Bulk Reef Supply takes investment from Bertram Capital

[paintman]

You should also expect more people in higher positions (that have no interest in the hobby), calling the shots. The only iconcern they will have is the bottom line. Which means across the board price increases!

 

[Variant]

Been in PE/VC for many years.

The play is growth capital to drive EBITDA to a multiple. Special VCs and PEs provide “value-add” by helping the management team operationally or offering their Rolodex. In the old days this was large capital investments for warehouses and increased inventory and better logistics but now the investment is more in sales and marketing with today’s smarter inventory and logistics systems we’ve learned from Amazon.

In return this typically means more administrative and compliance to agreed upon budgets and measures to dress up. Likely founders had to give up equity but I‘ve typically seen these deals restructured and restated so as to “clean up” the balance sheet to make the opportunity look more attractive as the enterprise value grows. The founders are usually granted incentive but are behind a “waterfall”, meaning they have to make money for investors before they really make money for themselves.

I would expect more efficient customer growth and service (yay to us) and wider product offerings (more neutral as this could be a good thing or bad thing for consumers). I’d expect higher brand awareness so attention to BRS products is a great guess. I can personally tell the BRS team is passionate and likely will always stick around until too much money for retirement, but I’m sure one of the selling points to capital was the large and engaged customer base via social media and how much we all tend to love them and their videos. This will become even more targeted as they transition from e-commerce to maybe something more, it was just publically undisclosed.

If things go poorly for them or in the industry there are usually a lot of pain points negotiated by the PE, so I’m sure this decision was not taken at all lightly and everyone agreed this provided a better future ahead.

Just some thoughts.

Having been in PE for quite some time myself, wouldn't you say that once a VC/PE group provides capital to a company, that it sets off an everlasting exchange of ownership? What I mean by that is that regardless of the size of the equity being exchanged for the capital provided, these investment firms are not in it to just provide capital and clip coupons but to exit at an optimal point to maximize their return on investment. This then would mean that within a few years, the investment team will try to sell their stake. Then the new investment group that takes over will then want to maximize the EBITDA further either through growth or margin optimization. So there is a never ending process of selling and buying and optimization of the company, which can make it hard for companies to remain true to their original core values?

On the rare occasion, the founders of the company in situations like this may have extreme liquidity outside of the company allowing them to buy back their company.

 

[Mawlbec]

Having been in PE for quite some time myself, wouldn't you say that once a VC/PE group provides capital to a company, that it sets off an everlasting exchange of ownership? What I mean by that is that regardless of the size of the equity being exchanged for the capital provided, these investment firms are not in it to just provide capital and clip coupons but to exit at an optimal point to maximize their return on investment. This then would mean that within a few years, the investment team will try to sell their stake. Then the new investment group that takes over will then want to maximize the EBITDA further either through growth or margin optimization. So there is a never ending process of selling and buying and optimization of the company, which can make it hard for companies to remain true to their original core values?

On the rare occasion, the founders of the company in situations like this may have extreme liquidity outside of the company allowing them to buy back their company.

Definitely, everyone will have EXIT on their minds. The competing interest with founders is generally not to sell too early especially if they are emotionally invested in what they’ve built. Nonetheless new investors simply want a return.

That return could be strong operational cash flow, but we typically see that in only hard asset businesses like energy or real estate, not in e-commerce with lower free flowing cash. The investor return models likely assumed an exit to begin with to generate the PE returns required for their investment groups in the fund (I believe I read this was their 4th fund).

 

[Mawlbec]

You should also expect more people in higher positions (that have no interest in the hobby), calling the shots. The only iconcern they will have is the bottom line. Which means across the board price increases!

You never know. E-commerce plays still must compete at price points.

But yes likely someone (or two) from the PE group is on the board.

 

[SaltwaterAq]

What is your estimate of the EBITDA multiple in our space these days? Ecommerce Pet Supplies

 

[Tuffyyyyy]

Is there anything to reference besides Chewy? But their PY 10-K had a negative EBITDA of 1.7%

https://www.sec.gov/Archives/edgar/data/0001766502/000176650220000007/chwy-20200202.htm

I wish my new employer had access to IBIS World like my old one did.

 

[Mawlbec]

I don’t know never been a part of a pet supply deal. Someone with CapIQ or similar might be able to answer that.

e-commerce is just a broad category. I would have liked to see the models at 10x or 20x to start.

 

[1guydude]

Any.publicity is good publicity. Watch the stocks rise! Lol. Capitalism. All good. Im from america. In america. Lol
D

 

[Mawlbec]

Is there anything to reference besides Chewy? But their PY 10-K had a negative EBITDA of 1.7%

https://www.sec.gov/Archives/edgar/data/0001766502/000176650220000007/chwy-20200202.htm

I wish my new employer had access to IBIS World like my old one did.

EBITDA in the PE/VC deal tends to loosely define free flowing cash from operations. The problem with comparing to publics is that EBITDA is strictly defined as part of a public company's accounting method, like GAAP. Usually a private company is not on a comparative basis, unless they plan to IPO.

Further, free flowing cash can be thought of as net cash after all operating expenses and debt service. One of the hardest predictors to outsiders is what does a private company's cost structure truly look like...its hard to define the operating expense component and thus the EBITDA without being a part of the company/deal.

An example of this was Facebook pre-IPO, one of the biggest points from the critical crowd was not knowing the company's cost structure against their initial valuation set at IPO. But look what happened...public markets valued something else to keep the price/valuation from tanking. And this may also be the case here, BRS has more than just an EBITDA in the space with how prolific the BRS team is at capturing and engaging the target market.

 

[Oldreefer44]

Coming from the executive leadership viewpoint IMO we are only hearing what they want us to hear so this is likely just a small part of the story. IME, this is rarely good news for employees or consumers other than stakeholders.

 

[Russell Casey]

Good luck telling the investors your giving away 100k in goods or a 20k dream tank. I won’t be surprised if that stops.

That is if they pay for the giveaways. I would think with their volume they get companies to provide freebies to give away for promotion.

 

[Steven91]

You should also expect more people in higher positions (that have no interest in the hobby), calling the shots. The only iconcern they will have is the bottom line. Which means across the board price increases!

I wouldnt really expect the pricing to go up, a lot of stuff they is URMP pricing, or MAP as this industry call it, which means everyone sells for the same price or you lose your contract with the supplier, all pricing is done at the vendor level, not at the retail level. Maybe some of their house stuff might go up, but I wouldn't expect most of it to do anything, also they could be using the money to help get into the salt game as if you pay any attention to their FB group, at least 1 a week someone posts that they should be making their own salt, this capital could give them the ability to do that.

They could change around their rewards, or start offering their card as well (usually a business having their own credit line saves them $$$ for check processing fees, source...i work in retail) but only time will tell

 

[r20crazy]

what language u nerds speaking?

 

[Mawlbec]

what language u nerds speaking?

ape.

 

[JMetaxas]

I predict Ryan and Brian will be out of this business within 2 years. I've seen this scenario many times in the business world. The new investors will demand changes that they will eventually not agree to do. These new owners will push them out, but they'll have their money. Hopefully they'll have happiness too, but seeing a business you grew from the ground up fundamentally changed from your own vision often depresses people.

 

[siggy]

Congratz! I can't wait to see the next chapter. I wonder what that might be............
New facilities/locations, Labs/studio, manufacture of reef gear........... I got $50 on expanded BRS branded gear.

Vertex (acrylic) & Reef keeper

 

[paintman]

If you check out Ryan's facebook page it looks like they are already spending some of their new found cash on art work for the offices. LOL!

 

[shred5]

I predict Ryan and Brian will be out of this business within 2 years. I've seen this scenario many times in the business world. The new investors will demand changes that they will eventually not agree to do. These new owners will push them out, but they'll have their money. Hopefully they'll have happiness too, but seeing a business you grew from the ground up fundamentally changed from your own vision often depresses people.

I have to agree to some extent. Been in the hobby so long and seen so many companies swallowed up like this. Every time it has been pretty much to the demise of the company. Remember Flying fish express.
But I bet there is some stipulation that they stay on for content at least Ryan. Really the main thing that set them apart from he rest of the hobby is the videos and being the masters of marketing. By making videos to move product they have been able to convince people they need something or one product is better than another.

There are plenty of places with great service and products. Heck some are even cheaper.

 

[Jbell370]

I was actually speaking with someone about this a couple weeks ago, unknown to myself they are huge in to ecommerce and also looking to expand to a much larger facility, selfish me would only hope a small warehouse in Canada on the horizon, the boarder delays are killing me.

 

[shred5]

I was actually speaking with someone about this a couple weeks ago, unknown to myself they are huge in to ecommerce and also looking to expand to a much larger facility, selfish me would only hope a small warehouse in Canada on the horizon, the boarder delays are killing me.

I mean that could be it too. Even expanding warehouses in the states for faster shipping like maybe a east or west coast facility.

Maybe they want out while the getting is good. The hobby has allot of challenges going forward with rising prices. Rising livestock, rising shipping prices, rising equipment prices. The hobby is most likely going to go under some contraction because of prices.