EP 52: Frequently Asked Questions June 19, 2020

Ed Mysogland  0:01  
Please welcome please welcome, welcome. This is another episode of the defenders of business value podcast podcast where we talk about what makes a business valuable learn the tips and tactics to increase your company's value that only veteran dealmakers know. And now, here's your host, Ed miso clamp. So the first question today is, when you buy a business, what exactly are you buying? And so in almost every situation here, purchasing, you're purchasing the assets of a company, all right, so, so that any advisor will probably tell you that you want to buy assets rather than stock. But most sellers want you to, to buy the stock, because because of the tax consequences. So So when let's just take a look at the two the two entities the sub s, so the Sub S Corporation and an LLC, they're most of them are taxed as an S. And what that means is that when they take the net income, and they divided by the number of shareholders, and that's what's put on their, on their K ones, and then they are taxed based on their individual tax bracket, a C Corp is double taxation. Alright, so So the corporation is taxed, and then the owner is also taxed. And so you can see why

the C corporation is, you know, it's a, it's a, it's really good for large corporations, it's not so good for, for small businesses. So, and again, for many reasons, you don't want to purchase the business by buying the stock. And like I said, the primary reason is that the first the corporation may have liabilities that aren't apparent, you know, the, if you buy the stock, the the inherent liabilities, known or unknown, go go with the stockholder. So if you buy the stock, you're also buying these liabilities. And then second, and probably most important is you won't be able to depreciate your purchase price. So substantially all of your purchase price will be allocated to the basis of the stock. And then you'll have to wait until you sell the stock to deduct the cost of the acquisition.

So then what exactly are you buying under an asset sale? Well, you're purchasing the furniture, fixtures, equipment, inventory, goodwill, trademarks, trade names, and and what you're buying is assets that are free and clear of any liens and liabilities. So the mechanics of the sale are kind of like this, you form an entity that entity buys the assets of the target and then you bring them into your entity you and then you again based on the allocation of purchase price that is your opening balance sheet. So you might be wondering, you know, what do you do about the cash and accounts receivable? That depends, I mean, there's a couple different scenarios they can or cannot go with, they may or they may or may not go with the business and just kind of depends on the business as well as how good the accounts receivable and accounts payable are many deals these days are including net working capital, which includes your inventory, AR and a p. So, again, outside of the the assets that I described, the current assets are are up for negotiation of whether or not they are not included

the next question is this fella wants to this fella wants to get into selling businesses for a living now I'm assuming that you're looking at getting to become a business broker, an investment banker, as opposed to I want to buy companies and sell them. Myself have a portfolio of companies and and basically have your own little portfolio of small midsize companies. So like I said, I'm assuming you want to be a broker. So let's talk through this. Number one, age and experience matter and and I paid that tuition firsthand. I came right out of college into the business brokerage industry, I wanted to be an investment banker. At that time now the investment banks would have had apprenticeship programs. So I did. So I couldn't go right into investment banking. So I went into business brokerage, and, and, and found out really quick that agent experience matters. So no, you can't expect a business owner to entrust most of their net worth, which is tied up in the business to someone young, unless you have the experience that indicates that you have, you know what you're doing. So number two, you have to have a runway. And when I say runway, you need, it takes time to sell a company, normally between six and 12 months to do it. So you have to have enough Personal Capital and keep you alive. While you're selling the company, and oh, by the way, it's also a challenge that it's also a challenge that a lot of companies don't sell. So, you know, when you look at the the odds, I mean, you need to have an inventory stacked up, and you need to have the capital behind you in order to to keep you alive, while you are procuring buyers. Number three, you need to an understanding of financial statements and sources of capital, you have to have a basic understanding of that, I mean, you can backfill it with like in our shop, I mean, we have I do a lot of the the business valuation and things like that. So you but you do need to be able to, to understand financial statements and how, how a business operates and sources of capital for the buyers. Number four, you need to understand how to evaluate buyers in relation to your deals. So not all buyers are equal. And when I say not all buyers are equal. I mean, there's different buyers for different businesses, and some may be financial buyers, where they're buying themselves a job. Others are strategic buyers, where they're looking at looking at growing through acquisition, you have to be able to determine number one, the credibility of your buyer. Number two, you have to understand how that buyer out what is that post closing? What does that deal look like for that buyer? Number five, you need to know that you're in sales, you know, this your business, the business that you're selling is your product, you're not there to fix the business, but sell it there, there are plenty of firms out there a lot of exit planning firms that help fix and prepare companies for sale. As a broker deal guy or girl. If that's your job, you're in sales, you're not a consultant. Number six, you need to understand that the process is relational between the buyer and seller, there are a lot of dynamics in play. But most most of what you don't know about and you have to understand that everyone, and I mean, all parties included, everyone has baggage and there's dynamics that play in into getting the deal done. Number seven, you need to understand that the best buyer may not be paying the highest price. Number eight, you need to understand that you are operating, you're operating in the world of the irrational for both buyers and sellers. So So you need to understand to expect decisions and positions that are counterintuitive to how it might look on your spreadsheet. And you have and that's the tough part, you know that where you are forced to, to be in a position where the closer you get to your paycheck, the less control you have. And when you have people operating in the world of the irrational that that's not for the faint of heart. So number nine, you need to know the difference between value and price. Value is the worth to somebody prices negotiated. Number 10, you need to know that that the closer you are to closing and I mentioned this earlier, the the less control you have. And then the the bonus one, you need to understand that just procuring a buyer just finding one item is about 30% of the job taking that buyer and carrying him or her over the finish line with all the things that can go wrong all the things that need to go right. That's where you earn your fee. Well, that about wraps it up. But before you go, would you like to receive a weekly newsletter of curated articles that I've stumbled upon or I'm writing about regarding business value and making a company saleable? Well, if so, go to defenders business value.com and sign up for the newsletter. Now if you have a question that you would like answered go to, again the website defenders of business value.com and push the appropriate button. Or you can email me at ed at defenders of business value.com Or you can reach me at Twitter at Ed miso. Thank you so much for spending time with me. If I can ever be of help to you in any way, please don't hesitate to reach out. Have a good weekend, and I'll see you next week.