May 23, 2024 • 20 mins
Welcome to an exciting episode of the Apex Business Advisors Podcast, hosted by Andy Cavanaugh and featuring Apex president, Doug Hubler. Recorded live at an Entrepreneurs Alliance networking event, this special edition explores common but costly mistakes sellers often make from the perspective of experienced business advisors. The hosts discuss errors such as running personal expenses through a business and the complexities of ad backs, highlighting the fine line between creativity and tax evasion.
In the second half, the focus shifts to the pitfalls of a DIY approach when selling a business, emphasizing the hidden disadvantages and benefits of professional guidance. Through humor and real-life experiences, Andy and Doug illustrate the importance of avoiding governance and transaction missteps, using examples of sellers and buyers who faced unfavorable outcomes by going solo. This episode offers invaluable insights for entrepreneurs and potential buyers, covering risks like tax evasion, staff layoffs, and financial mishandling that can complicate or derail deals. Join us to learn how to navigate these challenges effectively.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Music.
(00:08):
Welcome back to a special edition of the Apex Business Advisors Podcast.
I am your host, Andy Kavanaugh, joined by the president of Apex, Doug Hubler.
Doug, tell the people what they're going to hear. I was going to say, special episode.
It seems like they're all special, Andy, but I know what you're saying.
This is a live podcast, and this is to a group of entrepreneurs who are,
(00:35):
it's a networking group, and they meet every month.
It's called the Entrepreneur Alliance and what's nice about it is,
you know, normally we're hearing from entrepreneurs who have started their businesses,
they've been in it for a while, we listen to their stories of their successes, their challenges.
We learn a lot from those meetings and it's a great networking group.
(00:57):
So we thought, hey, why don't we do our podcast?
And they asked us, they thought it was a great idea. Why don't you guys do a
podcast in front of our monthly event?
So that's kind of what we're leading up to here. So what you'll hear is the
topic that we did was called Cellar Blunders.
That was the topic they asked us to talk on.
(01:20):
And so when this goes live, you're just going to hear from us hitting record.
This is going to be a two-part episode. First part is going to be the Cellar
Blunders part. Second part next week is going to be the Q&A,
where we took questions from the audience and answered those off the cuff.
So without further ado, enjoy the special live episode of the Apex Business Advisors podcast.
(01:45):
Music.
We'll add that in later. I hear you do like rolls after half the hours that last past.
(02:14):
I do not enjoy a good drum line after a long night out.
I'll let everybody know if they do that again at the IBBA this year.
Yeah, what Dave's talking about is last year, and Valerie's actually part of
this, is last year at the IBBA conference, I visited a friend.
(02:36):
And so I got to the hotel really early.
And Chuck Campbell and Jason actually were at the bar. So I joined them at the bar.
And after dinner, I was like, I'm going to make this an early night.
I'm going to take off about 8, 830.
Right around that time, Valerie and Debbie and a few other and Ron and a few
other people start coming in and like literally as I was getting ready to leave.
(02:58):
To go upstairs. And I was like, well, that would look very awkward and super
rude if I were to leave at this point.
So then I went for round three because round one was pre-drinks with Jason and Chuck.
And then there was dinner with Jason and his comrades.
And then round three here with Valerie and Debbie and all of them joining.
(03:19):
And then by the time I shut it down, it was like midnight and I was pretty hammered
and, and, you know, I mean this, yeah, we're on.
Yeah. And so wake up and head down and they started this conference with a drum
line with a ceiling about like this.
And I've never been that miserable in my life.
(03:41):
Like I was just I was, yeah, I was, I was done. I was, I was not enjoying myself.
I wasn't having a good time. So, but what I was going to say to Doug is I don't
know if we welcome people back to the, because normally we welcome them back
to the Apex Business Advisor podcast, but this is kind of the first time.
(04:02):
So I guess it's welcome to the Apex Business Advisor podcast.
I'm Andy Kavanaugh, as Jason mentioned, joined as always by the president of
Apex, Doug Huber. And when I say always, I mean most of the time,
because Doug takes a lot of vacation because he gets a lot of vacations.
So he's not always around.
It's a lie. Then there's a various back surgeries and knee surgeries.
(04:23):
I am a permanent guest host. Permanent guest host.
Permanent. Yeah. Permanent guest host. Yeah. So, but I think our topic today
was that we wanted to talk about cellar blunders.
Yeah. I think this came about, can I interrupt?
Thank you. Thank you. So we had talked about many times the sellers,
(04:45):
buyers, the deals that go on and the mishaps.
Common mistakes by buyers and sellers, but the common, and we'll go through
some of the common mistakes, but I think we really wanted to hit on the bigger
blunders because those are the most exciting, both fun to talk about.
(05:06):
They're true stories. I know that there's a lot of blunders that people make.
And a lot of times they're things that people in this room would just consider pretty obvious.
And so why don't Why don't you start us off with kind of what's the number one
thing that you have seen in your- The obvious things?
The most obvious thing that people make that devalues their business.
(05:28):
Well I think the things that we see most often, we talk about a lot are the
financial statements and Kerry and I were talking about this. We always talk about it.
People tend to focus their business around how I can avoid paying taxes rather
than just doing business, report what you need to report, pay your freaking taxes.
(05:49):
Can I say that? Pay your taxes and do business.
And so people tend to focus on how I can run personal expenses through the business.
We've got a long list of those things. We could spend, and we do spend a lot
of podcasts on that topic, but people who are running their home remodel through
(06:10):
the business or all of their groceries,
all their credit card expenses through the business.
But I had one where the guy had a $30,000 cruise for the family that went through
the business. And then we go to try to sell it.
And then all of a sudden he's having to sell or finance that deal because the
bank's not going to touch it.
(06:31):
So things like that can really impact the value.
Just $30,000 for the cruise? That was just that year. It was just that year.
Okay. So that was just one of the expenses.
Yeah. We're working on a deal where there's approximately $50,000 a year in
personal travel that gets ran through the business.
So you're looking at a business that on paper is making about $13,000 a year.
(06:57):
And after they tack on all the ad backs, it's about 250 and they're trying to
get full multiple on the 250.
And just shocked that not a bank will touch it. Shocked.
What's wrong with these people? Is the attitude. What's wrong with these people?
We hear that quite a bit. It's kind of like going to a kid's softball game and
(07:20):
hearing call it both ways, Blue.
Blue's calling it both ways. The problem is that pitch is hitting the backstop.
It's hard to call a strike when a pitch is hitting the backstop.
So, you know, and that goes into kind of the reason why those ad backs become
an issue, because on one hand, you're what? You're cheating.
Right. But then on the other hand, you're asking for that same company,
(07:43):
that same entity that you're cheating to, well, just go ahead and believe me.
We've tried to tell people that all along the way, you've gotten the benefit
of the value of your company because you haven't been paying tax.
You've been avoiding tax.
It might be tax evasion. Some people might call it. And so it's not,
it may be more than just being creative or legitimate tax strategies.
(08:10):
So when you get into that realm, then there are some huge issues and the banks
are going to say, well, if you can prove it, fine.
But when you get to that level of $200,000 or $50,000 in ad backs,
we're not going to touch it. If it's 10,000, I mean, we've interviewed Jason
before. We've talked about what banks can handle.
(08:30):
There's a lot of due diligence that takes place on that. But we get some extremes.
The boats, the lake houses.
The vacations, the remodeling, all those kinds of things. But that's common.
Yeah. Plastic surgeries. We have had plastic surgeries. Plastic surgeries.
Yeah. That's a good one. Yeah. What's that?
(08:51):
Yeah. Right. Yeah. Right. Yeah. Yeah. Yeah. Yeah. Yeah. Business development.
You know, the biggest mistake that I often see that, and these are generally
not even listings or businesses that come to sell through us,
(09:11):
but we get a lot of people that DIY it. They want to do it, do it yourself.
Really all I need is a lawyer and a buyer and I can get this thing done.
And I keep track of contacts and communications with my clients and it's 500
to 750 on average, touch points, 500 to 750.
(09:33):
I mean, today, just today, and you never know what it is.
Today i had to ask a seller that has
paid off a piece of property 20 years
ago hey who's uh
who's darla that's my ex-wife are we
gonna have a problem with darla coming and showing up and signing the deed to
(09:56):
this darla's on the you know darla's on all the property listings we're gonna
have any problems with well she doesn't live that far away and it's like yeah
you're gonna have to That's called Darla.
So we're running through things like that.
Today was the first day that I knew Darla existed. Now, had this person DIY'd
(10:17):
this, they don't have the professional contacts and the professional relationships that we have.
And at one point, we had four people in my office trying to figure out,
okay, how are we going to get, what can we do to get this done?
Because we've got closing set for Tuesday.
And we need mortgage lien release from a bank that no longer exists,
(10:39):
that has been acquired by two other banks. Thanks. And we may need to find Darla.
And those are, and as sick as it sounds, that's what makes the job fun for me.
It didn't sound fun when you're talking about it earlier. Well,
you know, sounds can be deceiving, Doug.
Yeah, right. There's a lot of complaining going on.
(11:01):
Here's another thing with the DIY though, is because people will think that
they have the buyer for their business.
And what they don't realize is they're missing the market. so they don't have
people competing for the business.
And so they think they're getting a great deal. They've got the perfect buyer,
but they don't have the market.
They're not opening it up to others who may have a potential interest.
(11:23):
So they think they've got a deal, and we go back and say, well, this has happened.
Talk to the seller that closed the deal and ask what they got.
They told us, and we're like, well, we could have gotten you 30% more than what you received.
And then they tried to back out of that deal. Like it's a little late.
So, you know, having a market is critical and, and so people try to shortcut
(11:48):
it, you know, to save commission.
And I think everybody sees that in their profession.
People try to do it on their own, save money.
And I think what they end up doing is shooting themselves in the foot.
So what are the things you have on your list? Well, More interesting,
more interesting cases.
So, yeah, I mean, kind of specific to the DIY, just adding to that,
(12:09):
you know, we've seen, we've had sellers and buyers ask us, do I really need an attorney for this?
I found this document on LegalZoom. I found, you know, my attorney friend over
there is nodding his head and laughing.
I found this, I found this on LegalZoom. I found this on Google.
I mean, we'll see buyers that will not use our offer to purchase.
(12:34):
They'll create their own letter
of intent, and they won't put exclusivity into the letter of intent.
Whereas, so legally, we can now just, hey, great, yeah, go ahead and run all
this, spend all this money, but we can still go out here and market the business,
take buyer-seller meetings, introduce people.
So a lot of times when people try to save a few bucks, they end up costing themselves
(12:59):
in the long run of not doing that. And that's one of the biggest things that I see.
I know that you wanted to make friends with our accounting friends.
So I know there's some tax stuff that you were wanting to bring up with some
of the common wonders that you see.
So these aren't common, but there's a case where we had a seller shortly before
Before closing, the bank always verifies tax returns before closing,
(13:23):
and usually it's like the week before closing.
It's just verifying the tax returns that they've given us.
We had a reasonable size deal where the bank said, hey, there are no tax returns on record.
We had tax returns in our file signed by the owner.
The problem was he had never filed taxes.
(13:44):
He had had them completed. He had signed them, stuck them in his file,
gave them to us, had never filed with the IRS.
I don't know how people get by with that, but I imagine at the time he had to
pay some fines to get the deal done because it did delay the closing.
(14:04):
We still got it had done, but it delayed it.
He had to go to the local tax office and make good with them.
Do you know if he brought cookies or like, wouldn't he show up with a six or
what? I think it was a checkbook. A checkbook. I think it was a checkbook.
Oh, good old cash. Yeah, a little cash.
(14:24):
Well, one of the other things that I see too, is just from an operational perspective,
that people will take their foot off the pedal.
They'll stop, just kind of stop running the business. They'll stop business developing.
They'll stop marketing. They'll stop all the things that have made them successful.
And the next thing you know is that their revenue and their profit that had
done that, now it does that.
(14:44):
And going back to the bank checks right at the end of closing,
it's like, hey, can you explain why Q1 is off 50% year over year?
And that is something that, well, yeah, he just decided that,
you know, he didn't need to business develop.
He wanted to save it for the buyer and he wanted to queue up work for the buyer
(15:05):
or didn't have the guy that's- Saving, they wanted to save money.
Yeah. They wanted to build their cash because they're going to keep that at
closing. So they stopped paying their advertisers, their marketing company.
In one case, they stopped paying rent. Stopped paying rent. And so you go into
a closing situation and the landlord's saying, we're past due two months.
(15:28):
Well, their profitability looked really good the last two months because they
hadn't been paying some of these expenses.
Revenue starts to take a hit. Profitability still looks good.
And the question is like, what in the heck's going on?
They realize they haven't been paying their bills.
They wanted to build up their cash because they're going to get that at closing.
(15:48):
And that will kill the deal.
That changes the whole deal when you get into it and say, well,
now I'm going to wait for you, pay your bills.
Now we're going to look at six months down the road. Let's see if you can get the business back.
And what was the last thing that you wanted to talk about that was really the biggest blunder?
(16:09):
The biggest one? The biggest one. Yeah.
That's, well, I have, I still have the tax, not paying your taxes,
not paying sales or employment taxes.
What was the other one? That's kind of a big deal. You should probably go ahead
and pay your taxes. Let's say that. Sales tax.
Pay your taxes. Sales tax, employment tax, those things. And those will go with
(16:30):
the buyer too in many cases.
So if you haven't paid the tax and that's discovered, that is something that
the state of Kansas will not give on. and we'll close down a business pretty quickly.
And that's happened to us before where we've had to negotiate with the state
and the bank to try to keep the business open while they paid their tax so that
(16:52):
the buyer could take it over.
So some simple things that for most of us would be pretty straightforward,
but some sellers try to get a little bit too smart for the britches.
Yeah. And along that lines, we had once upon a time, there was a business owner
that he let go of a significant amount of the staff to make the.
To again, reduce the payroll, right? I'm readying for sale.
(17:14):
And so he reduces his payroll. And now the buyer comes in and they're asking
about, well, what about this employee?
This employee, tell me what this person does. Oh, they're not doing that.
I took over their job. I took over their job.
I took over their job. And so somebody that was working 15 hours,
18 months ago is now working 60 hours because they had replaced three or four of their staff members.
(17:35):
So they stopped stop delegating things. The business became solely reliant on
them again, back to startup days where they had stopped with,
I forget who it was, but it was pretty important.
It was like an administrative person, a salesperson, and people would get into
the deal and it was under contract and they got into due diligence and they
(17:57):
found out that all these people had been let go.
And so now this business that was on paper, very profitable,
looked good, great CBR that, you know, talked about all these employees.
And then when you get, you take a look under the hood and it's like,
oh, well, I let them go and I let them go and I let them go.
(18:18):
And I didn't like her attitude. and you know and
so they they let all these people go well nobody wanted
to buy the business because one of the things that when we're
talking to a lot of business owners are like you know the things that you valued
that grew your business that bootstrapped your business that got you to the
level that you get to it's not what a buyer would value buyer's going to value
(18:39):
god bless you for working 60 75 hours a week but when somebody buys your business
they don't want to do that
They're not looking to work 60, 75 hours a week.
Most of them want to work 20 or 30 hours because it's either an add-on or it's
something else that they're not looking at doing. We have time for a couple more.
One more. One more. You have one more. Then you can have one too.
(19:03):
We have one right now. This happens on people who own multiple companies,
commingling funds, moving revenues from one company to another,
expenses from one to another.
So when you're looking at the business, we don't know what we have.
They look very profitable over here, but we find out they've been moving,
they've been using expenses over on this company to cover this one.
(19:26):
And so on paper, on their P&Ls, this company looks great.
But then like why this is a business where the margins should be maybe 20% net
margin and they're 40% net margin.
And it just doesn't make sense. And we're trying to figure out why,
where's the meat in this deal?
(19:47):
And it takes talking to the accountant and the business owner to figure out,
okay, well, They're moving some money around and it's completely clouded.
We don't know until the CPA gets in there, cleans it up and certifies it that it's accurate.
We're not going to be able to deal with that company because we don't know what we've got.
Well, I would like to open it up for questions unless you've got any more. I think it's about time.
(20:11):
All right. We're going to hit the pause button right there. We'll be back next
week with the Q&A from the session with the Entrepreneurs Alliance group.
Until then if you're looking at buying or selling a business there's really
only one place you've got to go and that is the apex website kcapex.com has
got everything you need your one-stop shop for your buying selling valuation
(20:32):
everything you need to know about buying or selling a business it's all contained
right there so until next week if you're looking at buying or selling a business.
Music.
Music.
(00:08):
Welcome back to a special edition of the Apex Business Advisors Podcast.
I am your host, Andy Kavanaugh, joined by the president of Apex, Doug Hubler.
Doug, tell the people what they're going to hear. I was going to say, special episode.
It seems like they're all special, Andy, but I know what you're saying.
This is a live podcast, and this is to a group of entrepreneurs who are,
(00:35):
it's a networking group, and they meet every month.
It's called the Entrepreneur Alliance and what's nice about it is,
you know, normally we're hearing from entrepreneurs who have started their businesses,
they've been in it for a while, we listen to their stories of their successes, their challenges.
We learn a lot from those meetings and it's a great networking group.
(00:57):
So we thought, hey, why don't we do our podcast?
And they asked us, they thought it was a great idea. Why don't you guys do a
podcast in front of our monthly event?
So that's kind of what we're leading up to here. So what you'll hear is the
topic that we did was called Cellar Blunders.
That was the topic they asked us to talk on.
(01:20):
And so when this goes live, you're just going to hear from us hitting record.
This is going to be a two-part episode. First part is going to be the Cellar
Blunders part. Second part next week is going to be the Q&A,
where we took questions from the audience and answered those off the cuff.
So without further ado, enjoy the special live episode of the Apex Business Advisors podcast.
(01:45):
Music.
We'll add that in later. I hear you do like rolls after half the hours that last past.
(02:14):
I do not enjoy a good drum line after a long night out.
I'll let everybody know if they do that again at the IBBA this year.
Yeah, what Dave's talking about is last year, and Valerie's actually part of
this, is last year at the IBBA conference, I visited a friend.
(02:36):
And so I got to the hotel really early.
And Chuck Campbell and Jason actually were at the bar. So I joined them at the bar.
And after dinner, I was like, I'm going to make this an early night.
I'm going to take off about 8, 830.
Right around that time, Valerie and Debbie and a few other and Ron and a few
other people start coming in and like literally as I was getting ready to leave.
(02:58):
To go upstairs. And I was like, well, that would look very awkward and super
rude if I were to leave at this point.
So then I went for round three because round one was pre-drinks with Jason and Chuck.
And then there was dinner with Jason and his comrades.
And then round three here with Valerie and Debbie and all of them joining.
(03:19):
And then by the time I shut it down, it was like midnight and I was pretty hammered
and, and, you know, I mean this, yeah, we're on.
Yeah. And so wake up and head down and they started this conference with a drum
line with a ceiling about like this.
And I've never been that miserable in my life.
(03:41):
Like I was just I was, yeah, I was, I was done. I was, I was not enjoying myself.
I wasn't having a good time. So, but what I was going to say to Doug is I don't
know if we welcome people back to the, because normally we welcome them back
to the Apex Business Advisor podcast, but this is kind of the first time.
(04:02):
So I guess it's welcome to the Apex Business Advisor podcast.
I'm Andy Kavanaugh, as Jason mentioned, joined as always by the president of
Apex, Doug Huber. And when I say always, I mean most of the time,
because Doug takes a lot of vacation because he gets a lot of vacations.
So he's not always around.
It's a lie. Then there's a various back surgeries and knee surgeries.
(04:23):
I am a permanent guest host. Permanent guest host.
Permanent. Yeah. Permanent guest host. Yeah. So, but I think our topic today
was that we wanted to talk about cellar blunders.
Yeah. I think this came about, can I interrupt?
Thank you. Thank you. So we had talked about many times the sellers,
(04:45):
buyers, the deals that go on and the mishaps.
Common mistakes by buyers and sellers, but the common, and we'll go through
some of the common mistakes, but I think we really wanted to hit on the bigger
blunders because those are the most exciting, both fun to talk about.
(05:06):
They're true stories. I know that there's a lot of blunders that people make.
And a lot of times they're things that people in this room would just consider pretty obvious.
And so why don't Why don't you start us off with kind of what's the number one
thing that you have seen in your- The obvious things?
The most obvious thing that people make that devalues their business.
(05:28):
Well I think the things that we see most often, we talk about a lot are the
financial statements and Kerry and I were talking about this. We always talk about it.
People tend to focus their business around how I can avoid paying taxes rather
than just doing business, report what you need to report, pay your freaking taxes.
(05:49):
Can I say that? Pay your taxes and do business.
And so people tend to focus on how I can run personal expenses through the business.
We've got a long list of those things. We could spend, and we do spend a lot
of podcasts on that topic, but people who are running their home remodel through
(06:10):
the business or all of their groceries,
all their credit card expenses through the business.
But I had one where the guy had a $30,000 cruise for the family that went through
the business. And then we go to try to sell it.
And then all of a sudden he's having to sell or finance that deal because the
bank's not going to touch it.
(06:31):
So things like that can really impact the value.
Just $30,000 for the cruise? That was just that year. It was just that year.
Okay. So that was just one of the expenses.
Yeah. We're working on a deal where there's approximately $50,000 a year in
personal travel that gets ran through the business.
So you're looking at a business that on paper is making about $13,000 a year.
(06:57):
And after they tack on all the ad backs, it's about 250 and they're trying to
get full multiple on the 250.
And just shocked that not a bank will touch it. Shocked.
What's wrong with these people? Is the attitude. What's wrong with these people?
We hear that quite a bit. It's kind of like going to a kid's softball game and
(07:20):
hearing call it both ways, Blue.
Blue's calling it both ways. The problem is that pitch is hitting the backstop.
It's hard to call a strike when a pitch is hitting the backstop.
So, you know, and that goes into kind of the reason why those ad backs become
an issue, because on one hand, you're what? You're cheating.
Right. But then on the other hand, you're asking for that same company,
(07:43):
that same entity that you're cheating to, well, just go ahead and believe me.
We've tried to tell people that all along the way, you've gotten the benefit
of the value of your company because you haven't been paying tax.
You've been avoiding tax.
It might be tax evasion. Some people might call it. And so it's not,
it may be more than just being creative or legitimate tax strategies.
(08:10):
So when you get into that realm, then there are some huge issues and the banks
are going to say, well, if you can prove it, fine.
But when you get to that level of $200,000 or $50,000 in ad backs,
we're not going to touch it. If it's 10,000, I mean, we've interviewed Jason
before. We've talked about what banks can handle.
(08:30):
There's a lot of due diligence that takes place on that. But we get some extremes.
The boats, the lake houses.
The vacations, the remodeling, all those kinds of things. But that's common.
Yeah. Plastic surgeries. We have had plastic surgeries. Plastic surgeries.
Yeah. That's a good one. Yeah. What's that?
(08:51):
Yeah. Right. Yeah. Right. Yeah. Yeah. Yeah. Yeah. Yeah. Business development.
You know, the biggest mistake that I often see that, and these are generally
not even listings or businesses that come to sell through us,
(09:11):
but we get a lot of people that DIY it. They want to do it, do it yourself.
Really all I need is a lawyer and a buyer and I can get this thing done.
And I keep track of contacts and communications with my clients and it's 500
to 750 on average, touch points, 500 to 750.
(09:33):
I mean, today, just today, and you never know what it is.
Today i had to ask a seller that has
paid off a piece of property 20 years
ago hey who's uh
who's darla that's my ex-wife are we
gonna have a problem with darla coming and showing up and signing the deed to
(09:56):
this darla's on the you know darla's on all the property listings we're gonna
have any problems with well she doesn't live that far away and it's like yeah
you're gonna have to That's called Darla.
So we're running through things like that.
Today was the first day that I knew Darla existed. Now, had this person DIY'd
(10:17):
this, they don't have the professional contacts and the professional relationships that we have.
And at one point, we had four people in my office trying to figure out,
okay, how are we going to get, what can we do to get this done?
Because we've got closing set for Tuesday.
And we need mortgage lien release from a bank that no longer exists,
(10:39):
that has been acquired by two other banks. Thanks. And we may need to find Darla.
And those are, and as sick as it sounds, that's what makes the job fun for me.
It didn't sound fun when you're talking about it earlier. Well,
you know, sounds can be deceiving, Doug.
Yeah, right. There's a lot of complaining going on.
(11:01):
Here's another thing with the DIY though, is because people will think that
they have the buyer for their business.
And what they don't realize is they're missing the market. so they don't have
people competing for the business.
And so they think they're getting a great deal. They've got the perfect buyer,
but they don't have the market.
They're not opening it up to others who may have a potential interest.
(11:23):
So they think they've got a deal, and we go back and say, well, this has happened.
Talk to the seller that closed the deal and ask what they got.
They told us, and we're like, well, we could have gotten you 30% more than what you received.
And then they tried to back out of that deal. Like it's a little late.
So, you know, having a market is critical and, and so people try to shortcut
(11:48):
it, you know, to save commission.
And I think everybody sees that in their profession.
People try to do it on their own, save money.
And I think what they end up doing is shooting themselves in the foot.
So what are the things you have on your list? Well, More interesting,
more interesting cases.
So, yeah, I mean, kind of specific to the DIY, just adding to that,
(12:09):
you know, we've seen, we've had sellers and buyers ask us, do I really need an attorney for this?
I found this document on LegalZoom. I found, you know, my attorney friend over
there is nodding his head and laughing.
I found this, I found this on LegalZoom. I found this on Google.
I mean, we'll see buyers that will not use our offer to purchase.
(12:34):
They'll create their own letter
of intent, and they won't put exclusivity into the letter of intent.
Whereas, so legally, we can now just, hey, great, yeah, go ahead and run all
this, spend all this money, but we can still go out here and market the business,
take buyer-seller meetings, introduce people.
So a lot of times when people try to save a few bucks, they end up costing themselves
(12:59):
in the long run of not doing that. And that's one of the biggest things that I see.
I know that you wanted to make friends with our accounting friends.
So I know there's some tax stuff that you were wanting to bring up with some
of the common wonders that you see.
So these aren't common, but there's a case where we had a seller shortly before
Before closing, the bank always verifies tax returns before closing,
(13:23):
and usually it's like the week before closing.
It's just verifying the tax returns that they've given us.
We had a reasonable size deal where the bank said, hey, there are no tax returns on record.
We had tax returns in our file signed by the owner.
The problem was he had never filed taxes.
(13:44):
He had had them completed. He had signed them, stuck them in his file,
gave them to us, had never filed with the IRS.
I don't know how people get by with that, but I imagine at the time he had to
pay some fines to get the deal done because it did delay the closing.
(14:04):
We still got it had done, but it delayed it.
He had to go to the local tax office and make good with them.
Do you know if he brought cookies or like, wouldn't he show up with a six or
what? I think it was a checkbook. A checkbook. I think it was a checkbook.
Oh, good old cash. Yeah, a little cash.
(14:24):
Well, one of the other things that I see too, is just from an operational perspective,
that people will take their foot off the pedal.
They'll stop, just kind of stop running the business. They'll stop business developing.
They'll stop marketing. They'll stop all the things that have made them successful.
And the next thing you know is that their revenue and their profit that had
done that, now it does that.
(14:44):
And going back to the bank checks right at the end of closing,
it's like, hey, can you explain why Q1 is off 50% year over year?
And that is something that, well, yeah, he just decided that,
you know, he didn't need to business develop.
He wanted to save it for the buyer and he wanted to queue up work for the buyer
(15:05):
or didn't have the guy that's- Saving, they wanted to save money.
Yeah. They wanted to build their cash because they're going to keep that at
closing. So they stopped paying their advertisers, their marketing company.
In one case, they stopped paying rent. Stopped paying rent. And so you go into
a closing situation and the landlord's saying, we're past due two months.
(15:28):
Well, their profitability looked really good the last two months because they
hadn't been paying some of these expenses.
Revenue starts to take a hit. Profitability still looks good.
And the question is like, what in the heck's going on?
They realize they haven't been paying their bills.
They wanted to build up their cash because they're going to get that at closing.
(15:48):
And that will kill the deal.
That changes the whole deal when you get into it and say, well,
now I'm going to wait for you, pay your bills.
Now we're going to look at six months down the road. Let's see if you can get the business back.
And what was the last thing that you wanted to talk about that was really the biggest blunder?
(16:09):
The biggest one? The biggest one. Yeah.
That's, well, I have, I still have the tax, not paying your taxes,
not paying sales or employment taxes.
What was the other one? That's kind of a big deal. You should probably go ahead
and pay your taxes. Let's say that. Sales tax.
Pay your taxes. Sales tax, employment tax, those things. And those will go with
(16:30):
the buyer too in many cases.
So if you haven't paid the tax and that's discovered, that is something that
the state of Kansas will not give on. and we'll close down a business pretty quickly.
And that's happened to us before where we've had to negotiate with the state
and the bank to try to keep the business open while they paid their tax so that
(16:52):
the buyer could take it over.
So some simple things that for most of us would be pretty straightforward,
but some sellers try to get a little bit too smart for the britches.
Yeah. And along that lines, we had once upon a time, there was a business owner
that he let go of a significant amount of the staff to make the.
To again, reduce the payroll, right? I'm readying for sale.
(17:14):
And so he reduces his payroll. And now the buyer comes in and they're asking
about, well, what about this employee?
This employee, tell me what this person does. Oh, they're not doing that.
I took over their job. I took over their job.
I took over their job. And so somebody that was working 15 hours,
18 months ago is now working 60 hours because they had replaced three or four of their staff members.
(17:35):
So they stopped stop delegating things. The business became solely reliant on
them again, back to startup days where they had stopped with,
I forget who it was, but it was pretty important.
It was like an administrative person, a salesperson, and people would get into
the deal and it was under contract and they got into due diligence and they
(17:57):
found out that all these people had been let go.
And so now this business that was on paper, very profitable,
looked good, great CBR that, you know, talked about all these employees.
And then when you get, you take a look under the hood and it's like,
oh, well, I let them go and I let them go and I let them go.
(18:18):
And I didn't like her attitude. and you know and
so they they let all these people go well nobody wanted
to buy the business because one of the things that when we're
talking to a lot of business owners are like you know the things that you valued
that grew your business that bootstrapped your business that got you to the
level that you get to it's not what a buyer would value buyer's going to value
(18:39):
god bless you for working 60 75 hours a week but when somebody buys your business
they don't want to do that
They're not looking to work 60, 75 hours a week.
Most of them want to work 20 or 30 hours because it's either an add-on or it's
something else that they're not looking at doing. We have time for a couple more.
One more. One more. You have one more. Then you can have one too.
(19:03):
We have one right now. This happens on people who own multiple companies,
commingling funds, moving revenues from one company to another,
expenses from one to another.
So when you're looking at the business, we don't know what we have.
They look very profitable over here, but we find out they've been moving,
they've been using expenses over on this company to cover this one.
(19:26):
And so on paper, on their P&Ls, this company looks great.
But then like why this is a business where the margins should be maybe 20% net
margin and they're 40% net margin.
And it just doesn't make sense. And we're trying to figure out why,
where's the meat in this deal?
(19:47):
And it takes talking to the accountant and the business owner to figure out,
okay, well, They're moving some money around and it's completely clouded.
We don't know until the CPA gets in there, cleans it up and certifies it that it's accurate.
We're not going to be able to deal with that company because we don't know what we've got.
Well, I would like to open it up for questions unless you've got any more. I think it's about time.
(20:11):
All right. We're going to hit the pause button right there. We'll be back next
week with the Q&A from the session with the Entrepreneurs Alliance group.
Until then if you're looking at buying or selling a business there's really
only one place you've got to go and that is the apex website kcapex.com has
got everything you need your one-stop shop for your buying selling valuation
(20:32):
everything you need to know about buying or selling a business it's all contained
right there so until next week if you're looking at buying or selling a business.
Music.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.