Apr 12, 2022
Buying a Business Requires Due Diligence w/ Elliot Holland
- BRT S03 EP15 (114) 4-10-2022
Things We Learned This Week
- When Buying a Business – Need Inspection (called due diligence) of the financials to determine what you are buying
- Quality of Earnings – financial audit of income statements, bank statements, taxes & cash flow
- Business Valuation is typically 3 – 4x Cash Flow / Profit
- 3 Outcomes Post Audit of financials: accurate – yes; middle – off 10-15%; fraud – no
- Startup Model (new biz) vs. Acquiring an Established Business or a Business Model (Franchise)
Guests: Elliot Holland of Guardian Due Diligence
https://www.linkedin.com/in/elliottholland/
https://www.guardianduediligence.com/
Elliott Holland is a Harvard MBA alum and founder of Guardian Due Diligence, which specializes in helping everyday people acquire businesses as investments to optimize ROI and create new millionaires. He can walk your audience through the business buying process, how to approach due diligence, how long it really takes, what’s involved, and how it’s different than the DD process you might be used to in other asset classes or investment types (see more in attached one page overview). He stops his clients from buying bad businesses and expedites his clients' process to buy great businesses. These are million-dollar investments often backed by personal guarantees - so it hugely matters that people get it right.
Notes:
Elliot – has an MBA and background in corporate world, worked in private equity for 8 years working business deals, then started Guard Due Diligence to consult
Elliot compares himself to a Home Inspector except for business buyers
He reviews financials to determine Quality of earnings, a financial audit, review P&l, balance sheet, cash flow, bank statements, Quickbooks financials, taxes
Process assumption is to not trust anything Business Seller gives you
Due Diligence Process ETA – 6 weeks, get and review all docs, then deliver a report for the buyer to review with 50 – 200 items on a list and a summary
3 Outcomes Post Review of Due Diligence:
Good: financials are accurate – rec of yes to buyer
Middle: financials off 10-15%, rec to buyer to negotiate the price or terms
Bad: Financials have bug issues, business may be a fraud – rec of no to buyer
Example of Sale Price - $2 million purchase w/ cash flow of $500 K, paying 4x CF (or 3 – 4x profit), make your money $ back in 4 years
Average Business Sale is $5 million in revenue w/ 5-30 employees in biz
Private Equity sale could be $50 - $100 million w/ thousands of employees in biz
Elliot works with past Executives (or Entrepreneur) looking to buy a cash flowing business, usually in late 30s or 40s (age)
SBA Loan example – put down 20 % or $200K on a $2 mil purchase, then a loan of $1.8 mil w/ a Personal Guaranty
Broke line vs. bad business ?
Negotiation - M&A type advising, if profit sales #’s are less than shown in financials, then negotiate the price down (15%) or a seller note of 3-5 years, and Keep owner 1 yr vs. 3 months.
Business Owner who is selling probably leaves after 3 months. GM & other staff likely stay.
Max ROI – if buyer belives there is potential in the business to grow, may pay more for the business and keep owner for 2 years in advisory role.
Guardian Due Diligence has a Sample Report of process to download at their website
Other website - https://www.offerfromelliott.com/
3 Things to Consider before you go to Buy a Business:
How much can you buy (afford) ?
What Industries and actual Location (City or State) interest you?
Are You Prepared for a Life Change?
Guest: Denver
Nowicz, President - Wealth For Life
http://wealthforlife.net/
https://www.linkedin.com/in/denvernowicz
https://twitter.com/denvernowicz
Denver is an advisor with nearly 20 years experience working with clients in investments and insurance, designing retirement plans with a combo of both. He takes us through different strategies for clients to get the best allocations for their money over the long term. It is the Combo Strategy of both Offense and Defense, the synergy of the mix, not ‘All or Nothing’.
Notes:
Acquire Assets and work to create income streams (passive if possible)
Taxes – largest expense for most professionals, what is your tax plan?
Investing analysis, consider time lines, fees and taxes
Executive leaves corporate world & decides to buy a business, first have a financial cushion, have monthly expenses covered, means less stress
Determine what is the monthly burn rate for money – ie monthly expenses, new business owners will have both personal and business expenses during business ramp up
Passive vs. Active management for investments – passive is somewhat of a myth
Tax team and advice, be protective with tax setup
Corporate setup - S Corp or C Corp
S Corp = pass through earnings to business owner
C Corp = business tax rate of 21% on earnings
Write offs and depreciation of equipment
Expansion plan and cash flow
File self employed vs. S Corp., good to file as C Corp if larger sized company, $1 million or more
Financing options – for established business or business model (franchise) is easier as you have cash flow from the business vs. startup with no revenue (need personal assets)
If business has revenue / cash flow – banks will accept
Build asset classes with income
rental income with real estate
stocks that appreciate, also can invest in stocks that pay dividends
Passive investing – Less connection and distance to a deal, less risk and less work, but also less return.
When you receive lump sum money or sell real estate or business – break up tax burden by setting up a trust first.
Deferred sales trust – sell through a trust and pay taxes over a 10 year period
Loans and lines of credit on assets like stocks or real estate
Loans not reported as income and loan interest rate is lower than tax rate.
Set up in 3 tax buckets – 1. Taxed (income) 2. Tax deferred (401K) 3. Tax free
Use each bucket as needed. Learn the tax offset strategies and put yourself in tax free position.
Real estate write offs and depreciation to save tax – check rules.
Can refinance and pull money out of a property – not taxed.
Check with professionals, CPA’s and attorney before doing any of this.
BRT Clip from Seg. 2 of 12/5/2021
Guest: Jon Ostenson, w/ Franbridge Consulting
https://franbridgeconsulting.com/
https://www.linkedin.com/in/jonostenson
Jon Ostensen discusses the Franchise industry on multiple levels; from being a broker, to purchasing a franchise, to investing and also the operation side of running your own. He gives numerous examples of opportunities in franchising - How much does it cost, the buy in process, and realizing franchises are more than just food opps.
Jon is a consultant, owner/investor, author (The Franchise Path), and international speaker specializing in the area of non-food franchising. He serves as CEO of FranBridge Consulting where he helps clients in the process of introducing them to opportunities from the over 300 high growth brands that he represents. Additionally, Jon oversees FranBridge Capital where he and his partners own 18 territories across 5 property service franchises.
Full Show: Here
Business Buying Topic: https://brt-show.libsyn.com/category/Private+Equity-Valuation-MandA-Franchise-Business+Broker
Investing Topic: https://brt-show.libsyn.com/category/Investing-Stocks-Bonds-Retirement
Link to Taxes Show on 10/31/2021 w/ Denver: Here
Link to Offense / Defense Show on 6/6/2021 w/ Denver: Here
Link to Shows, Denver was a Guest: Here
‘Best Of’ Topic: https://brt-show.libsyn.com/category/Best+of+BRT
Thanks for Listening.
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