Archive for category: What Buyers Need to Know

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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.

While we do take pride in providing our customers with peace of mind in a business transaction, there are limits to what we can do. In this article we’ll cover a few of those limits (and what resources you can lean on instead).

We’re Not Attorneys

While all of us have looked at more contracts than almost anyone who is not an attorney, we still don’t function as an attorney when we are your broker. We’re not going to bill you by the hour, and we’re always happy to look at some wording you might be puzzling over, but we have a solid list of attorneys who have experience in dealing with business transactions, not someone who’s your friend’s brother’s cousin who does property law.

While your attorney is someone you pay, like us, to advise you on the deal, beware of those who try to take control of the deal. We’ve seen more business sales flame out for this reason than any other. If you don’t manage your attorney, you will get managed instead.

It’s Not Our Decision

Outside of buying a home, this is often the single largest financial transaction our clients go through, and they often look to us for advice. We can’t tell you how often we’ve heard, “Which deal would you take” or “What would you do”? We always try to reframe this by reminding the client that it doesn’t matter what we would do, it matters what they want. We can only provide context and experience, but ultimately, accepting a deal is never going to be our decision.

A classic example of this is on price. If there’s a gap between what the buyer is offering and what the seller wants, and if we’ve already done the work on valuation, we will accept if the seller wants to wait for more money. That means the buying window may likely lengthen, but if the amount is significant enough, and the seller is not in a rush, this may make a lot of sense. In any case, we’re never going to tell a client to take an offer (or to refuse one). Again, our goal is always to advise and be part of the dream team that brings all this together.

We Don’t Focus on Specific Buyers

Our job is to facilitate meetings with different buyers (who may come from a range of backgrounds) but we are representing you, not them. They may have engaged a broker to help them purchase a business, and that broker may even be one of our colleagues, but our job is not to help our colleague close the deal his customer wants, but to make sure our client engages with the buyer he/she is most aligned with, and we’re always going to bring our clients back to the original goals and values they enunciated at their first meetings with us to offer perspective on what to do in a given situation.

So there are three things we don’t do. If you want a reminder of the many things we do, do, check out our Day in the Life article.

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.

Geography

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. 

Price

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.

Asking Price vs Cash Flow

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.

Industry or Business Type

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.