In 2015, Lorenzo de Plano and three other business partners started a business in the janitor’s closet of a Los Angeles parking garage. By late 2018 their business was doing $1-2M a month in topline revenue with a 40% margin. Not long after that, they exited for a cool $15M. Their business? Solace Vapor, which “specializes in the production, manufacturing, and distribution of unique nicotine supplements to replace conventional combustible cigarette usage.” Lorenzo helped build a vaping company.
Vaping was already well underway by 2015, so Solace wasn’t trying to take over the marketplace. Instead, they took advantage of the research already done by Big Tobacco, which had filed numerous patents over the years around adjusting the pH levels of tobacco. By focusing on adjusting the pH levels of the liquid (often referred to as “juice” in the vaping community) as well as the size of the cartridge, Solace focused on serving a particular niche of the vaping market.
This community was 35 and older and weren’t interested in making the big, obnoxious smoke clouds delivered by the large devices. They wanted something smaller and discreet. Less of a “statement” and more something to enjoy. They took their ideas to the manufacturers to help create smaller devices and they had a couple takers.
Their first year they burned through all their cash (they each put in $5k) and went into credit card debt. But before too long they were off to the races.
When the government doesn’t regulate something, it’s often a “wild west” scenario, and to some extent, the vaping/e-cigarette market in the United States still is. This is due to the fact that many saw this as a gold rush of sorts and hence did not file paperwork with the FDA, thinking that when it came time for regulation they would just shut down and declare bankruptcy. In the meantime, they planned to “smoke ‘em while they could,” and make as much as possible.
Those who took the time to actually put together applications with the FDA ended up with the most severe financial penalties (that story, and thoughts on why those who try to follow the rules get punished, are for another time).
Just as insurance providers prepared for the regulatory event of what was then called Obamacare, those in the e-cigarette and vaping space were considering their next moves as it became clear that there would be some regulatory action from the federal government.
Lorenzo and his partners (now just three, as they had already bought one out some time before) knew that this regulatory event would compress the company’s valuation, but they thought their venture would make more sense inside the portfolio of a larger company that had the pockets and the stomach for a regulatory fight.
They took the business to market and engaged with four serious buyers, got LOIs from three, and went the full way on due diligence with two of them.
They ended up taking the slightly lower offer that gave them a chance to grow within the structure of another company rather than simply being paid off and dismissed. In this case, only three years into the business, they weren’t sick of something they wanted to get rid of, they simply wanted help, and wanted to take some money off the table in the process.
The payday? $15.25M, $8.25M which was upfront in cash, with the rest in restricted stock. They had to divest or sunset any assets of the business that dealt with cannabis or CBD as the acquiring company did not want to have that part of the business.
Lorenzo’s story from startup to sale is not a long one, but it’s full of helpful lessons:
While we may not have a vaping business to sell you, we do have plenty of other smoking-hot deals here at Apex. Give us a call and we can share them with you!
Doug is on assignment this week, so Andy called upon fellow broker Debbie Small to step in and discuss a Buyer Search. Debbie shares her nearly 20 years of conducting Buyer Searches with advice on what leads to the most successful search.
A fair number of clients come to us because they first did a search on BizBuySell. It’s the Amazon of business buying and selling. It hosts tens of thousands of active listings at any given time and if you do a basic search in the Kansas City area, as you browse through the listings you might even run across an Apex ad!
Our goal in this article is not to turn you into a BizBuySell client (because face it, we’re better), but to show you how those listings can help hone your own criteria as you shop for a business.
When you get to the site you’ll notice the very first prompt is geographical. Once you put in your state or city you’ll see the next field defaults to “all industries.” If you want to get a broad swath of choices, opt for a state instead of just one city.
As you look at your search results, you’ll see different filter options. The next logical filter to use is price range. No point looking at businesses that aren’t a good fit for your financial position.
Once you’ve put in your price range, you’re going to have an even narrower range of results, but still high-level enough for us to have a lot of options.
The most worthwhile listings are going to list cash flow right underneath the asking price. This allows potential buyers to immediately assess whether this proposition makes sense and is worth pursuing.
For example let’s say you see an asking price of $300,000 against a cash flow of $150,000. That’s a 2X multiple, which is standard for Main Street service businesses. That might be worth looking more deeply at.
Or you might see something listed for $500,000 and instead of cash flow it says “asset sale.” This is a different proposition from a standard business purchase and is going to require more work. That doesn’t mean it’s not potentially a good deal, it just means it should go in a different bucket among what you’re considering.
You don’t have all the time in the world to look at every listing, so you should first consider the ones that list cash flow. The businesses are usually pretty confidentially listed (though you’ll occasionally see a name, picture, and website of the business!) so there would need to be a good reason not to list cash flow. These might take extra investigation.
You can probably also skip past businesses which have high multiples but low cash flows. For example, if a business is doing $10M in revenue with $2M in cash flow, it wouldn’t be unreasonable to see a price of $8M or higher.
But if your business is doing $300,000 in revenue, with $30,000 in cash flow, and you see a price of $200,000, you’re probably looking at a pure asset sale (equipment and inventory). This may be a more distressed business that you might want to skip.
Now it may seem funny that this is the last category we consider, but you have to realize it’s a lot easier to find a business that you might be a good fit for once you’ve taken a look at it versus insisting on only a few types of businesses that you are willing to look at. You really never know what might be a good fit.
On the other hand, be willing to be opinionated about what you want to do, because, after all, this is going to be a big part of your life going forward. If you don’t see yourself in an event rental or pest control business, cross those off your list.
What we recommend is keeping an open mind. The game of entrepreneurship is the same across many industries and business types. If entrepreneurship is what you’re after, there are many businesses that can suit your purposes.
Just as many might have found a career through what seems to be a combination of chance or providence rather than a set plan, so too the right business for you might not have been the one that you imagined, but the one that was a perfect fit, once you’d looked at the numbers, the opportunity, and had a chance to do your due diligence.
BizBuySell has a tremendous service, but they don’t have access to a lot of our private listings. If you want those, give us a call and we’ll be happy to share them with you.
In this edition of the Apex Business Advisor Podcast, Andy and Doug discuss the differences in buyers’ confidence levels. Some buyers are incredibly confident and looking at the growth opportunities. Others appear to lack confidence and seem to focus on what could go wrong. Tune in to hear if it matters once the sale and transition are complete.
“So, we’re a married couple that would like to keep our jobs, and we’re looking for an absentee business that can add another $50,000 a year to our income.” We’d love to say this is some fictional scenario but almost every broker in the office gets one of those calls at least once a month. For some reason, there’s a segment of the population that sees a business like a washing machine that you can program and leave and just periodically show up at for a check. Even better than that, in fact, because you still have to dry and fold your own laundry.
Yes, such absentee businesses exist, and yes, it’s possible for a business owner, in time, to create an absentee business, but having it seamlessly function that way from day one is an expectation that potential business owners should flush from their minds.
After we get the query we alluded to above and take a bit of time to hear out the potential client, we are generally going to follow up with, “What are you looking to get out of this?”
“Some extra income.”
Such an answer indicates a perspective that considers $50,000 a year of income as chump change compared to high-powered corporate jobs, so simply keeping that business going will be pretty easy, right?
But this is the perspective of an employee, not a business owner.
An employee thinks that he/she can show up somewhere for a certain number of hours and get a paycheck regardless of what happens to the business.
Business owners know that sometimes they can work 80 hours a week and still not get paid at the end of the month.
A business that can generate a respectable $50,000 of income a year requires a commitment of time and money and should not be thought of as a “part-time job.” We’ve seen relationships fall apart and marriages get tested because people bought businesses thinking they were simply part-time projects that could be done outside of working hours.
That’s simply not reality.
While we still maintain that you can’t seamlessly take over an existing absentee business, one way that this would be even remotely possible is if you have deep industry knowledge.
For example if you want to buy a printing business and have previously owned a print shop or have worked in the printing industry for many years, you’re probably not going to have to spend a lot of time learning the lingo of the business, or finding out how the machines run, or considering who the best and most reliable suppliers are.
But, you’re still going to face the same challenge that all new owners face: meeting the employees, making them comfortable, and retaining them long term.
That’s not something you can do on the nights and weekends, not something you can do “absentee.”
It will take time, and only after that time has passed, at least 6-12 months, you might be able to transition the business into an absentee one.
There’s nothing wrong with aspiring to own an absentee business. We’ve bought and sold many in our time. But it’s wrong to think you can run a business as an absentee from day one as a new owner.
What makes more sense is sharing with the seller that this is a goal you are shooting for so that you can find out what steps and what timeline would be necessary to make that happen…from someone who would know.
If you’re looking for an absentee business so you can be an absentee right away, we can’t help you. But if you’re interested in putting in the work to make a business an absentee one in the future, give us a call.
This week’s episode of the Apex Business Advisors Podcast discusses the fallout and dangers of employees learning prematurely about the impending sale of a business.
With a title like “Manage Your Attorney” in a series called “Cautionary Tales” you might wonder if we are teeing up that line from Shakespeare’s Henry VI, Part 2: “First thing we do, let’s kill all the lawyers.” Not at all. Some of our team here at Apex are married to attorneys, or were raised by them. We work with attorneys on every single deal.
What we want to make sure is that buyers and sellers remember that ultimately, it’s their deals that are on the lines, and that attorneys are meant to be advisors, not parties, to these deals.
Remember that part of the skill set that any entrepreneur has to gain if he/she doesn’t already have it is risk management. Entrepreneurs look at given situations, sometimes with incomplete information or risk assessments, and make decisions. Up to the time of that decision you want to gather all the information you can, but then you have to move forward on your own.
One of the first things new clients do with us is sign a non-disclosure agreement. We are going to be sharing confidential information, including a private company’s financials and tax returns, and sometimes other sensitive information. We have to have the assurance that you will not make this private information public.
We didn’t make up our NDA on our own. We had lawyers help craft it and it’s the same NDA we give to all our clients. It’s not negotiable.
On more than one occasion, we’ve not even got out of the starting blocks. “My attorney told me not to sign this,” we’ve heard. Well, then there’s nothing to talk about.
We are not going to share confidential information with someone who won’t sign a confidentiality agreement, period. If you find yourself in this situation, you might need another lawyer or you might need to ask yourself if you’re serious about buying a business.
One horror-story variant of refusing to sign an NDA was one time when a client racked up $10,000 of changes to a franchise contract.
Now think about this. Franchise contracts are meant to apply to dozens, hundreds, possibly thousands of franchisees. What is the likelihood that they are going to make the changes you requested for your contract? And that others won’t find out and demand expensive redrafting of their existing contracts?
The attorney who dealt with this was not someone skilled in M&A but happened to be the equivalent of the “wife’s brother’s friend’s uncle.” Do not pick an attorney for a business transaction based on anything other than someone’s experience and expertise in M&A and business transactions.
Whatever money you “save” or relationship you establish with this individual is not going to help you with the relevant goal in this situation: a business transaction. Choose wisely, or risk the chance of large bills with no payoff.
On more than one occasion a client has expressed interest in a deal and we’ve called them to let them know other buyers are putting in offers and that the clock is running down. Sometimes we get the answer: “my lawyer’s still working on the LOI.” While that’s certainly one way to go about things, here at Apex we use a signature service called Offer to Purchase (OTP) that speeds this part of the process along.
While an LOI might be fine, there’s no need to reinvent the wheel (and pay the billable hours necessary to reinvent said wheel). Our OTP covers the major elements of an offer and is easily amendable with additional details as needed.
With delays, deals die, and if you are stuck worrying about the precision of your LOI you might miss out on a great deal. In the meantime, those clients who use our no-charge OTP service have already submitted and are on to other things.
In all these cases, attorneys were doing what they were trained to do: flag up risk. But that’s not what entrepreneurs are trained to do or what they execute on every single day. They look at the risk assessment and make decisions. For them, attorneys are assets/counselors who empower them to make decisions, not jailers who tell them what to do.
Manage attorneys in a business transaction or they may manage you out of one.
Need an attorney with M&A experience as opposed to your wife’s brother’s friend’s uncle? We have a whole list of them. Give us a call and we can share them with you.
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