Aurora Deal Memo

Aurora is a SPV (special purpose vehicle) investment vehicle lead by Jim Graf.  The firm buys, scales and manages small businesses which are focused on residential and commercial outdoor maintenance related services, geographically concentrated in Central Florida. 

Our objective is to drive outsized returns, on a risk adjusted basis, by rolling up and optimizing, low risk, repeat demand, profitable, simple to execute, stale, residential and commercial maintenance businesses at great valuations.  We focus on identifying services for which demand will NOT change. 

This is the second acquisition vehicle, founded by Jim Graf. 

We are targeting a $10m capital raise for the SPV.  Aurora is registered as a C Corp in Delaware. Management equity in the entity will be earned based on the performance of the investment.  Therefore, properly aligning investor and management’s interests. (See below for more detail) 

Jim Graf lead the capital raise, acquisition, and transformation of a garden variety B2B lead generation company in 2015.  Operating in a wildly dynamic and changing industry, he revamped the business into a leading B2B Inside Sales business process outsourcing company. 

Under his leadership, Kazzcade pivoted from a project based revenue model to a fee-based revenue model, built proprietary software to embed their services within major client accounts, and productized a solution, applicable to any organization struggling with revenue growth. He operates with a technological mindset and is well versed in optimizing and scaling organizations. 

To date, IRR on Kazzcade for investors is 18.53%.  Jim continues as Executive Chairman to Kazzcade.  Prior to leading the investment and management of Kazzcade, Jim was a Director at Robert Baird.  M.B.A. from Marquette University.  

The objective is to buy and build existing small businesses in the central Florida area which focus on residential and commercial, outdoor (lawn, tree, irrigation) maintenance related services.  Market dynamics and business attributes defined below drive outsized returns on a risk adjusted basis. 

Simply put, we will be rolling up, low risk, profitable, simple to execute, stale, residential and commercial maintenance businesses at great valuations.  We focus on what is NOT changing, instead of trying to predict change. 

Target Industries: 

• Lawn service 
• Irrigation service 
• Fertilizer service 
• Tree service. 

Growing Industry.   

• Landscape services in Florida is expected to grow 4.2% annually versus 2.5% nationally.  
• FLA is ranked 2nd out of 50 states in industry revenue and is it is expected to be a $13.1B industry by 2026. 
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Industry ripe for consolidation.  The industry is dominated by small owner/operators.  Many of which are at or nearing retirement.  Providing a large pipeline of acquisition targets.  Here is breakdown of the length of time the average landscape company has been in business. 

• 5%: 2 yrs or less. 
• 5%: 3-5 yrs. 
• 8%: 6-10 yrs. 
• 17%: 11-20 yrs. 
• 19%: 21-30 yrs. 
• 46%: 31+ yrs. 

Valuation arbitrage.  Based on the size of these organizations, many can be bought for less than 3x Adjusted EBIT.  Simple valuation arbitrage is realized as we acquire more businesses.  Majority of current acquisition targets,  carry a 25%+ earnings yield, (EBIT / Purchase Price)  which is growing north of 7%.  We use Buffet's basic principle of and "Equity Bond" to guide our analysis.  

Revenue resiliency. The businesses being targeted are immune to economic cycles based on the necessity of the service provided. The needs for these services do NOT change. 

Recurring revenue.  Either contractually or based on the recurring nature of the need for the service or product provided.  Acquisition targets offer very attractive customer LTV.  (Life Time Value) 

Pricing Power.   Acquisition targets offer the opportunity to raise prices due to cost of service in relation to overall cost of home or commercial maintenance, emergency nature of service, or exiting management not keeping up with the market.  Many have natural price increases built into long-term contracts. 

High cash flow generation. These types of businesses are generally capital light and have Adj EBIT margins from 17.5% to 35%.  In addition, they all carry very very low Accounts Receivables.    

Avoids risk from AI.   Due to the nature of the product or service, AI is NOT a threat to displace.  However, AI is a tailwind to the organizations which can deploy effectively to lower any costs. 

Cross-Selling Opportunities.  All the services below are generally required by commercial and residential users. 

Opportunity for Profit improvement.   The majority of these companies are not professionally managed and lack basic technology optimization, blocking and tackling to generate greater profits.  In addition, scale offers significant opportunity for improved profitability across SG&A and marketing. 

Long runway to deploy capital at high ROIC.  Tremendous M&A opportunities as these industries are populated by owner operated, sub $4m revenue companies, with owners looking to retire.  In addition, capital reinvestment opportunities offer IRR’s of 30%+..

The first advantage of buying small business (sub $3m in rev), is the valuation.  Many of these companies can be bought for 2x-3x cashflows.  This helps drive outsized returns when many of them are rolled up and the market re-rates the new entity at 6-7x cash flows. 

Generally, companies of this size are owned and operated by an owner who is well versed in the service the company provides but not in optimizing and scaling operations.  Not only are there process efficiencies to be gained within each acquisition, but scale advantages. 

Lastly, there are marketing efficiencies and effectiveness to be had, by aggregating all of marketing under one entity.  In many cases some of these targets will not even have a formal marketing effort or website. 

Management (Jim Graf) earns equity in the organization over time, based on the performance of the investment.   This ensures everyone thinks like an owner and results in outsized performance. 

Assuming $10m in capital is deployed, at an average adjust EBIT multiple of 4x, with 15% EBIT margins, $16.66m in acquired revenue will be the starting point. 

Below is a projected scenario of how management equity and investor returns would perform, assuming $10m in capital was deployed, acquiring targets at a 4x valuation.   

In addition, are snap shot profiles of Acquisition Targets, to provide a feel for the opportunity.