Use a Crisis to Better Your Business

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Crises Management2020 saw many businesses pivot to different ways of operating in order to keep revenue coming in.  Denny’s, the quintessential American diner, not only started offering free delivery, but in California and Oregon, also offered some grocery items to add to those orders as well.  If such an established brand as Denny’s can imagine new ways to serve customers in a crisis, surely your small business can use a time of great stress in order to build a better business.

Where to Start?

In the earliest days of the pandemic we discussed various ways business owners could be looking at marketing, finances, and administrative tasks.  But a year on, the emergency cuts and savings have long been made, and there’s been plenty of time to make adaptations to what the law allowed for and what the market was interested in.

Audit and Adjust

Prior to 2020, year-on-year financial reports helped you see the general direction of travel for your business.  As 2020 rolled on, those comparisons might have only served to depress business owners in seeing how far “off the pace” they were.  But that wasn’t a fair way of thinking about those numbers.  2020 couldn’t be compared with 2019 because businesses in 2020 often had to fight to stay afloat with their hands (and sometimes their feet) tied.  

As the 2021 numbers start to come in, better measurements are possible.  You’ll be able to see how you are doing a year on, month-by-month.  It’s reasonable to expect to be doing better, as last year you were responding to something unknown, and this year you’ve had a year of experience under your belt.  You should still be relentless about cutting costs wherever it makes sense, but now that you’re out of damage control mode, you can ask yourself tougher questions: 

  • Why are we staying flat in that line of revenue?
  • This particular category continues to underperform.  Is it time to let it go?
  • Why aren’t we growing this service at a faster rate?  It helped save us in 2020!

In a sense, despite ongoing uncertainty, it’s a good time to demand answers to tough questions.  If you continue to stay in “damage control” mode, you may miss the opportunity to grow your business.  You cannot wait for “normal” to be restored to be “normal” in how you examine and audit your business.  This, right now, is normal.  Adjust.

Remote or No?

ChangeAt this point you will have probably had the chance to observe your team work both remotely and in-person during the crisis.  You should be able to intelligently comment as to whether your staff works remotely the same, better, or worse than in person.  

If they work better remotely, this might be a time to start examining your office space and making long-term changes that you didn’t expect (with the corresponding savings that you’re free to re-invest).  If your staff performance is significantly down because of remote work, it might be worth reconfiguring the physical office to allow for appropriate measures to be taken so that all can feel safe while still participating in the benefits of in-person interaction.  This may mean replacing those who insist on working remotely and refuse to come into a physical office.  As with the financial statements, you’re no longer “new” at operating a remote business.  If it’s not a good fit for you, it’s time to make some tough decisions (which might include a sale).

Forge Ahead

Ongoing uncertainty can be paralyzing.  But it doesn’t have to be.  You now have experiences navigating a pandemic and the data to back it up. No excuses not to make 2021 better than 2020 in every aspect.

Want a second set of eyes on your business?  Our broker team has hundreds of years of experience looking at financial statements and navigating tough times.  Give us a call; we’d love to help!

Using a Deferred Sales Trust in a Business Transaction

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Deferred Sales TrustThe incoming presidential administration has indicated its desire to tax certain earners’ capital gains at the same rate as their personal earnings.  That has led to us getting more questions here at Apex about ways to reduce exposure to capital gains.  One of these ways is called a deferred sales trust.

What is a Deferred Sales Trust?

Simply put, this is a vehicle one can use to defer capital gains taxes.  This is something that must be set up prior to a sale and, unlike the well known 1031 Exchange which is for real estate transactions, a deferred sales trust does not impose strict, short-term time limits on your proceeds.

How Does it Work?

The trust buys the business from the seller (this can be set up in a contract to be concurrent with the purchase from a buyer).  The seller can set up a contract that allows the trust to pay for the business over time.  In a sense, it’s seller financing…for yourself.  As you withdraw from the trust (on a timetable that you set up, that can be modified) then you will be taxed at that time, and only on those amounts.  Even better?  Those funds can be used to make investments which are not subject to the capital gains that you incurred on the original transaction.

Some conditions include:

  • A third party must be the trustee
  • The trustee can invest those funds in new investments
  • The trustee is responsible for making your disbursements or making modifications to the disbursement schedule
  • Capital gains are to be paid on any principal amount the seller receives from the installment payments.  As we noted above, the trust can make investments and earn income and hence could also be “saddled” with non-taxable (to you) interest on your payments.

What’s the Catch?

We’ve always said that it’s key to not fall afoul of the IRS.  You shouldn’t look at this vehicle solely as a way to “avoid capital gains.”  You won’t be able to.  All you can do is adjust the time of paying those taxes to your choosing, but that also means not taking all the gains from your sale at once.  If getting your proceeds in an installment fashion suits your lifestyle, this might be an ideal way to go.  You can also negotiate the payment amounts, so if you need a lump sum up front before moving to smaller payments, that’s possible.

The main “catch” involved is picking the right trustee.  This isn’t just because this person will be in charge of the proceeds of possibly the largest transaction of your life, but because he/she will also oversee investing that money.  Remember that capital-gains-free earning of new income via investments is a major benefit of this vehicle, so as much as you might want to just ask a family member to “help you with this one thing” you’re probably going to need to bring in a professional who can help you optimize your investments.

Speaking of professionals, that’s who you’re going to want to consult to help you examine a deferred sales trust: a lawyer in consultation with your financial team.  This sort of vehicle isn’t for everyone, but as tax conditions change in Washington, people should examine their options and be prepared to have different ways to execute their transaction, should they wish to do so.

We don’t create trusts at Apex, but we know great people who do.  If you need a referral, give us a call and we’ll connect you.

Case Study #46: Simplify and Multiply

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Pet BusinessesWhen Lee Richter and her veterinarian husband acquired San Francisco-based Montclair Vet nearly 20 years ago, they weren’t really taking a risk.  That practice had already been around for 40 years and had 3,000 regular clients at the time they bought it.  But by the time they sold it, they had nearly 25,000 clients and got to enjoy the EBITDA rewards that came with a thriving and niched business.

What niche?

There has been a boom in recent years in pet care, especially as more and more people treat pets like family members and opt to have them instead of children in the home.  The Richters understood the strong attachment that many had to their pets but wanted to bring a completely different take on visits to the vet that the customers had always known: more preventative care, and the use of Eastern medicine and practices combined with the newest technology: think chiropractic, acupuncture, and hyperbaric oxygen.

Sound unusual?  The numbers don’t lie.  Even more interesting, by insisting on this level of care for the pets that came in, the Richters began to see the customers end up taking better care of themselves as well.  By encouraging “wellness” instead of just bringing in pets when something was “wrong,” visits happened more frequently, and unsurprisingly, revenue went up to.  

Roll Up

Lee had a business background to complement her husband’s veterinary skills and she referred to him as the “simplifier” and herself as the “multiplier.”  As he imposed these new ideas on the existing practice and trained the growing team (they went from 3 doctors to 10), Lee went about marketing the business and coming up with smart ways to get the word out about the different way that they approached pet care.

This didn’t change when an acquisition possibility came their way as one of 500 practices being targeted for a roll up.  The work she had done with SEO and ownership of relevant URLs partnered with the new level of vet service her husband was offering allowed them to get 10X EBITDA when the industry normally trends around 5X.

Second Bite of the Apple

Not wanting to take all the proceeds from the sale of the practice, the Richters asked if they could “invest” in a future liquidity event by leaving some of the sale proceeds in the deal as skin in the game.  Out of the 500 practices that were rolled up, they were the only ones to ask for this, and the buyers, while surprised, took them up on the deal.  In fact, two years later when the roll up was complete and the new conglomerate sold to an even larger buyer, the $2.5M they had “invested” had doubled.  Unsurprisingly, they’ve asked to be included again, and they’ve put that $5M into the new company to see where it goes.  This gives them a seat at the table for a business way above their level but also puts them in the catbird seat when it comes to new deals and opportunities.

When asked why they wanted to keep letting the money ride, Lee noted that she had been blessed with good business mentors and had taken notes whenever they discussed their acquisitions and what they had done or wished they had done.  This led her to ask for a second (then a third) bite of the apple — staying in fractionally post-acquisition — when none of her colleagues did.

Takeaways

  • Buying is easier than building.  While the Richters were able to build an enormous practice, they didn’t do it from scratch.  They stood on the shoulders of the practice they bought.
  • Focus on your niche.  Not every pet owner is going to be interested in the holistic approach that the Richters championed.  They weren’t worried about that.  Instead they focused on winning new clients.
  • Create recurring revenue.  Rather than be content with just wellness visits and “break/fix” pet scenarios, the Richters implemented a wellness program which led to more frequent visits and hence, more recurring revenue.
  • Be willing to ask for deal points.  As noted, not a single other one of the hospitals involved in the roll-up even asked to leave some money in the transaction to pay forward.  The price of audacity in this case?  Doubling their investment within 24 months.

Interested in buying or selling a veterinary practice?  We’ve got plenty of experience doing both.  Give us a call!

Buying “Essential” Businesses in 2021

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Essential BusinessesWe continue to encourage our clients to look uncertainty in the face and move forward with plans to buy and sell a business in 2021.  But one of the new categories of business that people are asking us about are “essential” businesses, who did not have a “bad” year in 2020, but quite possibly their best ever.  In this article we’ll talk about a few of those business types.

2021 Essential Businesses to Buy and Sell

These businesses are in demand and as such may fetch a premium in the marketplace, but don’t discount the fact that there are always owners who are ready to get out, even after having a record-breaking year.  They are just looking for the right buyers.

Healthcare

This is the most obvious “pandemic proof” business.  In fact, it’s not just pandemic proof, it fits Nicholas Nassim Taleb’s classic definition of “antifragile” – something that improves when faced with a challenge.  Both clinical and non-clinical businesses in this field are doing well and even with the end of the pandemic in sight, there will still be plenty of opportunity in this sector even when the masks come off.

Tech

Not all tech businesses have been as fortunate as Zoom.  For perspective, this time last year Zoom was averaging around 10 million daily participants.  Today that’s around 350 million.  Its company revenue is four times what it was in 2019.  But if you’re in a tech business that is supporting remote work and learning, as Zoom does, it’s a very good time for you.  

This is because habits have been so quickly and dramatically altered that new models and ways of interacting have been created that these tech businesses will need to support long after a pandemic is over.

Real Estate

As workers were told they were allowed to work remotely for a short time, then indefinitely, we’ve been witness to a “great migration” that hasn’t been seen in America in generations.  Obviously realtors are enjoying this, but any business that supports a movement of people and their goods, like home contractors, HVAC, electrical, or moving companies, are also riding this wave.

Recurring Revenue

As people started trimming expenses to adapt to changing conditions, many businesses adapted their pricing to match.  Instead of requiring a large annual payment for a subscription or fee, companies started offering a monthly subscription where they previously had not.  Others chose to create new subscription models for their businesses as John Warrilow champions in The Automatic Customer.  In “normal” times buyers love to see consistent recurring revenue.  That revenue looks even sweeter in “bad” times.

We are working with buyers and sellers in every single one of these categories.  If you’re serious about moving forward with your life in 2021, give us a call!