Episode 26 – The Ceiling

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We recently discussed a business that had multiple buyer-seller meeting requests and offers. Today, Doug and Andy discuss why the asking price is the ceiling. Doug shares some lessons learned from his early days that resulted in mistrust between brokers, buyers, and sellers, ultimately leading to the policy at Apex.

Are you considering selling your business? Are you considering entering the world of entrepreneurship? If so, please get in touch for a FREE consultation. The best way to learn about us is at our website, which includes connecting Doug, Andy, or the rest of the Apex Team.

What is an SBA Preferred Lender?

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SBA Preferred LenderWhile we’ve talked about some basics the SBA considers when looking at your application, it’s important to know that not all SBA lenders are created equal, and that your choice of an SBA Preferred Lender Provider (PLP) can get you to a decision 3-6 weeks faster than a standard SBA lender. So, what does it take to become a PLP?

Do the Work

Lenders can’t get a PLP certification just by asking for it. SBA is going to want to see a track record. Proof that lenders have the ability to:

  • Process, close, service, and liquidate loans
  • Develop and analyze complete loan packages
  • Demonstrate knowledge of SBA policies and procedures

Additionally, they have to process a certain loan volume and to have done so with a satisfactory performance history.

Once there is an established track record of successfully processing and servicing SBA-guaranteed loans, there’s a good shot at becoming a PLP.

Nomination

A potential PLP can be nominated by an SBA field office or can ask that field office to be nominated. The lender then goes through an application process and if they are approved, they receive PLP designation for a maximum of two years.

During that two-year period, the SBA will audit loans, policies, and procedures as part of a possible recertification.

A lender can be recertified for the maximum two-year term, for a lesser period, or not at all. While this may seem like a burden on the lender, it also ensures that the SBA is working off the most current information, especially considering the special privileges PLPs receive.

PLP Advantage

Apart from having more loan options and configurations to offer clients, a PLP also has the authority to underwrite their own loans and make a final credit decision. That is what drives the time discrepancy between a PLP and a standard lender, who has to send in a completed package to the SBA and wait on an answer, which can vary significantly depending on the time of the year and market conditions.

In exchange, the PLP agrees, in the case of a default, to liquidate all business assets before asking the SBA to honor its guarantee, often 75% of the originated loan value. This is something the SBA would ask to be done anyway, so this once again underlines the speed component of a PLP relationship: a focus on wrapping up a failed loan with the same efficiency as approving a new one.

Not Just a Label

We’ve dealt with thousands of loans over the years across countless lenders and we don’t only work with PLPs. But we do tend to always have good experiences with PLPs. This is because the PLP label isn’t what made them great lenders. Great lenders have characteristics like:

  • Fantastic communication
  • Constant professionalism
  • Speed in dealing with paperwork
  • Empathy in dealing with challenging situations

Those traits are what led to them becoming PLPs, hence when they got their designation, we often already had a great relationship with them. We don’t only work with PLPs, but we definitely prefer them (and have names to share should you need them!).

Can’t get enough SBA knowledge? Check out this recent podcast with guest Jason Moxness that deals with myths about SBA lending. Or you can always give us a call.

Episode 25 – The Art and Science of Pricing a Business

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In this week’s Apex Business Advisors Podcast episode, Andy and Doug discuss how science and art combine to price a business. They discuss the various sources used for comps (science) and bring back the value drivers and discounters (art) discussion on how ultimately a business gets listed in the market.

Are you considering selling your business? Are you considering entering the world of entrepreneurship? If so, please get in touch for a FREE consultation. The best way to learn about us is at our website, which includes connecting Doug, Andy, or the rest of the Apex Team.

Case Study #64: Turning Down Shark Tank Money

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Turning Down Shark Tank MoneyIn 2013 Kate Field was living in Washington, D.C. working for a nonprofit when she discovered kombucha. Five years later she was pitching a home kit kombucha company on Shark Tank and two years after that she sold the company she bootstrapped, The Kombucha Shop, for just under $2M. Her sale of the business during the pandemic and her refusal to take on Shark Tank money are only two of the interesting twists in this fascinating story.

The Home Brew Niche

When Kate discovered kombucha it had not gotten popular or scaled yet so bottles were often $4 a pop. Friends tipped her off to brewing her own at home, which only involves the cost of tea, sugar, water, and the bacteria starter, called a scobie (think of the “starter” in a sourdough loaf), and often you can get a scobie free from a friend. Once she had gotten set up she offered to help out a friend who had asked about it, but the friend had already “bought a kit online.” 

Intrigued, Kate searched online and found some hippy-marketed kits, but nothing with the clean and trendy branding that her own millennial segment would be drawn to. There was an opening!

With $800 she bought glass jars, sugar, tea, PH strips, and a logo courtesy of a student designer and made 20 kits. She launched a Squarespace website just before Christmas and sold out those 20 kits just on word-of-mouth marketing. She took the profits and washed, rinsed, repeated. Before too long she had a business on her hands.

Shark Tank Calls

That regular word-of-mouth marketing is what Kate and her team stuck with and the company started to see hockey-stick growth, with $800k in sales in 2016, and $1.2M in 2017. Shark Tank came calling in 2018 and after three months of preparation and a lot of nervousness, she pitched.

Inc. ranked it as the second-best pitch of that season, and she consistently got praise from Mark Cuban during the pitch, but ended up doing a full-valuation deal with Sara Blakely and Barbara Corcoran. That deal valued the company at $3.5M, almost triple her trailing 12 months revenue at that time, but all the advice she had going in was to go high as the Sharks would inevitably try to take bites out of whatever number she came up with.

As it turns out, the deal didn’t end up being a fit (over 50% of the deals that “close” on the show never make it to the finish line) for various reasons, and all the parties were okay with not moving forward, but the entire diligence process only pushed Kate towards selling, as she was starting to feel that solopreneur burnout.

One Week From Closing

Getting on Shark Tank will get you a fair amount of interest when you take your business to market, and Kate met with 5-6 buyers before settling on a buyer who had grown some businesses in the past, wanted to give Kate a board seat, and give her an earnout over seven years that could lead to $2.7M in total earnings, but he only wanted to give her $1.5M upfront. She got along well with the buyer and despite some reservations about the earnout timeline, she decided to move forward.

One week before closing, on March 13th, 2020, she got a call from the buyer. He told her that there was going to be a global pandemic that would shut down supply chains for years and that he just couldn’t go through with the deal. Though she understood conditions were unprecedented, Kate was distraught and her husband suggested that they take a bike ride out to clear her mind.

But instead of clearing her mind, Kate got into a serious bike accident. Yet this only made her even more eager to sell: life is short, your health can be tenuous. 

Her broker got on the phone to people who were hoping the deal wouldn’t happen so they would have a chance and as she was going into surgery she gave a verbal okay for an LOI with one of those buyers. He had his own reservations about the international state of affairs (it was March 2020, keep in mind!) and so he shaved some of the value off Kate’s desired price of $2M to mitigate his risk: they ended up agreeing at $1.85M.

Lessons

There are so many wonderful lessons from this first-time entrepreneur pulling off a 7-figure exit in the middle of a global pandemic, but we’ll focus on three:

  1. Build a better mousetrap. Kate didn’t hit on a world-changing idea. It was simple, and in fact, there were already players in the space. They just weren’t marketing to people like Kate, and she jumped on that opportunity.
  2. So what if you “don’t know.” Kate didn’t know how to build a business, she just went for it. She did a test run, sold out, then just iterated from there. So many businesses would never have been built if the owner had let “I don’t know how to do that” stop them.
  3. Turn down money sometimes. While it’s definitely easy to get star-struck by the idea of working with Sharks, there’s no point in taking money if you don’t need the money. Venture money always comes with strings, and sometimes those strings pull you right out of your own company.

We helped shepherd many transactions during the pandemic and have continued to do so as the panic from that time period has subsided. We’d love to work with you. Give us a call.

Episode 24 – They’re Not All Rainbows and Unicorns

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On today’s episode, Andy shares a story about a deal that had more twists and turns than your favorite roller coaster.

First Steps in Listing Your Business

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First Steps in Listing Your BusinessWe’ve talked in the past about broad reasons why we might (and might not) take your listing, so today we’re going to get a bit more granular and talk about what that process of listing looks like.

I Want to Sell!

We get it! You’re ready to move on with your life and once you’ve told us you want to sell, you might already have a mental countdown clock started. But you shouldn’t start that clock, because we haven’t listed the business yet, and when we do, it’s going to take an average of 6-9 months to sell. So, we appreciate the enthusiasm but we need a few things first!

Key Information

We can’t price and promote your business without hard data. Most times that hard data is going to come from the last three years of tax returns along with the financial statements to substantiate and corroborate those returns. 

We’re going to need a bit of time with you and your accountant to understand some charges, as we haven’t worked side-by-side with you in the business for years and may not understand why certain things are classified the way they are.

Not Auditors

We aren’t the IRS and we aren’t interested in passing judgment or scolding you for where expenses have been classified. What matters to us is getting to a clear number of SDE that will allow us to move towards a proper price for your business. That said, we’ve seen some, shall we say, creative interpretations, including:

  • Vet visits for a dog classified as “security” expenses
  • Cosmetic surgery for a spouse classified as “building improvements”
  • A lake house used once in five years for a company retreat as an active company asset

Banks can be leery of excessive addbacks, but that doesn’t mean they won’t work with companies that have a lot of them. But without being clear as to what expenses are legitimate addbacks, we can’t get a true value for your business.

Seller Disclosure Statement

So we’ve gotten all the key paperwork we need to get pricing, now we need to cover anything the numbers can’t tell us, which can include:

  • Current or future lawsuits/legal actions against the business
  • lease/real estate situation (if applicable)
  • Upcoming changes (key employee or major customer leaving)

This information completes the snapshot we will come up with called the Confidential Business Review (CBR).

Why Confidentiality Matters

Confidentiality is perhaps an important part of a business sale in general, but it’s particularly important during the listing process. Don’t tell employees what is in the works or you may have an exodus that leaves you with a shell of a business.

Going to Market

Armed with all this information, we will put together marketing material to showcase your business in various formats and on various platforms, and to do so confidentially. We asked you to keep things confidential, and we follow our own advice. We even keep that confidentiality sometimes long after a sale closes, referring in general terms to a business in a generic industry in a generic region.

That countdown clock we referred to above? Now that the business is listed, you’re free to start it, but make sure you do with expectations that have been tempered by a discussion with us, not a timeframe you’ve manufactured in your head. You may have sold a business before, but you’ve never sold this business, in this market, before. 

Did this article make you realize you need to get a few ducks in a row before you can even list your business? We’d love to help you with those ducks! Give us a call.

Episode 23 – High Demand Business

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Our Brokers presented four businesses in the weekly Broker Meeting a few weeks ago. Three went under contract before the week was out. Today, Andy and Doug discuss Doug’s listing that had 8 Buyer-Seller Meetings before taking no more meetings. Hear the characteristics of the business and what it took for the Buyer to be selected.

7 Qualities of a Qualified Buyer

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7 Qualities of a Qualified BuyerWe’ve discussed questions buyers need to ask themselves before buying a business and we’ve also talked about three things that can help buyers make a great start after they buy a business. Today we’re going to talk about the qualities of a qualified buyer. The more of these you have, the higher your chances of being successful in business ownership.

An Entrepreneurial Spirit

You don’t have to have owned a business before or even run lemonade stands when you were a kid. Entrepreneurial spirit is about questioning the status quo (could this be better?), seeking growth and understanding (not just continuing education that you have to do, but general enrichment that you choose to do), and taking on challenges and opportunities (always being open to doing something new).

An entrepreneurial spirit, even if you’ve never been an “entrepreneur,” is key to business ownership.

A Management Background

You don’t need to have managed teams of hundreds or dozens of individuals. Even managing a handful or one person will open you up to the challenges of communicating with a different person, taking into account his/her personality, working style, and level of motivation.

Those who “don’t like managing people” won’t do well in business ownership.

A Willingness to Lead

Not every leader seeks out leadership. Cincinnatus famously was working on his small farm when he was appointed dictator to help rescue Rome. He defeated the enemy in a single day, celebrated a triumph in Rome, then went home to farming. He didn’t seek leadership, but when it came to him, he embraced it (and saved Rome).

Many consider themselves “reluctant” leaders. That’s okay; business ownership will give you the opportunity to put that reluctance aside and embrace the personal growth that comes from exercising your leadership muscles.

An Ability to Look at a Broad Range of Activities

A day/month/quarter/year of a business owner has regular cycles of things that will require knowledge and expertise you may have to develop.

Perhaps you’ve never looked forensically at books and budgets before. Or you’ve never iterated through a marketing and PR campaign for a business. Or examined SaaS products to see which has the best value for your business. Or run payroll. Or managed vendors.

You’ll have to do at least some of these activities as a business owner, and that means in some cases you’ll be starting from scratch. Bring humility and a student’s attitude of “always be learning” and you’ll be fine.

Support from Your People

Sometimes you’ll have opposition to business ownership from some people in your life, and that’s healthy to an extent. You need people pushing back so you can better articulate your reasons for buying a business. But if you have opposition from a spouse, for example, that’s a red flag.

Get signoff for your major life decision of buying a business from the people who are major in your life.

Comfort with Making Decisions with Incomplete Information

While some people can make decisions before they’re even asked, and others need all of the research possible and then years to ponder that info, business owners are often in between those extremes. They will be asked to make decisions and will be given some time to make them, but they often will not have all the information they would like, sometimes because it’s not available (“Will this marketing campaign work?”).

Business owners already have, or are open to acquiring, the ability to make decisions when needed, knowing that sometimes the wrong decision will be made, and out of that should come a lesson, not regret.

Knowledge of Industry

Of all the ones we’ve listed above, this is the least necessary, but it would be foolish for us to say that industry knowledge isn’t a major advantage, if you have it. The only caution we have here goes back to the idea of continuing ed and a student’s mind. Don’t ever get complacent about “what you know” and be open to the fact that there are things you don’t, even in an industry you may have worked in for decades.

If you like what you read here and want to listen to a podcast discussion on qualified buyers, you can find that here. If you have several of these qualities, we’ve got businesses you should take a look at. Give us a call.