Podcast Episode 17 – When to Fire a Client

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On this episode of the Apex Business Advisors Podcast, Andy and Doug are joined by Chuck Campbell to discuss the rare and unfortunate times when we have to terminate an engagement. Chuck shares his experience with a trusted advisor who set unrealistic expectations with a shared client that made it impossible for Chuck and us to serve the client. Doug shares other reasons why have terminated an engagement in the past. Andy shares an embarrassing moment at a local Chamber of Commerce luncheon.

The Climate for Business Sales in 2022

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The Climate for Business Sales in 2022One way to know how the market is looking in 2022 is to look at the most recent data and recently BizBuySell released their Q1 2022 Report which offers a number of insights worth considering for those looking to close a business transaction this year.

Q4 Beats Pre-Pandemic Levels

Based on BizBuySell’s last report, we already knew that Q4 2019 was eclipsed by Q4 2021, which saw a significant uptick in transactions which was welcome news for everyone. While there were a number of factors for this, not least of it being Q4, which always offers a natural calendar-based urgency, there also seemed to be optimism in an economy that continues to recover amidst uncertainty and inflation. That has carried forward into 2022 with acquisitions now 24% higher than the same period last year and just 3.7% shy of Q1 2019, when most of us had no practical idea of the meaning of “lockdown” or “pandemic.”

Business Owners’ Numbers

Another really fascinating statistic from the BizBuySell’s previous report (Q4 2021) was the fact that despite more than half of the surveyed business owners being negatively impacted by the pandemic, the key financials of business that sold in Q1 2021 were the highest since BizBuySell began collecting data in 2007. The median revenue of these businesses was $688,020 with a median cash flow of $147,752. As other businesses regained health and also went to market, these numbers only changed slightly, finishing at $656,599 and $150,000 in Q4.

Service Businesses Remain Desirable

Some 35% of buyers in the market say they are looking for a service business. This reflects a larger trend over the past five years, in which the number of service businesses changing hands in the market has grown to 45% of all reported business transactions. By comparison that statistic was 37% in Q1 2017.

The New Pandemic(s)

Most business owners surveyed were less worried about diseases and more about the labor shortage and Great Resignation. 64% of surveyed business owners say that they have been impacted by labor shortages, and of those, 59% say the situation is either not improving or getting worse. Peers in our industry weighed in to correlate, with 59% of business brokers saying that labor shortage is the biggest threat to small businesses at the moment.

Not far behind the labor shortage which itself leads to higher overhead, there’s also the challenge of inflation due to monetary policy and supply chain issues. 72% of owners say that their business has been impacted due to inflation, with 76% saying it has not improved or is getting worse. Many business owners have had to weigh keeping prices consistent for customers by eating the margin or raising prices and sharing the pain all around.

These pressures will surely push more business owners into the market to sell, just as the pandemic did two years ago. “Pandemic fatigue” was listed as moderately to extremely motivating for 43% of business owners to consider selling.

The Other Side of the Transaction

Over 5 million entrepreneurs applied for business applications in 2021, which was the largest number ever recorded by the US Census Bureau. At the same time, one in five business buyers self-reported as having come from the Great Resignation and business brokers correlated this trend by saying that 23% of inquiries came from corporate refugees or those proactively seeking business ownership. Part of what is causing pain for business owners — labor shortages — may also be the solution, as some of those “shorting” the labor market may end up buying those labor-troubled businesses.

Final Thoughts

Through these constantly shifting times, the fundamentals of business transactions still hold, whether sellers are finally letting go or buyers are excitedly entering the fray: due diligence, clean books, solid systems. 

We’ve got all sorts of exciting businesses for buyers to look at and are always open to representing sellers who think that 2022 might finally be time to ride off into the sunset. Give us a call.

Podcast Episode 16 – Writing a Compelling Offer Letter

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We discuss what makes a compelling offer letter on this episode of the Apex Business Advisors Podcast. Some of the components we talk about are acquisition price, escrow vs. down payment, bank financing, and contingencies.

Choose a Business Advisor, Not Just a Broker

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Choose a Business Advisor, Not Just a BrokerOf course here at Apex Business Advisors we are business brokers. We go to the business broker conferences, we have the business broker credentials, and we probably have some business broker t-shirts or mugs lying around here somewhere. But if you’re looking to buy or sell a business, a broker is the minimum you need. What you really want is a business advisor. Let’s talk about what that means.

What a Business Broker Does

At a basic level a broker is defined as someone who collects information from you so that he/she can list your business. But as we’ve spoken about in so many articles, that’s only one part of the beginning of the process.

What a Business Advisor Does

As we mentioned in our “day in the life” article, business advisors very rarely have a typical day. We are often working on different batches of activities for our clients. They can fall into a few different categories. Let’s discuss a few.

Information Analysis

It’s one thing to collect information from a buyer or seller, it’s another thing to understand what that information means, especially if a client is in an unusual business category. An advisor is going to look at all that information, make notes, and come back with questions. Some of those might be:

  • Why there are certain trends in the books (good and bad)
  • Where are tax documents (if any are missing/never filed)
  • What the legal status is of the company and how is the ownership distributed
  • What’s the status of payables and receivables
  • If there is paperwork substantiating any important decisions in recent years

Sale Prep

A business advisor has to get a business ready to go to market, and very rarely do business owners come into our office and plunk a business down that’s immediately ready to sell (though we would LOVE that). An advisor is going to look closely at:

  • Does the valuation make sense for the business and the marketplace?
  • What is the situation with key employees and employee turnover in general?

He/she will also look at current SDE and how to improve profitability and curb appeal of the business by ensuring there are manuals and systems in place.

Another part of sale prep that a business advisor is always doing is cultivating an engaged and serious pool of buyers and sellers so that when the right opportunities come along, making the connection happens quickly. Here in the office we’ve often seen advisors with great lists get genuine offers within hours of learning about a new opportunity via an email blast.

Confidentiality and Negotiation

Most business owners do not come into the process with multiple transaction experiences nor do they necessarily go on to have more after working with us. Very often a business sale is the largest business transaction of their lives, and despite those high stakes, clients can fail to trust the professionals who deal with it every day, multiple times a day. Two big client failures (when they happen) are in confidentiality and negotiation.

Business owners don’t realize that confidentiality is key in transactions, not just customer-facing confidentiality, but internal, employee-focused confidentiality. Deals have disintegrated in front of everyone’s eyes because this wasn’t respected.

Negotiation is particularly important because a business advisor has no emotional attachment to a business that will lead to him/her acting irrationally in a negotiating situation. Not only does this objectivity help in the actual negotiations, it helps before that even starts, as advisors help craft a negotiation strategy based on valuation, the client’s needs and wants, the realities of the marketplace, and the thinking and attitudes of the counterparty.

Business advisors also have experience, not just their own, but also those of their peers that they can consult who have been in similar situations and can then crowdsource that wisdom to the client’s benefits. No matter how well connected or networked a client is, he/she won’t have that specific and targeted (often even industry-specific) experience at his beck and call.

The bottom line? A broker might help you sell a business, but an advisor is going to help you do it for the best price and help manage expectation and the experience along the way.

We’re Apex Business Advisors for a reason. We’d love to offer that advice to you. Give us a shout!

Podcast Episode 15 – How to have an effective buyer seller meeting

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On this episode of the Apex Business Advisors Podcast, Andy and Doug share tips and tricks on what makes an effective Buyer Seller Meeting. They discuss the questions each side should be asking and topics that should be avoided.

Case Study #62: Exiting Near the Top

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Case Study #61: Exiting Near the TopAnna Maste didn’t originally set out to build a business.  Her mom had already created some travel guides for the RV community that were selling well when a discussion between the two of them led to Anna pitching the idea of using that customer base to build a website.  Anna then spent a lot of her maternity leave (with free babysitting from mom) using her computer engineering background to create a basic website that allowed people who wanted to allow RVs to spend the night free on their property to advertise (and allowed those looking for free stays to connect with hosts).  Boondockers Welcome was born.  At first more of a monetized hobby than a business, the website took 7 years to grow to $100k in Annual Recurring Revenue (ARR) but thanks to an offer that made her reconsider everything, two years later Anna and her mom built the business up to $500k in ARR, leading to a healthy mid-seven figure exit.

What Changed?

Anna and her mom had been happy as 50/50 partners (despite the challenges that can exist in family businesses).  But at some point Anna’s mom wanted to enjoy her retirement a bit more, not just in less time spent on the business, but in a possible liquidity event that would allow her to splurge a bit more on some trips.

Anna used a broker to take the business to market informally and found an offer with a respectable 3.9X multiple on her ARR.  But at a conference where she shared the idea of an exit with some people, she found support and encouragement to build a bit more and get a bigger exit.  The big changes she made when she came back from the conference included:

  • Hiring a replacement for her mom, dealing with one of the issues that her mom had a challenge with
  • Taking a salary for herself, potentially improving valuation
  • Overcoming imposter syndrome, in which she told herself that she was an employee-type and “didn’t know how to manage people”
  • Raising prices, while grandfathering in all current customers, as long as they kept renewing
  • Hiring a customer service person from the membership (she got over 200 applicants for that role!)
  • Adding a weekly newsletter that highlighted new hosts 

The loyal following they already had kept spreading the word and unsurprisingly, the business grew.

The Exit

The pandemic crippled many businesses, but not those catering to RVs.  Many people started to realize there were alternative ways to live, and not having a permanent residence was one of them.  While Anna maintains that the “lifespan” of an active RVer is roughly two years (after which they feel like they’ve “seen everything” and are ready to be off the road), there was a massive influx of people willing to try it, and the host community of former RVers only grew exponentially from these new inputs.

Anna looked at the remarkable growth over the two year period, powered by a pandemic but also by smart changes she and her mother made.  Two concerns plagued her:

  1. What if this is peak RV?  The last thing Anna wanted to be was the last person in the casino, not knowing to cash out when the getting was good.
  2. This is my Mom’s nest egg.  Her mom had now pledged nine years of her time and treasure into this business and was getting on in years.  It would be a good time to reward her investment.

The buyer who ended up acquiring Anna’s business was Harvest Hosts, which partnered with wineries to bring in extra income and awareness among the TRV community.  Anna was promised that her brand would stay separate but would be part of a community of brands that Harvest Hosts used to promote RV hospitality and partnerships.  She got her exit, only having to stay on as a consultant for six months.

Takeaways

Three lessons to take away from this story:

  • Your side hustle can become a real business.  Often the missing ingredients are what Anna experienced: limiting beliefs, intentionality, and paying real salaries. 
  • Manage family with care.  While she had a decent offer originally, and even considered buying out her mom, she realized that it wouldn’t go down too well if she had a massive exit a few years after paying her mom a fraction of that price.  Manage family relationships in business with care.
  • Know when to get out.  While RVs and #vanlife are still very much a thing, Anna didn’t try to keep riding a rising tide: she put in the work and got out with a major upgrade from a previous offer only a couple years before.

Are you looking at getting out of your business in a two year window?  Follow Anna’s lead and start planning now.  We can help.

Podcast Episode 14 – Confidential Business Review

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On this episode of the Apex Business Advisors Podcast, Andy and Doug discuss the contents of a Confidential Business Review and how a Buyer can use this to guide them to the next phase of the buying process.

5 Factors in Creating a Multiple

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5 Factors in Creating a MultipleWhile there are many ways to get a value for your business, we always point towards a professional valuation as not only the most accurate, but the one that qualifies for SBA and bank financing.  In this article we’re going to talk about five factors that professional valuation experts consider when evaluating the proper multiple for your business.

More Than Numbers

While we are never going to argue that an accountant doesn’t know numbers, we will point out that, without years of experience with business transactions, an accountant or CPA can only offer an academic valuation.  It may be accurate, but the advantage of having the knowledge and experience which comes from doing valuations regularly leads to a professional valuation that is tethered to the marketplace, and for those who are actually looking to sell a business, a number that has a relationship to the marketplace really matters.

So, let’s look at what the professionals consider for a valuation multiple that CPAs and accountants who aren’t regularly involved in business deals don’t:

1. Industry Assessment

As we saw during the pandemic, some businesses thrived. Others really struggled.  

Is your industry on an up or down trend?  Is there regulation or legislation that is pending that can really change the model of the industry?

Is the industry susceptible to supply-chain disruptions?  Weather?  Geopolitics?  Prior to 2020 these factors may have been never-never thoughts that we thought didn’t relate to Main Street businesses.  We know better now.

2. Company’s Competitive Position

As with the industry assessment, an assessor will look at whether the company is on an up, down, or stable trajectory within the local, regional, and possibly national markets.  

How is the company competing (price, quality, knowledge, customer service, etc.)?  Are any of those competitive vectors under threat from new entrants?  How?

3. Internal Trends

Just as we saw after 2008, many potential buyers are “giving a pass” to business numbers from 2020.  But that anomaly aside, what was the profitability year-on-year before 2020, and what is it now, when we are many months since shutdowns and business closings?  

4. Ownership Change Risk

With a solid team, a business should stay stable even with an ownership change.  In fact, when done right, many customers don’t even know the business has changed hands for months or sometimes years.

An assessor will look at how involved the owner is with sales and relationship management.  He/she will also look at how much recurring revenue is coming into the business, a factor that de-risks the specter of an ownership change.

5. Desirability in the Marketplace

How desirable is your business in the current climate?  For example, when the Affordable Care Act was going through the legislative process, a lot of health care related businesses didn’t go to market and buyers were adopting “wait and see” attitudes until the ink on the new laws dried.  What are market conditions around your type of business and your industry at this time?

There can be other factors to consider in valuations, depending on the industry and specific business situation, but these five factors are always considered when determining the right multiple for a business value.  Remember that before even looking at these factors the business needs to have clean books and operating manuals.

Do you have an academic value of your business and want a professional one instead?  We can help with that! Give us a call.