Prefer to read? (Transcript)
Speaker 1 00:15 Good morning everyone.
Speaker 1 00:19 This is a welcome to business and legal talk with Leo and Claudine. I am your host Leo Landa Verda with Greenland advisors. And my gracious cohost, Claudia, say hello, Claudine. Good morning. Good morning. How are you? Oh, I’m just soaked and wet on the drive here. I, it was an amazing drive in. So, um, yeah, there’s um, no drought, no drought anymore in California. I can’t wait to hit the Lake this summer. Yes. That, I mean just there’s this water to everywhere. Yeah. You know, and uh, I’ll come from Fresno. So you know that are reservoirs that just about everywhere you drive there’s a space that usually is empty, right? There’s just dry patches of land, right? All water, all water everywhere. I’ll tell you the highway had some huge, huge flooding coming in. Yeah, I was surprised. And yet, boy, you have to be careful, but you know what happens?
Speaker 1 01:08 So as California is on the road with a little bit of rain, right? Right. We don’t do very well. And we are lucky that we don’t have the East coast weather. Right. How do people manage their in the snow? Oh, you know, I, I have a friend’s son and Wisconsin and, uh, six feet of snow. So you come out of the house, opened the door and there is basically piles of snow either to the left or the right. Right. We don’t deal with that. Right. Thank goodness. We love it being in here in California. So, um, we have a great show for you today. Um, we had such a great feedback. We got some great feedback from having Harpreet um, last week that, um, this whole topic about building a business that you can eventually sell. It’s a hot topic. It is. It is. And um, there’s so much that goes into it is that people don’t think about it, you know, think about it.
Speaker 1 02:00 You know, you, you, it is probably the most significant event on an entrepreneur’s life, don’t you think? I think so. And you know what, I was thinking about our conversation last week and I was thinking that, um, one of the comments that we were talking about an Harpreet and I had been commenting back and forth about how 80% of the businesses don’t sell. And I want to clarify that because I think maybe I want people to know that 80% of the businesses don’t sell largely because they’re not put up for sale. People are not thinking to sell. It’s not 80% of businesses that are listed for sale don’t sell . It’s 80% of businesses in general don’t sell largely because people don’t think about selling them, you know, they want to retire, they close them, you know, for whatever reasons they the business discontinues um, particularly in small businesses.
Speaker 1 02:53 Yeah. I, yeah. So, um, one thing that is clear no matter where you are, and we happened be in the central Valley and we love being here, um, the bread basket of America and it’s just great businesses here. People, you know, think, Oh, you know, the great tech companies that great companies overall happen to be elsewhere and not in the central Valley. I don’t think that’s the case. I don’t think that’s the case anymore. Um, there is a great businesses coming into the Valley and started here in the area, started here. And I think I’m necessity is the mother of invention. And one of the things this is for traditionally the Valley has been an agricultural community and less on the business side so to speak. Um, in terms of, you know, maybe traditional type types of business like retail and so forth. Um, so people started businesses.
Speaker 1 03:39 Yeah. So so I want us to, so today we’re going to, we have some great stuff to talk to you guys about today as to what real life situations as buying and selling companies that are happening, uh, for us in our businesses as we advise clients that are happening. So broadly. You have some great stories you’re going to share with us, with w with us today. And I have a couple of stories to tell you as well. But what are the things that I, we started talking about last time is about the process of building and selling a company. It’s not overnight. Correct. So it, you almost have to think about if you decided to sell your business today, you almost have to think about a three years prior. It takes a while to get your business ready for sale and then a lot of moving parts in it.
Speaker 1 04:25 But even before that, I advise now, you know, cause I do a fair amount of speaking up to startups, um, and uh, uh, folks that are starting to throw to start a company that, you know, the next unicorn, the next Uber, the next Airbnb, the next great a billion dollar valuation company. And I tell them, start with the end in mind. Correct? Absolutely. What do you think about that? Absolutely. And in fact, it’s, that’s not just in buying and selling. It’s in so many areas of our business. Um, you know, when we, when we start, we would say for example, we have, um, uh, people who want to get into a partnership and they want to start a business. Um, we start talking about exit plans and at least with my, my clients, we talk about exit plans from day one, from day one, from day one.
Speaker 1 05:12 Um, if, let’s just say for example, you get into this and five years from now you say, Hey, this just isn’t working for me. And, and you know, we want to be able to exit the business without demolishing it. We want to be able to exit in a way that, um, um, you know, preserves everything you’ve worked for. So, yeah, I mean, this is, this is really great stuff. So, um, I have some notes. I would like to have some notes so I don’t get too scattered cause you know, I clearly you can talk for hours and we realize our audiences may not want to hear us for that long anyway. Um, what worked 10 years ago doesn’t work today anymore. I mean look at the landscape and what I call it, the collapse of retail. Yes. Um, and uh, we were just talking about before this show or there’s some of the things that are happening and I just cannot believe I would not have imagined 10 years ago the Payless shoes will go out of business.
Speaker 1 06:01 Right. And I’m walking around my friendly, you know, mall and a here, the fashion fair in Fresno ID on Friday night. And here I am. And I would just, I came to the realization that, you know, when you read in the media and you actually see it in real life, you see this going out of sale major, ah, across the windows. Right? It is his sat with me and, and I’m talking to my son, you know, my youngest and I’m like, wow, I’ve gone many, many times over the last 20 years. You know, it’s a good place. Right. You know, we don’t make a lot of money. You’ve got to find shoes. You go to Payless shoes. Right. Right. Iconic. Right. But not just Payless shoes, it’s across all retail spectrum. Can you name a few that, that, that affected you? Yeah, we just saw in Modesto be that, um, we are, it looks like, uh, Victoria secrets closing stores.
Speaker 1 06:51 Yeah. JC Penney’s is closing stores at turn. Looks like they’re not going to close the Modesto and the Turlock stores, but they are closing JC Penney’s and across the board he, we heard about gap, right? Gap is pulling out of certain markets. You know, we, we don’t have gap in Fresno anymore and uh, it couldn’t do any wrong in the 70s and eighties. It was just everywhere. It was Levis was ubiquitous, right? So there is, if you are a business owner with a startup or thinking about starting a business, you got to understand the trend. The trend is your friend. And I’ll be hard pressed to say somebody, Hey, you know, you’ve got this great idea. You know, you got this great way of putting together a dress, uh, you know, with, you know, making dresses and you’re going gonna I would, I, I was strongly discouraged you to get retail space, right?
Speaker 1 07:44 Because it’s, you know, Amazon, what did Amazon do? It would basically rocked the world. He basically reconfigure, uh, retail and the retail experience. Um, so, uh, so we’re gonna, you know, there’s, there’s one thing that I want to talk about before we get into it, that this is, this is a cautionary tale for people who are building businesses. And if you’ve been watching the news over the last, you know, year, you probably heard the stories of Toronto’s, um, you know, this biotech company, you know, there’s the unit corner valuation. I don’t, North of a billion dollar valuation, I’m not too long ago, um, started, uh, uh, but this, uh, you know, woman Elizabeth Holmes in who at some point was, you know, spending time with former precedents and, uh, speaking and, um, seem to have it together and it was worth at least on paper $1 billion.
Speaker 1 08:36 Can you imagine going from that to zero? It’s, it’s amazing. And it, and it looks like she, she is actually, I’m looking at 700 million in put potential charge or wire fraud and all that stuff. I mean, so we often hear the good side, right, of selling a business and trying to grow a business. But you gotta go in it with eyes wide open. You do. And I have to ask myself like, how did a person like this get caught up? I’m absolutely certain that when she started, she did not intend to have this, you know, be the end result, but somehow the wheel was spinning and somehow, you know, you just kept on going and lost control. Yeah. I think it is often greed, but not always. Sometimes it’s a combination of misinformation, wrong advice, not, you know, the right people whispering in your ear.
Speaker 1 09:33 You know, us and entrepreneurs, if you’re a founder, CEO, whether you have a million dollar business or a $10 million business, you gotta have the right people on your team telling you the right things. Absolutely. Why? You can’t know everything. You can’t possibly know everything. It’s hard enough just to running a business. Then you have to worry about the accounting side of things and the legal side of things, which I’m always talking to you about the legal side of things, right? I’m always worried about the legal side of things. First of all, because it’s my job when I’m hired as a CFO to worry about the legal immuno, the risk and the risk mitigation. Then I tell you, Hey, am I, should I be worried about this Claudine? And then you go, yep, you should. And let’s talk about it. Let’s take it offline and talk about it. Right? So, um, stay tuned cause we’re going to come back. Um, we’re going to come back and keep talking about this. So you right now you’re listening to business illegal talk with Leon and Claudine here on KFO at 1306. We’ll be right back.
Speaker 0 10:22
Speaker 1 11:28 okay, so we’re back guys. The perils of a live show. My micro was off for a second, so, Hey, welcome back. You’re listening to business illegal talk with Leah, Claudine. Hi Claudine. And let’s keep going. Yeah. All right, so let’s kind of get into the meat and potatoes now. Um, so stuff is happening every day with your business. So you had a pretty pretty that you want to kind
Speaker 2 11:54 of walk the audience through and um, I think is a great idea that we talked, you know, deconstruct the deal basically. Yeah. Oh, so we’re, our office is involved currently in a couple of, um, buy and sell, um, situations right now with various clients. And I think it’s important that when you first start out and you’re thinking about selling your business, it’s important to keep in mind, um, you know, who, who are you marketing to and who, who is your market if you’re going to sell your business. Some people, um, you know, have family members and the businesses, you know, grown and developed over the years for the sole purpose of passing it on down to generations. Uh, depending on what type of business you have. If you have a corporation and we have shares and, and things like that that need to be evaluated. Um, it’s not typical that a business is just simply handed over to the next generation.
Speaker 2 12:45 And the reason being is that the older generation perhaps that built it needs to get some sort of, um, equity out of it so that they can move on and you know, have their retirement and so forth. So we structure, buy, sell agreements. Um, a lot of times they’re internal, uh, another way and another, um, really popular, uh, way of going is um, key employees selling to key employees. And if you structure your business that way, um, because your employees are on the inside, are you talking about like an Aesop type of thing and like employee stock option, uh, program or, well, you can, you can, I’m no actually employee stock option. No, I’m talking about identifying a key employee who may want to take your shoes. Oh, selling to alley. Correct. And you can, you can set up a situation where the seller essentially finances it.
Speaker 2 13:40 Most businesses when they’re purchased are purchased with third party money somehow. Um, but selling to a key employee oftentimes ensures that the business is well cared for because the employee, he has been in the business, they understand the business they’ve grown in, developed within the business, and they are very well suited to take the shoes of the previous owner. Um, and which makes sense. Right? Great sense. It’s a great, it’s a great alternative. So if you have, have been building a business and perhaps you’re thinking about changing industries or perhaps you’re thinking about, um, retiring, think about perhaps selling to a key employee and structuring, um, a payment plan that goes over the course of years. And we oftentimes structure it as a percentage of profit or sometimes we just do a simple promissory note. It can be structured at any, any number of ways.
Speaker 2 14:33 But there, um, those are, those are kind of, you know, as opposed to going out on the open market and, and going out on the open market. Um, some industries fare better than others. Um, and then once you do that, once you decide to go out onto the open market or you decide to sell the business, then we have to start looking at what are the, what are the mechanics of actually doing it? Right? Um, you know, people don’t just walk through the door with a checkbook wide open and write a check and walk back out the door. It’s a lengthy, lengthy process. Lengthy can it be, it can be there’s no limit. It can be something that goes over the course of a year, 18 months, depending on what it is we’re buying and selling. How many assets, what the assets are. Farming operations oftentimes take a long time to sell because there’s just a lot of moving parts.
Speaker 2 15:25 We’ve got crops and um, you know, land deals and leases that are involved. Um, and so those things need to be negotiated out. Uh, if you’re dealing with third party money to finance it. So for example, suppose you have, um, a loan coming in from a bank or some sort of SBA SBA loan or something. So those are a challenge because the SBA guarantees the loan. Um, so now are, you are not just preparing your business to sell for the new new owner and getting all of those things ready, but you now have to have approval of spa and meet all of their inordinate party to the table and now they’re far more exciting. Yep, yep, yep. So, um, you know, then, then we have the mechanics. How do you get an offer? How do you, what does an offer look like? Well, typically, and I think we talked about this a little bit last week, typically, um, an offer looks like a letter of intent and a letter of intent or otherwise known as an LOI, a letter of intent.
Speaker 2 16:23 Um, just outlines the basics, um, of the terms. It usually comes from the prospective buyer. Prospective buyer says, well, this is what I’m willing to pay. This is how long it’s gonna take me to close. Um, this is what I want. Um, if I want an asset only purchase, um, I don’t want to purchase your corporation. I just want to purchase your stuff. Um, and that’s usually outlined in an ELO LOI, which is usually the best way to avoid litigation is not to buy any shares. We actually purchased the assets. It really depends. Um, if you can avoid purchasing the shares, there is less liability because for example, if, if there was something that happened four years ago or three years ago, um, and it may be an employee situation or some sort of a vendor situation, you can, um, the new owner can be liable because the new owner has the, it’s actually the company that’s liable.
Speaker 2 17:18 When you own the company, you own the liability. And when the company gets sued, the shares get sued. But on the other hand of that, if we have a business that maybe has a lot of branding that has a trademark logo that has a trademark name, now you, you can’t really avoid, you have to buy the shit, have to buy the shares. Hey, by the way, if you’re listening to this show right now, if you want, if you have any questions I’m talking to us to, to, to, to me and Claudia and feel free to call a five five one three, four eight three as the studio line, uh, five five, one three, four, eight, three 50 or call in love to talk to you and obviously it will be great to have somebody other than me and Claudine talking. So, um, yeah, so you were talking about us intuition about um, yeah, a letter of intent and an actual potential situation and what can you share that it will be useful to the audience as to, you know, the good, what, what good can happen and the bad can happen.
Speaker 2 18:16 You know, what happens when a due diligence thing go, goes wrong, right? So when he goes well, when it goes well, so typically what happens in the very beginning, um, you know, we, we agree on the basic terms of, of the offer and the new perspective buyer wants to have what they call a period of due diligence, right? They have an opportunity to come in and do, you know, look at all the things that you’ve been preparing as we talked about last week. Um, you know, your financials. So now you have a person who is prospective buyer and they want to see your financial records and they want to see your leases and they want to sometimes even talk to your employees and you know, understand the processes within your business. So for example, if you’re a retail business, you know, they want to come in and see w, you know, what do you owe in and who are you dealing with and what contracts do you have?
Speaker 2 19:07 This period of time is critical for the new buyer, but it’s also critical for the seller to be very, very, very careful. So a client this week had an LOI come in and multimillion dollar, uh, LOI come in and the, um, potential buyer would like a 30 day due diligence period with, um, with no deposit. And then after the 30 days, um, if the prospective buyer decides he doesn’t want or she doesn’t know, does not want to buy the business, they want to be able to just go ahead and walk away. Um, and no harm, no foul, no harm, no foul. And, and I can certainly see from the buyer’s perspective why you would want to do that. I want to come and I want to see that what you have is actually, you know what you’re telling me. It is, um, the, the, the part that the seller needs to be aware of and, and we’ve, we talk about this within our office, um, is when somebody comes in and has an opportunity to go through your books, go through your systems, talk to your employees, and know your business, um, and it really intimate way, they now can’t unlearn what they just learned.
Speaker 2 20:17 Right? So let’s just say you were a very, very savvy business person and, and you had, you had some money and you had a little, yeah, a little dough in your pocket and you thought to yourself, Hm, I’m kind of interested in entering the shoe business. And so why don’t I go to the top five shoe manufacturers? Um, it, you know, that are out there and I can send them an LOI and Sam really interested and I would like to have this due diligence period. And I go through each one of these businesses and I comb their books and I comb through their processes and I come through, you’re talking to their employees and that education that I just have, I walk away and I have a tremendous amount of knowledge and I can now become your competition. How about that? Huh? Yeah. And how often does that happen?
Speaker 2 21:02 It happens. It happens when there’s no money involved. Right? It’s right. And, and so, you know, sometimes, I know Harpreet and I were talking about this, uh, this week he had a, uh, a business sale, um, of some retail stores that were underway. Uh, seller was a little bit financially strapped and was anxious to sell, got a little bit emotional and know, you know, go back to the, you know, emotional decision conversation that we’ve had. A seller was a little emotional and, um, you know, was very willing to open the doors and open the books and, and you know, crossing his fingers at this sale would happen. Um, no money down, no money in deposit. So there was, you know, buyer had nothing on the line by or decides that, um, he doesn’t want to buy the retail businesses anymore. And, you know, mysteriously 30 days later, um, seller gets a notice from the IRS, uh, that there this seriously coincidence, who knows? But he, you know, now he’s suddenly being, um, audited by the IRS.
Speaker 1 22:03 So buyers and sellers, you know, be aware, be aware what, you know, you, I would not ever advice a business owner who’s built a sizeable business to go at it alone. Um, you need the right people advocating on your behalf.
Speaker 2 22:22 Absolutely. And, and really, um, the more, if you have more than one advisor, you’re better off. I mean three, three minds, three sets of eyes looking at these things because something is gonna occur to somebody based on their own personal experience or education and so forth. So if you’re dealing with a solid financial group, a legal team, um, you know, I know my legal team, we sit in our office, um, and, and discuss cases back and forth, you know, that maybe a case is not my case or it’s not as something I’m working on. Um, but we all sit together, so you’re not just getting me, you’re getting my entire team because we bounce ideas across. You know, immediately when an LOI comes into our office, it goes out to all three attorneys in the office and we sit and talk about th that LOI amongst ourselves,
Speaker 1 23:11 regardless of whose client I know we’re going to talk about it so more, uh, get into this, but at through stories. So I had a, a business in LA who was being contemplated for a potential acquisition and the, a, a potential buyer came in, did due diligence that carried it over two, three months and then they kind of, there was this virtual love Fest going on, but the company stopped selling, so stopped growing. Um, so while the founding team, you know what the executive team was helping in the negotiation threat or strike a deal, uh, the company was falling apart. So Kia, no, a wonky employee left. Um, they lost the key account. Uh, pretty soon, um, the potential buyer become, uh, became suspicious and um, guess what pulled out. Yup. So can you imagine after all that emotional investment and trying to sell your company, you have to go back and tell your constituents, your employees, your vendors that does not happening and then you have to rebuild and then your sales are going down. What do you think is going to happen to their morale?
Speaker 2 24:11 Right. You bring up a really good, really good point, uh, this in the, in the, the idea that your potential buyer is going to be going through their due diligence period and they’re going to be in your business and they’re going to be physically, literally in your business and they’re going to be talking to your employees. What happens if your key employee meets that meets the, uh, the potential buyer and says, Oh, I’m not working for this day. I’m not working for this girl.
Speaker 1 24:36 Yup. A, so I hope this is a, a juicy enough conversation that we have a, and feel free to engage us. Um, right now we’re gonna go on a commercial break, but you’re listening to business illegal talk with Leo and Claudine. We’ll be right back.
Speaker 0 24:48
Speaker 1 25:31 Hey, you still there? We’re still Leo and Claudia in business illegal talk. So want to make sure that you’re still there. Uh, we’re having, uh, a great discussion on, I’m really exercising your right of capitalism. Bought it, you know, have built a business. Now it’s time to sell it. What do we do next? So we’re talking about, uh, yeah, there’s great stories and those great stories make it in the media. You know, companies that actually go public or choose to actually take eh, their business public, some, but most of them don’t. And we know 90% of all transactions happen to be on the private side. There is no public involved. Uh, there is, um, somebody with money or trying to look for an opportunity to try to get into a market and then buying an existing business. Now, uh, I’m starting to get a lot into the tech world, um, and the software side and a company has to make a decision when they’re looking at another potential, uh, uh, revenue stream.
Speaker 1 26:29 If I’m a tech company, is there is this competitor out there that I can acquire and I could acquire them if the cost of me building something, some asset myself would be more. And then the branding and the Goodwill and all that. So, um, this is usually what happens is, uh, there are all kinds of buyers. You know, there, there, there’s the mom and pop, you know, there is that the retired executive who worked 30 years at affirm came into a couple million dollars and they want to, uh, uh, get into something because they just want to be a home, you know, the rocking chair. Right. And there is this spectrum of those to their institutional buyers. So your VCs or your private equity who want to take, um, I love the story of, uh, Burt’s bees. You know, there’s, um, you know, the chapstick. Yeah. But you know, that the stories, uh, actually I just, I don’t know why I just thought about it.
Speaker 1 27:18 Um, started with this guy who basically was a honey, a beekeeper and in, I believe there was a smaller city probably in Oregon or somewhere, you know, where there’s just a lot of open space. And, uh, he used to go to this, uh, fairs and just basically sell his honey and, um, and you know, little products. It was a very, very small artists and type, uh, the guy had no knowledge of business. He just love caring for those, uh, bees, Burt’s bees. Right, right. And then this lady comes along and says, Hey, you got something here. Let’s take it to a whole nother level. Fast forward 15, 20 years. Uh, he got bought out early. By the way, you know, he probably got a couple of million dollars. The lady that bought him mouthed that eventually grew the company sold to a private equity group, ended up cashing it on $300 million. Wow. Now you don’t hear about that every day, right? But before every story like that, the stuff that doesn’t, doesn’t go well. So what, what, what does that mean to you? Um, so there are, you know, I think we could talk and start talking about it now. Uh, Claudine, there’s, there’s, it’s all about value. It’s all about building enduring value, right? Right. Um, and it’s, it’s much more than just looking at the numbers and, uh, I have a list of things that we can talk about, you know, that increases value. Um,
Speaker 2 28:39 you know, and then on that subject, this is a key, key thing that a lot of sellers do. Um, they get in the mindset. They perhaps have a strong commitment from a potential buyer. And then they start to think in their mind, they’re kind of halfway out the door, you know, Oh, I’m, I’m almost retired. This is going to be so great. Or mentally already kind of starting to spend the money that that’s coming in. And, you know, we’re, we’re, you know, we, we can go from, you know, working 80 hours to, you know, taking a break real fast. And next thing you know, we’re saying to ourselves, well, why should I invest in, you know, five new trucks for the business? Or why should I spend that money right now and continue to, you know, invest in the business as if I’m going to be here in a year.
Speaker 2 29:25 Um, and I’ll tell you, it’s, it more deals fall apart and you have to be so prepared and mentally prepared. And this is why working with a strong team around you who can keep you kind of propped up and going and, and, and yes, it’s important that if you are going it, be it not for the sale. If you were going to buy five trucks for your business this year because the ones you had were worn out, right. You need to do that. Um, and you need to keep that business going because, um, these deals do fall apart. I know, and it, it does happen. Uh, they take a different twist and turn along the way. And so it’s important that you keep one foot on the ground through the entire process and having a strong team around you. Um, and, and we worry about a lot of this stuff. You just w what, how we work with our clients as we, we keep them working, keep them doing what they do. If they’re, you know, making shoes or building fences, whatever it is they’re doing, they stay doing what they do and let us worry about the rest of it. Um, and I think that helps sellers from just checking out too early.
Speaker 1 30:28 Yeah. Right, right. And you know what, while you’re doing that on our end, what we do is whenever we started working with a company, we’re all about creating kind of a franchise model. Correct. You know that the franchise model doesn’t really mean that you’re going to go out and sell franchises. It’s a way of saying to a potential buyer, right? Cause you always should be thinking about whether you’re going to pass it to the next generation. More likely, more often than not, you’re gonna end up selling it. Do you have something that can be replicatable and scaled? Right? That franchising concept means a, can I take this cookie cutter approach to the way you run your company and you do that here in Modesto? Could I do that in LA? Right? And do you have, have you left nothing to chance? Is everything systematized? You know what I always say? Is it documented? Do you have a documented way of doing things, um, and cannot be all in your head? Now, if you were to ask me today, Leah, what could I do today to increase the value of my business that I could sell it for five times? What it’s worth is ask yourself this question. How many days, weeks, and months can the business run without you?
Speaker 2 31:33 Right? And if that answer is, you know, five minutes ,
Speaker 1 31:37 then you don’t have a business that can be sold yet. That’s right. Right. That’s right. And hence than reading the need as you were talking about with get talking about advisors, advisors, but advisors don’t always have to be outside advisors. Like we are whisper into the, you know, the CEOs and the founders ears. It’s key employees who have valuable knowledge that you can build upon in your, you know, we have spent up time talking to them in prior shows about when a relationship with an employee is a liability if you don’t treat them right and it can turn into a liability in a wrongful termination situation. But the flip side is also true. Your employees are key assets. They have intellectual knowledge that can be helpful to you, so use them to your advantage. So, um, and that kinda goes
Speaker 2 32:24 also along the way of, you know, they are also your potential selling market.
Speaker 1 32:29 Yeah, we were just talking about that. They really
Speaker 2 32:33 oftentimes they know the business, they know it from the ground up and they’ve been working in the business there. They’re, uh, a great contact, so to speak.
Speaker 1 32:42 So here’s, um, so, so let’s, let’s run down the list real quick so we can, you know, th so number one is seek advice, right? We’ve talked about that work to boost your profits. Uh, that’s the number two. So listen to this. Don’t expect high offers if you’re only breaking even, right? Let me say that again. Don’t expect high offers if you’re only breaking even. Well, whether you’re gonna ask me, well, how do I know I’m breaking even? But you should know that as an owner, um, you should know that because if you’re running a business and if you looking at the expenses and the your revenue and somebody is doing your books and you should be doing your books, which I talked about a thousand times already, you should know your break even point. If you don’t know your break even point, how do you know you’re making a profit?
Speaker 2 33:27 Look at, um, anytime a buyer comes in and has to rebuild your business or has two looks at your business and says it is not functioning at its full potential, you are going to get low ball offers. I mean that’s their, they’re going to skeleton your business right away. And if they come in and look at and they say, Oh, I see so much potential here, your offer is not going to be, your offer is going to be commensurate with that. Hey,
Speaker 1 33:52 I’m going to read this to you. Tell me what you think. So you also don’t want on speaking on the topic of boosting profits, you also don’t want to take too much money out of the business. Interesting, good retained earnings on your balance sheet. That port, which is the portion of your net income that hasn’t been distributed to the shareholders. Why do you think that is?
Speaker 2 34:08 Well, I, I can tell you that, um, you know, can’t cannibalizing your business before the new owner takes over and just great concept also known as litigation. So, um, do not cannibalize because the, the buyer has a um, uh, uh, expectation. They’ve looked at the books, they’ve looked at what’s there, they have an expectation of what they’re going to have, what they’re buying. And they come in and all of a sudden, you know, they thought they were buying a Cadillac and they’re getting a Volkswagen bug. It’s, you know, it’s a problem. It will be a problem. Guaranteed. Yeah.
Speaker 1 34:43 Number three, right? Increased sales and lower expenses, duh. Right? If you’re not working as, as, as the owner of your business and increasing sales then or lowering your expenses, then that’s back to one Oh one.
Speaker 2 34:57 Right? It is. And it, it also leaves you super vulnerable when that day comes, if that deal falls apart. Now what? Now you have to start over or you’re behind the April.
Speaker 1 35:06 Well, we’re just talking about you have a story about somebody who just, um, basically had to start over and the deal didn’t go through a no, that was, that was probably my story. So, um,
Speaker 2 35:19 business,
Speaker 1 35:20 right? So key account has lost key employee leaves, deal, falls apart. Company almost basically went under over a bad deal. So let me tell you, it took years for those, for data, for the, you know, for the founders to actually get it back together. Eventually they actually depth selling for a tidy sum. So they learned the lessons and it goes to show that everything that we do as an experiment, right? The two things that I was listening to our podcast today, and these are about entrepreneurs who are actually raising capital. Then they keep saying that if you’re, why are you doing this? It’s, it can’t just be about the money, right? You know, if you’re running a business, unless you inherited the business, there’s a reason why you started it, right? There’s a reason and you must have purpose. And they say the recent, the, the, the two things that are key elements to racing capital increase in the value of your company, our purpose and persistence.
Speaker 1 36:16 Purpose. Why are you doing this, right? Why do you build it and why do you want to sell it? What is the purpose for doing what you do? Um, um, and then the other one is persistent. Are you persistent enough? Do you believe in your business enough that you and I keep working at it? Because if you are, if you started this company, uh, you’re not long, you just checked out and you let your employees and you’re not lung, you know, leaders are those who have followers. If you don’t have followers, you’re, you’re not a leader, right? You have to be the leader of your company. What do you think?
Speaker 2 36:48 We have, um, a client currently we are working on a buy sell agreement. Um, and the client is a, um, has been in business for many, many years. This we’re third generation now, third generation, third generation business has been going and is weathered the storm solid, solid, good, good folks, good business. Um, but they, there was a decision along the line to um, sell to a non family member and that brought about a whole nother list of, of, of scenarios that happened. And I think that that’s really what you’re saying about understanding because in the seller’s mind, keeping the business alive was the most important thing. The keeping the business going. Was it, that’s, that was the, the most important thing. And even if I had to sell to somebody who’s not a family member, the name stays alive. Um, and so it knowing your purpose and, and some people that, that’s not how they would feel.
Speaker 2 37:45 Some people have said, Hey, my grandfather, father dedicated, you know, all of their lives to this and that, and maybe the next generation wants it and does it or doesn’t want it. But understanding that purpose and not getting, you know, and being able to stay focused on that purpose, um, was what allowed them to make a decision to sell to a non, a non family member. Um, but the non family member had that same passion and drive for the business and wants to keep it going and, and so it goes forward. Um, and it lives on and that was what the seller wanted ultimately, that the business lives on.
Speaker 1 38:20 Why? Because there had a purpose for that business, right.
Speaker 2 38:24 Purpose and he’s lived his purpose and he’s lived this business. Um, but he understood his purpose.
Speaker 1 38:29 So we’ve got a minute left before the next commercial break. So, um, any in, um, any thoughts more on that? Um,
Speaker 2 38:37 yeah, I, I think that, um, knowing why you’re doing what you’re doing and then it helps you narrow down your market. Um, when you are preparing to sell, um, you know, what is, is the new buyer gonna come and completely change the purpose of the business because everything you’ve worked for and maybe you care and maybe you don’t care, there’s people who absolutely don’t care and businesses completely morph with a new owner. They’d take a new shape and then they go on. Yeah, that’s not bad. Um, I don’t think there is a right or wrong in, in this scenario, it’s just understanding.
Speaker 1 39:13 So I’m good stuff. We’re going to start wrapping things up and get into some other topics and a little bit by stay tuned that you’re listening to business and legal talk with Leo and Claudine and power talk 1368
Speaker 0 39:27 wow.
Speaker 1 40:20 Welcome. Which is just having some great conversation with a while we went on break. So more on that and other topics. But welcome back. You’re listening to, to business illegal talk with Lee and Claudina. Can you believe it? It’s just this w this topic we just barely just unpacking fairly. Oh my gosh, there’s so much to talk about. And so we’re, we’re talking about those, um, seven steps to increase value. It’s about value. The more value your business has, the more potential, uh, you know, uh, money that you can get because at the end of the day, beauty is in the eye of the beholder.
Speaker 2 40:57 It is, it is. And I, and I think, um, you know, during the break we were kind of talking about the, the concept of franchises. One of the things that makes franchising so attractive is that it is the extreme idea that somebody has taken a business, thought out all of the, all of the details, ironed out, everything right down to the color scheme. Um, I mean, you could not have a sandwich made any more simply and well and thought out than a subway franchise. I mean, they have thought it all out to the number of ounces that cheese that we know how it’s done out of the shape of the green pepper. That’s correct. I mean, crazy. It is. It, it is the extreme, right? And if you consider your own business to be a version of franchising, and if you consider that your buyer wants to be able to come in and pick up a business that’s already running, there’s value in that.
Speaker 2 41:53 That’s why they’re willing to pay. But they, they don’t want to have to necessarily come in and rebuild it, restock everything, you know, buy all new trucks. If you have a construction business and you know, you need five trucks and you have neglected to maintain your equipment, that’s not what buyers are looking for. And if you are not clear on giving your buyer what your buyer’s looking for, that’s when you get involved with litigation. And that is the big Al you want to avoid. Interesting is it’s managing those expectations. But take your business and consider it like a franchise or just maybe not as extreme.
Speaker 1 42:30 So I put, um, any, you know, I, I’m all impro of giving, I mean constantly given advise and I think is, it’s, you know, I, I give it freely. I don’t want any potential business owners make mistakes I’ve made in the past. So I given this advice, if you, um, I am passionate, just like you are about helping business owners build business that are profitable and sustainable, right? And sometimes if I say, make a couple of comments, I said, day, when was the last time you had your standard operating agreement? Uh, or, or, or your son up? Pretty procedures. It’s all about a standard approved procedures tweaked. They go, we don’t even have one. What is there to tweak right? In my world? Job descriptions, uh, what’s that? Oh, well they know what they’re doing and then they, I know needs to be written down. So number four. So you know, so we talked about number one, seek advice. Number two, work the boost to boost your profits or your business on the seventh steps to increase value. Number three has increased sales and lower expresses. Number four is continued to invest and improve. Right? Again, back to the purpose, uh, of your business. If you believe in it, you should be investing back. Profits of the business should be invested in back to perfecting how sensitive of Arab are you about perfecting your product or service.
Speaker 2 43:42 Right, right. Creating that kind of franchise model where we’ve ironed out all the details,
Speaker 1 43:49 I know of a restaurant, um, that was to franchise. And you know, I, I, when I hear that as this, this is great, this is this is that the, uh, you know, bad rock of capitalism is be able to create something that you can expand and scale right across multiple markets. And, uh, and guess what came to mind? Great. Do you have everything? I mean, there are great. I mean, they been featured, um, and, and, and, and, you know, with guy Fiore or what is the name of that show? Dry a driver, drivers, dives, diners, drive ins and dies. Right. Love it. Totally. Triple D has been featured. So this particular restaurant has been featured and I, I know the, the, the, the, the founder, CEO and, uh, what a great concept and we’re going to leave it like that because I don’t want to spoil it for anybody, but more than that, uh, at a later day. But he’s for, I asked, great, you want to franchise people are coming to you, why do you have to offer? Yeah.
Speaker 2 44:45 You have to be able to iron out every seat. I mean, your recipes have to be cookie cutter.
Speaker 1 44:50 What, what do you mean? Well, why do you have to, how does, when, what does the experience look like when somebody walks through the door, the color scheme, you know, that they have you trademark your logo, there’s up protected. Do you have an intellectual property now your, your sauce is, I, I, you know, the way you prepare the food, is there a process that you take that through to, down to how many degrees does the oven need to be in? How you preseason, how do you cook? What does the customer see? If I’m a hungry, um, uh, if I’m, I, if I’m a customer coming in to your door, right? Uh, what does the process look like? Have you experienced that yourself as a potential customer going through your, cause we know owners get diluted. They get like, Oh, well they should know that, but nobody should know anything,
Speaker 2 45:35 right? No, it’s foolproof. You’re creating a foolproof system as full proof as it can possibly be. Um, so somebody can come in and somebody can come in and not have any idea about the restaurant business and you’re, you’re giving them and that a, B, C one, two, three steps.
Speaker 1 45:50 It’s funny, I’m reading number five, create a strategic plan and with this spend time I’m talking about it. But number six is develop a repeatable process and empower your people. I was not even looking at this 10 minutes ago and we were already talking about it. I guess we’re always thinking about the process and your business needs to be repeatable, predictable. We’ve got to call our guys, I’m coming in. So calm in, color, stray marks for business. Oh guy, come on in. Who do we have on the line?
Speaker 3 46:17 Right.
Speaker 4 46:18 Is that how you doing
Speaker 1 46:19 ed? Welcome to this show.
Speaker 4 46:22 So my question was regarding crude Mark from the Senate, from your company, and you’re protecting your legal name. Should you hold it through the corporation or should you hold it personally?
Speaker 2 46:33 Well, that’s a really good question. Um, and, and that is, um, depending on your actual unique circumstances that you can hold it individually. And then if you sell your business that that is a separate asset that you would be selling. Um, however, if it is attached to your business, so for example, you have, um, a restaurant franchise and that, that logo goes along with it, then it, then it becomes an asset of the business. Um, you know, it’s just, it’s hard to answer that directly because it really depends on the unique circumstances, but it can be done either way.
Speaker 3 47:06 Huh?
Speaker 1 47:07 when we asked what type of
Speaker 4 47:09 a liability issue, right? If you hold it personally,
Speaker 2 47:11 yes, absolutely.
Speaker 3 47:14 Okay.
Speaker 1 47:14 May I ask what type of business this is?
Speaker 4 47:17 I would just in general, um, that’s the one I was, uh, I own a corporation. It’s a real estate company that more doing mortgages and stuff and basically got it. The company name is owned by the corporation. I was just curious cause I had somebody else was talking about it and I had it. I just want to ask you guys.
Speaker 1 47:34 Yup, yes. Great point. And you know what, at some point, if you create enough traction, um, use something that you seriously have to consider because, um, that’s an, it takes, you know, with the U S patent and trademark office, it takes a while. you gotta you gotta get some help in the IP, you know, with, with some illegal .
Speaker 2 47:51 Yeah. And you can trademark federally or you can trademark in, in California. And the rules are different. California’s a lot, you know, more symbol. And if you’re just doing business in California, you may consider that it becomes part of the intellectual property. And I think a lot of business owners are not really conscious of even the social media and in your industry, um, you probably do use social media to promote the business. That social media now, um, is an asset and it is part of your intellectual property. Wow. People don’t realize that. So you really have to look at everything as being an asset. So if it’s owned by the corporation, not a bad thing, not a bad thing at all, depending on, you know, and if you’re gonna sell, um, again, that becomes an asset of the business and, and that something you can sell. Um, if you’re gonna do an asset only purchase or an, you know, an entire corporate corporate shareholder purchase. Does that answer your question?
Speaker 4 48:45 Yes, it does.
Speaker 1 48:46 Awesome. Well, thank you so much for having you, uh, as a listener. No problem. Thank you. Thank you. Bye bye. Hey, so I’m great stuff.
Speaker 2 48:56 Yeah. Interesting, interesting that a lot of people are not really aware of when they sell their business, all of that social media that you’ve been doing. And some businesses are more heavy in it
Speaker 1 49:06 and then others, but social media also as part of your branding. And it also does include, if you’re going to trademark, um, that becomes your intellectual property and you need to protect that. So, so if you’re a business who has heavily , who relies heavily like on Instagram, right? Or Facebook to drive traffic back to your site, how does that work? If you mistakenly violate some type of covenant with, with the social, with the social media platform mean you get kicked out. Um, they, they have no, how does that work? Like, do you have any, um, the, the, you know, Rick, or do they have any protection, like, um, you know, because of your brand, um, who does, who have protection? Does the social media sites have protection? No, I, I guess what I’m saying is if you get kicked out of a social media platform that well, first of all, it’s not good.
Speaker 1 50:03 You right? And you’re on, you’re on the platform at their leisure, at their leisure. Right. I understand that, but, okay. So, wow, we got a minute left. Um, but that’s something that I, I’m curious about is because you know, you should do everything you can, not to get kicked out, of course. But if you are, if you’re in social media is because you want to be known. Correct. Right. If you want to be known, you must to protect your brand, right? Right. Because if you’re not protecting your brand from the outset, then you’re probably asking for trouble. Right. You need to protect your brand from the outset, you absolutely do. So. So this is great stuff. I hope it helped you. Um, number seven was ironically stand out from the crowd and we were just talking about social media and our color, um, and trying to protect and secure the copyrights to their IP.
Speaker 1 50:50 Um, so we’re, we’re going to continue to develop topics over the next few weeks and have guests. Um, we have a guest coming up on, on March 27th, though on growth marketing, which is, you know, growth hacking, which is going to be, you guys are going to love it. A lot of intellectual property stuff right there, right there. That’s what they’re building. So we’re grateful to have you in our audience as listening and tune in next Saturday at 10:00 AM on power top a M Modesta 1360 and we’re going to bring you some great topics and just as always be, just be straight talk about business and what you need to do to grow a business that is profitable and sustainable. So, um, have a great Saturday, and this is business and legal talk with your colleagues. Talk to the Saturday
Speaker 0 51:30
Speaker 5 51:46 .