Archive for category: What Buyers Need to Know

Photo by Money Knack on Unsplash

Buying a business requires a balance between the purchase price, the revenue the business generates, and the costs of ownership. When you factor in debt repayment, taxes, and working capital, there’s often less left over for an owner’s salary than many people anticipate. That doesn’t mean business ownership is unattainable—it just means careful planning and realistic expectations are essential.

A typical business within reach of a modest down payment might provide enough free cash flow to cover its expenses and offer a comfortable salary for someone with minimal financial obligations. However, if you’re accustomed to a higher income or supporting a family, the gap between expectations and reality can be significant.

Not that long ago someone called our offices looking to buy a business. “I’ve got $150,000 saved up,” she said. “What can I buy that will get me a $350,000 salary because that’s what I make now.” This isn’t the first time we’ve gotten such a call, and as we usually do, we walk through the numbers.

$150,000 Down

Let’s say a reasonably sized business for a $150k down payment could generate around $350,000 a year in free cash flow. From that $350k, we will need to subtract annually:

• debt service on a typical SBA loan (rates are averaging 10% these days)
• an average working capital estimate for the business
• Income taxes

After working on the calculation, what does that leave for an annual owner’s salary? In this case, the available cash flow remaining for an owner’s salary might be in the $100-150k range. If the business doesn’t provide the necessary wage, a buyer may need to increase their down payment to reduce borrowing costs or adjust their expectations. To achieve that $350k salary, a buyer would probably need to invest at least to that level initially, which means a more significant business. Expect to invest at least 10% of the business value.

$300,000 Down

If she had $300k, which she might find through saving more, getting a partner, or using a retirement account to add funding to what she already had, we could look at a business that more readily meets her needs.

Now, we are much closer to her original request for $350k, as this business could get her a $250-300k annual salary. By tightening her belt a little bit now and by putting some great ideas to grow the business over time, that salary could quickly grow to $350k and beyond, and now, freed from her job, she would also be free from the financial and time constraints that a job puts on her.

Observations

You might note in our fictional example that doubling the down payment resulted in three times the potential salary. This is a general principle: the larger the initial investment, the larger the business you can buy, and the larger the annual salary/distribution the owner can take.

You might also realize now that you can come at this problem from either direction, either from how much you have to put down or how much you need to make. There are plenty of calculators online to help you play with numbers.

Finally, if you can’t match your current salary when buying a business, what sacrifices are you willing to make to accept that lower salary? Is your family on board for those sacrifices? If they aren’t, then there’s no point in proceeding further.

What size business are you looking to buy? Give us a call and we’ll tell you what we have available.

Photo by Signature Pro on Unsplash

At the very beginning of our process we ask potential buyers to do two things:

• Sign an NDA
• Disclose some basic financial information

While this does not sound like a lot (because it isn’t) it often serves as a significant enough roadblock to keep us from moving forward. Why is that?

Your Financial Information

One of our brokers shared on a podcast episode that a potential buyer had very quickly signed an NDA, but had refused to disclose any financial information: “My financial information is none of your business, I have enough money to buy this company and I don’t know anything about you.” While that’s certainly true that you may not personally know anyone you share financial information with, it’s context that matters. When you apply for a credit card or a loan, they may not know you personally (and in a certain sense, it doesn’t matter) but they can get an idea about you, at least the part relevant for their decisions, from numbers.

Numbers don’t lie. They aren’t emotional. And for us as brokers, this first hurdle is a bare minimum. Some brokers will require you to disclose all your real estate and security holdings and other such more in-depth information, but for a first conversation about a business, we will need at bare minimum your free cash to invest and your net worth. These numbers verify that you are qualified financially to talk about this opportunity. If this is still really troublesome for someone, we would always happily accept a letter from your banker attesting to your financial capability to execute this deal.

While there’s a minimum of due diligence on our side at this stage in the process, it’s also a question of a level playing field. We can’t just take someone’s word for it: we have to treat every potential buyer equally. If someone thinks he/she deserves special treatment, that’s an early warning to us that this might turn into a very difficult deal.

A Non-Disclosure Agreement

As we’ve said so often here, confidentiality is key in business transactions. We have a responsibility to the seller to make sure that employees or customers don’t find out that a business is for sale. Key employees may leave and customers, not knowing what might happen, might flee to the competition prematurely.

A buyer is invested in neither of those things happening, so a non-disclosure is the first step in protecting the future worth of a business.

Can an NDA be negotiated?

This isn’t something we are opposed to in principle. In some specialized cases or in particular industries a slightly modified version of the very basic NDA we offer might make sense. But more often than not, it’s a red flag of a buyer being managed by an attorney, rather than the other way around.

Exceptions

We can answer a question or two if it’s broad and generic enough. For example, if you are calling about a medical business and you want to know if it has Medicare involved or not (because that’s a dealbreaker for you) we can answer that without making you sign an NDA or share your financial information. Or maybe you want to know if the business is residential vs. commercial, or even how it performed during Covid. A very basic question which for you is a baseline for even looking into a business is totally reasonable. But again, this is not something we run into too often, and it still demonstrates the importance of what we’ve spoken about above.

Promising confidentiality and sharing basic financial information is table stakes for any serious buyer looking to acquire a business. It also serves as a screener for us as brokers. If you make it difficult for us just to get these things done, there’s no way you are going to make it through a months-long process which is going to be far more intense and possibly invasive than these two requirements.

If you’re looking to buy a business, and don’t have any problems signing an NDA or sharing financial information, give us a call.

Photo by Brian on Unsplash

Earlier this year we talked about the fact that “boring businesses” had gone from ugly duckling to prom queen. Now it’s time to talk about the effects of all that PE money entering the market in those businesses.

First, Higher Prices

Just as the new owner of an apartment complex might do some landscaping and painting and raise rents 25%, so too many of the professional operators who took over the mom and pop laundromats and plumbing businesses took advantage of market inefficiencies to raise rates. But as other PEs bought competitors, there was no longer just one digitally and social media savvy plumber in town. Then higher rates for borrowing slowed the roll-up wagon.

But Also, Better Services

But those higher prices did often come with better services, whether that was someone actually picking up the telephone, or even responsive chatbots that could answer your questions or even take a booking.

Next, Add Revenue

So it wasn’t enough to bring these businesses out of the fax machine era and help them win with digital marketing, these new operators had to innovate and create new lines of revenue. And they have. Examples include:

• Add an adjacent product or service, like car washes that have added oil change services. If you’re already stopping by to take care of keeping your car clean, why not knock out some pesky maintenance at the same time?
• AI has driven ways to examine customer data and automate outreach campaigns, using combinations of email and SMS marketing. Instead of worrying about acquiring new customers, some businesses have focused on selling more to their existing customers.
• Create serious strategic partners. A carpet-cleaning business is a natural partner for a home-cleaning business. Either type of business would be well-suited to screen potential partners in their markets and lean into joint marketing efforts.

Don’t Focus on Pricing

There’s still a lot of froth around home service businesses now because YouTube has made them the hot new thing. That can lead to some of these PE firms asking (and getting) prices that are based on higher multiples simply because of the popularity of these types of businesses. Don’t sit out waiting for valuations to come down. They may not in the near future, or ever. Home services are a long-term smart investment, as AI cannot fix your leaky faucet, or put a new roof on your home after hail damage, nor can it give you a paint job you’ve been waiting for for ten years. You may be too late for a bargain in a home services business, but if you are sensible about plotting future growth, paying current market prices now may still be a savvy investment.

Are you interested in a boring business? Get in line, and give us a call.

If you’ve ever paid any attention to the small business community on social media platforms like X, “boring businesses” are as popular as ever. The “bad” part of a boring business is that it’s not glamorous. The fun part? It reliably returns cash flow, day after day, month after month, year after year.

The Category

In case you’re still struggling to visualize these types of businesses, they include:

• Self-storage
• Laundromats
• Vending machines
• ATMs
• Car washes
• Bookkeeping/accounting
• Home services

Other telltale signs of boring businesses include:

• A fax number
• No website
• No internet presence

Codie Sanchez, one of the prophets of this category, even has a list of 130 of them you can peruse. She’s even started a holding company that strictly acquires and scales home service businesses.

The Opportunity

Some of the opportunities lie in the telltale signs we just mentioned. For example, a fax number indicates a business that has been around a long time and has established customers. But it also means that there’s probably been a lack of voluntary tech upgrades. Those upgrades would include an updated website, branding, and the right type of digital marketing and SEO.

All of those upgrades necessarily reach a broader audience, instantly adding new low-hanging revenue for mostly one-time investments.

Because a lot of boring businesses tend to be mom-and-pop (less so self storage since it became a PE darling) the possibility of a roll-up is also present, magnifying the financial effects of someone cutting inefficiencies/poor practices out of a mom-and-pop-style business.

For example, you buy a laundromat which is decently kept up, but perhaps you add branding, vending machines, wifi, etc. which brings in more customers. That means you can then apply those same changes to the next laundromat you buy, making it part of your new “chain.” This adds even more value for a future exit.

Not Complicated

Perhaps what is most attractive about boring businesses, both for rookie entrepreneurs and seasoned business owners, is that these businesses are not overly complicated, nor do they require a significant training/certification period. They involve a discrete list of tasks that need to be completed by you or your team each day, week, month, and year. Some businesses, like ATMs, for example, can run pretty much on auto-pilot. They already have built-in customers. They can sometimes offer lower overhead, which is a great help to a first-time business owner.

Guess who also loves boring businesses? Banks. These boring businesses are the types of companies who have already been part of transactions at the bank or who bank there now.

As you build out new customer acquisition funnels through digital marketing, etc., you will learn how to add these new processes to what you’ve already been doing.

Does a boring business sound exciting to you? Let’s find you one! Give us a call.

While no one is usually excited to hear about changes to a government program (more fine print to read?) we here at Apex are pleased to see some of the changes coming in August 2023 to SBA programs, particularly the 7(a) loan program which we see so much of. We don’t have time to get into every rule change (see your banker for those) but we wanted to highlight a few that are definite game changes.

What is the 7(a) Loan Program?

The 7(a) is the SBA’s most common loan program and is a good option when real estate is part of a business purchase, but can also be used short and long-term working capital or for refinancing current business debt. It has special requirements to obtain the loan and requirements to stay compliant during the life of the loan.

Changes

Percentage of Business Purchase

The headline-making change here is that the loan no longer has to be used for a 100% change of ownership. Starting August 1, 2023, these loans can now be used to buy a portion of a business or even a portion of an owner’s interest in the business.

What this means:

• Key employees who had equity in the business no longer have to exit as owners
• License holders, particularly those who hold licenses which are difficult for new owners to obtain, no longer have to exit as owners, but can stay onboard, in a way, to ease the business transaction
• Buyers can buy part of a business to learn, then buy more as their comfort, expertise, and cash flow allows

Related to this, the old rules stated that an existing owner could only stay on in a transitional role for a maximum of 12 months. Under the new rules, the seller could stay on as an owner, officer, director, or even a key employee.

Liquidity Restriction Lifted

Oddly, those with substantial personal liquidity were formerly restricted from access to these loans. This restriction will now be lifted.

Minimum Amount Removed

Loans needed to be for businesses valued at $250,000 and above. This restriction has been removed.

Equity

The SBA changed the definition of what constitutes equity in relation to seller debt. Formerly 10% of the business needed to be financed by both buyer and seller in a traditional formulation of “five and five” in which a seller note was half of that 10% amount and the buyer put up the remainder. But the new rules indicate a 2.5/7.5 split between borrower and seller, but some have interpreted that several ways:

• Could the part of the business that a seller keeps count towards the down payment?
• With a seller note as the majority contribution of the 10% rule, could buyers find a way to get an SBA loan without any money down?

Alas, with governmental bodies, there are rules, and then there are interpretations of the rules. When a rule isn’t clear, you’ll see a cooling effect on those who would be interested in taking advantage of an opportunity in case they face an adverse ruling in the future.

However, where no interpretation is necessary is the new rule that if you have the same NAICS, ownership, or geographic area, this will be considered expansion and no equity infusion will be required.

As we mentioned above, your banker is your first stop for questions about these changes. Your next stop? Apex. Give us a call.