Selling Your Business: The Often Avoided Aspect of Business Ownership

Leo and Claudine welcome Harpreet Singh, a savvy business broker, to discuss how to set up your business for success so that when you exit, you get the most amount of money possible, maximizing the value of the business while minimizing tax impact.
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Speaker 1 00:09 Good morning. Good morning everyone. Welcome to business illegal talk with Leah and Claudine and I am your host, Leo and Virta. And I have Claudine here with me, my cohost. Good morning. Good morning. How are you? I’m doing fantastic. Great. Well we’re happy. Happy Saturday. Wow. What a WIC. Right. Woo. We made it.
Speaker 2 00:28 We made it. How was your weekend? It was good. It was good. You know, we got some really good feedback from the topic last week.
Speaker 1 00:34 We did. Yes we did. And especially those pictures, right? Yes. So we’re excited to have everybody back. Um, you know that this just, this legal and business topic is really resonating with our audience and I’ve gotten a lot of hits in social media, just people wanting to know, Hey look, you, you guys are onto something. So we’re building a community here. Absolutely. What you, the audience, you know, our listeners, it really, it’s, it’s about helping you. It’s not about us, it’s about helping our audience, our business owners really understand how to build a successful and profitable and sustainable business. Right, right. So we’re excited to have your back, um, with you to discuss important business and legal issues that affect, uh, business owners daily in the central Valley. And our ultimate goal is to help you grow and profit from your business. Now, if you remember from last week where we talked about raising capital for your business, and I actually got, you know, actually got an email from someone who saw the link and social media and my Facebook page and they were asking some specific questions about raising capital. Oh, that’s fantastic. I forgot to tell you that because it’s directly related to the show. So thank you guys for listening in. Soon enough, we actually going to be going live and taking calls, which is very, very exciting. So are you ready for this week’s topic?
Speaker 2 01:55 I am. This week’s topics are fantastic and I think they’re a great dovetail off of last week. Um, and you know, it’s at such a unique thing about this particular show and the combination of information that we’re, um, that we’re delivering is people can get things from this show that is not necessarily something they would get just sitting in my office or just sitting in your office. It’s, it’s a nice combination and I think this week, um, is excellent information and we’re ready to go. So people get to have a double dose of, yeah, absolutely. But you know, it’s always fun. We find that small business owners often go to their accountant and they get certain information and then they go to maybe their bookkeeping service and they get certain information. Then they go to their attorney and they have a hard time kind of figuring out how it all is supposed to mesh together. Um, and that, that’s something that we work with quite a bit with our business owners. So that’s one of the things that I think is really valuable about this, this particular show and, and the combination of information that we’re, we’re able,
Speaker 1 02:56 able to share with people. So we’ve got two, we have a lot unpack for you today. So today’s topic is you build it, you build it. Now, how do cash in, in the success successful your business by selling it for millions selling it? Isn’t that what the whole thing is?
Speaker 2 03:10 No. You know, I read a statistic this week that, um, in preparation for the show that 80% of the businesses never get sold. 80%, 80% of businesses never get sold, largely because people don’t think about selling them or maybe the business goes under unfortunately or maybe the, you know, somebody passes away. Um, but they just, literally, people are not groomed to think, sell the business. And the, the times that they do is when maybe they’re talking about estate planning, um, or, or in our professional industry. Um, I know that we work out agreements, you know, just in case something happens. So in case something happens to me, I’ve already got somebody lined up, uh, to purchase, you know, just for safety sake.
Speaker 1 03:54 So our goal for you today, particularly if you’re listening in today to our show or in later recordings, is how do you set up your business for success, right? So that when you exit, you get the exact amount of money, the most money that you can get. So you maximize your value and minimize your tax impact. If we can do that today, it’s a win for us, right? It’s a win for you. Just a little, because it’s the big subject. I mean, we’re hoping that we can finish it all together. So here are some surprises that this sticks about a small businesses. You know, I, you know me and my stats, right? I’m a numbers guy. I want to know what, what, what the deal is with businesses. So you said that 80% of businesses never get sold. Well, there are 28 million businesses in the U S wow.
Speaker 1 04:36 In the the SBA, right? The small business administration defines a small business as an enterprise having less than 500 employees. Now, if you tell me, Leo, I have a business with 500 employees, do you automatically think, Claudine, that this is going to be a small business now at 500 employees in California, that’s the larger business, right? But according to the SBA is a small business, multi medium sized business. Um, over 50% of the population in the U S works in a small business. I thought it was interesting. Well, I think that fall, it follows true if, if the definition of small businesses, 500 employees or less. That’s true. That’s a good point. And there’s a pot approximately 543,000 new businesses that get started each and every month. That is, that is a, for me, that’s a great number. That’s a great number. And if you, if you put that fat together with the fact that 70% of people who work today who are actually working for us are dissatisfied with their jobs, then you start to kinda connect the dots.
Speaker 1 05:40 Right? So, um, so our job today is just, we’re going to go over a few things. So here’s, here’s the deal guys. Selling your business may be one of the most significant, if not the most significant transaction you’ll do in your lifetime. So he’d be hoops you to figure out a way how to scale it to the point that you maximize the value of it. Right now you can say, yeah, you know, um, yeah, that, that’s fine Leo, but you know, I have in my house, you know, and you know, some people will eventually pay off their houses right there, their loans on their homes and eventually have that possibility of selling your home for what, two, three, $400,000 or, or more. Uh, but rarely ever you’re going to have a house that is going to have $3 million worth of equity that you can cash in and try to figure out a way how to shelter some of that.
Speaker 1 06:32 Right? What we’re talking about is something very unique. So if you work very hard for a period of time and you build equity in your business, that equity could be worth millions, literally millions of dollars. Yes. I been pre-vis and I’ve been fortunate that I have worked with businesses that sell from anywhere from one to $10 million. And that’s one transaction, right? He know, I don’t know if I told you this story that the whole reason why I actually started my first company a, did I ever tell you that? No. Is that, was that an anger? I was angry and I was so angry at this guy who hired me long. We’re talking about moons ago, maybe 17, 18 years ago and one of the last corporate jobs I ever had. And um, I saw this company being built and go from zero to $35 million in sales. I got hired as the national accounts developer.
Speaker 1 07:25 We eventually become a regional vice president and had the entire West coast from, I had offices from Seattle to San Diego and I used to go to Seattle twice a month for two years. So I thought I was doing great. I thought that my, my future was secure. I thought my kids were going to graduate and go to college and I was going to save enough out of this job to be able to send him to college and I was going to take my vacations, et cetera. And you know what happened? Guess what happened? Got laid off, no better. So what happened was that unbeknownst to me, after about three years of working there, he secret being plotted to sell the company, which is great, right? Isn’t that what the whole thing is all about? So sold the company for $35 million, right? 22 million in cash and the rest in options and the new company, and I’ve got nothing but my last paycheck, Oh, not even $1,000 and I got nothing.
Speaker 1 08:21 And out of anger, I when it started, but you know what? That is exactly what I needed. I realized that. So I’ve seen businesses sold for 25 $35 million. So it’s possible. So what is your company worth? You know, I think beauty is in the eye of the beholder, but I’m going to tell you right now, and I’m hoping that you could take notes on this, but this or this, this are the six things that we are going to develop today and with the time that we have, but absentee ownership, what buyers look for in a business, right? You need to know what buyers are looking for before they look at your business, right? This is an open book test
Speaker 2 09:01 and this is very, very difficult, very difficult. Probably the most difficult subject, um, in terms of selling your business is have you allowed your business to be so completely dependent on you that you can’t leave it? That is, that’s, you know, one of the most difficult things to tackle.
Speaker 1 09:21 So what is the goal that we build a business that will survive you? So you can be in Waikiki three months out of the year and your business thrives without you and you come back and your employees are like, you need to get away Claudine, because you know, every time you hear, we don’t grow. Say it isn’t. So anyways, stay tuned. You’ve been listening to business and legal talk with Leo and Claudine and we’ll be back in a few seconds. Thank you.
Speaker 3 09:48
Speaker 4 10:01
Speaker 1 10:13 are you still listening in? If you’re a business owner, you are listening to business and legal talk with Leo and Claudine here on power talk 1360 KFI FIV so I left you in a cliffhanger before the break, but we started talking about the six things that you need to look at. We’ve been to be looking at if you are a business owner with any hope to ever sell your business for 10 $220 million, right? First thing that a buyer’s going to look for is absentee ownership, right? Right. If you are the kind of business owner that works for the business 84 hours a week and without you, there is no business, you have no chance of selling it. So let’s get that out, right? If you are the kind of business owners that chooses not to delegate and that you want to do everything on your own, you will dive with your business. Probably you won’t be able to sell it.
Speaker 2 10:57 Well it certainly, and this, this is one of the things that we want to start thinking about early on, um, as structuring your business. And I know I am certainly guilty of this, but there are a lot of people who do work 80 plus hours a week in their own business and feel like they can’t leave it. Um, if you do nothing but conquer that and hire competent people and delegate, um, if for no other reasons so that you can maintain that value of your business, that’s a really good reason to change your habits is to add value to your business.
Speaker 1 11:27 Yeah. So years ago, you know, I always, I never felt to talk about, um, a book that I’ve read that has helped me a lot cause I am a reader. And uh, when you were talking about that, it made me think of the four hour work week. Remember that book from like 10 years ago? No. Well that book is about when I was still in my 84 hour work week. You’re still, we’re working 80 or not, but you we, but we’ve changed. You are so much better. Oh, I am building a great law firm. So this book, the whole idea was to that you can actually design a business and you only work on it four hours a week. It was a concept. It was an idea that basically grew like wildfire. And I latched onto that because at the time I was working 70 hours a week.
Speaker 1 12:12 Right. And I didn’t know anyone who was working four hours a week. Now is it to say that Tim Ferris was working four hours a week at a time? No, I don’t know that. But regardless of what, how many hours he was working, the whole idea I latched onto. But there’s power behind that. So absentee ownership, it’s huge. Sophisticated buyers will want to buy a business that where the owner is its owner independent, right? Where the owner can hire people to manage it. Why? Why do you, why do you have the whole concept of franchising? Why is franchising so important in the game? So big in the U S is because you buy a franchise model, the systems or procedures, which leads me to my next point. So number one is absentee ownership. Number two is systems and procedures for everything in your business. This is, I call it that hit getting hit by a bus. Um, syndrome. So what would happen to you as a business owner if all of a sudden you got hit by a bus and you’re gone? How do you, how does your
Speaker 2 13:08 well, um, w in my industry, um, if it, you know, I believe if you’re a smart attorney, you have a solid paralegal behind ya, you better you. And I’ve got a solid paralegal. My senior paralegal would, um, know how to jump into gear. She can probably hire the attorneys to replace me and she could manage that. But my industry is really unique because paralegals do something very different than attorneys do and they run the show. There’s no question. They are the bones of the, of the business.
Speaker 1 13:42 So, but you gotta have systems. Some guy have it, and I’ve said it before, right? Why do people invest in a, in a very successful franchise? Because they don’t want to have to think about the whole process. The whole process comes in a 200 page book that they call the standard or procedure operating procedure manual. The SOP that becomes the Bible in your business. Well, somebody had read it all the thinking. You don’t have to be on the decorations, including the decorations, including the color schemes, including the way that the, the, that the tables are laid out in the floor. If you let me know, and I’m talking about franchisees as in restaurants, franchisees, right? There are franchises for everything, right? So number three, do you have a recurring revenue stream? And this is something that I’ve noticed and this is huge and technology is huge.
Speaker 1 14:27 And software, uh, I’ve, you have said it before and on the show that a business that has a recurrent revenue stream is worth 10 times to 12 times more than a business though has, it does have a recurring revenue model. Um, interesting. And um, uh, and, and there’s the concept I love. I think, I honestly believe that every business, regardless of whatever industry that in, they either have, they could have a recurring revenue model or predictable sales system that allows them to actually predict the revenue. Got it. Is not just the membership. You know, when we think revenue model, we think a SAS model as in software as a service, we think, uh, like LinkedIn, you know, if you want a premium user, you’ll pay $70 a month. Well they, LinkedIn runs metrics on the amount of paid premium users they have to break even for that business unit.
Speaker 1 15:21 Right? Right. It becomes predicting revenue and growth becomes so much easier. But you probably wondering, Claudine, what if you don’t have a model that you may know that it is, we know our recurring revenue, you, you sale, uh, estate planning or other types of things that don’t require a, um, a recurring revenue, but you may not have this service onto itself may not be recurring, but the whole sales process to deliver that client, that could be connectability. You can come up with a . You could come up with a predictable model in which if you spent X amount of dollars in advertising with through a funnel system, right, that can eventually deliver those five, seven, 10 clients a month to do what you want it to do. Now you have yourself a recurrent revenue model. And I think every business has it. They may or may not have realized it or they may not have analyzed it yet, but we’re all surviving some way.
Speaker 1 16:17 Yes, yes, absolutely. And you know, one of the biggest things that in the construction industry, right? Construction, they work in this feast and famine, right? It has this mil multimillion dollar project, right? And if you’re not thinking about what’s going to happen after the project has gone now before, then you’re really missing the Mark. Well, you’re going to sit on the beach for a couple of weeks for sure. For sure. And then you kind of, Oh my gosh, what am I going to do now? Right? So absentee ownership systems and procedures, recurring revenue model, year over year growth. Now, if you are a business broker and or if you are a sophisticated buyer and I’m looking at your business, I’m going to ask a three year history of growth. Of course, right? You want to know that the business is growing. I call it the wire. Why the year over year growth?
Speaker 1 17:03 And that’s kind of what we talked about last week about needing to have a, when you’re, when you’re talking about whether or not you’re bankable, you know, what’s the bank looking for? The bank is looking to see, not that you’re declining and not that you’re flat, but what the optimum is to be increasing over years. Why would I give you a loan if you’re going to be losing revenue every, you know, going to be going down 15% every year for the next three years, right? Who wants to give you a loan for that? But you know, if banks know something about that, they move, we should. And so new buyers, right? So how about this client mix? Now I’ve said this story before, and this is just really what encapsulates this. General mills is the largest producer of, you know, one of the largest producers of cereal.
Speaker 1 17:49 You know, all the general mills cereals, right? In, as of a few years ago, Walmart was their revenue that general mills received or derived from Walmart was in excess of 20% do you think Walmart had a little power over general mills? Yes, they did. And the rule of thumb is, if you’re listening to this, no clients should be over 20% in the aggregate of all your revenue leverage. So otherwise known as leverage, Oh, otherwise known as leverage. So if your, if your business, you know, if your net profit is 20% on a business and now all of a sudden that 20% of sales goes away, how much profit you have, you have zero. Okay? So keep that in mind. And intellectual property, which is where you come in, right? Does you, do you have intellectual property and if so, have you made an effort to protect it? Right? What are your thoughts on that? Intellectual IP,
Speaker 2 18:52 it’s, it is, excuse me. We refer to these as nondisclosure agreements. Nondisclosure agreements are typically with a third party. Um, a noncompete, a Glint agreement is going to be with somebody who is an employee, um, or a confidentiality agreement is typically with somebody who’s within the organization. And those are critical and you should be thinking about it from every step. And I know in the very first episode we talked a lot about employee stuff, but you should be thinking about those from day one and really put together some strong, um, no compete confidentiality slash NDA or nondisclosure agreements because it, it’s CR, it’s critical and um, enormous lawsuits have been tied up for just that.
Speaker 1 19:39 Absolutely. I agree. And so now there’s one thing I would like to talk about, which is something that I’m always asking you about is buy, sell agreements, right? So that our sticks ins to know about buy, sell agreements. I will like for you to kind of develop that into, to tell us what we should be looking at.
Speaker 2 19:54 Well, buy sell agreements are something that a lot of businesses don’t even think about. And, and one of the, one of the things that we, we talk about, one of the six things is these are things that should be developed early on. And if you’re setting yourself up from the very beginning in an effort to want to sell your business, then you’re going to start making provisions, delegating responsibility, creating, um, responsibilities and procedures so that they’re interchangeable. Um, but doing it early is, is really, really important. And for example, in my industry, and I suspect in yours as well, um, we can turn to other, the players in our industry. For me, I can turn to other attorneys and I can create a buy sell agreement early on now, um, that says, Hey, if something happens to me and I die, we have made an agreement that you’re gonna by my, by my business for say $50,000, and you do it early on as the buyer likely to get a better deal.
Speaker 2 20:48 Um, but we also fund it with life insurance. So there’s a life insurance policy that say is carried on me. And if something happens to me that life insurance policy pays for the buy sell agreement pays the purchase of those social, the ones known as canceling life insurance pal policies. Oh, I don’t know the term where they basically they will buy, they’ll buy one of the owners out. Yes. And, and, and there’s so many different ways to structure it, but you, and you can do it with multiple people. Um, but they should always include the business valuation. So right from the very beginning, and we talked, when we talked about real estate, we talked about having an option to buy, um, having a buy sell agreement with an evaluation early on is sir, sort of your option, um, you kind of are able to establish the price early on.
Speaker 2 21:37 You can reduce the emotional impact of the need for a bio sell agreement. So for example, if somebody passes away unexpectedly, it’s an emotional time and then everybody’s scrambling thinking, what are we gonna do this business? And we’ve got clients and we have all this stuff going on. What are we going to do if we do it early on? We can reduce that emotional impact. Okay. And they set the ground rules. It says we set the ground rules early on as to how is this going to take place. Um, and one of the ground rules that is really critical is setting your evaluation method. I’m sure you could talk for quite some time on different valuation methods, um, and how we’re going to go about evaluating it, weighting it. Um, and then there’s also tax tax implications. Um, and so I w I don’t advise on tax implications. Um, I don’t advise on tax at all, but just know that when there is a buy sell agreement, there is a tax implication involved in that. And so you want to look at all of that stuff early on while your business is not in a state of emergency. Um, and that just makes the whole process of just a tremendous amount easier.
Speaker 2 22:43 Okay. So guess walk Claudine. Uh, we have a guest today. Yes, we in our show and I’m going to let you do the honors. All right. All right. Well, we have Harpreet Singh is a licensed attorney. He is an associate in my office, excuse me, he earned his Juris doctorate degree, which is your law degree. Um, with honors from Concord law at Purdue university global in 2017 and he earned his bachelor of science degree in computer science with, with Summa cum laude honors from California state university, Stanislaus. Go warriors, smart guy, a, he’s been a small business owner since his early twenties and mainly working as a business broker in the family business. He’s a licensed real estate broker as well and that has an understanding of business brokering is what she was, what he was doing prior to going to law school. Um, so our pre came to our office and brings with him this fantastic experience of knowing the, the complex process of brokering businesses because everything we’re talking about here is something that he’s had his fingers in on one level or another. So, um, he has really understands valuation but not necessarily, or maybe, maybe he does. Maybe I’m, I’m over speaking, I’m sorry. But he understands it from a business standpoint in terms of needing to be able to transfer a business, uh, from one person to the next for a reasonable pricing and getting everything done correctly. And what got buyer X that I’m expecting.
Speaker 1 24:07 Welcome to this show. Harpreet thank you. Thank you. Clouding for the kind words and then wonderful intro man. How do you feel now? You, you are a smart, smart guy. Yeah. Trying to be work hard, done. Well you don’t have one of the hardest working guys I know already. So. So just to wet your appetite, these are some of the things that we’re going to be developing into segments three and four, what it’s coming up. Um, so before we go on a break, so Harpreet is going to be talking to us about the purchase agreement. We’re gonna be talking about letters of intent, financing terms, agreements, lease the lease portion of it, licensing, escrow, closing and beyond. And you have been listening to business and legal talk with Leah and Claudine. You can find us our green Greenland, That is G R E N L a N D in Sharon law is S H E R R O We’ll be right back.
Speaker 3 25:05
Speaker 4 25:19
Speaker 1 25:30 you are listening to business and legal talk with Leo and Claudine and I am so excited. Have our guests with us. This is our first guest. So Harpreet I, I’m excited to hear you talk about, uh, purchase agreements and letters of intents. What, what’s the difference between these two?
Speaker 5 25:51 So the purchase agreement is basically as it’s sounds, it’s a purchase agreement for sale off the business, but the letter of intent, it’s just, just the first step to enter into any kind of purchase relationship. Uh, so it’s basically provides you a way to provide the terms of your initial offer to the other side and just see how the other side reacts on that. So the purchase agreement provides you the opportunity to present the whole terms, but the letter of intent is just the first step, uh, to just show your Toms.
Speaker 1 26:28 Okay. Um, Hey, have you, I’m just curious, you know, have you ever seen a buyer pullout or a S or a seller, uh, pull out of the sale?
Speaker 5 26:39 Yeah. Um, so it depends if if the buyer or pulled out from the letter of intent street, most of the time the letter of intent are not supposed to be binding because you’re just presenting your Toms and this is not considered as a complete purchase agreement but uh, but if you have a complete agreement and you didn’t intend to have a, it has a binding contract so sure means there are issues which works on a, because the other side who won two stomps would consider that as a binding agreement and then your normal litigation starts from there.
Speaker 2 27:19 So can you explain a little bit of how the purchase agreement, um, is developed? Because I know, you know, in my mind I function from a contract perspective. So you know, as an attorney we are trying to, um, we’re trying to troubleshoot everything that could possibly go wrong and address it in our agreement. Do you find that when we’re transferring business, typically you like to work with some sort of a pre drafted document or do you draft each one individually? I think that would be interesting to know. Yeah,
Speaker 5 27:54 because I think the main purpose of the letter of agreement is just to start the talk about the purchase homes. And so you can just provide your basic terms to the other side and just start a conversation about that. So, so the other side can just counter those basic terms because if you have a very large deal, there would be numerous terms to deal with, right? But if you just start throwing out the 70 page purchase agreement, it will be very difficult to reach at the final point. So, so usually the mechanism of letter of intent is used to just just start the conversation about your basic, uh, important terms of the agreement. And once you hash out that you can move forward to a more formal agreement.
Speaker 2 28:40 So do you go, um, several rounds of letters of intent? Yes. Yup. That’s what I was, I was gonna say, um,
Speaker 1 28:48 I have a question. Yeah. So, so how often does among, so I, I need to, I guess better understand. So you’ve been on and the buy on the buyer side and on the seller side of the transaction. Yes. What, what, which case can you walk us what is like to be on the buyer side versus being to seller side and what did, what is your mindset going into, you know, this deal.
Speaker 5 29:10 So mostly a lay person if you are selling a mom and pop business and uh, your broker says, okay, let’s, uh, this is a good business and making good revenue. And so mostly you just the broker drafts a letter of intent and uh, so just present the price and the basic, uh, if it would be a seller financing or some other outside lender financing and it’s presented to the seller and the seller, just look those basic terms. And most of the time it’s the contention of the seller to fight on price. Obviously that’s the most important term the seller looks at. And once the seller have a, some kind of a counter in mind, they just present another kind of letter of intent. You can say or or maybe an informal response to the other side. And then the other side just sends similar response.
Speaker 5 30:04 So it just goes back and forth until you have those basic terms which include your price and your timeframe of the ordeal and the basic condition of due diligence, which is once it hashed out, then you move forward for the business purchase agreement. So how often does a buyer have their financials in order deepen your experience? I’m not most of the time because uh, the buyer don’t understand the process and the things which are needed for financing. So sure means in that thing you need good professionals on your side, which can prepare you for purchase. Buying a business before where you enter into this negotiation round because you never know, you don’t even qualify for refinancing and you are just throwing this term of financing to the seller. And even if the seller is not much sophisticated, maybe the seller is also wasting his time because later they find out that he is don’t even qualify.
Speaker 5 31:06 So, so it definitely doesn’t do the buyer. It doesn’t help a potential seller to go this, you know, this road and try to sell their business if the financials are not in order. So who would be advising them to do that? Yeah, so I think the main important people to go on is it’s good business brokers and and also good attorneys can advise you on that and prepare you. Uh, because I think the most important thing is also to understand because business brokers can help you in the sales process and they are not the legal professionals. And so attorneys are needed, especially in the initial rounds of the process when you’re drafting and sending out your letter of intent. If your language is right or not, you have to just look bad because layperson doesn’t know that. And sometimes the buyer and seller get tripped off and have wrong expectation, had their letter of intent street and someone pulls out.
Speaker 5 32:09 Then there is a dispute if this letter of intent is binding or not. So getting advice from an attorney is really very useful for buyer and oral. So solar, you know what I been, I have a lot of my experiences on there on representing the buyer and the seller. So from my experience, Harper, you may correct me if I’m wrong, but you only get a first one chance to make a first impression, right? So if you don’t, if you’re not ready to sell your business, if you don’t, haven’t done your due diligence. If your financials are not in order, if your legal house is not in order, right. When your agreements are in order, Claudine and you know, all the things that we talked about, you have protected your IP, you have defensible agreements, you have vendor agreements or all those things. What self respecting buyer with one, I even take a look at your business.
Speaker 5 32:57 I mean, does, do you run into that? Uh, yeah because I have seen, I think sometimes the business is good but the presentation is wrong. So it just lowers your value. So it’s similar to if you just go to buy a house and you’re looking at house and it’s, it’s a, it’s really a good location and good square feet and everything is good. But when you see like some small hole in the wall, which is not that much significant, but probably the buyer’s thinking, it would decrease the value by 5,000 maybe it can be patched up with like two $300. So it has the same effect. Presentation is the most important thing, especially when your buyer is not sophisticated enough. And most of the time in these small business, uh, sale agreements or transactions, the buyers are not sophisticated enough. The they have buying probably that’s their first business they are buying and it creates a very strong and her honk impression. See what I, in my world, I’m, I’m, you know, I’ve come from the lower to middle market. So businesses are doing anywhere from one to 15 million. And then the buyers are sophisticated buyers. They have the teams of attorneys and accountants, they’re gonna pry open everything about your business. And if you’re not ready to deal, you better have somebody on you on their side like you, right?
Speaker 2 34:15 I’m thinking, you know, that figure there are so many businesses that are in the a hundred thousand, 300, 400,000, you know, 800,000 category under a million. That’s a lot of, it’s a big, yeah, it’s a, it’s a big gap and it’s also a big portion of the buying and selling community. Um, is the smaller businesses
Speaker 5 34:34 Christmas. I see. Yeah. Because I think, uh, it has been, I don’t know the exact stat, but it’s, it’s a very significant number which you have those kinds of businesses which we call mom and pop businesses because those are the businesses also the backbone of the U S economy, which is a, and also whenever you want to move up prom, a job to just become a business owner. So that’s the kind of business you enter in and then you just move on to make it bigger.
Speaker 2 35:06 What businesses, um, in your experience have more difficulty or less difficulty in selling if you, if you’re, I mean, is there a certain segment of industry that is really difficult to sell? Um, or prepare for sell versus another?
Speaker 5 35:22 I think we can find, I think different industry, I think the most important thing is just the preparation and presentation of your business. If your books are not in order and if you are not able to show the buyer that this is revenue and this is the thing I’m making because that’s the basic question. Buyers always ask, okay, how much I will get at the end of the month in my pocket. If you are not able to explain that, if you have any kind of business that’s difficult to sell and that’s one of the reason you have these, uh, about 80% of businesses on market, which doesn’t sell because they don’t have good presentation. And in the, in addition to that, you have different factor. But I think the presentation is the most important factor.
Speaker 2 36:07 I know you and I have talked recently about buying and selling businesses and one of the big, um, I guess kind of pitfalls is the valuation piece of it. and, and that there is um, a tendency on the seller side to maybe inflate the value of a little bit and on this, on the sell buyer’s side to want to drive the value down. And so when you’re presented with a set of financials, um, what, what do you advise, um, your buyers or sellers to do? Do you get second opinions on them? Do you take them to another, maybe another bookkeeper or CPA or something like that?
Speaker 5 36:46 Yeah, I think it depends on your buyer and sellers. If they are not sophisticated enough, they don’t understand. And most of the time if you are in mom and pop operations, so these people are working hard in their business and they don’t understand the presentation aspect and they don’t understand the presentation on the paper because they are making the money. But if you cannot show that to the buyer on the paper, then it’s unfortunately your business doesn’t raise to the value you want. Right. So sure. I think it’s always helped to, to consider other professionals to have second opinion. Maybe just talk with the CPA or the person who they trust. And so at least I think they have the idea of what they are dealing with and and what it will take to sell the business.
Speaker 1 37:35 And that’s great I think is to me is you, a lot of people get stuck in this whole thing about I have a buyer, I have a buyer, I may have a buyer. So they stopped selling, right? A lot of business owners just get so enamored with the idea of selling the business, the desktop selling. And you know what? If you are in due diligence any length of time and it’s going to bleed into like two, three months and your sales go down, guess what? You just lost. It could be lost losing hundreds of thousands of dollars worth for valuation, right? Well, we’re going to be talking about some more and in the topic in, in the next segment. But um, Hey, so you build it. Now you know you have a business that you can sell for millions. This is today is the time to cash in on the success of your business. As you’re listening to business illegal talk with Leah and Claudine here on power. Talk. Hey FIV we’ll be right back.
Speaker 3 38:22
Speaker 4 38:40 go back
Speaker 2 38:49 everybody you’ve been listening to business illegal talk with Leo and Claudia in here on power. Taka fib 1360. So we are bringing it home us. So Hey, over the break, I was just writing a couple of questions that I wanted to make sure that we asked that we, that you know, the three of us talked about is, so what makes up the value of your business, right? So you worked hard for 20 years. How do you know how much your business is worth? Right? Um, I think you have to look based on what kind of valuation you’re asking for. It’s a are you asking for the stock valuation or are you asking for the assets valuation? Because when you just enter into the stock valuation, you’re asking for the value of the piece of your business. Right? And when you’re talking about the asset valuation, it’s about the whole assets, including the Goodwill of your business.
Speaker 2 39:40 And Claudine, I think, uh, can put more light on that. Yeah, there’s, um, there’s, so there’s two different types of purchase. Um, essentially you can do an asset only purchase or you can do what we call a stock purchase, a stock purchase, uh, obviously only available for companies who have stock, which are corporations, corporations, right? So, and to asset purchase though can be really advantageous. Um, because what you’re doing is you’re essentially just purchasing the assets. You’re not purchasing all of the liability that comes along with the business. You’re not purchasing the business itself. Um, and typically what happens is the business that is being sold will actually close down the new business. We’ll open up, it’ll start on, you know, the day after one closes, the next day one opens. The owners of the new business now go through the whole entire hiring process. Um, and so we’re not just automatically pulling all employees from one business to another.
Speaker 2 40:33 While they may stay, they literally get rehired as a brand new employee. Um, and there’s some real serious tax advantages from going, um, with an asset only purchase. Um, from our perspective, we look at not so much the tax, while that is really important because you really should be, um, consulting a competent CPA on that issue, but we’re looking at liabilities. Um, are there any lawsuits that are pending? Are there any potential lawsuits? So if you do a stock purchase and you actually purchased the stock of an already existing business, um, if a lawsuit arises two years from now, um, you know, from something that happened say two years earlier, that’s your liability now. Um, and so there’s, there’s this a lot of stuff that we have to look at. Um, depending on which direction you want to go. And from my point of view from, from, you know, as a, as a CFO and business consultant, the first thing that I look at is, and people always ask me, so when is the time to sell your business? Well to me is when do you, what, what, what
Speaker 1 41:34 point in time during the life of your business you showing the most growth year over year, the most revenue, the most trending, the most profit, um, you know, you’ve perfected a, as some type of intellectual property. Uh, but you know, for every unicorn out there, you know, I, you know, you watch the news and you know, you watch TV and it is the news media, you know, this crazy multibillion dollar valuations, you know, Uber or, or, or companies that, um, have zero revenues and in zero profits, yet they’re worth billions. How does that happen? Well, I think a lot of it is hype. Yeah. Right, right. Yeah. A lot of it is hype that does $3 billion evaluations don’t help the average business owner here in the central Valley. Correct. Alright. So what never fails to me is you got to build a business with the end in mind.
Speaker 1 42:23 You, when do you start selling your business? The day you open doors, right? By creating the systems and procedures by really driving the revenue, by having a recurring revenue stream, by having the systems in place, by protecting your assets. But so we, I, we don’t all agree that one of the biggest drivers of a business valuation is its revenue and its profits and there is different combinations as far as that. You know, some businesses are sold that one times revenue, a one and a half times revenue or two to three times discretionary cash flow or five times profit, you know, 10 times EBITDA and all, there’s multiple ways of which, which basically is how much profit on the sales. Right. And that is some buyers are going to be, well, yes I know that the business owner is fun finally in some of those personal expenses through the business.
Speaker 1 43:16 I want to add those backs and there are formulas for that, but that’s only one part of it. Now how much role play you’re, does your intellectual property play into it? A guys care to, you know, chime in on that. What do you think? I think intellectual property is one of the most, um, important thing which have previously not been considered by especially small business owners. Because if they are creating, uh, in their business, some kind of a Facebook page, which is very popular or some kind of weird a radio show or some kind of videos, those are intellectual property and you are investing time and money in that and suddenly now you’re selling your business and then you think about, okay, so this is my stuff or our hostesses because usually people don’t think about that. So I think the IP issues come up a lot after the people have sold their businesses, uh, because then they look and see, uh, the demands from the buyers that uh, that these items, uh, either these Facebook page or other things which, uh, which should be a type of the parties included in the purchase agreement,
Speaker 5 44:32 which is not there. And now everyone is just entering into the litigation about the IP issues. So IP issues is becoming a lot important since
Speaker 2 44:42 well calls. It could I could intellectual property be worth hundreds if not thousands of millions of dollars. What do you guys think? Absolutely. I think people right now are just now beginning to, uh, understand the value of things like a heartbeat’s mentioning your Facebook page or your social media. And there are, there are businesses that are completely, um, driven through social media and, and people who are investing money as we did back in the early two thousands on Google words, they’re now investing in, you know, Snapchat and, um, even LinkedIn and, and, and things like that. And so there’s, they’re doing that just as a normal course of business. Like we, you know, years ago we, and even today we run an ad, you know, many, many businesses, we ran ads in the yellow pages, didn’t think anything about it in terms of being intellectual property, but now it actually qualifies and it’s a big driver of your business.
Speaker 5 45:35 So what about Goodwill? Can somebody explain that? Yeah. Goodwill is a kind of a thing which is just in the air. If you just see in the normal, because people understand real estate much a lot because it’s physical, you can touch it, feel it, you can see the land, you can change the pipes on it. Sure. But Goodwill is the kind of thing which is just the reputation of your business or that system which you have built in that particular location because most of the time businesses runs on lease and lease is also one of the most important thing which is considered in your whole Goodwill value. So, so Goodwill is basically kind of a thing which is, which is just reputation of your business and and also the most important thing in in the Goodwill, he’s as mentioned earlier, it’s the lease and the people have lots and lots of issues, especially small business owner because they understand very basic terms in the lease.
Speaker 5 46:31 Okay, how much is my monthly rent and how much money I’m giving. But there is a whole lot of other things going on in the lease, which they later know about after a couple of years of buying the business that they have to deal with, these rent increases provisions. Scam provisions. And also they have to deal with how the assignment process will work when they want to sell their own business. And how well and what are their liabilities in walled if they want to sublease the business. Now who remembers flicker? Remember that little website, a photo exchange years ago, purchased by Yahoo for $25 million. Didn’t have much revenue, but they had a ton of Goodwill, right? Who remembers Hotmail? Yes, yes. Hotmail sold to Microsoft for $400 million. It made the guy, the founder, very filthy rich, right? So this are some of the things that we’re talking about. And every week we talk about one subject and our whole is for you business
Speaker 1 47:30 owners to build a very profitable and sustainable business. One thing is clear, you can build any business you want. Well, one that is profitable will sell correct. One that is not profitable. We’ll go to the tank. So, um, and you need your presentation and you need to be presented. So this is what we do. So if you need any advise on the presentation and the legal protection there, Sharon law, I mean you’re local here in Turlock in um, Sharon is S H E R R O com. Yup. Absolutely. And we’re, we’re here to help you put together the legal side of it, the contracts and you know, just really kind of button everything up. And if this is something you haven’t thought about doing and maybe you’re starting to think, you know, you want to, um, maybe rejuvenate the retirement plan, um, 401ks and a little, we may have to talk about it in the future, but remember we’re a one two punch clothing because you may dress them up in PR and make sure that they are sustainable.
Speaker 1 48:30 I want to make sure you guys are profitable. That’s right. And we’ll love to be able to just give you our perspective, complimentary perspective. It takes me three minutes to look at a set of financials and tell you if you have a shot, right? And you can find this at Greenland, That is Greenland. As if the country of Greenland and the HQ for so you have, I hope this was helpful, uh, to you guys and prefer call us our office or email us. Look us up on social media, LinkedIn or Facebook. But, um, these are the topics that are, that we think you need to hear because this is what puts money in your pocket. You have been listening to business, illegal talk with lyrical idea. We’re having a ball. You haven’t a, we haven’t a great time. Great. Thanks for coming and joining us. Thank you Pauline and Leo. It was a pleasure having you on the show. You made a better thanks everybody. To stay tuned and come back next Saturday at 10:00 AM here on KFI B power talk business and legal talk with Lee and Claudine.