Author: Telless

Death, Divorce, or Distress…the 3 main reasons owners sell.

“Why are they selling?’ is a common refrain from buyers as to why a seller would sell a successful investment or business. The decision to sell is never a decision that is taken lightly and is often influenced by 3 significant life events, death, divorce, or distress. I would like to take a moment to delve into how these three Ds shape the motivations and circumstances under which people decide to sell.

Death, while natural and a part of our lives, oftentimes happens unexpectedly. It often involves dealing with estates and inheritances, where properties or belongings must be sold to divide assets among beneficiaries. Not to mention if this is a business with employees and partners can throw a monkeywrench into operations. This selling is not just a financial transaction but an emotional process, as it involves letting go of items with sentimental value. Selling here can occur due to heirs wanting to cash out or simply lacking the knowledge required to run the business. The sale can be used to help a family transition to life after the passing of a loved one.

Divorce, another critical life event, often necessitates the sale of shared assets. This process is not only about dividing possessions but also about individuals starting anew, which often requires liquidating shared assets to facilitate this fresh start. The emotional turmoil of divorce can affect selling decisions, sometimes leading to hasty sales under less-than-ideal market conditions. This urgency to sell can impact the final sale price and the financial futures of the involved parties.

Distress, whether due to job loss, debt, tax situations, or several other types of hardships, can force sellers into the market. Businesses can be in distress as well but in this instance, we are looking at distressed sellers. In these situations, the need to quickly access funds often takes precedence over waiting for the best market conditions or price. Sellers in distress may accept lower offers, affecting market values and creating opportunities for investors.

The 3 Ds are life-changing events for owners and their families. These events require finesse and consideration that can lead to some uncomfortable conversations with sellers and their families. Lead these conversations with care and remember you are there to solve a problem for these sellers.

Buy, Don’t Build

What do companies such as Tesla, WWE, and even Coca-Cola have in common? Besides being behemoths in their respective industries (we can debate Tesla is more hype than it is fundamentals), they all were purchased from their respective founders and taken to the next level by the buyer. Before Elon came along, the Tesla prototype barely worked. WWE was a small rinky-dink company in a fragmented industry and Coca-Cola was still a fledging soda fountain drink.

Have Immediate Cash Flow Day One. Buy Don’t Build.

Sometimes the worst person for a company IS the founder. And once more, as the founder, they are often too close to a company to see what exactly the problem is that is preventing a company from scaling and hitting that next level. Many founders find themselves in a position where the business isn’t a business for them but a job. Instead of working on the business, they work IN the business.

I have firsthand experience in this. I started a cleaning company earlier this year. In the beginning, I was the one answering the phone, fielding customer emails, and sending out quotes in addition to handling all the marketing and strategy. I was working in the business and it was just a job for me (A poor-paying one at that. It’s not uncommon for founders to take reduced or no salary in the beginning). In the startup world, this is called going from 0-1. It’s a lot harder going from 0-1 than it is from 1-2 because at the 0-1 phase it’s not a business yet. You don’t have systems in place. And there is no capital. 1-2 it’s a business. You have capital and maybe even some employees so you can focus on the overall business strategy.

We are especially in a time where it can be more advantageous to buy rather than build. There are approximately 2 million businesses owned by baby boomers. Sure, most of these businesses aren’t suitable for ownership (probably just 1 guy doing gigs under an LLC), however, even then there is lots of opportunity for those who find themselves in a position for an apprenticeship buyout type of situation.

Many boomers don’t have heirs who wish to acquire and continue the business, opting for careers entirely independent from their birthright. This is an opportunity that as of yet, has not been overrun. Namely, because it’s difficult to find these owners. Of course, this can be wrought with landmines such as businesses being dependent on one client, poor or nonexistent financial statements making due diligence nearly impossible, or employees all quitting on day one. Acquisitions can require a finesse that can require professional experts. Explore working with M&A advisors or business brokers to get a beeline into the acquisitions space.

Make things easy for you. Reduce your brain damage. Have Cash Flow Day One. Consider buying a business.

The Owner’s Paycheck

“Cash rules everything around me. C.R.E.A.M. Get the money. Dolla, dolla bill y’all.”

-Wu-Tang Clan

In the world of lower market M&A, SDE is the principal reason a buyer acquires a company rather than build from scratch. It’s arguably easier to buy rather than build. Seller’s Discretionary Earnings (SDE) are the barometer of small businesses. It’s the metric that reveals the true profitability of a business, beyond what traditional financial statements might show. Whether you’re considering buying a small business or preparing to sell one, understanding SDE can mean the difference between a fair price and a great deal. Let’s delve deeper into what SDE actually is and its significance in lower middle market valuations.

At its core, SDE represents the total financial earnings a full-time owner-operator would realize from a business annually. This isn’t just a technical term for accountants to bandy about; it’s essentially the business owner’s annual ‘paycheck’ for operating the business. Seller’s Discretionary Earnings are what gets an owner up in the morning each day.

It’s important to note that SDE can vary significantly across different types of businesses. Tech/Consulting style businesses, for instance, often boast high SDE due to typically higher margins and lower direct costs. Conversely, Brick & Mortar style businesses tend to have lower margins, given the additional expenses such as rent, utilities, and other operating expenses that must be considered.

To calculate SDE, one starts with the net profit from the financial statements and makes adjustments for:

  • Owner’s Salary and Benefits: All personal expenses paid through the business.
  • One-time or Non-recurring Expenses: Such as unique legal expenses.
  • Non-cash Expenses: Including depreciation and amortization.
  • Discretionary Expenses: These may range from travel to entertainment expenses not essential to business operations.

For sellers, an accurate portrayal of SDE can significantly enhance the perceived value of their business. It provides a truer representation of a business’s earnings, reflecting what an owner truly gains from the business. If taking out a loan to acquire a business, SDE can give an owner insight into how much profit they will take home after loan payments.

For prospective buyers, SDE is a crucial measure of a business’s underlying profitability and potential for future growth. If taking out a loan to acquire a business, SDE can give a buyer insight into how much profit they will take home after loan payments.

Choose Your Hard

One day, we all are gonna be 70 yrs old (God willing). I see so many people avoid long-term pain for short-term pleasure. Hell, there are things I should have done in my early 20s that would have made things a lot easier for me now in my mid-30s.

So do the hard things. Because you CAN do the hard things. Start that business. Buy that house. Get that education.

At the end of the day, life is going to be hard regardless. You will have pain. Ask yourself, would you rather have the pain of effort or the pain of regret? Choosing to avoid the hard things isn’t going to make life easier for you. In fact, it might make things really hard for you one day.

“Find an asset class institutions aren’t aware of. When they do that’s your exit.”

These were the words spoken to me by the Chief Asset Officer of my old private equity job.

Well, I’m paraphrasing. But that’s the gist.

We one day were hanging out smoking cigars and drinking whiskey in San Francisco, pontificating on the next hot asset class. CAO mentioned he was looking at Detroit when homes there were going for $10,000/home after Detroit filed bankruptcy in 2013. Homes there now average around $80,000/home. Would’ve been the type of play financiers regaled themselves with for generations.

This is the edge for those of us savvy with social media. Every day there is someone patting themselves on the back regarding their returns. I’ve seen individuals invest in mobile homes, vending machines, Turo car fleets-the choices are endless.

I hold in high esteem the business acumen of Robert F. Smith, Vista Equity Partners’ Founder and CEO. He began investing in enterprise software right before the dot com crash of 2001-2002. He was investing in lower to mid-market private software companies. He was buying controlling interests in those businesses for pennies on the dollar before institutions flooded the class with capital. Those institutions are who he exited. Now he’s worth multiples of billions.

Or in the words of Sam Zell, “If everyone is going left, look right”.

Investing vs Speculating

One needs only to scroll social media briefly to see mention of someone “investing” in some asset. Be it real estate, businesses (private or public), or even digital assets such as websites or cryptocurrency, we are witnessing the rise of investing as an everyday commonality similar to putting on one’s pants every day.

I posit most are speculating and calling it investing.

Investing is hard. A thesis is given, research conducted, and values determined on a given asset. It seems today’s investor knows the price of everything but the value of nothing. Apps like Robinhood have brought the casino to the everyday investor and each day millions bet it all only to lose.

There is room for speculation in all portfolios, however, if one were to inquire as to the value of an investment and your only retort is silence and eye blinks, maybe take a step back and reevaluate.

Speculating subscribes to the greater fool theory. Speculators buy an asset and hope for price increases. They are swayed by whim & fancy and are always chasing the next great investment.

Speculating is like buying the ingredients to make your favorite dinner and just sitting them on your counter hoping they somehow come together in the proper manner.

Become an investor. Thoroughly vet your investments. Determine values. Develop an investment strategy. Do not be dictated by price. Be moved by value. It is so much easier on your emotions. When your thesis is solid not even Jesus will be able to sway you.

Leverage the advice of others who have been where you wish to go.

You don’t get any awards for doing life on expert mode. Some of us (myself included) like to experiment and learn themselves. Today I had to snap myself out of this mental trap. I don’t know what I don’t know and oftentimes a solution is relatively simple.

That’s where leveraging others comes into play. Leveraging others isn’t using others, let’s kill that noise first. We leverage others every day through books, media, and all sorts of devices and gadgets that don’t enrich our minds or our lives. Once more, nowadays money have monetized their knowledge for a fee. I paid tens of thousands for college, what’s an extra few hundred to learn a skill that I can use for life? Or on the contrary, what’s the extra few hundred to learn what I dislike about something worth to me? That time saved is priceless.

So I’m neck-deep in this course that was only a few hundred bucks. Even though I’m in real estate for my day job, I have a lot to learn when it comes to the acquisitions part of real estate. And that’s the part that makes you money in real estate. In some industries education isn’t a true substitute for experience. It’s up to you to think and decide whether or not this applies to your industry as well.

Do what you are best at. Fuck all the bullshit.

“Find what you are good at and pour gasoline on it. Then light a match.”

Who’s the better athlete?

In a game of 1 on 1 basketball, who would win Jordan or Phelps? Of course, MJ would, he would beat Phelps 11–0. Phelps would never get a shot off.

In a swimming competition, who would win? Duh, Phelps would dust MJ.

The point of the aforementioned examples is to point out that these 2 athletes are considered on par some of the best athletes in human history. But it is only at their niche. If we were to ask them to race Bolt they would lose before they knew what hit them.

Do what you are innately and uniquely great at. You can be good in lots of things however you would arguably only achieve greatness in the lane you are naturally talented in.

Go be great.

Pulling the trigger

“Shut up and shoot. Stop pussyfooting.”

G.O.A.T.

We sometimes spend too much time and energy researching and lining up our shots. This isn’t to say research and proper due diligence isn’t important, on the contrary, it can be paramount to avoid catastrophe. I’m saying we spend all our time analyzing, thinking, tinkering, research, sleeping on it, etc., etc. blah, blah, blah and we never act. It’s exhausting. And it’s from fear of failure.

You’re gonna mess up. You’re gonna fail. Sometimes in the most epic ways. But the important thing is to shoot the shot. Imagine if Michael Jordan spent all his time analyzing the perfect angle to shoot a jump shot. Perfecting the way he jumped. Mastering the art of his fadeaway. But he never actually shot the ball…he wouldn’t be Michael Jordan.

Stop worrying so much about the 1% that can go wrong. There is never a way to mitigate 100% of the risk. You’ll never have all the information. You have to learn how to act with 70% or hell sometimes 60% of the information. The best leaders learn how to trust their gut and have the confidence to see their actions through.

After a certain point, the best mentor is experience. And the only way to get that is to shut up and shoot the shot.

Go Where The Opportunity Is

“If you pay attention, you will see where the opportunity is.”

Recently I read Sam Zell’s Am I Being Too Subtle. In it, he repeatedly emphasized, “When others are looking right, go left.” In today’s economy, there are a number of opportunities hiding in plain sight that go unnoticed by many who are looking to turn one dollar into three dollars.

Are you aware we are witnessing many legacy businesses trade hands? Private equity and hedge funds have made a killing buying and selling legacy businesses. What if I told you the average main street investor can copy these techniques? There is $30 trillion in assets transferring right now from Baby Boomers to subsequent generations. A lot of that wealth is tied up in small businesses (think plumbing, HVAC, and other small businesses).

In addition, many small businesses fail within the first 5 years. A main street investor can buy into a business and from day one, have cash flow coming in as opposed to starting from 0. It’s much easier to go from 1-2 than it is to go from 0-1. Meaning it’s much harder to start and business and make it profitable than it would be to buy a mature business and increasing revenue. Capital makes everything easier.

There is a bull case for small business acquisitions. The vast majority of these small businesses will be unfit for acquisition, no question about it. However, if you go on any golf course midday during the workweek, you’ll find it filled with small businesses that own their own business.