It’s A Great Time To Buy OR Sell A Business

Feb 5, 2021 | Financial Planning, Investing

On this week’s podcast, Karl welcomes Clint Fiore, CEO of Texas Business Buyers. Clint tells us this is one of the best times ever to buy OR sell a company due to several factors.

Karl Eggerss:                      Hey everybody. Welcome to the podcast. My name is Karl Eggerss. Our telephone number (210) 526-0057. Our website creatingricherlives.com. Thank you very much for joining us. Appreciate it. Hey, we got a great show coming up. We have today Clint Fiore, who is the CEO of Texas Business Buyers. And he’s going to tell us why this is a great time to sell or buy a business. Yeah, usually it’s going to be one or the other. He’s going to give you some reasons why right now is a great time to either be a seller or a buyer. Some really interesting things coming up, you’re not going to want to miss it. But before we jump into the interview, let’s do a brief recap of the markets this week, and we won’t spend too much time.

It was a really good week for the markets. I mean, we had the S&P 500 up almost 5% this week. The Dow Jones up almost 4%. And there was really buying across the board. Small caps were up almost 8% this week. International and emerging markets up 5.5%. So we saw buying across the board. Technology, small cap value, growth. I mean, pretty much across the board. Everything was working this week. And look, what we saw in the prior week with the whole Reddit GameStop thing, we knew how that might end and of course, GameStop came crashing back down. A lot of those stocks did, and it was much to do about nothing. Although again, we’re seeing a lot of chatter about it, but it fizzled out and we got back to a normal market. So we saw a huge jump in the VIX two weeks ago, the volatility index. In fact, it was the highest VIX we had ever seen while the S&P didn’t even correct 5%.

So in other words, there was a lot of fear in the market, but the stock market wasn’t selling off. So people were anticipating the market going down or volatility was just very high because of these stocks that were going up 20% and 30% and 50% in a day. But the overall market did not sell off. So that turned out to be a great buy sign. And it responded, the market that is, very well this week because buyers stepped in big time. So you’re seeing broad participation in the market. People are asking me should we be worried about this, that, and the other? The proverbial wall of worry that we know exists on Wall Street is in full effect. And look, we are stretched as I’ve been saying, I don’t know when a correction’s going to come. But this is about time frames.

We’re probably stretched in the short term. We’re due for some correction. There’s a lot of things baked into the market right now. We know a stimulus package is likely to come down very soon. We had a weaker than expected jobs report on Friday. So this recovery we’re seeing, again, continues to slow and look, there’s people out of work still. There are still issues. And so the stimulus is coming in, but there’s still too much money coming into the market. And so that’s pushing things up and so longer term, we’re still very bullish. But in the short term, we’ve got some issues to deal with. We have valuations that are stretched. So again, be very careful in what you own and examine that because we could see the market pullback in certain areas, but maybe not other areas.

But overall, things are a little stretched in the short-term. But to me, it’s still a buy the dip market currently. And look, what we’re seeing across the board in the bond market is just really mediocre, but you’re seeing sell off in treasuries. Long-term treasuries are down 6% this year. Even the BarCap Agg, which just the basket of bonds. What a lot of people own in their portfolios for their bond allocation down about 1%. even long-term investment grade bonds, down about 4%. So you’re seeing some selling as interest rates are persistent, right? They continue to go up, continue to go up. And so that’s going up even though the economy is slowing. So clearly the bond market is either worried about inflation, or it’s worried about maybe the economy opening up and we get this spurt of growth, who knows. But it is going up right now, interest rates, and they’re not racing up, but they are creeping up as we’re continuing to see treasury yields that are on the tenure above 1%.

And so again, we’re going to be in the next couple of weeks, probably talking about inflation and maybe some things you can do to prepare for that. Not that we see 1970 style inflation, and we don’t predict where it’s going to be. However, we are seeing the inflation expectations pick up. And that’s why you’re starting to see some things that do well when inflation does well, they are going up right now. And so in the next couple of weeks, we’ll be talking about that, but really a fantastic week. Energy led the way up 8% in terms of the sectors. Communication services up over 7%, those were your real strong areas. Even financials up almost 7%. Healthcare was the laggard, up a 0.5%. But it was still green. So the only sector down this year right now are the consumer staples, down about 2.75%.

And remember, staples tend to do well when? When we’re going into a recession. So the fact that the economy is opening up and there’s anticipation of that, the things that benefit from that seem to be doing well. But as I said, this bounce in the economy that we saw in April and May and June is starting to slow down a bit. I mean, you can see it in the jobs in particular. So there’s some work to be done, but the economy is still growing. It’s just slowing down a little bit. So watch that.

All right. Let’s jump right into the interview. All right, as I mentioned at the top of the show, we’ve got a guest today. His name’s Clint Fiore. He is the CEO of Texas Business Buyers. And if you want more information about them, texasbusinessbuyers.com, texasbusinessbuyers.com.

And I wanted him to come on the show today because we have people come on that have investment background, have accounting background, lots of different walks of life. And with the transformation going on right now in our economy, interest rates, where they are, there’s a lot of deals going on, mergers and acquisitions. And I thought this is a perfect person to bring on to explain to us what that looks like, what’s going on in the marketplace. And then obviously a little more about what they do specifically to help those two parties come together. So Clint, welcome to the podcast.

Clint Fiore:                         Thanks Karl. Thanks for having me.

Karl Eggerss:                      Yeah. So let’s dive right in. I mean, you look like you’re probably in the ballpark of my age. So tell me how did you get in this? What’s your background?

Clint Fiore:                         Yeah, so I’ve been in this business for six years and I was a salesman turned serial entrepreneur. So I helped start a couple of businesses with angel investors and then turned into a startup and deal guy almost by accident. My first business was a manufacturing company in Kerrville, Texas. And we went from zero to 50 employees in about 18 months and it was a really, quite a rocket ship ride. And we ended up getting bought out and that was my first transaction. And I was a minority partner on that deal. And that was the first time I got to see a transaction, was from the inside. And then I started helping other people go through raising money and startups and launching businesses. And I just discovered that I liked putting the puzzle together of doing deals more than I liked running companies.

And I didn’t really know much about business brokerage or M&A, mergers and acquisitions at the time. I was just feeling like I was an entrepreneur helping start new ideas. And then I discovered there’s a whole career for people like me that are that shiny object chasing serial entrepreneur DNA. But instead of just going company to company, you can really build a profession and a team around helping people do deals. And so that’s what we’ve done.

In 2014, I went back to school to learn business valuation and really start getting the industry certifications in mergers and acquisitions and business brokerage, and really getting educated in this space. And then I launched Texas business buyers in 2015. And since then we’ve formed a small team that works all around Texas. We are doing about one transaction a month on average. So we’re just have a pipeline of deals that we’re working on. We’re typically working at about 10 projects at a time on our small team. And we’re really in the premium main street area, which I would say $1 million to $5 million transaction size is really typical for us. But we do some as low as a quarter million or half a million, and some as high as 10 million, 15 million, 20 million.

But our sweet spot’s really this size range that I think a lot of your listeners will relate to. And it’s the family owned private business. Typically five to 50 employees. It’s been around for a while. And that’s usually who we work with as clients.

Karl Eggerss:                      Now, you stole my thunder because a lot of people listening have either worked for a small company that’s been bought out or merged. I’ve gone through one deal myself and learned a lot through that process. But like most business owners, I had my head down, working away. And I think a lot of business owners do. And at Covenant, we’ve advised people after they’ve had a liquidity event and they’re like, “Now what do I do with all this cash?” And maybe they didn’t go do another business, or it could be somebody saying, “Hey, we’re in acquisition mode. Where do we go?” So we see some of that, but it is interesting that, again, I think a lot of business owners really do. They just grind it out for years and years, and they’re very good at what they do.

And then they either get approached, blindsided, like, “Oh, I didn’t know that there was this much demand for my business. And furthermore, how do I construct this?” And so at what point do you come in? I mean, it seems like the earlier that you’re in the process where a business owner can really get a good value on their business and really understand what it’s worth. And also what stepping stones they need to put into play can set them up for success as opposed to a rush decision where they haven’t planned. So how do you get involved in that? What timeframe do you get involved?

Clint Fiore:                         Yeah, you’re right. The earlier, the better is what I recommend. And I would like to give a few tips for the business owner listening that has a small business and one is, to get a valuation and get it from someone that’s like us, or is a broker. That has to go and extract money in the marketplace. So they’ve got that real deal experience. CPAs often have valuation credentials, and sometimes they do a good job, but sometimes your own CPA will tell you what you want to hear. And if they’re not out there having to go prove it in the marketplace and go get you that price they say it’s worth, than a lot of times it’s easier for them to just go with the most publicly available data, which is usually larger companies.

Let’s say you own a manufacturing company, for example, that’s $2 million or $3 million in revenue and you ask your CPA, “Hey, what’s my business worth?” A lot of times what they’ll do is they’ll pull data from data sources, which are typically from small business, which the government defines is under 250 million as a small business to… And the government [crosstalk 00:12:56]-

Karl Eggerss:                      Almost Everybody. Almost everybody.

Clint Fiore:                         Yeah. But to me, a $200

Clint Fiore:                         … $100 million revenue manufacturing company is big. That’s a solid M&A middle market going to be looked at by public companies type of business.

Karl Eggerss:                      Right.

Clint Fiore:                         And it’s not really apples to apples to the $2 million guy. And so there’s a risk there if you don’t have someone that’s out doing deals in the marketplace that they could grab the wrong data and some industry rule of thumb multiple, and really lead you astray as to what your business is actually worth in the market for its size. And in our experience about probably 95% of business owners really overestimate their business value, and so that can be a big hangup for people like you that are trying to advise people on their retirement plans and financial planning. You want to make sure you have a real accurate picture realistically of what your fair market value of your small businesses so that you can plan accordingly. And then also, if you have that conversation early, then if you don’t like the number that it is, you still have time to do stuff about it.

One of the things that happens with us is people call us when they’re done, done, done, at the very, very end, “I need to sell. I can’t work another year at this business. I’m burnout.” And at that point, it’s really hard to build value and it’s really hard to set your business up for a successful exit. We just have to do our best with what we have at that point. But if you talk three to five years in advance, a lot of times a broker or M&A specialist that’s in the market can give you a good, realistic valuation and also some pointers of things you can do to help maximize your business prior to exit so that you can have a really good exit.

Karl Eggerss:                      How do you guys handle different sectors and industries? I know for me personally, I had to go out to a specific company that only dealt in my specific industry, and because obviously evaluations are different, there’s different metrics they’re using for a business. Like you said, it could be a widget business, $200 million in New York, and it could be a financial services business that’s not in San Antonio, Texas, or wherever. So how do you, how are you able to place a proper valuation on all these different industries that have different metrics, or does it just always boil down to revenue, earnings, EBITDA, growth, et cetera?

Clint Fiore:                         Yeah, I mean, that’s a great question. We’re an industry agnostic shop. In fact, out of all of the deals we’ve done, we’ve done many dozens of them, we’ve repeated industries only a handful of times. I mean, we’re constantly learning new things, and really where we specialize is in a size of business that has a profile of buyers. And so, for instance, the SBA will government guarantee acquisition loans through the 7(a) Program. They’ll go up to $5 million in transaction size. And I’d say more than half of our deals end up being acquired with the help of an SBA loan, and we know that process very well and we know what their formulas and metrics are and how they get underwritten. And so those formulas apply across the board industry-wise, and when we’re doing a valuation, we subscribed to about four different done deal databases. So we’re pulling data from the SBA, from other brokers, from banks, and looking for comps for your business of the same type of industry.

And, in general, in small business deals, the multiples don’t vary that much. It’s generally the biggest variance is recurring revenue models versus one-off revenues. Whereas the home remodeler that year to year doesn’t know how many jobs he’s going to get and it’s a lot more volatile and a lot more subject to the whims of the overall economy, those are typically a little bit lower multiples. But overall, in our size range, in the SBA deal world, there’s not a huge difference.

Karl Eggerss:                      I would imagine you’re always hammering home, know your numbers, to every CEO. Again, sometimes we meet people, we look at their business, we may do a little business consulting as well, but for the most part, we’re looking at their business and they may not know their numbers very well. And so I think it’s important to know your numbers. And also, I do think in industries are benchmarking studies, which is helpful so that you can look at your own company and say, “We’re way out of whack of what’s normal,” because if an acquirer’s coming in and you don’t fit the benchmark, either you’re going to get a better valuation because you’re better than the benchmark. So so I think benchmarking studies can be helpful as well.

Clint Fiore:                         Yeah, absolutely. I really nerd out about this stuff, and there’s a lot of directions we can go.

Karl Eggerss:                      Yeah. I was really curious, I mean, given the environment we’re in, which you’ve been doing it during an environment where we’ve had historically low interest rates. And so when you talk about SBA or any financing going on, it’s very attractive to do deals. I guess, I’m curious what your thoughts are if interest rates started to rise. How has COVID changed this? What’s the lay of the landscape right now? Are there specific industries that you guys, when you talk about a deal a month, are eight of them one type of industry you’re looking at, or are they very, very diversified in the types of businesses you’re talking to?

Clint Fiore:                         Yeah, so right now, deal activity is strong and the low interest rates and the SBA incentives out there are making buyer interest very strong. However, places that are still heavily impacted by COVID are still very hard to finance and very hard to sell. And so most brokers right now are pretty much staying away from restaurants as much as possible until we’re on more solid ground there as an industry. But there are certain companies that have actually thrived during this time, that were set up for this. And, for instance, I’ve got a deal under contract right now that’s about a three million and change small business, and it’s an IT services company. Obviously, demand has been huge for IT services, and that’s been a growth sector, and they were already set up.

They were running this business from their home. A husband and wife own it, and they have contractors all over the country that work for large companies that have been doing fine the last year. And so they’ve actually had a great year in 2020, and there’s still a lot of hot money flowing around there in private equity and in family offices and the SBA borrowers at the under five million level. And so there’s lots of money and not enough deals. If you think about 30% to 50% of the market’s frozen because of COVID impacts right now, but the same amount of buyers and the same amount of money is still out there, that’s actually driving a lot more attention to the good businesses.

So if you’ve got a business that did well in 2020, this could actually be a great year to exit, because people are worried about potential tax increases or capital gains tax increases and are saying, “Man, if I’m going to pull chips off the table or sell, this might be the year to do it.” And so if you’re in an industry that’s doing well and your business is doing well, I feel like timing is really great for a 2020 exit.

Karl Eggerss:                      Now, I think it’s fascinating that when we always compare the public markets, which you get a huge valuation premium because of liquidity primarily, but when you look at the public markets and you look at the private markets, it always amazes me what looks like an unbelievable deal going in the private equity world, which we dabble in that as well for our clients, depending on certain situations, we’ve done private equity deals or advised on them, I should say, we haven’t been in the middle of them, but when you look at the valuations of those companies versus what’s going on in the public markets and some of the ridiculous valuations, it’s very compelling why there’s still a lot of M&A, why you’re seeing SPACs, why you’re seeing just a lot of companies potentially coming public because there was such that big premium.

But I was going to ask you, so are you guys a matchmaker or are you strictly working with either the buyer or the seller? So does somebody come to you and say, “We want to sell our business,” and you take it from there and start trying to find buyers, or are you just putting the package together and they already know the players involved?

Clint Fiore:                         We are a matchmaker. We work for the seller most of the time. So we’ll get engaged by the company that’s trying to sell. However, what we do is we build a package. We build a rear looking business valuation where we look at the historical financials and recast them and show the earnings power of the company and the story and all the historical information about the company. And then we also do forward looking projections and opportunities and we try to find, where is current ownership leaving money on the table? And what are the upside potentials here that a buyer could enjoy? And we build a confidential information memorandum, a SIM, or sometimes those are called CBRs, confidential business review. And that’s where we take your business, build a really nice presentation, put a bow on it, but then we’ve got to go find the right buyer for it.

And so most of the time we’re talking to buyers that aren’t represented by a broker, and we end up basically, once we’ve located someone that’s interested, take an intermediary role. So we’ll basically be the conduit of information between the buyer and seller, make sure everybody’s comfortable, knows what they need to know to move forward, and help them negotiate a win-win deal between both sides. And so we work for the sellers, but by the end of a deal, we’re usually best friends with the buyers because we’ve helped them secure their financing and get through their diligence, smooth out any rough patches with the owners or any other issues they have and serve as a buffer between the opposite sides of the table so that we can make sure things go smoothly and nothing gets overlooked. And we help manage that project start to finish.

Karl Eggerss:                      Again, we’re speaking with Clint Fiore. He is the CEO of Texas Business Buyers, and if you want more information, texasbusinessbuyers.com. A lot of information on there. So the environment we’re in, when you work for a seller, for example in your case, and let’s say they do come to you two years in advance of an actual transaction, are they paying you consulting fees or are you risking the time and the energy put into that because you are getting paid once a transaction happens? What is y’all’s fee structure, and you don’t have to get ultra specific on numbers? But what is your general fee structure, and is that consistent among other people that do exactly what your company does?

Clint Fiore:                         So we’ll usually not charge until a transaction occurs, and we like to make money from success fees from selling businesses and like a real estate agent would where you engage exclusively with a firm to market your business and then they get a piece of the deal in a commission at closing. And so that’s typically how we work. When we talk to someone two or three years in advance, we’ll often do a ballpark valuation as a complimentary service just to show them what their business is worth, establish ourselves as their go-to expert in the space. And we’re not trying to make dollars by just selling hours of our time. If someone needs a true consultant, someone that’s going in their weekly or monthly rolling up their sleeves and helping them oversee some of the improvement projects, we’ll typically refer in a consultant. We used to do some of that ourselves, but we’re so busy with the transactions side of the house that we don’t have time to play consultant as well.

However, what I could do and what several of our team members can do is when we do a valuation, we’ll typically see the low-hanging fruit, and what we can say, “Hey, here’s five things. If you change these things or improve these things,

Clint Fiore:                         You can definitely get a much bigger price in two years, and so if you want to take those on yourself, here’s kind of the general strategy and roadmap you need to go to do that. We would just share that. If you need someone to hold your hand and help you do that, then we can bring in a consultant to help you, on a fee basis, execute that. That’s some of the best money you can spend too, is actually getting some help on that. We’ve had stories.

One of our clients was a lady in San Antonio, actually, that had a company that did the back office for charter schools. I’m not going to share the name of the company specifically, but it was basically, she works through the regulatory and compliance and bookkeeping and business management side of education sectors so that the educators that started the charter school can just focus on loving on the kids, and teaching the kids, and doing the stuff they’re passionate about. And she can handle the kind of multi-million-dollar business side of the house, of making sure you’re complying with all the state regulations and got your financial house in order and all that.

She had a great business, but it was really wrapped around her, as the owner, and special knowledge she had in her head. There were some disconnects between … She had this huge mailing list, and she sold information. But a lot of people didn’t know that she actually had the services side of her company, which is, “You can use our firm to do all this. Instead of just learning from us, you can hire us.” We helped her kind of revamp her marketing to convert more of her informational clients that were watching their videos and consuming their content into contracts that were using their firm to do the managed services.

Over the course of, it was about a year and a half, her valuation went from a half-million-dollar company to … We closed the deal at a million dollars. So it was a double in value, but we also got an earn-out structured for her that, six months later, she got another million dollars from. It ended up being where, if she had just called me saying, “I’m done. I need to sell. This is what I have,” we could have gotten her that half a million. But just paying attention to it and her putting the work in for that year or two in advance ended up getting her four times as much, and that was just kind of … She did a great job executing, and so I don’t want to take credit for that.

She listened to good coaching and did it, and then, we ended up with a buyer that really wanted the business and wanted to keep her on as a CEO for six months and continue to land some of these larger contracts. When we freed her up to have someone do all the day-to-day business oversight, managing all the people and all the day-to-day stuff, and just turned her loose to go land the big opportunities that were out there, she ended up doing more for this company as a salesman. So she kind of earned herself an extra million bucks over the next six months, and the buyers were happy about it, too, because everybody she brought in was three-year contracts that were going to benefit buyers for many years to come.

Those are the kind of things that you just don’t think of all that, all those angles. When you’re an entrepreneur that’s been growing your business, you probably don’t know what your business is worth, and you probably don’t know how to maximize your exit and how to structure a deal so that sometimes you can even get that second bite of the apple like she did, or you can get … That’s the kind of stuff that just people that do deals all day and help structure these things can really help you with.

Karl Eggerss:                      Well, yeah. I mean, a lot of business owners don’t know what EBITDA is. They don’t know what earn-out is. I mean, so just talking through some of that to say, “Oh. You mean if this isn’t a sell, walk away, pay my taxes, and move on. There’s other …” Yeah. There’s a lot of factors, and in fact, you can extract more in it. Both sides are happy, because obviously, you do have this intellectual property, and like you said, it freed her up to do other things.

How much involved do you guys get, in terms of structure in relation to taxes? That’s always the big thing. Well, if I sell it, I’m going to have to pay all these taxes. Maybe I just continue to work, and this thing just fizzled out until I can’t do it. Then, the company just goes away, and you’re going, “No. There’s value there. It’s structured properly.” Do you guys bring in CPAs and accounting firms, or are you saying, “No. We can do that part, as well, and at least consult on that.” They may have their own CPAs. Is this a team? What does this look like?

Clint Fiore:                         Yeah. We work with CPAs. We are not CPAs, but we do enough deals and we consult with enough CPAs on enough deals that we can kind of point people in the right direction. But we always make sure that a solid CPA that knows deal structuring is involved in the conversation. Typically, on a lot of our deals, they’re healthy cash-flowing businesses where the biggest asset is the intangible value. It’s what we call it goodwill. Banks sometimes use the word blue sky, but goodwill, I think, is the better term for what we sell.

That’s just, basically, people are paying X amount of dollars for a company based on its expectations of future earnings, and they’re deriving that, those expectations, from its historical earnings. And so you’re just basically buying cash flow. That’s what you’re buying when you buy a healthy business, and tax-wise, most deals, I’d say over 90%, gets structured as asset sales. And so the buyer will form a new company, or they might have a company already, and they’re going to buy the website, the name, the phone number, the physical assets that they need. They’re going to bring it into their own company, and then they’re going to buy the name. And so it’ll be new company, LLC, doing business as the selling company.

If you’ve structured it right, and the goodwill is a big component of that sale, you’re, most of the time, you’re taxed at long-term capital gains rates, which is a pretty favorable, at this time, anyways, tax bracket to be in. And so I would definitely … This is one thing that you want to have this conversation early with your CPA, as well. If you have a C corp, definitely have this conversation earlier. I’m in a deal right now that just, they should have switched from a C to an S, but without me getting into full-on tax advice, there’s a five-year window that if you switch from a C to S and then you sell your business, you still get taxed like a C, which is a lot more tax burden than an S gets in an asset sale.

And so make sure that you’ve switched to an S corp or had a conversation with your CPA about switching to an S corporation, and that’s a need to do that five years in advance kind of thing to avoid unnecessary taxes there. But yeah. We typically just give people a ballpark idea of how the tax structure is going to work typically, and then, we’ll work with the buyer and seller’s CPAs and attorneys to make sure that we’ve structured it in the most tax-efficient manner. That is something that gets negotiated in the deal, as well, because certain things, like the purchase price allocation, can be positive or negative, like a tug of war between the buyer and seller, depending on how you allocate the assets that are being sold in the transaction.

Karl Eggerss:                      We’re working with a family right now that sold a business. He’s going to stay on as CEO. The company wants him as long as possible, because it’s a conglomerate that just wanted another business in their portfolio. So they’re like, “You continue to run it.” So he stays on as CEO with his current salary, personally, or in an LLC, leases the building, has a multi-year lease where he’s getting good income that’s going to continue, but yet now has this cash.

One of the things we’re looking into, and maybe you can explain it in layman’s terms is the 1202 small business exemption with the $10 million exemption that was, I think, I want to say it was created after the recession of ’92, kind of in the 1994. So basically encouraging small businesses that, under a lot of check boxes you have to adhere to, may be exempt from capital gains up to $10 million for their business. Have you run into that, or advised on that, or seen that in play?

Clint Fiore:                         I’m not an expert on the tax side, and so that would be … I would probably recommend the CPA on that one.

Karl Eggerss:                      Yeah. It’s very, I will say, it’s very, very tricky, but here’s what’s interesting, is that oftentimes, and where a consultant can come into play, whether it’s a financial advisor or a business broker, the CPA nor the attorney had told them or knew about this. It took the financial advisor, at least, to say, “We’re not sure if you’ll qualify, but we should definitely be exploring this.” Because under certain provisions, it could save them two to two-and-a-half million dollars of capital gains tax.

Clint Fiore:                         Wow.

Karl Eggerss:                      So there’s a lot of, to your point, there’s a lot of different structures in play, and when you have buildings, and equipment, and trademarks, and all of those things, but yeah. I think you’re right. The earlier you start, the more you have time to examine that.

Clint Fiore:                         I’ll give you a couple things that are, I think, current, interesting things to explore for your listeners that they’re not going to hear on … from just anyone talking to them. On the tax and law side of these deals, I definitely encourage you to work with a CPA that has a lot of experience doing transactions, because they’re going to know things that a general accountant won’t know. The same thing with an attorney. If you just have a good business attorney you trust, make sure you bring someone in that’s regularly doing many small business transactions to advise you, because they’re going to know things that a general practicing business attorney will not, as well.

From some things I can share that are kind of unique that are factoring into deals right now, one is the CARES Act II legislation that just passed. Starting three days ago, February 1st, and concluding September 30th, or until the program runs out of money, there’s special incentives for acquisition loans. And so if you’re a business owner that’s looking to buy a business, and you’re, maybe you’re in acquisition mode, try to find a deal and get in progress on it as soon as you can, because you can save a substantial amount of money if you get an SBA loan right now. So some of the things that are incentives right now is they’re waiving the SBA guarantee fees on new acquisition loans, and SBA loans have a lot of fees with them. It’s typically about 2.7 or 3% of the deal is fees, and so it’s like you get that as a discount right off the bat.

Karl Eggerss:                      Yeah. It’s great.

Clint Fiore:                         They’re waiving those. They’re also upping the SBA guarantee from 75% to 90%. So that’s the government backstop portion of the loan, and what that’s meaning is that banks are getting very comfortable lending with just a minimum of 10% down on loans, because the government’s guaranteeing the other 90%. And so you could really leverage your cash available. In the past, I might tell someone that’s got, maybe, if they had 200 grand of dry powder to search for an acquisition with, and they had that as the down payment, I would say, “Hey. You should look at up to a million dollar deal size.” But now, I’m saying, “You could look up to 2 million,” and because of the change in that guarantee structure and how little you have to put down on deals right now. The other part that’s an even, probably the biggest bonus is all the deals that close between February and the end of September are getting six months principal and interest paid, up to $9,000 per month, by the SBA.

Karl Eggerss:                      Wow.

Clint Fiore:                         And so it’s essentially like they’re subsidizing your acquisition, and they’re paying your first six months of loan payment. And so altogether, one of the deals we’re working on right now, it’s going to … It’s almost like $150,000, I think, of government incentives for the buyer.

Clint Fiore:                         … and that’s the IT company I referenced earlier. They’re going that route. And it’s going to save them a tremendous amount of money, and it also made our buyer comfortable paying full asking price, not negotiating with our seller on the purchase price because they’re getting kind of partially subsidized here.

Karl Eggerss:                      I was going to say that’s an excellent point is that it really helps everybody out, and it gets the seller what they want.

Clint Fiore:                         Have you ever heard a realtor say, “It’s a great time to buy or sell?” I always hate that because I’m like, “It can’t be a great time to buy or sell.” It’s usually a seller’s market or a buyer’s market. And I kind of feel like that about business, but I’m going to put on my sales hat and say, “It is kind of a great time to buy or sell a business right now” because sellers have this unusual situation where a big chunk of the other seller competition’s off the market due to COVID impact. So if you’ve got a good business, you have more buyers and less deals. They can get extremely good interest rates, and they’re getting partially subsidized. So they’re able to pay top dollar, and you have a lot of competition for your business.

And also as a seller, you’re kind of worried right now. There’s talks about capital gains going up and things like that in the future. And if you’re going to do a deal that’s got a big capital gains implication, it might be a better year to do it.

So that’s all my pitch of why it’s a good time to sell, but buyers, if you’re going to buy a business, you can’t change what the tax structure is going to be 5 or 10 years from now anyways, so you might as well do it now while you can get all these SBA incentives and really come in with some assistance with the CARES Act II program.

And so that’s what I’m saying. It is kind of a good time to buy or sell right now.

Karl Eggerss:                      And I mean, I would think demographics come into play. You’ve got a lot of baby boomers that have businesses that are starting to kind of wind down and new group of people wanting to take things over.

We’ll kind of wrap up the interview with this. Obviously with COVID going on, there are businesses that are maybe at a discount right now. So it’s preventing people from wanting to sell, but maybe people are wanting to sell because they’re just like, “I’m done with this.” And so there’s some deals out there. So we kind of know what those businesses are, and we kind of know who’s probably getting a premium. If you’re in some type of cleaning, air filtration, technology business, you’re getting a premium. If you’re in hospitality, you’re getting a discount.

For you guys, Texas business buyers, what’s your ideal type of client that comes to you and says, “We’re looking to sell or buy.” What… is it a deal size? Is that what you specialize in?

Clint Fiore:                         Things we’re looking for is I’m looking for the healthy company. So we don’t do distressed. We don’t do auctions, liquidations. There are specialists that do those things. We’re trying to match premium cash-in-hand buyers that appreciate a really good business and are willing to pay top dollar for it. And that’s kind of who’s on our… we have about a 1500 member mailing list that we have built profiles on that we call our VIP buyer list. And so we know what their appetite is, how much money they have to invest, what industries they’re looking in, what geographies they’re looking in. And we can offer… about half the time, we match-make out of our internal pool of buyers. And then about half the time, they come in via responding to advertising and marketing we do to the outside world.

And it’s all done confidentially, by the way. We don’t put names of businesses on ads. It’s all, “A Hill Country laundromat chain,” and until someone signed a non-disclosure, and we’ve screened them do they ever get a chance to learn the name of the business for sale. That’s a common fear, and that was a rabbit trail. Where was I going with that, Karl?

Karl Eggerss:                      Basically, what was the ideal client for you guys? And you’re obviously explaining the process which I would imagine that there’s a lot of people that try to kick the tires to see who’s out there selling, and it can control prices, but in terms of what you guys look for, I mean, is it a less than $10 million revenue company, but more than X, or what does that look like?

Clint Fiore:                         I’ll say first, the ideal seller… I’ll do a buyer and seller. Ideal seller is a 5 to 50 employee, Texas-based company, typically at least a million revenue up to 20 million revenue is usually the bracket where we like to play. That’s a good size for us. Over 20 million, you’re probably better served with a boutique M&A firm with a national footprint that generally sells into private equity and the public markets. And under this space where it could kind of be either way, it could be an individual buyer, or it might be a small group of investors or another small company. That’s where we like to do business, and that’s who most of our buyers are. So that, I’d say, 1 to 20 million revenue company. You got to be in business for at least three years to work with us and have transferable earnings. So if it’s, sometimes we meet an owner that’s doing those numbers, but it just absolutely doesn’t work without them. That’s a hard one to sell, and we’ll typically turn those away even if the numbers are great.

Ideal buyers are just people that are serious about buying. There’s a lot of buyers out there that are looking for this unicorn of we need to see a million in earnings, a solid management team in place where we can just buy this thing and hold it as a passive investment. And those aren’t typically our buyers. Our buyers are typically… we’re looking for do you have some relevant experience? Are you willing to roll up your sleeves and fill the spot of the owner that’s going away and really learn what you’re doing and be a good steward of the business, not just a mailbox money buyer, but a really entrepreneurial buyer.

So that’s what we like to see is people that have some cash to work with so they can get the deals financed, but also are true entrepreneurs that are willing to bet on themselves and find a great business, but then bring themselves to the table and help take it to the next level. And so that’s the buyer that we look for.

Karl Eggerss:                      It’s always fascinating to me. I’ve worked with lots of clients over the years. I’ve been doing it since 1995, and I’ve had small business owners as clients a lot of the times, and some will say, “I want to sell my business,” and I kind of look at the numbers and I’m like, “There’s nothing to sell here, unfortunately.” I have to be honest about that. Or, “I’m just going to close the doors.” And I say, “Wait, wait, wait, wait. You have something worth value here.” And oftentimes when someone’s people say, “I understand that, but I don’t want to go through the process because I work alone of bringing somebody on, training them for another two years, and doing all that. It’s easy for me just to close the doors.” And man, it’s hard for me to say, “You’re leaving money on the table.” And again, had you thought about this in prior years, you could have still left at this time, had you planned in advance. But in their mind, they’re thinking, “I want to retire. And now, I don’t want to stay on another two to five years.” Well, if we would have done this two to five years ago… so it’s interesting to see how people, they either, like you said, they think they have too much there where it’s like it’s worth more than it really is, or they don’t think they have a business, and there’s actually a lot of tangible value there.

So that’s great. And especially the SBA stuff you brought to us, that’s extremely valuable. And I think that’s, to me, the way you get an economy back on its feet after a major contraction, recession is to entice people to start businesses because for every restaurant that closes down, there’s going to be another one that opens. May look a little different, but that’s great advice today. Appreciate it.

That’s Clint Fiori who’s with Texas Business Buyers, and it’s texasbusinessbuyers.com. A lot of pretty faces on your website there, so you can go check them out. And if you are a small business owner or somebody that wants to invest in another business, give Clint a call.

Clint, thank you very much for your time today. I appreciate it.

Clint Fiore:                         Thanks, Karl. I really enjoyed visiting with you.

Karl Eggerss:                      All right, everybody. Thanks for joining me. Appreciate it. Don’t forget. Creatingricherlives.com is the website. Telephone number (210) 526-0057. Don’t forget to Like and Share this podcast. It’s on all the platforms, Apple Podcasts, Spotify, Google Podcasts. You name it, it’s out there on there. And it’s a course on our website, creatingricherlives.com. Share it to your friends. You have some people that are curious about what’s going on in the stock market. We got plenty of information on creatingricherlives.com.

All right, everybody. Have a great weekend.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multifamily Offices, LLC, Covenant, or any non-investment related content will be profitable, equal any corresponding indicated historical performance levels be suitable for your portfolio or individual situation or prove successful.

Moreover, you should not assume that any discussion or information serves as the receipt of or as a substitute for personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing.

Covenant is neither a law firm nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at creatingricherlives.com.

 

Schedule a Free Call

Receive a complimentary 15-minute financial evaluation with one of our wealth advisors.

Other Resources