. So every time you do that, you’re also hiring a $100,000+ programmer because you’re going to need somebody onsite to make the parts and get it working and figure out how to do it. So there’s a little more cost then than what it seems on the surface. And then as you get more automated, most of these facilities, you’re talking 5 to $10 million to fully automate, at a minimum. It’d be pretty simple version of automation, actually, fully lights out.
And then the stuff that like Tesla’s doing, hundreds of millions of dollars for what that … But again, they are practically cheating science over there. I’m shocked every time I see the new stuff that they’re bringing out.
So does it make it easier to perhaps finance some of this new automation now that you have multiple foundries?
Absolutely. It’s kind of a running joke. Everybody that’s bought a business and gone through the SBA process or talked to banks know exactly what I’m talking about, is banks wouldn’t talk to me five years ago like, “Okay, that’s great. Nope.” Now it’s a daily call from what banks want to finance what. “You have the track record and we’re going to … “Hey, you want to put more equipment in? No problem. Just send us the receipts. We’ll send you a check.” So that’s not an issue whatsoever. I think it’s a pretty sizable benefit when they look at our financials and, “You’ve grown 4 or 5X in four years.” They’re not too concerned about what we’re doing because profits are scaling ahead of sales even.
But when we look at that, it’s a very cash-rich business. Honestly, it’s partly do we want to spend the money on automation? We can pay for that in cash. Or do we leverage that up and go try and buy more? And then you run into the you can only get $5 million with SBA, which I’m sure we’re going to talk about that yet. But it’s always a constant guess of where do you put the money? But once you buy a business and, certainly, once you buy two or three or five and continue to show execution and an ability to grow a balance sheet and income statement, the money to do equipment is unlimited. I’m sure they wouldn’t give me 100 million, but I’m certain I could get 10 million tomorrow if I wanted it.
Does that help pick up the pace of automation within your foundries, too?
Yeah. Everything is about a payback for us, still. That’s not true. It’s a payback, but it’s a risk-mitigated payback. What I mean by that is it is really hard to find these workers, and it’s certain areas are much more difficult. So the larger the parts become that you need to make, the harder it is to find those workers. Also, of course, the automation is much more expensive as well. So something where if it’s a small part, you could probably have a worker making 20, 22, $25 an hour, something like that, without a problem. But it might be 350, $400,000 to do that piece of automation.
You have the exact same worker doing something really big, might be making 27, $30 an hour. That might be a two-and-a-half million-dollar automation, but you’re 10X in your output and you can consolidate all of that into one facility. You’d never be able to do that if you only own one facility. Once we owned multiples, we can stack and say we’ve got this idea over time where we’ll have some of this stuff that’ll be COEs, so center of excellences, where one facility may do the really large parts. One facility may do the very automated parts, depends on where. So we can find a proper mix.
There will still be some amount of overlap in our businesses all the time, but there will also be some amount where you can only buy that one time. You’re not going to go buy a $2 million automated equipment to make a mold that’s three feet by four feet by two feet. There’s just not enough demand out there. So you buy it once. But there’s no way we’d have the technology, software, tech expertise, capabilities, et cetera, to be able to do this if we only had one or two.
Yeah. You mentioned the SBA prior a little bit before. What have been your constraints using the SBA program?
So let me step back just to explain. Our first deal we did was on an SBA deal. I will not mention the large bank that I use, but let’s just say it was very painful. The quick story is it took … We were replacing a piece of equipment. It was worth $80,000 on the books. We were putting in a $130,000 piece of equipment. So we’re taking the $80,000 off, replacing it with 130. I was paying in cash out of my pocket to do the difference, and it took them five or six months to approve it. I probably lost $100,000 in profit. I walked into my local bank that we’re now with, and I love those guys, Charter Bank here.
I just said, “Fix this for me, please.” They came up with terms, so we refinanced our SBA deal into conventional about 18 months after we’d done it. And then the next deal, we did a conventional financing deal with them as well, mainly an equipment deal. The third one we did was an SBA deal again, because it was out. Actually did it with Live Oak. They were great to work with. So we have been on that one now for about six months. The plan will be continue to rinse, wash, repeat. So hopefully, the third and fourth round SBA, we’ll probably take that one 18, 24, 30 months out, whatever that might be, whenever we can find someone to conventional refinance, refinance that again so that we get off of the SBA.
And then the fifth one we did was a conventional deal with a local bank, Bank of Grain Valley, down in the Independence, Missouri area, where they were awesome to work with as well. They just said, “Hey, we know these guys. We worked with their grandparents, and they helped found the bank. We’re willing to do this deal with you guys.” We put 25% down, but we really got the deal done and were able to work through that. So SBA has been, it’s interesting is your only option at the beginning.
There’s really no way that you can’t use that, I don’t think, I mean unless you’re doing obviously some sort of a search fund where someone else is putting up. If you’re trying to do this yourself, like we did, I don’t think any bank, unless you have $2 million in the bank, they’ll give you $750,000. Sure, don’t get me wrong. But you’re not going to get that without some way of handling it. So for us, we’re going to constantly run up against this, where we bump up against that $5 million limit, back it off. I love the product, the stuff that Live Oak does, where we can still do 7 or $8 million worth of deals with them in a second position. We’re going to continue to leverage that as we expand out and use that.
But it’s still tough. Till you get big enough where you can actually go get standard conventional financing, your options … Seemingly right now, and I’m trying to work through this, this is my big thing. You’re either going to give up equity, which I absolutely don’t want to do. Or you are going to something 16% mezz debt or some crazy thing like that. Within a year or two, I’m starting that process right now, my controller and I, to go figure out how are we going to bridge that chasm so we’re not slowing down growth.
Yeah, certainly. What are your main hurdles to the next five years of growth?
Financing, honestly, for acquisitions. That’s it. I could tell you right now, if we could find a bank that says, “Yep, here’s,” I don’t know, make it up, 20 million or 30 million or 50, whatever it is, I could line up every single one of these. As soon as we got the financing, then my team would not be happy because if we’d have to go find operators, but it would be the operators right after that. But if we had it, we know specifically where and who and what places we’d go do to put this together.
But like I said, I don’t want to give up equity. I love the fact that I can make any decision, other than my wife telling me that I might be doing something dumb. If an employee runs into an issue, I think I mentioned this story before, but I had an employee who had a graduation party that she’d spent more money on than she wanted. I just said, “Hey, listen, you’re a great worker. I don’t want you to worry about this. I want you to go enjoy your kid’s graduation. Here’s a bonus to go take care of it.” Didn’t matter to me. I won’t notice the difference, but changed her ability to go enjoy that and not think of it. I don’t ever want to have to answer to anybody about doing something like that.
That’s a lot more freedom. How much freedom do you feel like you have today versus your corporate job?
Not quite infinite because I had a little bit of freedom. But I always joke about in corporate, I learned this from one of my mentors in my third company. He was awesome. He was the head of services for the company. He said, “Listen, I do things my own way, and that really, really irritates the company.” I’m trying not to use the language that he normally would have used as a electrical services guy. But he said, “The biggest thing is that as soon as you’re not doing it their way, if you’re not delivering numbers, you’re going to be fired. That’s it.”
You can either do it their way and end up in the corner and everything will be fine. No one will probably bother you for 30 years. Or you can do it your way, the way you want to do it. But as soon as you don’t deliver, you’re gone. It’s just the game you play. It’s the two sides of the coin. I tended to be much more on the I’m going to do it my way, filling out forms in corporate or making your team do PowerPoints. Yeah, that’s not happening. We’re actually making our numbers every quarter, so just leave us alone. I don’t know. I’ll fill in something, but I’m not going to have my team spend 20 hours a week doing something that adds no value to the customer who actually brings this in.
So I probably had a fair amount of freedom, but again, I was also probably going to be tossed out. It was better that I left. They probably would have thrown me out eventually anyway. But I think that you couldn’t do anything. Everything had to be justified. Getting a really good employee that was vastly underpaid, I can’t tell you the number of times I had to do this where they were underpaid by 20, 30, 50% or something, and we knew it. You go talk to HR like, “Hey, we need to give them money.” They’re like, “Well, we can’t.” “Well, what do you mean we can’t? They’re going to leave.” “Okay. Well, if they get an offer, then we can do something.” What are you talking about?
Okay. Well, the guys make an 80. Now he has an offer for 130. He found out it’s a great job out there. He never would have looked and now he’s going to leave. Now you think that we’re going to go match his 120 or 130 and he’s suddenly going to say, Oh, thanks for that, I’m not going to leave now?” No, we’re jerks about that. I’d leave. I did leave for that exact reason, multiple times. So the degrees of freedom are beyond comprehension different and I wouldn’t take it any other way.
That’s fantastic. I love it. Moving into closing questions, what college class would you teach if it could be about any subject you wanted?
I heard a lot of the other answers on here. I already referenced John’s strength thing. I love that because I’m a fundamental believer in doubling down on your strengths and just trying to minimize your weaknesses. There’s a few others in here. I’m just going to go with my personal version just because it would have helped me so much, especially in engineering, to have this ETA concept pushed. You see it in business schools. I don’t think you see it in undergrad. I don’t know that you need to necessarily wait till you go get an MBA to see these classes.
But I would want it to be really tactical. I would really want to help people understand here’s what it really takes kind of the nitty-gritty version of this. And then after you do that, because that’s only going to take you a few classes of the semester, really then it’s helping to understand how to run it, which the basics of I think even when you get into accounting classes or finance classes. I’ve had plenty of them. I was also one of those unfortunate souls who got an MBA, required by my company.
But you don’t really understand small business finances and accounting and why it really matters until you’re in the middle of it, unless you’d figure out a very different way to do it. So that would be what would want to do and just help them understand. Here’s the simple things on marketing, and here’s what you need to think about for customers and how you want to handle employees. It’s just I would love to have a really simple, small business class taught to I mean more tech-centered engineers, computer science, the like. I think you can certainly get that in your business classes, but I think we do a woefully inadequate job in engineering programs, for the most part.
I love that. What strongly-held belief have you changed your mind on?
You and I talked about the FIRE movement. That’s probably one of them. I won’t go down that path because then I’ll somehow start a Twitter war or something, so we’ll stay away from that. But I really used to think anybody could be an entrepreneur. I think anybody could have owned a business. So I’ve changed my mind on that after seeing it. Really, I didn’t understand that until COVID, where I know a lot of people that own businesses and as soon as the bad times hit, they were cowering in the corner, barely in the fetal position, barely able to get up.
I looked at that like, “Let’s go. This is awesome.” It was just more fun. I think there’s a lot of ways where it takes a certain person to want to do it. We make it look really, really easy. SMB Twit, you’d think we just stack Brinks trucks worth of cash. But I try and at least get into a little bit of that where it’s certainly not. There’s a lot of anxiety. There’s a lot of pressure. There’s a lot of things where it took me at least 18 months to realize that you write out a check. A piece of equipment breaks, you’ve got to write out $130,000 check.
You’re not just thinking, “Oh my God, I’m $130,000 less wealthy right now.” And then you suddenly realize, well, it’s just part of doing business and you get used to it and you move on. I think there was a ton of people that are awesome operators, number twos, number threes, number fours, and those are really good jobs. For the people who have the ability to be or they want to be that number one, I think it’s really beholden upon us to make sure that those number twos, number threes, number fours, they’re richly rewarded.
They’re taking a lot of risk. We may not see it that way of stepping out and becoming the people that are leaving their corporate jobs to come and help us to do whatever it is that we like to do on a daily basis. So I fundamentally believe you pay your folks in the profits of the company and you give them the upside as well. So if you’re getting rich, the people that are doing that work with you are getting rich, too.
I love that answer, too. That’s a good one. What’s the best business you’ve ever seen?
I think that, especially in the SMB group, we always gloss over the ones that are incredible. This specific podcast, I needed something to be able to tie in to a wired headset for you, make sure we could get good sound. Amazon delivered it for me two hours later because the local Best Buy didn’t have it. It’s absolutely mind-bending to me to think that we can get things like Amazon and same-day delivery. Or I remember when the iPhone came out. I’m probably dating myself at that point in time. I just could not fathom the … I mean so those are unbelievable companies. But if I just think more to the SMB world, I can’t pick you a specific company.
What I can tell you is any company that can run itself as an owner but with the leadership team, so the owner really isn’t doing anything day to day, I love it. I think those are far and away the best companies because you’re free to pick and choose exactly what you want. It’s ultimately what we want to do. It can be anything from an HVAC or a plumbing place to foundries or anything in between, SAS companies that you’re outsourcing.
But anything that you can have a lifestyle that you want to choose or the job that you want to choose and yet you’re still able to make money and grow and enrich your people, build a culture you want, that’s, to me, exactly what I think are the best companies.
Fantastic. Thank you, Reg, for sharing a little bit of your time. This has been really, really fun. I enjoyed our first call and loved this podcast too, so I’m excited to keep chatting and hearing how you’re growing here. But thank you so much for sharing a little bit of time. This has been fun.
Great. Thank you so much.