EP 44: Office Hours

For things so I started in consulting and leadership and sales consulting in 2003. And spent that time really serving small businesses helping someone to increase sales over 40%. Then got my law degree and graduated in 2018. ran for mayor, the city of Lawrence and earn 49% of the vote, now helping buyers and sellers close transactions of their business to not only pull cash out of their companies, but also grow through acquisition.

Ed Mysogland  1:32  
Well, we're glad you're here. How about you, Larry?

Larry matsing  1:36  
Larry met Singh. I've been with Indiana business advisors now for close to 40 years founded in that period of time with Dick Hester, my partner. We've been doing small and medium sized business transactions now during that period of time and have done a couple of 1000 plus. So we've got a lot of background and experience. In addition to doing a lot of business deals for Indiana business advisors, I've done a few for myself. So I have stepped into the shoes of both buyers and sellers on multiple occasions. So it gives me a little better feel for how the process goes and what you all feel on the other side of the equation. So I think what we would like to do is just answer questions today that you all may have regarding, you know, what's going on during this pandemic? And how are businesses reacting to all of this are their buyers or their sellers? And has the process changed as a result of all of this? So hopefully, we'll be able to answer some of your questions today.

Ed Mysogland  2:50  
Yeah. And speaking of questions, if you if you have questions in the chat box, go ahead and put those in. We're monitoring that our marketing director Chelsea is also on the backside of this keeping an eye on it. We did receive a number of questions prior to prior to the webinar that will that will begin with, but like I said, if you have questions as we go through, please put them in the chat box. So with that, why don't we go ahead and get started? The first question we receive are what are the financing options to purchase a business today? Larry, I think you're knee deep in the middle of that.

Larry matsing  3:31  
I would say we are knee deep in the middle of that I don't think I don't think the options have changed dramatically yet. The options that were historically available to us, obviously you always have conventional bank financing. You've got SBA financing, which is probably been the most prevalent financing tool that we've used in the last I'd say 10 to 15 years. A majority of the transactions under $5 million that we do are typically financed with SBA financing. And there are some other I would say more creative financing, whether that's seller financing or some sort of earn out Performance Base payout. But I think the options have changed. I feel like the SBA money is still there today and readily available, although everything that we read with the PP P program and the cares program and the amount of money that they've allocated the SBA, it feels like there is concern that some of the SBA financing might not be available or as readily available as it has been before but only time will tell on that one. There's talk about the fact that they may run out of seven eight money and seven A is the program that we typically use for acquisition finance I'm seeing and they're talking about the fact that they may run out of allocation on that they're working to get more allocated, which we hope will happen. And at the end of the day, they may change some of the some of the criteria, some of the SBA underwriting criteria to require a little more equity than they do today. They may also open up the opportunity for some performance based payouts in the form of earn outs that they haven't had before. So I still think those tools will be available. I sense that some of the underwriting has tightened up a little bit. I heard, I don't know whether there's any fact to the rumor that one of the major banks has basically pulled back all of their SBA financing, anything that they haven't in the queue today. And even if it's gone through underwriting and been approved, they're pulling it back to take another look at it under the current economic circumstances to make sure that it still makes sense that the numbers still work. So I think you're going to see a lot of moving parts as it relates to SBA financing over the next 60 to 90 days. The really good news is if you do get SBA financing between now and I think it's September 27, that if you close the deal between now and then it's my understanding that under the cares program, there will be six months of forgiven payments. So your first six months of payments are forgiven. And that is about as unprecedented as the times that we are in i We've never seen a situation where the government picks up your first six months payments. So that's a huge benefit. And then if you combine that with the PPP program, there's some real benefits to buyers today with SBA financing on an acquisition. But I still think I think even if we evolve, and we don't have as much SBA financing available, we'll we'll end up doing more seller financing, just like we did before the SBA was so prevalent.

Ed Mysogland  7:21  
Yeah, that what is your crystal ball look like? I mean, I remember when when we went through the recession last time, I mean, we still had conventional financing. You know, it was not a it may not have been the the capital was completely as available as it is today. But it was still available. So I mean, what is your crystal ball say? What do we look like, a year from now on on business financing?

Larry matsing  7:48  
You know, I wish I had that crystal ball. I don't, I think a year from now, I don't know, so much of it depends on what happens. And I think in the next three to six months, second quarter, third quarter if things can recover, and we can get back to financing normal, meaning we've gotten some of the pandemic under control. I think you'll see SBA financing as prevalent as it has been in the past. It's a great tool. And there are just too many businesses in America that are going to change hands over the next 10 years. You've got to have some financing to facilitate that. So I don't I don't think it'll look significantly different.

Eric Armacost  8:37  
anywhere else. I've heard a lot of feedback from small business owners that the PPP pipeline has slowed down their SBA applications or you know, their their bankers are so busy dealing with all this other bailout stuff that they're able to get new deals done. What have you seen in the marketplace about people being able to actually get transactions done based on pipeline?

Larry matsing  9:04  
I think it's really tough. You're right. Every banker is absolutely swamped right now with PPP applications that cares applications, but especially the PPP program. So they're buried, a lot of them are not looking at some of them are not looking at new loans. I've got two right now that are looking at new loans. But the big issue is just getting them to allocate some time to that while on Yeah, it's definitely slowed down. I would agree 100%.

Ed Mysogland  9:38  
And on top of that, and we follow the International Business Brokers Association, and there's currently a petition going around that, you know, so much of the budget has been allocated to the BBB and the disaster loan component which which again, that it I'm not saying that it doesn't have merit, but the budget for seven A and 504 loans up, is is going to be eaten up by June 30. So I think it's Marco Rubio from Florida is, is chairing that committee to again, go back to the well, and and get additional funds for this, you know, the greatest wealth transfer in history. So, yeah, it's it's going to be a real interesting run here and that for certainly for the next six months, maybe a year and to see how this whole thing plays out. I'm optimistic. I mean, I think, to see what the federal government has done just to keep companies afloat. I mean, that's those are, you know, there'll be casualties, but nevertheless, it, it could be a lot worse. All right, the next question that came in, is what should I expect from valuations as a seller with the with the upcoming economic slowdown? Either What do you do?

Larry matsing  11:04  
What do you think? Oh, you're the valuations guy?

Ed Mysogland  11:09  
Yeah, I mean, your crystal ball look. Good, quick quid pro quo? Yeah, the tough part with valuations is that, you know, there's no empirical data to surround yourself. On on guidance, I mean, we've got seven or eight valuations that are backed up here, that we're trying to provide sound guidance on what to do and how a buyer will react. Now we know that just by virtue of this pandemic, that it is it has stress test tested a number of businesses, so the ones that have prevailed, or and have come out of it, you know, do they want a premium? I'm not certain that they do, maybe, but I'm not certain that that's the case. Now, as we look at business valuation, it's it's based, it's based in three buckets, you have earnings, you have risk, and you have expectations. So earnings, we know we're going to do perhaps have changed, we know we'll have to adjust for for non recurring expenses associated with with with the pandemic, maybe you lost revenue, lost earnings, or perhaps, income that's been received from the federal government, things like that, that we have to make adjustments for. As far as risk goes. It depends on the business, the risk associated with, with businesses in general. Especially at this level, they're amplified that small size matters in in risk, and in the in small businesses inherently risky. So how much more risk? Do we apply? post, post pandemic? And that, you know, there's no, it's not like we're getting lots of transaction data. If we have time, at the, at the tail end of this, I'll I'll share some of the guidance that we've received from the associations and kind of where where everybody is seeing deals going. So I'll do that at the end. And then, as far as expectations, you know, good luck. I mean, that's, that's the million dollar question. But it but it always has been in small business and you know, forecasting a, you know, a million dollar company, what is the next six months look like, is probably easy, what is the next three years look like? Probably not so easy. And so we're still in the same, we're still in the same camp. But I don't think valuations are necessarily going to change, I do believe that the structure in order to accommodate the risk of the sale will change. And, and I was telling Larry, the other day that, you know, I'm I'm authoring with some other folks, you know, some recommendations for the Small Business Council, that Marcus Rubio is part of that, you know, right now, you know, earnouts exclude disqualify a deal with the SBA. You know, that's a wonderful vehicle to mitigate buyers risk, and that that needs, you know, that needs to get put back in. Same thing with with owners transition, you know, they can only stay right now, they can only stay a year. Well, you know, if it, if they could stay two years, would it mitigate the buyers risk and help them, you know, get in there. So, so I think those are a couple of components that I don't think again, I don't think valuations are going to change dramatically. I do think that there will structure will change So, either you do have any additional comments.

Eric Armacost  15:04  
I do have one follow up here. And that's, it sounds like valuations are done in a way in a vacuum, especially using historical data. And how does that compare with most probable selling price and the actual market value that the buyer sees within that business, because there's some buyers that may want to purchase the business at a discount, because they see lower value in an industry where it trends, or others are looking to pick up a new business strategically, so they can add customers versus spending money on new customer acquisition via salespeople or advertisements or etc. So, how do you really think and compare? How should we think about the historical and market data used for valuations traditionally, and what and how buyers can see these deals right now? Yeah,

Ed Mysogland  16:02  
Larry, and I've have our dog and pony show has been been surrounding that, for most of my career. And value and price are two different things, you know, I'm the the value that I that I share, this is the way a buyer should behave toward this investment, given all the other alternative investments that they have, when it leaves my hands and it moves into your hands or Larry's hands, it's now you need to get that buyer to behave irrationally, just by virtue of the process you have, you have people that are, you know, competing for the opportunity. So when they compete for that opportunity, you're you need to, to facilitate a deal. That's, that's greater than fair market value, or at least that's what I'm counting on. And normally, what we what we do see is, you know, either our valuation is, is pretty spot on, or it's undervalued. And it's undervalued, from the standpoint of the price versus what the value, what I what I came up with. And so, you know, it's a different, it's a different animal, but like you're saying it is the empirical evidence, it is what it is, but the process facilitates a premium, or, you know, and again, you got to remember that the the number of businesses that don't sell is substantial. So you have that component to consider also that, you know, these the, and it's not like real estate, where you have 1000s and 1000s and 1000s of market comps, and you can drill so far in. I mean, if we have, you know, 20 or 30 that we can apply to that particular business. I mean, we're in pretty good shape. So anyway, Larry, I saw you last locked and loaded, go ahead.

Larry matsing  18:04  
No, I'm not locked and loaded. I don't think that I know, Ed talks about buyers acting irrationally. And that's not irrational compared to his statistics or his empirical data, maybe. But at the end of the day, the one thing that we've learned after 40 years in this business is that if a deal goes together, that means buyer and seller are both happy. I can tell you if that if a deal does not go together, if the buyer thinks he's paying more than he should be paying, or the seller thinks he's getting less than he should be getting at the end of the day, they both have to be happy. So I think what really happens is the process, the process will provide competitive bids, hopefully. And at the end of the day, the market speaks the market is the market and and it may be equal to what Ed comes up with value, it may be more, it may actually be less than what Ed comes up with. Because and in this situation, I think the market is going to be very interesting. You can take it to the bank that every buyer that looks at a business, if that business was impaired negatively as a result of the pandemic, the buyer is going to beat you up on valuation. That's just the way life is that's been that way forever. If you have a down year, if you have two up years and one down year, they're going to beat you up based on the down year. But at the end of the day, if if you get buyers looking at the business, you're going to end up getting a fair market value. So I think as we position the company, I think you've got to look at what happened to that business during this period of time. And can we foresee that happening again? And if it does happen again, then yeah, there is going to be an impairment to the valuation if this was a blip on the radar screen and And we're six months past this, and we're back just, I mean, I actually talked to a friend of mine that owned, I mean, you think food and beverage is getting really beat up today? Well, he owned a group of fast food, a popular fast food chain. And while the numbers during the initial stages of this were down, some of the numbers today are equal to or better than they were for the same period last year. So a lot of businesses really are doing as well, they may have had that little blip. And you're not gonna beat some guy up on his price, because he had a one month blip, everybody had a one month blip. But I think the process is still going to be very similar to what it's been in the past. But I think you're going to have to look very closely at those adjustments that we might do to EBIT, da today, we add back a lot of things, we deduct certain things. And I think you're gonna have to focus on the financial impact of this short period of time. And there may be some add backs as a result of that. Yeah, it's just a matter of whether the bank will accept those add backs. But if you if they're thought out, from a rational standpoint, and presented logically, they'll probably accept some of it.

Ed Mysogland  21:26  
Yeah, I know, a number of of, of deal guys are, are our presenting the business? In in trailing twelves? So, you know, you're and and I don't know, I haven't seen enough of it to know whether or not it dramatically changes the, you know, the position of the company, but it is an interesting, an interesting way to to, I suppose, put put the business in a different light, you know, well, we

Larry matsing  21:58  
think about the negative impact of the pandemic on the financials, what about the positive impact? What about some of these companies that their revenues up 500% period over period, you know, I'm not going to, if I'm doing the valuation, if I'm buying that business, I am not going to make the assumption that it's going to move forward, and a 500% increase every month thereafter. So I think you've got to, you've got to adjust it accordingly. There's no way anyone's going to pay a premium based on three months of record earnings based on something really, really unusual, or at least they should get out. If if you're selling. If you're selling the disinfectant hand wipes, those are probably going to be around for a while, and they're probably going to have significantly better sales than they've had in the past for a period of time. It's kind of like toilet paper, you can only use so much.

Ed Mysogland  23:00  
All right. Our next question, so what are the threats to businesses? You see, amid the current pandemic, John, why don't you take that one?

Eric Armacost  23:14  
Sure. So one of the first things that I see as a threat to business during the current pandemic, first is not being able to shift within what's happening in the marketplace. So the tough thing right now is that things are changing on a daily basis. And there's also a lot of uncertainty coming from our national and our state leaders. And really, that's not just from a policy perspective, but also how their decisions on their policy are being communicated. For example, the Indiana governor has a five phase reopening plan. And as I not only watched the press conference, and then the comments from the press conference, and then the articles from the press conference, and that kind of trail of information afterwards, people were just confused. So being able to handle the new information coming in and making decisions off of something that seems uncertain, is tough for leaders, and it's tough for the business environment, but also shifting and thinking through what do we do now? What type of strategic decisions do we make based on how things have changed, for example, where he talks about different business sectors that may be way up or way down? And there are some companies that are shifting their operations based on other sectors that are up right now and really thinking of where they can actually still sell or how businesses are actually triaging. So I was reading an article in Indianapolis monthly yesterday about how a restaurant tour with a group of restaurants including the rooster and black market, and three others, how he had to make decisions and Sam square down and Fountain Square, he had to make decisions about closing four of his restaurants but leaving science square open for takeout because they already had infrastructure for takeout. They already had people ready to shift. The Marketplace already knew them for takeout, but also have to make the tough decisions about shutting down temporarily those other four restaurants. So you know, even though we're a couple months into this, and the pace of change is starting to slow. And we're also starting to understand what the at least short term impacts of this are. A lot of business owners have yet to turn the corner and making the strategic shift and thinking critically about how their businesses are impacted. One of the other things that we need to think about in terms of market is how supply chain shifts. So it's really weird that there are some farmers that are throwing away millions of gallons of milk, because there is a lack of demand because of food service and schools and restaurants purchasing. But then on the flip side, because of Coronavirus and COVID-19 Hitting meatpacking plants or beef and chicken. There is an under supply. And I guess Wendy's is preventing people from buying hamburgers, right? So those are two examples in food but supply chain with the number of workers how fast products be it to people, the number of folks are actually working in some of the factories and distribution centers, that's going to be impacted as well. And then finally, just the general squishing us in the marketplace, has been a result not only from uncertainty, but also people just being gun shy. But with that uncertainty, there are a lot of business owners who will thrive during the midst of uncertainty and will thrive during an economic downturn because of what they've done with their mentality and how they're shifting in the marketplace. So those are my thoughts, Ben.

Ed Mysogland  27:18  
Thank you, Larry, you got anything?

Larry matsing  27:21  
No, I'm good.

Ed Mysogland  27:26  
Let's see the next question. When do you foresee m&a activities will pick back up. Back to the crystal ball, anybody? Who

Larry matsing  27:43  
I would say the the there's a slight slowdown today in the number of businesses coming on the market to sell. I think everyone's kind of in a holding pattern. They may have been thinking about it before all of this, their numbers, their financials may be impacted negatively. And I think there's a little a hold a pause on maybe thinking about I think they'll continue to think about selling the business. But they're going to question whether this is the right time to put it on the market. So I've seen a little slowdown in the number of sellers that are coming into the market. So I I hope as we get into the fall, some of those people will start reconsidering it. And once again, I think they'll reconsider based on what's going on at that period of time, with their business and with the economy. So I would think I feel like it should start picking back up. Third and fourth quarter, fourth quarter for sure.

Ed Mysogland  28:55  
Like I said, I have some idea of one place.

Eric Armacost  28:59  
Sure. So I do have one kind of follow up thought for Larry and really to get your feedback on this as well, but fill in the blanks. But I guess for those business owners who are gun shy about putting their business of the market, why is now a good time to begin that process. Because I've been having conversations with some of our clients we've been talking about. One the length of time it actually takes to get your business on the market between developing the marketing materials and Queen physically cleaning up their business and getting their financials together and cetera. Second, you know, with the length of time it takes to sell a business, six 812 months of being on the marketplace of being prepared for the market and on the market when things start to turn around the availability of additional financing vehicles like you talked about before. So what are some of the other things you should think about in terms of why Now's a good time to get back and put our businesses on the market.

Larry matsing  30:04  
Well, that's, that's a good add on to my comment. Because based on what I just said, I really think now would be a good if you're thinking about selling, I don't think that I don't think there's a downside to putting it on the market today. And the upside is that there's not as much noise in the market, there's not as much competition when buyers are looking at businesses to buy and they're still many buyers, we're still getting a lot of calls from buyers. And I think a lot of these buyers are folks that, you know, they're looking at the current situation like most entrepreneurs have, historically, I don't really want to work for the other guy, especially if there's a chance that my employment could go away at the flick of a pen, or a flick of a virus or whatever. So I think that buyers are still out there. But there aren't as many sellers, I think today's a good time. If you're thinking about selling at the end of the day, you're going to sell for the price you're going to sell for. And if you don't want to sell for the, if the market tells you that your business is worth 20%, less than you thought it was you don't have to sell. But right now, I think there's not as much competition when a buyer comes in here, there is less inventory for that buyer to look at than there was a year ago at this time. And I just look at the deals we've got in the pipeline right now, we've got probably a dozen businesses that we have offer signed both ways. And they're all going to close in the next 30 to 90 days. That's another dozen businesses that are no longer available for anyone to look at. So I think if I were a seller, it's not a bad time at all to be thinking about put put your business on the market. And let's see what the market looks like.

Ed Mysogland  31:58  
Yeah, and, and as we were just doing our month end stats, and I mean, the number of the number of buyers that are that are entering into our world or into our sphere, looking for deals is increasing. And I think what you you find at the conclusion of any kind of economic storm, like we have, whether it be a recession, or a war, or a pandemic, I think you find that people get displaced, and they're not, they're not gonna let that happen to themselves again, and they start looking at, at how to get into business for themselves. And so we're, we we've seen an increase in our buyer throughput. And so and that's, that's why we're, we're doubling down so hard on our on our sell side work is because you know it, it's a really good time to be thinking about him. And I don't mean it from a commercial standpoint, I truly mean it from, from a, from a business owner standpoint that as far as positioning your company now is, is a really good time, because it's going to take some time to sell it. And I do think that the there's going to be available financing, I do not believe that the federal government is going to let the $13 trillion wealth transfer just evaporate. So having said that, I mean, I think that we're we're we're going to see an influx now, I think you're you're also going to see a slew of, of businesses that, you know, are on their last legs. And you know, somebody take this, you know, I don't want any cheese, I just want out of the trap kind of thing. And that's going to be I think we're going to see a lot of that too, but at the same time that those are going to probably be some really good opportunities for somebody. And absolutely, whether it's growing through acquisition or what I don't know. But I do think that that from an inventory standpoint, we will we will certainly jump

Larry matsing  34:13  
in there are some of those businesses that are going to be in trouble that are in trouble. And they're may not necessarily be in trouble as a result of this pandemic. They went into the pandemic. They may not have been managed well going into it. So they obviously were not managed well coming out of it and they couldn't come out of it. So you're going to get management situations, you're going to get undercapitalized situation. If you go into a situation like this and you're undercapitalized, that's the anchor that that's going to drag you down. But if you as a buyer have the magic sauce, you can bring better management to it. You can bring more capital to it. You may be able to bring once again the magic sauce that the previous owner didn't have and you're gonna get a real bar Getting buy in that business?

Ed Mysogland  35:01  
Yeah. A question that came in through the chat. What typically are the underwriting ratios you think will tighten? I don't, I don't know about you, I'm not certain that debt covered that debt coverage ratio of one three is going to change much.

Larry matsing  35:20  
It's been that for 100 years, so it's probably not going to change dramatically. I think there's a chance that from an underwriting standpoint, the SBA may tighten up on the amount of equity that they might require, which could be, you know, partially cash equity from the buyer and standby seller financing. So they may tighten a little bit on that. And some of the banks may tighten up a little bit, just once again, based on the current economy and the unknown, about the next six months to a year. So I think, but I don't see like the Debt Debt. You know, debt to equity might change a little bit, but the debt coverage ratio of you know, how much free cash flow, you've got to have to service that I don't think that'll change dramatically.

Ed Mysogland  36:15  
Yeah, I don't I don't think so. either. I, the the interesting thing is like, like you were saying with the bank, that the bank is requiring that additional scrutiny to mitigate their risk, which is, which I think is the is the more prevalent speedbump than debt, you know, trying to make it fit in the box, I think, you know, they're trying to perfect their loan, and I get it. But again, most of the risk is with the buyer, not necessarily with that with that lender, you know, the lender, especially SBA. So the in the end, for those of you don't know, the mechanics of the the SBA loan is that you have a primary lender, which is the banks that we all know, and they have a guarantee, the federal government guarantees a portion of that loan, and typically what 75 80%, right. And so there are local bank is only, you know, has exposure of, you know, 20 to 25%. And that's what that's what we're talking about is, you know, does that, you know, when you look at risk, you know, and they're requiring additional scrutiny, you know, for their 20% versus, you know, the personal guarantee from the buyer, as well as the the SBA, that's guaranteeing 75%. So,

Larry matsing  37:43  
but I think at the end of the day to the underwriting the other, they're certainly not going to loosen it up dramatically, because the bigger issue for the bank is their historical performance with SBA loans. So they they have a preferred a certified lender status, which allows them to, basically underwrite commit, fund, document the loan internally, which makes it go a lot quicker, and a lot easier they, and most important, they get a ton of fees, the bank makes a ton of fees as a result of doing SBA loans, they do not want to lose that. So they're not going to loosen their underwriting criteria and take the chance of running into loan losses on SBA loans in the future, because they'll lose that certified status. So I think they're going to continue to underwrite, fairly tight. The other thing that I've just seen recently, and this is first time ever, we have a transaction that is pretty far along and the bank has, has requested, they always, if there's real estate involved, they always want a real estate appraisal, they want a business valuation done almost anytime the loans over $250,000. If there's real estate, you've got all the normal real estate, environmental appraisal, et cetera. And in this case, they are requesting a quality of earnings report from an independent third party accountant.

Ed Mysogland  39:15  
What is that? What is that quality of earnings report?

Larry matsing  39:18  
Oh, that's, that's the first time I've ever seen a qv report requested by the bank. So basically, the best way I can describe it, it's a mini audit. It's a mini audit that's done by the CPA firm, where they basically dig in and, you know, if the business has 5 million in revenue, we want to satisfy ourselves that that 5 million in revenue is real, that it came from the operations of the business, not selling used cars out the back door, et cetera, et cetera. So we're looking at, you know, if you got 6 million, it's a, it's an audit, they're gonna look at, you got 6 million in revenue. They're gonna look at the bank statements during That year, and they're going to make sure that, you know that 6 million in revenue that's on the books actually got deposited into the bank. And they're going to do some ticking and tying and, and tracing some of that just to once again, satisfy themselves that the earnings that have been reported are fairly accurate, not 100%, accurate, just fairly accurate. Now, you can have a limited scope, quality of earnings, which we might just focus strictly on revenue, you might have another limited scope that would focus on cost of goods sold only, you know, is that accurate? Is it is accounted accounted for in the proper method. So, once again, just think of it as a mini audit. And it can and they can change the scope. And I, my question to the bank was, under what circumstance is this an SBA policy or a bank policy? And in this situation, it's a bank policy, they started it back in the fall. And so my question was, under what circumstances do you request or require qv report? And they basically said that if the loan is over $2 million, and and or the buyer has a limited or no experience in the industry, and actually at the end of the day, performing a qv is probably a really good idea under under those two circumstances. Now, I haven't seen it with any other bank, only one bank so far, but it could catch on. And I'm sure if the accountants have anything to say about it, they'll lobby hard for that. Yeah.

Ed Mysogland  41:39  
Jamar, I wanted to ask you, I mean, I've seen that you've been a panelist on on a number of different areas, or in a number of different areas, what, what are you hearing and feeling from, from the small business owners that that you're serving, and that you're speaking in front of?

Eric Armacost  41:59  
Sure. And I talked about this a little bit earlier. One of the pieces is the uncertainty. But what we've been countering with is, is how to think about this downturn. So I did a little bit of research. And since the Great Depression, any average economic downturn, it's lasted nine months. The longest was two years. Since the Spanish Flu of 1918. Any new specific pandemic, the longest that that's lasted is two years, but there are also shorter food pandemics that were about six months. So for all the doom and gloom business owners out there, they're thinking that the sky is falling. It's not. And over the last century, it hasn't. Now, there have certainly been some tough times. Yes, but the reality is that this thing is going to end. And as entrepreneurs as business leaders, and as those who are maybe involved in transactions getting out or into or adding on to businesses, we've got to be prepared and ready, not just for the end of this thing, but how to get through it. So that's, that's number one is just how to think about what's going on right now. The second thing is access to financing. And there's a lot of pain out there right now with business owners trying to figure it out. How do I how do I get through payroll over the course of the next two weeks, month, quarter federal How do I help my team that's really suffering. And the other half of that is, is that as they continue to operate, you've got to take a lot of time to research, what all these resources are. So sure, a couple obviously, Larry mentioned the SBA and pears act, relief that's out there in the chamber, and the city of Indianapolis just released. I think it was $25 million in relief, which isn't a ton, but it's additional relief. Musk has just released $5,000 small business grants. So again, not a huge amount of money. But when we compile all these things together, they're helpful. Because we've kept sapper Miller has a COVID 19 release page on their website with not only accounting and financial help, but also financing help to find additional sources of funds. So these things are out there and they are compiled. But you know, those two things in terms of general feeling is one, getting people's minds right and getting the money tight. And that's that's what's going on in the marketplace.

Ed Mysogland  44:49  
Yeah, and for the small business owners that are there currently on on the line, if you go to the state, the state's COVID Resources area I'm a we just did They have, you know, where they'll give you masks, shields, sanitizer, and a couple other things and based on the size of your company, so you know, zero to 50 employees gets this baggage 5200 gets this package and it's free. So if you just go to irs.gov, and I believe it's COVID that'll that'll, that'll get that that's a free resource from the state. Alright, so next question. If valuation expect expectations are not changing much for sellers, how should buyers think about an urn out as a percentage of the transaction price to to reduce risk? Either of you, or you want me to get

Larry matsing  45:48  
a percentage? Yep.

Ed Mysogland  45:51  
So if valuation expectations are not changing much for sellers, how should buyers think about an urn out as a percentage of the transaction price to reduce to reduce risk?

Larry matsing  46:06  
But we just have to say that's that's much more of an individual transaction. Considering consideration, I think you've got to look at the, you know, if it were negatively impacted during this, you know, what, what's the risk of not returning? Is this situation that's going to continue? For a short period of time or a long period of time, you know, is it a six month recovery, or a two or three year recovery to get back to normal? So I think I think you're just going to have to look at each individual deal, but I would certainly do I would see a I you know, that's a tough one. I think it should be I'd like to see it be a minimal amount on the earn out. But depending on the situation. I mean, it could be a significant amount of the purchase price is tied up in a performance based payment.

Ed Mysogland  47:08  
Yeah, I mean, I think the first thing for you as the buyer, that's that's looking at this, this situation, you know, are you going to need SBA financing, based on the current regulation, if you're going to employ an earnout as your risk mitigating vehicle, it's going to disqualify you. And so if you have the capital to finance it, then that's one thing and you could probably lop as much as you can into the into the if then financing earnout vehicle. But if you're looking at conventional financing, or SBA financing, and I think you're you're in for a long, long road, but you know, and then that case, if you're if you are looking at SBA financing, then you might be able to deploy what's called a self cancelling promissory note that basically acts as an urn out, but is in the form of is in the form of a promissory note. All right, Jim, are you anything on that? Okay. I, I have now you guys haven't seen this, but this just came out? Can you, you should be able to see my screen. This is from the this call the market pulse from the from the International Business Brokers Association. This just this just rolled out. And if you guys want to comment as I go through it, you know that that's fine. And like I said, these guys haven't seen it either. It just literally came out. So you can see that here, roughly half of the deals are have been delayed, and about 10% of these deals have been cancelled. Alright. Let's see. Reason for cancels canceled cancellation. So again, buyers pulled back here, less than 2 million greater than 2 million. So again, it's about 5050 that the buyer cancelled. Quarter the seller cancelled. And then Which to me this part is the most interesting thing is that the banks were still there. But I guess when we look at the composition of the 12 deals we have I mean, the banks are still there. We may just be on hold but they're still they're still hanging in.

Larry matsing  49:30  
As an example, as an example, and that one on hold. You know, we've got one business that is non essential. So it was closed during this period of time. The bank is still going to finance it, but they won't finance it until the business reopens which should be next week. So once they reopen, the bank will step in and finance the acquisition.

Ed Mysogland  49:56  
So we were talking about, you know how long Have a delay this will be. So you can see, you know, one to 30 days, you know, very few think so most people think that it's going to be a 90 day plus ride in order to get these things close, so it's it's somewhere between 50 or 50 or 45 and 90 days that to get the deals done that that are currently on now we're not like I said, we're not seeing seeing that, but and we participated in this survey. Let's see businesses that are for sale, what what happened to him 40% We're, we're at partial capacity 4% benefited 21% Were on unaffected and 35% were temporary closed. So for the valuation questions, 81% of people are deal deal folks expect that valuations will decline? It's but I again, I don't I don't see a huge change. I mean, like Larry was saying, and we were talking 10 20% You know, if you're gonna if you're gonna lose standard 20% In your stock portfolio, what would possibly give you the indication that you weren't going to lose money in your small business? I don't think let's see, I don't think I am. market sentiment, I think I have a, you know, here's, here's, you know, kind of how how the seller's market goes, you know, they're all decreasing. And again, this is, you know, this is quarter, this is quarter over quarter. Okay, this, this number here is from 2013 to 2020. Okay. So, let's see where our business valuations trending. So as you can see, I mean, there, you know, there's a little bit of a dip in each category with the exception of the 500 to a million. We were thinking, you know, valuations were, you know, you know, price that in this chart that we're looking at, as the final price realized versus the asking price. You know, this is this is a lot of the deals here in the 500 to a million range. And again, I think that's by virtue of the process that you get a higher sale price. Now, the multiples.

Eric Armacost  52:42  
So I guess, going back to that last chart, yeah. And so basically, this is saying q1 2020. And the tail end of q1 was obviously the beginning of the economic. But, but so this is saying that final price that we've gotten from the deal, versus asking price is actually higher, in almost all cases, except for greater than five of the larger deal. So we started out very strong here. Yeah.

Ed Mysogland  53:19  
But I think everybody, I think, I think, you know, you saw our throughput. I mean, we were we still are I mean, there's a lot of activity, again, like I was saying, in in some of the, the, the material that I'm authoring is, you know, this wealth transfer isn't going to stop. So that's, that's where, why we need the SBA to come alongside it, even though we have a pandemic, they need to come alongside and help us out. And this, this is kind of the same thing that we're coming out strong. And, and I don't think we're, we may pause for a minute while we catch our breath, but I think it's going to pick right back up.

Eric Armacost  54:01  
So one of the comments on the sidebar of this report, and it talks about how those that were nearing retirement and wanted to sell because of retirement, that's not going to change, still nearing the end of running a business. So, you know, like you mentioned earlier, the companies that were in poor financial state, nearing retirement owners who are ill, that need to get out buyers who may have lost their job, don't want to deal with the uncertainty and want to purchase their next next jobs or business or businesses that are an acquisition those deals are still going to happen. Oh, good.

Ed Mysogland  54:40  
Yeah. So market multiples again, you know, it's not like it's the stock market where it's a total wild ride. You can see that the multiple slipped in the lower middle market this quarter, dropping below market peaks. Historically, the multiples on Main Street have varied with within about a 10% range. Cash or close? So for my, for the fellow with the earnout question you can see, you know, here's, here's some guidance on on these earnouts and seller financing. So typically, you know, you're running, you know, 8875 to 80% cash at close plus plus, you know, a component of of seller financing, you know, tend to are eight to 17%. And that hasn't really changed. Let me see if there's anything else, why are they selling, you can see, the biggest reason is because of retirement. Okay. And that, again, that's not going to change. This is, you know, who the buyers are, you know, for those sub half million dollars, most of them are first time buyers, those that are under a million, again, half of them are first time buyers, one to 2 million, again, first time buyers, you know, and then we start once we get north of $2 million in transaction value, you know, it starts moving into, you know, strategic buyer. You know, there's there's certainly some people that are acquiring, you know, as a job. But most, you know, as we start moving up the growth or the size chain, we start seeing, you know, businesses that our business acquiring business to grow through acquisition, and then five to 50 million tend to be private equity or strategics. So, what are they buying? Now, you can see that it's a sub sub half million, you know, a quarter of the time it's restaurant, personal services, and then consumer goods. And then healthcare and half a million to a million healthcare to personal services. Once you get north of a million in transaction value, you're moving Construction Engineer personal services, manufacturing will always be there. wholesale distribution, and then north of five quarters of the time. It's healthcare, wholesale and business services. And I think that's, yeah, that's that's that you can if you go to the Pepperdine Graziadio Business School, they are the ones that manage this.

Unknown Speaker  57:32  
Let me get over here.

Ed Mysogland  57:35  
Any other questions? I know we're, we're, we're coming to, to the, to the end of our time. So anybody else have any questions? All right, Larry, you got any final thoughts?

Larry matsing  57:59  
No, I think I'm good for the day, my crystal ball is about as foggy as it can be.

Ed Mysogland  58:04  
Excellent. Well, Jamar, oh, come through for us tomorrow. What do you think?

Eric Armacost  58:09  
Yeah, I'm just gonna say that statement you made that there's a lot of sellers who don't want to eat cheese, they just want out of the trap. I think I'm going to take that one to the bank and write it in my journal saying for the posterity,

Ed Mysogland  58:25  
well, you know, the funny thing is, I have to give credit where credit's due the guy to the left of you on my screen is the one that that authored that. So I don't know. And I don't know where he got

Larry matsing  58:37  
authored that, because he's been in that position many times. So,

Ed Mysogland  58:43  
so, I'll close this up by by saying, you know, you know, we've been around for 40 years, and we've had an open shop and anybody that that you talk to, will attest to it, that, you know, we were generous with what we can give you and if we need to turn the meter on, we'll let you know. Having exploratory conversations and, and things like that. That's, you know, that's what we do. We do it every day. This recording will be Chelsea will send that out to everyone that that registered with us. And we will be happy to field questions from there. It will also be on our podcast, defenders of business value that will be released later on today also. So our next session, I got I got a last minute question our what's our cadence, our cadence. You know, we'll show up as long as people have questions and right now it seems as though every other week seems to be good. If you go sign up for our newsletter, Chelsea, regularly pelt people with with these opportunities to come visit with us. So if you want to be part of that, just sign up for the newsletter. You can reach out to Jamar or Larry or any if you're working with broker in the in our office, reach out to them and just make sure that they'll take care of you. So with that, we on behalf of Indiana business advisor, we thank you for your time and we hope to serve you sometime. Thanks. This was another episode of the defenders of business value podcast for more episodes packed with strategies to increase the value of your business visit defenders and business value.com For shownotes transcripts in free tools to start you on your journey. Subscribe now so you don't miss any future episodes.