Welcome to Upper Market

Happy August. I hope you’re all looking forward to the coming spring & summer.

I sure am - we could do with the cash.

Here’s what’s ahead in this email:

Earlier this year, I met an owner who runs an Australian based business.

I know most of you aren’t Australian, but listen up.

He was looking to sell his business and had all the financials and documents ready. The business looked healthy.

After digging through his employment agreements I realised that something that would fundamentally ruin his business.

He wasn’t paying his employees correctly.

In Australia, businesses operate under the award system. Certain business activities trigger different pay structures for staff based on when they work.

Wildly, the owner wasn’t following the right award system, under paying their staff and operating a business which could not be profitable if they did everything correctly.

So what does that mean for you?

When doing due diligence you need to consider how the staff are being paid and if it’s right, based on the needs of the business - and the law.

Most people overlook this - and I get it. You’d think that the owner of a business would follow the law, but you can’t assume it to be the case.

Not everyone values staying out of prison to the same degree.

Summary;

Circa $850k of EBITDA. Asking $3m. That’s around 3.5x - the same multiple as last week’s childcare centre, for a completely different kind of asset.

It’s a West Auckland food manufacturing and meal solutions business, eight years old, founder-led, running out of an MPI-certified 600sqm facility with 25 staff. Three channels underneath it: wholesale manufacturing for two well-known NZ food brands, government and institutional contracts, and a direct customer base of around 10,000 repeat buyers. Two-time Deloitte Fast 50, including fastest growing manufacturer.

On paper it’s the opposite of a passive asset - it’s a real operating business with plant, people and contracts. Which is fine. But the questions that matter here aren’t about who runs it. They’re about whether the earnings are real, whose revenue it actually is, and how much cash the thing swallows to stand still.

What I’d Want to Understand:
First is the number itself, because $850k is a 2026 figure. That’s a forecast, or at best a part-year run rate. You’re being asked to pay 3.5x on earnings that haven’t fully landed. I’d want the last three years of actuals side by side, and I’d want to see the bridge - what specifically takes it from what it did last year to $850k, and how much of that is already contracted versus hoped for. Then the add-backs: founder’s salary and vehicle, any family on payroll, one-off legal and consulting, R&D or grant income sitting in the wrong line. A number built on a forecast plus a generous normalisation can be $200k lighter by the time an accountant is finished with it, and at 3.5x that’s $700k off the value.

Second is concentration, and what the contracts actually say. “Blue-chip wholesale partnerships with two of NZ’s most recognised food brands” is a selling point right up until you learn they’re 60% of revenue. I’d want a revenue split by channel and by customer, and then I’d want to read the agreements. Are those manufacturing relationships contracted with terms and notice periods, or are they purchase-order-by-purchase-order with no obligation to keep buying? Contract manufacturing for a big brand is a lovely relationship until they retender, bring it in-house, or lean on you for a price reduction because they know what your margin looks like. Same question on the government and institutional work - those come with tender cycles and expiry dates. I’d want to know when each one is up for renewal, whether it’s been renewed before, and whether the contract survives a change of ownership at all. Some don’t.

Third is cash, not EBITDA. Food manufacturing is one of the more cash-hungry businesses you can buy. You carry ingredient and packaging inventory, you pay staff weekly and suppliers on 30 days, and then you invoice a major grocery brand or a government agency who pays you on 60 or more. Growth actively makes that worse - every extra dollar of wholesale volume ties up more working capital before it ever becomes profit. I’d want the cash conversion cycle, the debtor ageing, and a clear answer on whether stock and work-in-progress are included in the $3m or sit on top of it. Then maintenance capex: commercial kitchen equipment, blast chillers, refrigerated vehicles and a chiller room all have replacement cycles, and none of that shows up in EBITDA. Real free cash flow here could be meaningfully below the headline.

Fourth is capacity, because every growth lever listed needs it. Expanding wholesale volumes, new retail channels and South Island expansion all mean producing more food out of one 600sqm site. So what percentage of that site’s capacity is being used today, on how many shifts? If it’s running at 60% there’s genuine free upside. If it’s at 90%, the growth story isn’t a growth story - it’s a capex plan, a second site, or a night shift, and the buyer funds all of it. I’d also want the MPI audit history and any recall or non-conformance record, because that certification is the thing that lets the doors stay open.

Growth Angle: The interesting one is mix, not volume. Wholesale manufacturing is the lowest-margin channel and the one where someone else owns the customer. The 10,000-strong direct database and any retail listings are where the margin actually lives, and a database that size is under-monetised in most businesses I look at - frequency, basket size and reactivation are usually worth more than a new channel. Beyond that, this is a natural bolt-on. If you already have a kitchen, distribution or a food brand, you’re buying capacity, certification and two brand relationships you’d struggle to win cold - and you can strip out overhead a standalone buyer can’t.

The Drawbacks: You’re paying a full multiple on a forecast, in a low-margin, labour-heavy sector with 25 staff and real capex. Ingredient and freight costs move on you and big customers don’t always let you pass them on. And a founder-led business that grew fast enough to win Fast 50 twice is exactly the kind that has grown into its systems rather than the other way around - fast growth hides a lot, and it’s usually the working capital that tells you the truth.

Final Thought: This is a proper business with real assets and real revenue, priced at a multiple that isn’t demanding for what it is - but only if the $850k survives contact with an accountant. Get the actuals, read the two wholesale agreements, find out when the government contracts expire, and work out what percentage of the plant is already full. Do that and you’ll know very quickly whether this is a $3m business or a $2.2m one.

If you want more details on either of these businesses or would like an introduction to the sellers, just reply to this email.

$449k of EBITDA, run by a manager, on a 3.5x Multiple. Childcare Centre’s normally come in at a 4x Multiple. Is this under valued?

This is the closest thing this week to a business that seems to run itself. Which is exactly why most of the questions are about the two things holding it up: the manager, and the regulator.

It’s a South Auckland childcare centre, licensed for 70 children, that’s averaged over 80% occupancy for two years and earns $449k of EBITDA. An ECE-qualified manager and an established teaching team run the day-to-day; the owner’s input is minimal. Strong community ties, defined systems, a well-established catchment.

On the surface this is the dream: a hands-off, cash-generative asset in an essential service. But childcare is a business that lives inside a regulatory box and stands on a single manager. Both need to be tested.

What I’d Want to Understand:

First is the manager - because the whole “managed” element may stem from one person. “Minimal owner input” is only true while the ECE-qualified manager stays. So who are they, how long have they been there, what are they paid, and what stops them leaving the month after settlement? The detachment you’re paying a premium might walk out the door with that one person.
With that being said, Childcare is what I like to call a “known” industry. It isn’t something novel or unique and therefore you’re more likely to be able to plug talent gaps, should you have any. You don’t have a niche skill that needs to be taught and there’s likely to be a bigger talent pool than other industries (or ability to promote internally).

Second is the regulator and the funding. ECE is licensed, ratio-controlled and heavily dependent on government funding and policy - pay parity, subsidy rates, staffing ratios. A rule change can move your costs or your revenue overnight, in either direction. I’d want to understand the current funding mix, the licence status, any compliance history, and what’s coming down the policy pipe. Seeing as it’s an election year, I’m sure there’s something in the works.

Third is occupancy and the catchment. 80%+ for two years is healthy, but it’s the number the whole business rests on. What’s the waitlist, what’s the local under-5 population doing, and how many competing centres are opening nearby? Childcare demand is demographic - I’d want to know the catchment is stable or growing.

Fourth is the premises. A centre is its location and its building. Is the property owned or leased? If leased, how long is the term and what does the rent do? A licensed-for-70 centre you could lose in a few years - or whose rent jumps - is a very different asset than the earnings suggest.

Growth Angle: The obvious levers: lift occupancy from 80% toward capacity (each extra child is high-margin) and optimise the funding and fee mix. It’s already systemised and managed, so upside is about filling the last 20% and running it tighter - not reinventing it. A buyer with other centres could also fold this into a group and share overhead, or this could be a cornerstone acquisition for someone looking to bolt-on another centre or two in the future.

The Drawbacks: The detachment rests on one manager, and the economics rest on government policy - two dependencies you don’t fully control and are not for the faint of heart. It’s labour-intensive in a sector which requires more hires to continue to scale. At 3.5x you’re paying a full price for the hands-off quality.

Final Thought: A genuinely manager-run, 80%-full childcare centre is a rare hands-off asset, and it deserves the multiple - if the two things holding it up hold. Lock in the manager, get across the lease, explore the future of funding and policy changes, and confirm the catchment, and you’re buying an asset.

If you want more details on either of these businesses or would like an introduction to the sellers, just reply to this email.