Cody Agee·May 23, 2024

Finding a Great Business in Cow Country | Cody Agee Interview

Cody Agee, a former JP Morgan investment banker (five years covering public REITs and technology companies) who grew up around his father's residential construction business in San Diego, conducted a self-funded search starting in fall 2022 and acquired Sierra Dar Laboratory in Tulare, California in late October 2023. Sierra Dar is a 35-year-old food safety and dairy testing lab founded in 1989, performing roughly 600,000 tests per year for dairies, dairy co-ops, and dairy processing plants across the California Central Valley. The deal was structured with approximately 75% SBA financing and a blend of seller note and equity raised from investors Cody found on Twitter/X; the purchase included both the business and the real estate, creating a blended SBA loan with a roughly 16-year amortization. The acquisition price approached the $5M SBA cap, required a 10%+ price reduction after a quality of earnings report, and nearly fell through twice — once when Cody was initially rejected in favor of a strategic buyer and again when a personal guarantee dispute on the seller note surfaced two weeks before closing. The business benefits from a powerful combination of regulatory moats (FDA/ELAP certification requirements), decades-long quasi-recurring customer relationships, recession-resistant demand, and a strong in-place management team (notably Melinda, who has worked there since the early 1990s, and Natalie) that allows Cody to operate semi-remotely. Six months in, Cody's primary near-term initiative is implementing a lab ERP to replace paper-based processes, which he sees as significant low-hanging-fruit efficiency gains.

Deal facts

purchase price: near SBA cap (~$5m, with real estate comprising ~35% and business ~65%)
financing structure: ~75% SBA loan + seller note + equity (investors found via Twitter/X); real estate included in blended SBA loan yielding ~16-year amortization
notes: Price was renegotiated down more than 10% after quality of earnings report failed to substantiate broker's preliminary financials. Seller also owned the building, sold both together as a package deal. Buyer used 401k withdrawal for equity contribution, partially offset by bonus depreciation (~$1M equipment at 80%). Blended SBA loan: 10yr on business portion, 25yr on real estate, resulting in ~16yr blended term.

Why this business

Cody was specifically looking for a recession-resistant, durable business in California. Two weeks before the listing appeared, he had explicitly thought about what people need no matter what — food, shelter, water — and reasoned that someone must be ensuring food safety before it reaches consumers. Sierra Dar Laboratory appeared on the market two weeks later. He was drawn to its longstanding customer relationships (some dating back to before 2000), regulatory moats requiring FDA and ELAP certification, strong margins, and the essential-but-low-cost positioning it occupied with dairy producers.

What's working

Recession-resistant demand: dairy testing is required regardless of milk prices or macroeconomic conditions; 2008-09 was reportedly the business's best year
Revenue non-correlated with milk prices; volume stays stable whether milk is cheap or expensive because producers still need to test
Regulatory moat: FDA and ELAP certifications create a high barrier to entry; competitors cannot simply enter the market
Long-tenured customer relationships — decades-long, quasi-recurring revenue with major dairy co-ops, dairies, and plants across the California Central Valley
Strong management team in place (Natalie and Melinda), enabling semi-passive ownership; Cody believes the business could run without his physical presence
High-value, low-cost positioning with customers: an essential service that is a microscopic line item on large dairy operators' P&Ls, making it unlikely to be cut in downturns
Differentiation from large multinational competitors (Eurofins, Mérieux) via nimble, accessible customer service
Owning the real estate alongside the business, creating a blended SBA loan with a longer (~16 year) amortization and lower monthly payments
Bonus depreciation on ~$1M of equipment offset the tax impact of the 401k withdrawal used for the equity check

What's hard

Deal nearly fell apart: Cody was rejected initially in favor of a strategic buyer (a national lab aggregator) that ultimately couldn't meet the seller's terms (seller wanted to sell the building too; strategic buyer wanted to relocate staff)
Quality of earnings report revealed the broker's preliminary financials could not be substantiated, requiring a 10%+ price reduction renegotiation — a tense period with the seller
Personal guarantee on the seller note surfaced two weeks before closing despite LOI stating the note would be unsecured — caused a major last-minute hurdle
Business is highly technical (dairy food safety testing); Cody has no background in laboratory science and is learning incrementally, which is a slower process than he'd like
Business still runs on paper-based processes; ERP implementation (lab software) is a near-term project requiring significant involvement to understand workflows step by step
Relocated from New York to Tulare, California (a town of ~30,000) for the business — required wife to leave her United Nations interpreter career

Notable quotes

I remember probably two weeks before this business got listed I said to myself — in the context of a potentially looming recession — if someone goes in a grocery store, I bet the food, no matter what, somebody needs to make sure the food's safe. And I bet there's some kind of business out there that is doing testing. And two weeks later, Sierra Dar Laboratory got listed.

I text friends and investors every day — or not every day, but pretty often — and I pinch myself. I feel like I really — and I'll say knock on wood — it's a great company with a really good reputation and there's a lot to like about it.

We provide a super important service and it's a microscopic cost relative to their operations, because if you're one of these big dairy co-ops you're running these huge plants, you have the trucking expense of moving all this milk everywhere, which is enormous. So there's a lot of other costs for our customers that we're not the first place they're going to go when they're looking to clean up their P&L a bit.

Not everyone can go get certified by the FDA and ELAP — which is like the water certification board — to do this testing, then buy all the equipment, and you actually have to know how to do it. It's pretty difficult to just have somebody come off the street and try and compete with you.