See me at the Getting it Done Seminar April 20 in Indianapolis
April 23, 2020

Office Hours 2020-04-23

Office Hours 2020-04-23

This is office hours at the brokerage where business owners, buyers, and advisors can ask any question they have.    ************ For past guests, please visit Sign up for the Defenders of Business Value newsletter For show notes, go to:...

This is office hours at the brokerage where business owners, buyers, and advisors can ask any question they have. 


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Ed Mysogland  0:58  
The podcast starts now. Good afternoon. This is Ed Mysogland. I'm the managing partner at Indiana business advisors and this is our first up office hours. And the reason we we've been fielding a lot of calls specifically over during the time of this Coronavirus mess. And And what we've found is a lot of people have a lot of questions. So we thought we would just open open our doors and answer questions as they come. So I have two of the founding partners, two founding partners of Indiana business advisors de Castro and Larry matsing. And joining me and we've gotten a number of questions that we're going to address throughout throughout this program. And then what we will do is we will it'll certainly the if you have to leave for whatever reason we'll have it replayed Chelsea, our marketing director will send it out to all attendees. It'll also be on our podcast. So we decided that we would use GoToWebinar we wanted to preserve the the anonymity of of business owners, a lot of business are the cornerstone of our practices confidentiality, and we don't want business owners to come on a zoom call and be recognized by somebody else. So that's why we're doing Go Go To Webinar and this is totally anonymous. And if you have questions throughout the, throughout our conversation, all you'll have to do is put it in the chat box, and we'll get them answered. So let me introduce you to a couple couple good buddies, Larry matsing and Deke Hester. So Larry, once you give your 32nd overview of you and Dick do the same.

Larry matsing  2:42  
Well, and I would assume it's okay, if I take more than 30 seconds, because I'm old, and the overview might be long. But anyway, I'm Larry Mensing, one of the founding partners at Indiana business advisors and Edie came up with this bright idea that we should have open house business hours during the shutdown, which I think is a very good idea. Because all of us really are fielding a lot of questions, some of which revolve around the new SBA programs and how they work. And a lot of them revolve around buyers who are looking at businesses and maybe down the path, and how that how the new SBA programs might affect them. And then just general questions that everyone seems to continue to have on buying or selling a business. So hopefully, during our Open Business Hours today, we're going to be able to answer some of your questions. That's the goal anyway. Welcome.

Deke Hester  3:42  
Thanks, dad. And since I'm younger than Larry, I'll take less than 30 seconds. As Larry mentioned, we founded that company over 40 years ago. And it's really been a blessing for us all these years to help business owners get out of the business when it's time for them to retire and move on to the next phase in their life and, and to help people who've always wanted to be in business and be their own boss, you know, get started. So we've been very fortunate been doing this for over 40 years. We've may not have all the answers. I'm sure we don't. But we do have a lot of experiences. And we're happy to share with those who are listening today.

Ed Mysogland  4:15  
Well, thank you so. So do you want to as far as the questions go, we I mean, some of the attendees have already submitted some so the the lightning rod these days is the Cares Act and how that affects small business. So Larry, I know you've you with the deals that you have in process you you're knee deep in the middle of how the stimulus package is affecting deals. So can you talk a little bit to that?

Larry matsing  4:48  
Yeah, I think talk a little bit about two of the program. Well, maybe three aspects of the program, the PPP program, which is the payroll Protection Program, and We've got some sellers, most of the sellers, every every one that we're dealing with, we've pretty much told them that, you know, whether they need the PPP program or not, they should at least consider whether they need it today or not, they should at least consider getting in line. Because you don't, you don't have to, you don't really have to tell them how much you want to you get to the head of the line. And it's time to make the decision to actually borrow the money. But it's a basically, it's a once in a lifetime opportunity to help some of the small businesses get through really, really tough time. So some of the things we've been addressing our existing owners who are in the process of probably got seven or eight deals right now that are in process. So the question is, does the existing owner knowing that he's going to be selling the business maybe even within the next 30 days, should it go ahead and apply for the PPP program, and even before the that loan is forgiven? So there have been mixed feelings about that most of the people that we're dealing with have applied for the PPP program, some of them have actually gotten the funds they've been funded. And if as we've talked through this, if we were to close, before that loan is forgiven, even halfway through, we may figure out a way to prorate it between the buyer and the seller, if we need to. I think the other much more interesting aspect is those folks that have existing SBA loans today, whether it's a seven a or five, oh, for those folks that have existing SBA loans, today, they're going to get six months of payments forgiven, not deferred, but actually forgiven. And any loan any SBA loan that closes between now and I think it's September 26 2727, any loan that closes between now and then their first six months of payments are forgiven. Once again, that's a once in a lifetime opportunity. And it really, as I pointed out to one of the buyers that's looking at closing here in the next 30 days, he's probably looking at adding to his liquidity because the business is still running, it's it hasn't missed a beat, he's probably going to add over that period of time about $150,000 to his liquidity. So it really gives him a nice head start on this business.

Ed Mysogland  7:32  
Well, the funny thing and and one of the challenges that we keep on hearing a lot about is is reliable information where Where are you getting your information? Or? Um, I mean, collectively, we've

Larry matsing  7:45  
Well, yeah. Yes, in the very beginning, it seemed like the guidance on the SBA loans. If you ask one banker one day, you know, what's the deal on this? Well, it's a deferred. Well, you ask them the next day, and that's actually forgiven. So what I've done every time, I've gone to at least three different bankers with the same question. And when I get the same three answers, I know, it's probably pretty good. In addition to which we've, we're actually getting some of the documentation and you get the opportunity to review it yourself and interpret it. But having said that, it seems like there's constantly new guidance coming out from the SBA relative to those loans. And I think what you're going to get into down the road is today, we think that forgiveness will be based on x, I think there's an outside probability that as we get into it, they're going to learn more about the forgiveness and what should be forgiven and what shouldn't be forgiven, under what circumstances probably going to be some more guidance at that time, but at the end of the day, to get the opportunity or to get it.

Ed Mysogland  8:51  
So you don't think that the business buyers and sellers, I mean, because they're they're making a fairly big risk of both on both sides. I mean, how does this unwind? If it doesn't work? Obviously, you can probably walk away from the deal. But if, if the loan or the stimulus package isn't what they what they anticipated? What I mean? Can you unwind it? I mean, once you get into it, can you? Can you is it like any other deal, you can put the brakes on and say, Look, I'm walking away,

Larry matsing  9:22  
once you get into what the actual transaction or the loan from the SBA both

Ed Mysogland  9:26  
I mean, obviously on the transaction, you can always walk away I'm talking with the with the SPM, assuming it's a fixed to the, to the DT or it's a fixed to the entity, right. So can you talk a little bit so you have an asset sale that, uh, that that the stimulus goes along with that entity, right?

Larry matsing  9:46  
Yeah, actually, actually, I don't think it works that way. While the entity that exists today will sign for the SBA loan. I think it's also predicated on the business itself. So As long as the business continues, so you may end up prorating, just between the buyer and the seller, you could end up potentially prorating it. But I think, as I understand it, it is applicable to the business, not necessarily to the assets or anything like that it's applicable to the business. So when you say you keep those same employees and you continue paying them, then it should be forgiven, even though halfway through, you may have sold the business, as I understand it from the bankers. Even though halfway through, you may say, you may have sold the business to new owner. As long as you continue making the payroll to those same employees, you should qualify for forgiveness, at least that's what they're saying. Now, I don't think that'll change, the important thing is to get the money in the hands of the employees. Right.

Ed Mysogland  10:50  
So so it follows the business, not necessarily the EIN, or the Fed ID. Right. That's what I've been told. Well, and that's the million dollar question, what's going to change, you know, in in the interim. So, yeah,

Deke Hester  11:06  
one of the other things I want to add to that, because I, Larry's right on target. But while I was talking with one of the lenders that we use on a regular basis the other day, because they have an individual who's getting ready to write a letter of intent on a business. Now, this particular business, you know, has been considered essential, it's remained open. They have not applied through any of the PDP or other programs, because they haven't had to. But the question is, is talking about incentives that people ought to be thinking about or to utilize? Basically, what the banker told me is, he said, you know, we're talking so much about the PPP and other programs as we should be. But there are some excellent opportunities for acquisition loans right now, much more attractive rates, more attractive terms, and particularly for businesses that have been considered essentials and are closed. I mean, that's all but I think you're looking for incentives to buy. And if you're looking for a business, that happens to have not had to close, or has had minimal effect, because of the pandemic, it's an excellent time to apply for a small business acquisition loan, that terms and interest rates are very, very attractive. So I don't want to talk just about the PvP and some other care incentives for the Cares Act, when there's some other incentives that people ought to be looking at, if they want to buy a business at this point in time.

Ed Mysogland  12:31  
You have the lot of the challenges, you know, as we talk about value and and doing deals, I mean, value, the value is based on earnings, growth, or risk and expectation. And right now, risk is high and, and and expectation is unknown. And so I think, and that's one of the things that that we continue to talk about is, how are we going to offset some of that risk for the buyer, because the buyer is, is faced, no one ever been through something like this, at least to my knowledge. And so, you know, the buyer, the buyers that we're talking to, especially on the buy on the on the buy side with the valuation, it's how do I quantify this risk? And I know on the podcast, we've had a number of times, how do you guys think that we, how do you mitigate that risk? Or is that the million dollar question?

Larry matsing  13:32  
I think that is certainly the million dollar question. But I think you're mitigating part of the risk. mean, once again, how many times do you get an opportunity to get a loan, and the bank will actually make your payments for six months. So as I think about a few things, if I were structuring my SBA loan today, and the SBA says, Well, you know, we're, we're more than happy to go out 14 years on that loan, or it's just a business acquisition loan, they'll typically go out 10 years. If I were getting that business loan today, I would strongly suggest that we amortize that over seven years. And the reason being that if they're going to pay the first six months of payment, they're going to pay a lot more on a seven year amortization than a 10 year amortization. Now, you know, a lot of folks like to keep that payment lower, which is what a 10 year would do. But I think you do takes away some of the risks because you just picked up six months of liquidity. Yeah, that's

Ed Mysogland  14:33  
a real Yeah,

Larry matsing  14:36  
I mean, I think there are opportunities to take advantage of once again, a once in a lifetime situation. So you basically got about five months right now. If you've got something in the pipeline that you're looking at. I think a lot of people have thought that buyers would take their foot off the gas pedal right now until we see how this is all going to shake out. I would think just the opposite. I think if you got something you really like, and it's a business you bet you want to buy, I don't think you'll find a better time.

Deke Hester  15:08  
Ya know what? I agree with you on that, Larry, because I've talked to several people that I've been working with, and they're anxious to buy right now. Because they have experience in that industry, they know that industry, they think they mitigate the risk because of their own background of their own experience. And now it's time for them to own instead of working for somebody else. So I think that's part of the reason that people think they can mitigate the risk because of their background and experience. And the timing is great for them to go ahead and jump in the ownership, because the financing terms that you just mentioned. Yep.

Ed Mysogland  15:43  
So dick, you had, I know, you've had to coach some of your some of your clients that you were in, you were pretty far along in India in the deal. And you've had to suspend, you know, you had to put the brakes on, and I know, you have a couple of deals in different, different phases. I mean, what are you coaching them? What are you saying to them about what happens next?

Deke Hester  16:09  
Well, honestly, none of us really knows what's going to happen next year. But as I coach, because one particular deal that you're probably referring to, was really based around University and colleges, and with them being closed, that basically shut off their income stream, the revenue stream. Oh, my first advice was, let's don't panic. You know, let's wait and see what's going to happen. You can't apply for a PPP loan, you know, keep your employees employed to kind of keep the business open, even though the revenue stream isn't open. You know, and so I guess my the biggest thing I really share with most of my clients at this point, let's don't panic, let's just wait and see what's going to happen in the next few months. I mean, there's no reason to try to shut down operations, there's no reason to just basically try to get out of leases, there's no reason to try to liquidate, you know, let's just take a deep breath, and see what happens for the next few months and take advantages of any of the stimulus opportunities that might be available to you.

Ed Mysogland  17:13  
So do you think that that the deal will eventually go together? Or is this a, should they anticipate Plan B? and C?

Deke Hester  17:22  
Well, I think we should always have a plan B, you know, but to answer your question directly, I do think the deal will go together eventually. No, because we had a buyer who was experienced in the industry, you know, but they were affected the same way, because of being in that same industry. So I do think the deal would go together, I just think it'll take some time to do so. It's always good to have a band aid, even the best of times.

Ed Mysogland  17:49  
I don't know what that buzzing is, but should be great to stop it. Well, we've got a number of questions. So should I be still thinking about entering the restaurant industry? And if so, what what funds might be available? How's that for a loaded question? So what do you think, oh, let's,

Larry matsing  18:14  
let's just start out with the fact that entering the restaurant industry is always a risky business always has been and always will be. The first question normally is finding a banker that will actually make a restaurant loans, and there are a few of them. Having said that, I don't think I think the current circumstances dictate even significantly more risk with that particular business than maybe a lot of other businesses. And because we don't know what that industry is going to look like, you know, when we opened back up, I mean, if you had capacity for 200, before, and you were packed every Thursday, Friday, Saturday night, and today, tomorrow, you're gonna have to cut that capacity in half, because of the social distancing requirement. I don't know what that's going to do. You can't double your prices and make it up in price. So I think it's I just think it's a risky time having said that, if you've got some capital, and you've got to some experience, I would also say there going to be a lot of opportunities to go into existing restaurants that went into this situation, undercapitalized highly leveraged, and they're not going to come out of it. So there will be some acquisition opportunities.

Deke Hester  19:41  
I think your key word there, Larry was experience. All right. If you have experienced the food and beverage industry, this might be an opportune time for you to look at some acquisition opportunities. As Larry said, I think there's going to be a lot of the smaller Mom and Pop type of establishments that were under capitalized and they probably are not going to be able to reopen. So there'll be some opportunities from that standpoint to assume some leases, maybe to renegotiate those leases. And to get some good equipment. Obviously, there'll be a lot of people available to be hired, because there's been so many people laid off to work, I think your employment base will be, you'll have a better employment base, and you've would have had in the past. So I think there's some opportunities I really do in this industry. But I do think it's important that you've got the experience, and that you've got some working capital behind you. Because everything I'm reading, it still might be mid next year, before, particularly the food and beverage industry, gets back to where it was almost where it was, just for the standpoint of capacity, not having some of the other challenges that they're going to have. I was talking to somebody yesterday about the food and beverage industry. And they were actually working with the governor's office, they're a part of the Restaurant Association, working with the governor's office about what these new guidelines are going to be come probably sometime in May. And Larry was exactly right, they're talking about making sure that tables are so far apart from one another, you know, that it's going to really cut down the capacity, they've talked about, all the employees will be wearing masks and gloves. 14 thing. Doc talking about patrons who are in masks and gloves could be kind of hard to eat with a mask on. But I do think that some of the other things that they've been talking about are really going to change that industry and change that industry for probably a good 12 months.

Ed Mysogland  21:43  
Yeah, I mean, I think people underestimate the the level of complexity just inherent to a restaurant, I mean, you have so many moving parts from, from, you know, the controllables, you know, food and your other cost of goods sold, as well as each person is their own, you know, I don't say risk, but you have to, to manage them. And, and at all times your your brand as well as your, your your income could be potentially going out the door. So it I think it's hard to I think the the restaurant industry is hard, in general, but I think it's even more amplified now. Because I believe that the the biggest thing that we have is, you know, who's going to buy it, I mean, the new the new norm, you see the new the new normal, and who is who is willing to, to buy, the model has changed a little bit, you know, how many of these restaurants and, and, and on the podcast last week, I mean, there was a restaurant tour, that, you know, they'll never have a storefront again, they, they they've moved to 90% of their business is now online and delivery. And, you know, he I don't wanna say he's missed, he hasn't missed a beat, but he's, he's doing okay. And he's sitting here saying, Well, why in the world would I pay for, for that kind of storefront and the rent associated with it when I can just, you know, operate from an industrial and industrial complex, where I'm paying two, three bucks a foot, and, you know, and then door dashes. So, um, I think I think the restaurant world is, is is in for a real, a real change that if you don't have if you're not going to and, you know, for an experience, like a CSA, and almost, I think, or something like that, I think, I think there's a lot of, especially the eclectic restaurants, I think they're they're just going to evaporate. But again, they're, you know, it's an opportunity for somebody else, but I, I just don't think it really,

Deke Hester  23:53  
I agree with you at 100%. But I do think it's gonna be an opportunity for some people that are true entrepreneurs that have experience in the industry. When you ask people, what's the first thing you want to do? When the restrictions are lifted, and the pandemic is subsided, 99% say, I want to go out to eat, I want to go to a restaurant, you know, I want to be able to socialize instead of social distance, you know, or social distance in a much different sense of what we've been doing. So I see what I think is opportunities. I do think, again, from what I heard the other day, when I was talking to the folks that are working on what these guidelines might be coming from the governor's office. There might be some capital expenditures, too. Because one of the things they were talking about is people ordering from tablets, you know, so that you don't have you have minimal contact with a server. They were talking about everybody going to paper menus that are disposed of every day as opposed to handing you that leather bound menu that 16 Other people have touched. You know, I also heard they were talking about reservation requirements, you know, we get a reservation for an hour. And then the next reservation can't be for another 1520 minutes, because that was time set aside to sanitize. You for the next comes in. So I think you're right, the landscape is going to change dramatically, at least for a year and maybe even longer. But I still think there's some opportunities for people that have that experience that are going to deliver the service that people do want that sir.

Ed Mysogland  25:28  
Yeah, those those, I think those businesses, the hospitality industry in general, those that, that there's an experience that accompanies, that, I think we'll be fine. But just opening your doors and, you know, and because you you make a better sandwich, um, I'm not certain that that's going to be be viable. But But again, I hope, I hope I'm wrong. I mean, that, that, that employs a lot of people. The problem, again, it comes back to risk. Now all of a sudden, you have an entirely different model on doing business, and how does that affect it? And so, I mean, I'm, I'm hopeful, I just, I just don't know, how you how, how a lot of businesses, how a lot of hospitality related businesses come through this in the same fashion they went in? And they may be different than one, although I don't know, I'm sure many of them will,

Larry matsing  26:25  
because they know how to do it, and we don't, right.

Ed Mysogland  26:30  
I'm gonna get the next question. So so how is my selling price determined? Learn money, you take that one, evaluations guy? Well, that's true. But the so when we do when we do our work, we want to when we go to market, we want to have the company position that it makes sense, I mean, anymore, we have buyers that, you know, that they're making an analytical decision, and they have advisors that are coaching them on value. And so we have to make the deal makes sense to, to, to outside parties. So we go through various model modeling, you know, so we'd look at the income asset and market approach to value and most of the time we spend in the market approach, because we want companies, we want to look at what deals have had, you know, what deals either we've done or what deals that we know of through the various databases, you know, what was the buyer behavior toward that. And then, and then we apply the various, multiple, the multiples and to the company related metrics, and then we come up with what we believe is value. Now, we may not the business owner, in fact, most of the time, the business owner doesn't necessarily agree with our value, but they understand it, and, and we can go to market with whatever value we want. But at the end of the day, we know that most deals these days are going to have some level of financing. And what accompanies financing is that underwriting requires of that valuation work. So we theoretically all of us appraisers have to we're pulling from the same body of knowledge, so so we can't be totally totally out in left field on on value, it has to make sense or it'll never get, it'll never get to the closing. Now, having said that, I mean, that's fair market value. This is how a buyer should behave. Now, when we talk about the brokerage forum. You know, that's an entirely different story, where we're by virtue of the process, can you can you get a premium? And that's kind of where I'm going to segue to you, Larry, you know, I do my I do my my thing, and I give you my number, and here's, here's where I believe that a buyer should come in. And now it's your turn for you to do the process and, and hopefully amplify or get a premium over and above my fair market?

Larry matsing  29:15  
Well, I think the big issue is the bump in the road. And hopefully, it's long term, it's turns out to be just a bump in the road with the current financial impact on a lot of businesses. I won't say even most businesses, but certainly a lot of them and maybe it is half or more a everyone's going to feel some impact of what's been going on and what's going to continue to go on. What impact is that going to have on valuation? I think at the end of the day, we typically look back at historical financial statements and cash flow and historical performance. And even when we do that, we look back at historical performance. We may adjust that historic performance, the actual financials based on you know, the the the multiple ways that owners take money out of businesses, we might do some adjustments, we might look at one time non recurring expenses. And we've done that in the past where a company had a $50,000 legal bill last year, and they never had one before that. So we're going to add that 50,000 Back to the cash last year's cash flow, because it was a one time non recurring experience now is the current financial situation that we're going through a one time non recurring experience. We all hope that's the case. And I think when we start recasting financials, after we come out of this, and we have to go back and look at the company's financials over this, hopefully 234 month period of time, hopefully, we can come up with some type of adjustment that makes up for that one time non recurring experience. Now, some folks aren't going to miss a beat, the revenue still coming in, they get the same expenses, they're going to have good cash flow, and their 2020 statements are going to look as good if not better than 2019.

Ed Mysogland  31:17  
So do you believe that that that warrants a premium, because they didn't have a bump in the road?

Larry matsing  31:24  
I think the market will tell us whether that warrants a premium or not, if that's a business, that is recession proof, virus proof, and proof away from any other bad things that can happen. It should that business result in a premium from a valuation standpoint, I'm gonna go with Yes, because anytime you come up historically, with a business, that's recession proof, and it's proven that over a long period of time, those businesses typically are sold at a somewhat of a premium, no question. So I don't know, I don't know how much that premium will be at the end of the day, the market is going to set that that premium. And eventually, then when you're able to look back from a valuation standpoint, you'll be able to see the premium that the market gave those particular businesses. So I think as we move forward, we look at some businesses on an ongoing basis, we're going to have to come up with maybe some either creative ways that we can adjust the performance during this period of time. And I think there are ways to do that. Now, the other adjustment you may have is exactly the other way, when you look at the bottom line, if some of these businesses that are taking the PPP money, and they continued business, they continue making their payroll just like they said, they wouldn't all of a sudden, they just picked up another $150,000, they didn't miss any payroll, they didn't miss a revenue. I think that's an adjustment the other way, because that's a one time non recurring income item that you need to take out all the financials, you're not going to sell it next year based on that, because it's not going to happen again. So I think there will be some creative adjustments that we'll have to do. And also for the banks, when we go in for financing. Well, speaking of that, Larry,

Deke Hester  33:17  
I was talking to one of our SBA lenders that we use frequently about another client of mine, a buyer looking to buy a business that has been closed, you know, their non essential business. So I was talking to him about how is this going to be financed when we get through this. And he said, he certainly can't promise what the SBA is going to do. But what he's hearing is, once we reopen, if they he looks, they look at a business, the SBA and they see, and then the bankers, that within two or three months after we open, they kind of get back to where they were, that the SBA will probably just kind of negate these few months of this pandemic crisis. You know, I would agree. Yeah. So that's what he said. He said, I can't promise that but that's what he believes the SBA and the lending institutions are going to be doing so as you get back like first two or three months after this is over kind of where you were there just kind of kind of negate those months during the pandemic crisis and move forward as normal.

Ed Mysogland  34:24  
Yeah, the so coming from the valuation community, the new acronym is EBIT, AK EB are earnings before interest, depreciation or interest, taxes, depreciation, amortization and corona. And so, so that is, that is the new the new acronym that you should probably familiarize yourself with. Yeah, and so the

Deke Hester  34:51  
guys have too much time on your hands. They really do. They really

Ed Mysogland  34:55  
do. We just like acronyms. So But the thing that the challenge that we bump into, in, in valuing, you know, in, in this environment is, number one, you don't have market data. So So you need to evaluate whether or not you know, how much of a penalty should you have. If you've gone down and, and the likelihood that 90 days after you you've been restored whole is probably unlikely. And if I'm the buyer, I'm trying to capitalize on that, that this isn't the same company, and it MIT perhaps hasn't been stress tested enough. And therefore it warrants a penalty the same, the same way, you know, those recession proof companies, you know, alright, it's been stressed test tested. You know, I'm trying to figure out how to quantify that premium. And that's, that's a both ways as a real hard undertaking. And I'm not certain that there's going for at least for a while, that there's going to be any kind of empirical evidence that would say, you know, other than surveys, you know, I know, there's a number of brokerage and investment banking surveys that are out there that are saying, you know, you should probably anticipate a 10 to 25% decrease across the board. Well, I'm not certain that's true. It may, but, but that's the only guidance that we have right now. But it's a that's a that is just such a big undertaking to try to quantify that, at least, to advise buyers and sellers. You guys got any thoughts on on the workaround other than point to me and say figure it out? No, only time

Larry matsing  36:38  
will tell.

Deke Hester  36:40  
I like to answer a point to you and let you figure it out.

Ed Mysogland  36:45  
So So what's, what's the crystal ball? I mean, what what do you see for our industry? You've been doing it for 40 years, you've been through recessions, you've pretty much seen 911 You see in stock market crash? So what's the crystal ball here?

Larry matsing  37:03  
Relative to business brokerage, or the continuation of the change of ownership of small businesses, is that going to continue? I'm gonna I mean, is that what you're basically asking? Yeah,

Ed Mysogland  37:19  
I was, I was curious to know what what you believe business brokerage, not necessarily the business brokerage industry, but this service we provide what is you've been through this a few times. So what other than the pandemic? So what what is what does

Larry matsing  37:34  
it look like? See, I don't I actually don't think there's, I think once we get through the this initial portion are, is something going to happen where they're going to be no more sellers and no more buyers. Well, that's not going to happen, unfortunately, demographically, whether we like it or not. When Michael Hicks at Ball State tells me that 80% Of all the small businesses in America are owned by baby boomers. And those baby boomers have finally now started selling those businesses. We're not going to have a shortage for a while, businesses to buy. I think you combine that with, I believe the SBA, as a result of all that's going on right now, they've already proven beyond what I ever expected as to how aggressive they can be in providing financing for small businesses. So I think the SBA is going to change, I thought they were very aggressive before, I think they're going to continue to be aggressive. So there's going to be money, it's never easy money, but there's certainly going to continue to be financing for all of those transactions that are 5 million and under might you see the SBA even increase that they increase that from 2 million to 5 million, quite some time ago, they may increase the from 5 million to 10 million for SBA loans. I don't know where that part will go. But I do know, there's going to continue to be SBA loans available. The bankers love SBA loans because they make a lot of fees. So I don't see any bankers getting out of the SBA lending business for a while. So you're gonna have a lot of businesses on the market, you're going to have very good financing available. I think even on the smaller businesses, there are investors equity out there that's available. And I still think there's not going to be a shortage of buyers.

Deke Hester  39:35  
I agree with you, Larry. You're right. And Larry that a little bit older. So we have seen some economic downturn during 11. Contrary to popular belief, we were not around during the Spanish flu. But we did see some of these other economic turned down. And now the bottom line is majority of people that Want to sell their business, they sell it for reasons other than the fact the business isn't doing well, or it's undercapitalized. They sell it because their retirement age, they sell it because there's an illness in their family, they sell it because of partnership dispute. A lot of reasons that people sell a business don't change, because of the economic situations that we're in. Just like a lot of people want to buy a business, that's always been the American dream, and always will be, they want to work for themselves. Instead of working for somebody else to somebody else, tell them what their worth, they want to work for themselves and look at the tax return at the end of the year. And they know what they're worth, because they think they can do it and do it better than other people. So those things will never change. It was interesting, I was talking to a business owner earlier this morning, actually. And he and I've been in conversations for over a year about putting his business on the market. And his biggest fear was he wasn't sure if he was really ready to retire, and wait to him in the fullness when he goes, You know, I've been staying at home for last month, and I don't think retirements gonna be that bad. I actually think I'm going to enjoy it. So I'm not sure that I want to return and work as hard as I have in the past. So maybe now it's going to be the time to put it on the market. So again, I think we have all those kinds of emotional human reasons that people will always be at a point in their life that they want to sell, or they want to buy, in spite of what the economic situation is, maybe.

Ed Mysogland  41:32  
Yeah, I hear you. I think the big the challenge that we collectively, as an industry are facing is the business owner that has, you know, I've lost, you know, 30% of my portfolio, I've lost 30% of the value in my company. And, you know, I need to recoup that. And I'm not certain that, you know, that's what we're facing is that income replacement, you know, that income replacement value that that's hanging out there? And how do you? How do you reconcile the two? I'm from, from my standpoint, I'm looking at these baby boomers and saying, You know what, you're not going to get another crack at this. I mean, at some point you you do need to get if you're gonna go on the market, now's a real good time. I mean, you know, in the next year, two years, three years, but you're not going to get another crack at at, you know, this kind of lending or the access to capital. And, and the buyers at least I don't think so what do you guys think? What? water's fine. Come on in.

Larry matsing  42:42  
I think the advice, you know, what's the advice today for the guy that has lost 30% of his stock market portfolio? If you ask ever. I haven't asked every advisor out there. But I have asked multiple advisors, the ones that I've asked, they're their responses, exactly the same. And that is stay the course, stay the course. Why is this any different than staying the course? If you're thinking about selling your business today? Why would you not get started on it and stay the course now? Eventually, you know, is that is that 30% The stock market going to come back? I have no idea i If you listen to everyone, they seem to say yes, it's just a matter of when. And same way with the value on your business today. If your business has been closed for three months, and you think the value has gone down, once again, stay the course when you open back up. If within six months to a year, we're back to exactly where we were before your value is back. Now, we all know it's going to take you six months to a year to sell your business anyway. But I don't think there's anyone today that's going to be looking at a business that has got no are they going to want to negotiate with you and negotiate the price because of the bumps in the road? Sure they are. And I think it's a matter of how we get through that we may have to and this is once again where I think the SBA may change ever so slightly. They they threw out earnouts if you have an urn out and an SBA loan, you can't have earnouts and SBA loans, this may be a really good time for all those bankers who would like to see her announced back in SBA loans. They should be petitioning the SBA, this is a perfect time to put an urn out back end because of the bump in the road, you know, less less based the future performance on what the historical performance was before we got into the pandemic. And if you come back and your revenue before was 2 million this year, it was only a million and a half. And a year from now we're back at 2 million that I should be rewarded for that I should be paid the fair price for my business and I'm willing to take the risk, because I think it's going to come back and the buyers willing to take the risk, because if it doesn't come back, he doesn't pay for it. So earnouts would be a really good way to get through some of the this particular bump in the road relative to valuation

Ed Mysogland  45:19  
and risk. Right. I yeah, I agree. And any long gating the, the time that the business owner can remain with the company, I think also would would augment or mitigate some of that risk. You know, right now, that business owner can stay a year. Well, that elongating that time, you know, I think fixes some of that problem, too.

Deke Hester  45:44  
The other thing I think we just talked about to for just a second, as we're talking about SBA lending, because obviously, there's a lot of SBA loans, a lot of SBA deals, there are still a lot of community banks, smaller banks, other banks who are doing conventional loans, you know, and depend on the type of business. And I still think those are viable options for a lot of the people that we would be working with. Our clientele is buyers and sellers.

Ed Mysogland  46:13  
Agree, I think any capital capital is a plenty. So So let's see. I don't think, again, if you have any questions, just go ahead and put those in the chat. Let me go double check. So, So Derek, what I guess, what are next, what are what is the rest of 2020 look like? For you guys? For you? Not you not you guys? So I mean, what the the people that you're working with? So you're you're you do an awful lot of by side work? I mean, what are you hearing from from from them? What are the buyers saying?

Deke Hester  46:58  
You know, again, there's different categories that we're talking about here. We're still talking about, there's a number of businesses that have been essential businesses that they're doing as well, or even doing better, you know, during this time period, you know, so that's one category, there's a category of the businesses, you know, that are closed, you know, and they're the ones that are taking the PPP. But they're not in the food and beverage industry. So there's a good chance they're going to come back stronger than they were before and the next three to six months. And then you got the other category of the people have really been have been been affected by this. A lot of that is the food and beverages we talked about earlier, and are they going to be able to rebound? You know, so you got different kinds of categories. We also have different kinds of financing that we discussed earlier, you know, they're in this session. So I see that buyers are going to the ones that I've worked with, they're still looking to buy, their motivation to buy hasn't changed. I guess some of them, their motivation may have changed a little bit because they see maybe an opportunity that they didn't have before because of this situation. And they're going to take advantage of that opportunity. You know, so I see what once things get reopened, you know, and let's face it, there's still going to be some trepidation for those that have more Consumer Direct to consumer contact with their businesses, because there's some people that still are going to be leery, you know, go into a restaurant, go into retail store go into places where there's a lot of consumer contact, until there's been a vaccine that comes out route for the Coronavirus, but those that are more b2b type of businesses as opposed to b2c. They still have more safety in place than the b2c folks. And I don't think you're gonna see much of a difference, I think you're still gonna see a lot of activity and buying businesses between now and the end of the year.

Ed Mysogland  49:03  
So So one of the questions that just came in was, how do you buy a distressed business? You guys got any thoughts on that? I mean, so, you know, financials are a mess. It's not coming back. It's predominantly an asset sale, how do you do it? Or it's predominantly an assemblage of assets? How do you buy that company? What do you look for?

Deke Hester  49:31  
Well, first of all, you you look for, do you have the capital? And the experience? I mean, if you're buying a distressed business, one, hopefully you've got experience in that industry. Maybe your turnaround specialist may get the turnaround specialist that looks for distressed businesses anyway and they look for him all the time. So do you have experience in industry? Do you have some working capital yourself to back that up? You know, and then obviously, if you go look for look for financing, there's some conventional financing, probably the seller is going to be asked to carry some paper on that type of deal. But buying a distressed business, you know, you're, you're gonna pay less higher risk. So the bottom line is you have the experience and the working capital to mitigate that risk, even though you're paying less for it.

Larry matsing  50:21  
Yeah, that's, that's always the secret sauce, can you bring something to the equation to that assemblage of assets? And that's really the value you're going to look at at that point in time. But if there's no business, can you really bring something to that equation that is going to make it profitable? And that's, that's the $64,000 question. That's the risk.

Ed Mysogland  50:45  
Yeah. And, and the real challenge that we we bump into is now the supply and demand of of used equipment. So as as the failures, as the failures happen, and more liquidations are taking place, there becomes more capital equipment that's out on the market, that that innate, that suppresses value even further. So that's, that's one of the challenges that any buyer is going to, to face. And I believe, I mean, it's so the mechanics of buying a distressed business are the same as buying a regular business. But I think you're going to see that that those assemblage of assets are moving closer to out of fair market value and moving closer to orderly liquidation or forced liquidation values. So

Larry matsing  51:45  
correct. And, and to finance, that's not going to be easy. Because the bank, I mean, all they have to look at then is the collateral value. And if it's a bunch of used assets, it's pennies on the dollar. So financing, that's going to be very difficult.

Deke Hester  52:02  
Yeah, that's why I think you're really looking at some type of seller note or some kind of earn with stellar from that standpoint. And it still may be worth the seller as well, because he looks at liquidating what he's going to get pennies on the dollar, versus at least on just somebody that's going to give him some kind of cash up front. And then some kind of promissory note urn out in the future, still isn't advantageous to the seller in many cases.

Ed Mysogland  52:24  
So since we're coming up to the top of the hour, any, any final, any final thoughts from either one of you?

Larry matsing  52:34  
No, I would just say that if, once again, if you're thinking about buying, you basically got five months to finish that deal and take advantage. I mean, I'm not saying that's obviously the only motive, it should never be the only motivation for buying a business. But if you're already in the process, or you've been looking or given identified, I would move that forward, to take advantage of that opportunity. And also, I think, if you're looking at buying over the next even year or two, I think the financing is going to get even better than it has been. And it's been really good. But I actually think it will be better. I think the I think the government's going to be doing anything and everything they can to prop up small business. So I think it's a really, really good time. So obviously, that also translates into a really good opportunity to sell your business too.

Deke Hester  53:32  
I agree with you, Larry, my final comments, Ed would be words we use before, stay the course. Don't panic. If you know you have the skills and ability, and the attitude and the work ethic, and some working capital behind you to great time to go ahead and buy and fulfill your dream of owning your own business. If you were going to sell for a variety of reasons in the past, you know whether it be it was time to retire was an illness, your family whether it was a partnership dispute, stay the course don't panic, it's still a good time to sell, you'll get a fair value for your business. We get a premium. No, no, we have to discount it go know what your price will get a fair value for the business. So stay the course. Don't panic.

Ed Mysogland  54:25  
Yeah, and I think, you know, one of the one of the beauties of our shop is that, you know, we've we've always been been generous with with information and and I think my parting comments is, you know, we've got 15 people that are willing to visit with you about what they what they see in the market, and what their experience on the buy and the sell side. So you know if there's questions, if there's resources that we have available, we'll certainly make them available. You know, you'll sir We know when we need to turn on the meter. But generally speaking we are we're really generous with what what we give. And we bet we haven't been in for two years. We haven't been in business for two years in it not being generous with with our time and our expertise. So I hope that as next steps that if we can come alongside and help that you reach out to us, we'll have all of this. This on the replay on the podcast and on the website. So thanks for joining Larry Deke, and I, and hopefully we'll do this again next next month. Thanks.

Larry matsing  55:41  
Thanks, everyone, for joining.


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Ed Mysogland (EP39)

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