Episode 73 – Are Your Experts Really Experts?

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On today’s episode of the Apex Business Advisors podcast, Andy and Doug share a cautionary tale about an accountant that valued a business approximately eight times over what it would sell for. Hear how they arrived at their number and the flaws in the analysis that led to an unnecessarily difficult conversation with a would-be client.

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 with Doug, Andy, or the rest of the Apex Team.

Case Study #75: Riding the Sports Gambling Wave

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Case Study #75: Riding the Sports Gambling WaveWhen Kyle Scott started Philadelphia sports blog CrossingBroad in 2009 he was simply trying to stand out from the plethora of Philly websites by being a bit more edgy, willing to shatter some glass and ruffle some feathers. Eleven years later, due to some savvy business moves in a changing content environment, he enjoyed a cool eight figure exit.

Google Surveys and T-shirt Sales

As so many great business stories start, this one begins in a parents’ basement. Kyle had moved back home to try to make a go of being a content publisher and as he developed a loyal following due to the writing he put out each day, he looked for ways to monetize that audience.

Early on he used Google Consumer Surveys, which paid something for every user that would click through to answer some questions. This led to a significant bump in revenue for a while…until Google decided to keep those funds and direct them internally. Kyle learned a lesson about not being diversified in his income sources and added local events and t-shirts to the arsenal, eventually going viral with a Philly Special t-shirt that outlined a winning play the Eagles used in the Super Bowl.

The Supreme Court Changes the Game

In 2018 the Supreme Court struck down the federal ban on state authorization of sports betting in Murphy v. National Collegiate Athletic Association. This led to a number of states beginning the legislative process to legalize sports betting in the time-honored tradition of government grifting off legal gambling.

In his ongoing search to provide value while finding ways to monetize content, Kyle started to write “How Do I” articles on sports betting as it became legalized in certain states. Those articles would contain affiliate links from some of the sports betting companies that paid as much as $300 per user that would sign up, put in some money, and place a first bet. With hundreds of thousands of readers, Kyle saw the potential and went all-in on this strategy and when he saw $30,000 of revenue in one day he realized that this was a new vector for his company.

He added a business partner who had websites and a talent stack that offered good synergy and as other states were considering legalizing sports gambling, they came up with a strategy to acquire similar websites in those states before legislation took effect, as they had a game plan to then significantly increase the value of those properties.

Then Covid hit, and with money drying up for acquisition, they decided instead to partner with the websites they wanted to acquire in Colorado, Illinois, and the South. At the time of their acquisition they were doing topline revenue of $5M with SDE of $2-3M. 

Lessons

Kyle had a respectable lifestyle business before the Supreme Court ruling. But because he saw the potential of what affiliating with sports betting websites could do to his business, he made a big bet and won. Here are three things Kyle taught us:

  • Build a loyal audience: Kyle says he was always focused on making his writing sound like he was writing an email to a friend rather than “optimizing for SEO.” While those don’t have to be mutually exclusive, Kyle’s hard work on the keyboard storytelling every morning won him an audience that was willing to fill out surveys and buy t-shirts to keep him afloat.
  • See where the puck is going: Wayne Gretzky famously talks about how he played to where the puck was going, not where it was. By seeing the popularity of sports betting grow from ground zero, Kyle and his team built a template that would add value and work state-by-state and got there before everyone else did.
  • Adapt: just as the Supreme Court launched a part of his business, Covid shut down his expansion plans. Instead of feeling sorry for himself, he adapted an acquisition plan and made it a partnership one, leading to growth that would see him get an enormous payday: $12.5M up front, $9.5M in a three-year earnout, and $3M of stock in the acquirer that would vest after a couple years.

We aren’t experts at sports betting, but we can better your odds of a great business transaction. Let us know how we can help.

Episode 72 – When Brokers Buy a Business

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Ryan joins Andy and Doug on this Apex Business Advisors podcast episode. Ryan is a broker in the office and recently acquired a business that Apex had listed. He discusses this unique approach to acquisition. Doug details how the notification to the Seller is handled when an Apex broker buys the business, and Ryan shares his experience going through the Offer, Due Diligence, Lending, and Closing process.

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 with Doug, Andy, or the rest of the Apex Team.

Seller Financing: What Buyers and Sellers Should Know

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Seller Financing: What Buyers and Sellers Should KnowOne of the effects of rising interest rates, and worse, bank failures, is a move towards alternative forms of financing for business transactions. As interest rates rise in coming months, more clients will be looking at seller financing as a larger part of a transaction, rather than a pro forma aspect of a traditional SBA loan. Let’s examine what buyers and sellers should know about seller financing.

Sellers

Some sellers offer seller financing as an option because they can’t get bank-financed deals. They haven’t kept clean books, or as we’ve heard once, they “don’t feel the need to involve the IRS in my cash business.” We don’t get involved in those sorts of businesses because we often find that the business isn’t really healthy enough to sell anyway.

There are four main draws for sellers to offer to finance their own sale:

  • Deferred taxation: instead of incurring a one-time liquidity event tax, they will be taxed annually at the capital gains rate on only the payments they have received that year
  • Higher premium: seller-financed businesses are known to sell at a premium above all cash deals
  • Faster sale: seller-financed deals involve a larger buyer pool, driving both the number and velocity of offers
  • Better rates: sellers might be able to get better terms for their money in a seller-financed deal than they can in the general marketplace

For sellers who are ready to sell but are neither anxious about the ongoing success of the business nor need a large payout, seller financing can be a solid option, even during times of great market and bank certainty.

Buyers

Since there is no third party involved in the financing of the deal, sellers have to scrutinize buyers more closely. This can involve:

  • Pulling a credit report
  • Doing a background check
  • Interviewing references not only for character but for business experience, particularly in the industry
  • Examining the business plan
  • Hiring a private investigator

While the last one might seem a bit serious, it’s a small investment to “trust, but verify” on what will be an important transaction in your life.

Buyer and Seller Expectations

Here are some reasonable expectations that both buyers and sellers should prepare for:

  • Sellers may want to maintain access to financial statements for the duration of the deal; their money is tied up with the success of the business, and they have a reasonable right to monitor the situation.
  • Sellers will want to create strong promissory notes with clear clauses for non-payment and late payments and should consider a general lien on the business for the duration of the note.
  • Sellers may demand a significant down payment, sometimes as much as 50% of the deal and will offer repayment periods between 3-7 years.
  • Buyers should remember that seller financing isn’t a forever situation: as market conditions improve and they are able to establish a clear financial history for the business, they may be able to obtain traditional bank financing during the term of the seller-financed note and pay it off early.

We’ve been around a long time at Apex and we have experienced times when banks weren’t even returning calls! Being familiar with seller financing before you need it only strengthens your position if it ends up being a significant part of your transaction.

Are you interested in offering seller financing for your business? Give us a call.

Episode 71 – Closings

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Doug is back and talking about his favorite subject – Closings! While he was on vacation, several businesses closed their transactions. He discusses the deals that got done and what it took to get them to the finish line.

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 with Doug, Andy, or the rest of the Apex Team.

What Size Business Do You Need?

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What Size Business Do You Need?A fair number of would-be buyers come to us still in the midst of their careers, so they have been used to a certain income level for some time. They’ll tell us, “I need to make X,” and it’s almost never lower than their current salary. While we understand that perspective, let’s put that within the frame of a business transaction.

Look at the Numbers

There are some key numbers we need to consider when trying to calculate the X referred to above:

  • Asking Price
  • Cash Flow
  • Debt Service

How do these numbers work together? Let’s use round numbers to make the math simple. Let’s say a business is asking $550,000 (and because they are one of our clients, they’ve gotten a professional valuation so that number is bankable) against annual cash flow of $200,000. Most SBA deals (and many of our deals involve SBA loans) require some kind of seller financing, which can bring down the total upfront amount. In this case, let’s say the seller is willing to finance 5%, or $27,500.

The bank is generally going to want to see at least 10% from the buyer, so with the $27,500 that the seller is willing to finance, the bank will want to see $52,250 from the buyer. That gets us to $470,250 that needs to be financed.

Let’s assume a 10% interest rate, which gets us $74,568 in annual debt service to the bank and the seller financing we’ll assume to be around $6,000 for a 5 year payback.

So if we subtract the debt service ($80,568) from the cash flow ($200,000), we get $119,432.

If our client’s X was $120,000, we’re there!(A buyer also needs to consider ongoing  working capital requirements with their cash needs but most banks will supply a line of credit to handle 30-60 days of working capital.)

But what if our client’s X was $150,000? There are two ways to go.

The first is delayed gratification. Save your pennies for a few more years and come back with a larger down payment so we can get closer to your X.

The second is belt-tightening. Reduce your expenses now and see how you do for 3-6 months on a new budget that’s closer to the X that’s appropriate for the down payment you have in hand. Sometimes going forward means taking a couple steps to the side and even back. 

Keep in mind too that our fictional scenario doesn’t account for individual tax situations. While owning a business is definitely more favorable than having a job in the US tax system, your accountant should be consulted when making these calculations. With all the advantages business owners have you may not be taxed as heavily, meaning you’ll get to take home more net pay than you might have compared to the exact same gross amount in a regular salaried job.

We hope this exercise helps you see that buying a business, like buying many other assets, involves more than one sticker price. Dive deeper to find out what size business you need to pay your bills while you build it and grow it.

Not sure if the market these days is tracking along with our fictional numbers above? Give us a call and find out what’s out there…before it’s gone!

Episode 70 – Real Life Seller’s Advice

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Billy Oxley once again joins us to share his experience selling three businesses. Similar to his Buyer Advice, he shares how his process changed after he had gone through it a couple of times.

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 with Doug, Andy, or the rest of the Apex Team.

Depreciation Recapture: Plan and Prepare

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Depreciation Recapture: Plan and Prepare One of our watchwords around the office is “have a plan.” The thing is, there are so many items that live in the world of business transactions that a business owner could be forgiven for saying, “What the heck is that?” when we tell them about something. One of those items (that gets that reaction) is depreciation recapture.

Definition

If you have a sinking feeling as you’re considering the self-explanatory term, you’re not alone. But bear with us as we spell it out: depreciation recapture is the monetary gain from the sale of an asset at the ordinary income tax rate. 

This could be less than you think, because, after all, we are usually talking about a used asset here. But in other circumstances, as with collectibles or real estate, we’re often talking about appreciation, and all that profitable gain beyond what was written off in depreciation is taxed at the capital gains rate.

Depreciation

To clarify for those who aren’t entirely clear on depreciation, it’s the wear and tear and operating expenses of a capital asset necessary for your business. It can be something as simple as a printer or as complex as a CNC machine.

There isn’t one way to calculate depreciation, though the one most are familiar with is the no-mystery-there “straight-line depreciation,” in which you take the difference between the original cost of the item and the value at the end of its usable life and divide that by the number of years the item will be in service.

An alternative to this is declining balance depreciation, which uses much larger amounts of depreciation early on in the item’s usable life. This is often used for tech purchases which can sometimes be capital-intensive.

Why

We don’t make the rules, but if you follow the logic, it’s a way for the IRS to recoup a portion of taxable revenue it didn’t receive because of a depreciation declaration against gross revenues.

Is It Avoidable?

Yes, but only for real estate, and only using the well-known 1031 exchange.

“But what if I don’t use depreciation?” We love that line of thinking, but someone must have tried that already because the tax code says that this applies to the depreciation that “was allowed or allowable.” So even if you don’t take it you’re going to be treated as if you did.

How Will This Affect My Transaction?

One of the first lessons new workers learn in the job market is that the amount of their salary isn’t what they get to keep. Business owners can be the exact same way when they talk about valuations and what they want out of a sale. The government is always going to get its take as well. And there’s even more at stake in regards to how all this is calculated, using terms like cost basis and adjusted cost basis and inputs like gross annual income of the business itself. That’s where the accounting part of your dream team comes in to help you calculate what your tax burden will be in relation to these assets and what kind of bite that takes out of your expected take-home from the sale.

Don’t feel bad if you didn’t know about depreciation recapture! There’s all sorts of stuff you might not know about business transactions. That’s where we can help. Give us a call.

Episode 69 – Buyer Advice with Billy Oxley

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Billy Oxley was a serial entrepreneur before it was a common thing. Billy and his Dad bought, operated, and sold three businesses in his career. Today, he sits down with Andy to share how his experiences changed with the knowledge he learned from each transaction and what advice he would give a buyer on evaluating if the business is right for them.

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 with Doug, Andy, or the rest of the Apex Team.