Jude Wilson  00:28

I’m doing excellent. I am so excited about this topic. It’s one of my favorite topics.

Speaker 1  00:32

Well, we got the Georges here, so guys, thanks for being with us, and we’ll talk a little bit about this. I know we got a couple more questions, but I guess let’s just set you up to kind of maybe explain some of the X’s and O’s, like the logistics of, hey, I want to buy something. How do I start?

Speaker 2  00:47

Shall I Yep, please. A self assessment and figuring out what are your strengths, what are your weaknesses? And use that to kind of reverse engineer, what are you good at? What do you want to do? Then you have to find a business that suits your abilities and is compatible with your skill set. If you’re great at sales, you want to find a business that the owner is handling the sales role. If you’re not good at sales, you don’t want to buy a business where the owner is the sales force. You got to play to your strengths. So the first step is really understand where you are. You want to talk to your financial planner. First, you want to understand, how much am I willing to invest, how much do I need? And understand when you buy a business, you’re buying it net of the cash in the bank accounts, unless you’re doing mergers and acquisitions, so that price that you paid for the business doesn’t include the working capital, and that’s going to have to carry you between the time you make a sale and the time you get paid. If you’ve got receivables, that can be 3060, 90 days, if you’re in a construction field. So you’ve got to know the industry that you’re going into, what the cash conversion cycle looks like, and how much risk you’re willing to take the next step once you understand how much cash you’ve got to work with, what you’re looking to accomplish, as far as the size of the business and what your day is going to look like now that you’re taking out the owner and assuming that role is, how are you going to finance them? We’re going to talk to an SBA financing, that’s the Small Business Administration, and understand the SBA isn’t making loans directly. They’re guaranteeing the lender who makes the loan. So the lenders have an SOP that the SBA puts together that says you can’t loan in this industry. Of course, we’re not doing nightclubs. We’re not doing adult entertainment. It’s got to be a nice industry that the Small Business Administration wants to support. But then you got to find how much of the finance ability is going to be there, based on the SBA wants two years of historic tax returns that demonstrate it can support the debt service and how much debt service can the business support? If we’re doing SBA financing, we’ve got to take whatever that quote, unquote sellers discretionary earnings is take out of that figure how much you need to live on a year. What’s left over is the cash flow that’s going to be available to service the debt. Then we’re going to put that through a little financial function, say, divided by 1.25 so we have something called a debt service coverage ratio. And that says, well, after I take out what I need to live on, I’ve got at least 125% of whatever my debt service is going to be per year to support that debt service. Okay, once we’ve checked those boxes, we know what we can afford to buy. Then we go out to the marketplace and we start looking for businesses. Geographically. You want to find a business within about 30 minutes of where you live. The further afield you have to be, the more time it takes to get to your business. And these aren’t virtual businesses. These are bricks and mortars with employees and inventory. You can want to be about 30 minutes door to door. If something happens, you need to be there. And that limits the radius for what you can where you can buy, unless you’re willing to relocate. If you’re coming in from out of state, find the business first, then figure out where your house is going to be. That’s one of the suggestions that we make, because that business is a lot harder to replace than the house. Now that you know you can afford to buy that particular business, you want to negotiate with a seller. Nobody wants to pay full price. If you’ve got a very attractive business and there’s a lot of activity on it, and it’s going to get under contract quick. If you say HVAC, everyone’s trying to buy an HVAC company right now, heating, ventilating and air conditioning. You’ve got big players buying those. You’ve got little players trying to buy those, and they’re selling for premiums, and they go under contract quickly. If they’re priced reasonably, you can. To be ready to move, and that means whether you’re going to go with a letter of intent or directly to an asset purchase agreement, in some cases, a stock purchase agreement. These are all the variables that you’ve got to have teed up and ready to go you find the right business now you’re negotiating with a seller. You don’t want to pay full price. You want to offer something a little less, unless it’s very sought after, maybe good full price is appropriate. That doesn’t mean you’ve actually bought the business. That starts to where you’ve rested control of whether or not you’re going to buy that business as soon as the seller accepts your offer, you’re the only person on the planet, you and the lender who get to say whether or not you’re going to proceed to buy that business. That’s called the due diligence process. Usually it’s 30 days. Sometimes it’s 660, days. But you got that clock started during that period, you are getting your financing button down, and you’re verifying everything that the sellers represented is true and correct. You get through your due diligence cycle. You check that box, you get your lender’s approval with a commitment letter. Now you’re spending hard cash. You’ve already spent money with your CPA, you’ve already met with your financial planner, you’ve already negotiated with the seller. You’re under contract. You get through your due diligence, which you’ve spent a lot of money with your CPA, reviewing bank statements to tie everything into tax returns to internal financials. Now we’re ready to sit down with a closing. You got two closings. You got your loan with the lender’s attorney and all the costs associated with that. Then you’ve got the closing attorney, which is going to process the paperwork between you and the seller, and that just starts the process of your business ownership. That’s the day you take ownership, and the work really begins. So you don’t want to misfire. You want to make sure it’s the right business at that point.

Jude Wilson  06:51

Yeah, I think in our discussion today, what’s really become evident is that, yes, there’s a desire for people to buy businesses, but there’s so many questions that don’t be that are not top of mind, that you’ve brought to the table that I think if you’re doing it on your own, you don’t even think about some of these things, like the example you gave about being maybe 30 minutes from from the business. And so I think that’s part of the value that you bring with this 30 years of experience is challenging people to think about the things that could go wrong and being proactive before they go wrong. Because let’s face it, if you’re buying a business, a lot of people are using all of their savings from a lifetime to get into this business. Now that’s from the purchase side. On the seller side, it’s even more important to start thinking ahead. And George, you had mentioned that a lot of times, clients come to you and they’re wanting to sell the business like this year or this moment. But what’s more appropriate is to think about it a couple of years, or even more, in advance. Tell, tell me the X’s and O’s of the things that you’ve seen on the seller side to make sure that that sell is as successful as as it can be.

Speaker 3  08:09

Well, you know, we try to do an analysis of, you know, how many, how many people are involved in the business? What is the role of the owner? What actually do they accomplish on a day to day basis, and sometimes it can get fairly granular, you know, what is it that they actually do? And half the time, you know, many, many business owners don’t stop and think about what they do every day. They’re just doing it, you know. So you get this analysis that we have to let them slow down and understand exactly what they’re doing, and what it is that they can actually replace, if they can, obviously, if they’re the go getter, the if they’re the clog in the, you know, in the wheel, that makes everything happen. If they were, if they’re removed from the business, we don’t have much of a business itself, so we have to figure out where, where their involvement is, whether they’ve actually given some thought to that. Obviously, the most successful business to sell are people who have already done that analysis and come to the conclusion that they can’t be there day to day. You know, sometimes we tell them, hey, what would happen if you left and you went on a three month vacation? What would you come back and find? That’s a real mind opener for some of these people, they go, they’d find nothing. They’d find ashes on the frame, whatever they whatever their their analogy would be. So, you know, you have to get them to stop and think about what it is that they do and and where they’re at in that cycle, you know. And many times we’re in great shape with that. You know, I think a lot of times they’ve already given that some forethought. They’ve thought about bringing in other people, maybe even family members, that now have decided they don’t want to buy the business. So they’ve had an exit plan. So if they’ve had somewhat of an exit plan, those are the most successful people we can deal with. It, because they’re already on that road to just we come in and try to do an analysis. One of our biggest jobs is when we look at somebody’s financials, for example, we want to see that, if we do actually take the this business to market, can we get financing for this, and what are they going to be looking at, you know? So if they’re not financeable, you know, we have a big problem, because 95% of the people that want to buy your business is going to need an SBA loan or an other type of financing to purchase it. So, you know, we run into a situation where we try to, we try and we actually do the analysis upfront, whether you’re a buyer or you’re a seller, we do the analysis. We’re going, Hey, if it’s not financeable or it’s not doable, why are we going to get involved in a contract?

Speaker 2  10:50

And there’s another aspect of that. And if I’m selling the business, am I going to be able to sell it for my target number? Have I met with my financial that’s a big one. I can afford to sell the business based on what I’m going to realize and go on to what’s next, whether it’s hitting the beach or going on cruises or whatever I choose, I need to make sure I don’t outrun my capital if, and I’ll give you a perfect example. This was in 2013 a husband and wife bought a small business was a $350,000 business, and they wanted, and they were in their late 50s, they wanted to buy a business, build it and sell one for more than a million dollars. So they bought a $350,000 business. Fast forward to 2017 they were approached by a bigger regional competitor who wanted to buy their business. They came to me and said, What? What should we sell for? I did the numbers and said, right now you transact for about 750 that’s not going to net you the million dollars that you wanted to sell it for. So we went back to that regional competitor and we said, we’re not ready to sell, but if you need us to sell, if you make us sell, the price is 1,000,002 50. They said, Well, we think you’re worth about 750 we said, we agree, but we’re really not ready to exit. What we did with that company, between 2013 and 2020 was focused on the business, put it through the Small Business Development Centers, business development process, and we took that company and took the two owners out of the day to day. They were able to move to the beach. They replaced themselves with two managers. They increased their revenues from 700,000 to just over a million by the end of 2020 their owner benefit after covering the cost of those two employees was about $100,000 more than it was in 2017 what changed was that buyer was acquired by a private equity group. That buyer was tasked by the private equity group to go out and find additional acquisitions. They came back and said, well, we’d love to buy these guys, but they want to pie in the sky number so they were they approached my client again. The husband and wife came back to me and said, How about now? What can we sell it for? I said, Well, you’re worth about 1,000,002 50, but those guys are going to save about $130,000 a year in intellectual property they can afford to pay a little bit of a premium. So we went back to that buyer and said, Well, now we really don’t want to sell. We’re living at the beach, coming back one day a week any of our managers, and we’re enjoying about 450,000 a year in mailbox money. And if you buy business, you’re going to make about 580,000 a year. So for you, I want you to pay 1,000,007 50. They said, Well, we think you’re worth about 1,000,002 50. And we said, Yeah, you’re right to anyone else if you want to buy us. The price is million. 750 they bought it for 1,000,006 50 and $100,000 for the seller to stick around for six months to do an earn out and transition the business and make sure that everything was transferable, and that was a success story that we love. In fact. Pam, the value builder, advisor, client was the wife. Oh, wow.

Speaker 1  14:19

So Jude, like, you know what I’m hearing from these guys is that, much like you, it’s an ongoing coaching process, fellas, sometimes you’re not, you’re not just doing a transaction right for your client. You’re really coaching and educating along the way as well. Right? Is that a fair story?

Speaker 2  14:35

Absolutely. And that’s the fun part too. Is people take us and trust us in their inner circle to help them get their business to where they want it to be, and not always to exit. Sometimes it’s to sell it to their management team. We do that. That’s a much longer process, but when we do it right, we can sometimes get a premium over and above what we can to a third party buyer. As we’ve already covered, the management team’s lifestyle needs, so whatever the owner was taking out is free cash flow to service that debt.

Jude Wilson  15:07

Wow, those are some amazing stories we’ve heard today. And you know, when I think about my clients who are in a similar realm of looking for businesses or selling their business, the way that we work with our clients is I’m the quarterback of the team. I tell them I’m going to bring on, you know, some of the best professionals to help you really make a transaction that suits the dreams and the accomplishments that you’re trying to get to. And I’m sure you guys have the same perspective. You’re very consultative in the things that you do. So when you’re quarterbacking, what are you looking for as far as bringing in other professionals? And are there maybe stories around that, that that highlight that? Well, we

Speaker 3  15:50

have the same philosophy. I mean, you have to, this is not a one, one person fits all situation. You know. You have to have a team, you know you and depending on where they’re at in the process. I mean, let’s face it, if you’re running a business, you need a darn good accountant. You know. You need to have a financial planner that is instructing you or making sure that you’re putting your money away in your, you know, in your SIP account, or your you know, for your employees, their 401, case, you know you have to be in a situation where you know you might need a you know you need a good attorney if you’re going to put things into trust. So there, there’s, there’s a dynamic there, depending on how you’re set up and how many, how involved you are, and what kind of finances you have. Quite frankly, I mean, let’s face it, the more money you have. It gets a lot more complicated for most people. So, I mean, it’s important to have the right team, you know, and we, we lean on that quite heavily, because, you know, we, we don’t want to give somebody advice on our side and not have them saying, Gee, my financial planner didn’t tell me that, or, you know, anything like that. We have to have a, you know, a consultive group that’s all in agreement pretty much of what’s going on with the particular client. I mean, George, remember the we had a shower door company that was just recently well sold or being sold. So why don’t you tell them what happened with that situation?

Speaker 2  17:20

That was a situation where the young man was bought the business through us back in 2007 and he did it with an SBA loan. And back then it was a $680,000 business. It was a nice small business. It was throwing off a couple 100,000 a year after paying the SBA note, he still had 100,000 to live on, which was what his lifestyle needed at the time. Fast forward to 2017 10 years later, he paid off that SBA note. He redirected all of that debt service that was going towards that SBA note to go towards his retirement plan. He coordinated that with his financial planner, and at that point in time, the financial planner was the quarterback. He was playing to the quarterback’s strengths, and this is what I need right now. Back in November, that gentleman had me over to his 60th birthday party. In February, I was in his kitchen with his wife, and he says, I finally know what I want to do when I retire. I said, What’s that? He said, climb Mount Machu Picchu. And I laughed, and I thought he was kidding, and I think I hurt his feelings, because he really meant it that he’s going to do that. I said, Well, fantastic. Let’s figure out what your company is worth. And we did the number crunching, and we said it’s going to go for around 1,000,006 I said, Will that get you what you need to retire and carry your lifestyle needs for the next 30 odd years? And he said, Yeah. In fact, he’s got over three and a half million dollars invested in his retirement accounts, and selling the business for that million six would just be the cherry on top. Now, something we did in 2020 because we do revisit with our clients, was looked at his business from a buyer’s perspective, and said, your business is going to be less valuable because you are the sales force. We need to take that responsibility off your shoulders, bring in an employee and let the employees do the selling, so a buyer can come in and buy your business and not have to be the guy on the road doing all the selling. He did that. We got the person in place back in 21 so that was four years ago. Then I turned to him after we decided, okay, we could sell it for about 1,000,006 and I said, but we’ve already got the best built in buyer, somebody who’s already taking out everything they need to live on out of the business. We can sell it to your general manager. Get you an extra $350,000 in value. And by the way, that’s the house’s money. And he says, Well, my general manager doesn’t have the down payment. I said, That’s okay. You’re gonna lend it to him with the house’s money. It. And then we got to talking about he really would like to do that with his GM. Remember, back in 2007 he had 100,000 a year lifestyle business and no savings. Here he is in 2025 and he’s getting ready to add another $2 million on top of the value of his business, on top of his retirement savings, and he gets to pay it forward and help his general manager accomplish what he did over the past 23 years. If his GM is diligent about putting money away for retirement, he’s going to change the financial trajectory of his life. And that’s a field Absolutely, that’s one we love to participate in.

Jude Wilson  20:42

Absolutely, I’m old enough to remember the A team, and one of the things they used to say is I love it when a good plan comes together. And that is definitely a good plan. And I think when you bring professionals together, that all have the mindset that we’re here, the service, the client, the financial advisor, the business broker, the accountant, the attorney, those are the type of outcomes that we like to see, because it’s not just about the retirement plan, it’s putting together a holistic strategy. That’s what Our firm focuses on. That’s your mentality as a consultant. And so guys, guys, we could talk about this all day. And I think you know, in the future, we we’d love to get you back to maybe talk about some some case studies and go a little bit deeper. But I think today, we really whet the appetite for our listeners and hopefully educated them on the fact that there is tremendous opportunity out there right now. And I can’t thank you enough for participating in this episode and opening the doors to these discussions.

Speaker 3  21:43

Yeah, we feel the same. Jude and thank you for the opportunity. But there is a lot of opportunity there out there right now, and people just have to be aware of it. You know? They have to be mindful that there’s, there are some really good things going on right now in the economy, even though the press doesn’t say that all the time. Right?

Speaker 2  22:01

Ride for your clients. Also, that is incredible when you got the right people working together in a team. And we’re not always going to be the quarterback, we’re not always going to be the wide receiver. Sometimes we’re going to say, that’s a great CPA question, or that’s a great attorney question. Let’s get your financial planner in on that, and that’s how we advance the ball.

Jude Wilson  22:23

There you go. Wow, way to bring a analogy home. That’s the way to advance the ball.

Speaker 1  22:30

That’s right, exactly. So, yeah, you want to make sure that you have a team in place, and we’re going to have links in the show descriptions below, guys. So if you want to reach out to the gentleman at contango investments, we’re going to have links down below. Of course, we’re going to have Joe. We’re going to have Jude’s information as always. So don’t forget to subscribe to the podcast the Roth guy so you catch more content as it comes out. And of course, if you need help again, please reach out to the fellows so that you are making sure that you’re getting the right information for you, whether you’re buying or selling. It can be a component that is something that you’re after in your future self, your future retirement plans. So reach out today, and as always, thanks for your time. We’ll see you next time here on the Roth guy, Jude, my friend, have yourself a great week, and we will talk soon here on the program,

Walter Storholt  23:14

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