3 Stupid Tax Mistakes

Tax MistakesIt’s that time of year in America when taxes are on our minds. When we get to pay the government for the privilege of providing fellow citizens with jobs, supporting the economy, doing something that matters to our community, etc. However you might feel about the tax system in general, one thing you shouldn’t do is make stupid tax mistakes, especially with your business. We can tell you we’ve seen them all, multiple times, and they will usually bring any sale to a screeching halt.

Not paying taxes

Small business owners have cash crunches at times, and it can be tempting to take money from any available source. One of the most obvious places is the withholding for your employees. Many small businesses don’t use a payroll service and  are responsible for paying the withholding to the IRS on a timely basis. Instead of doing that, they “borrow” the money that isn’t theirs. This never, ever works out well.

Worse, if you do have a payroll company that files timely reports, the IRS will be immediately notice the discrepancy between the filings and what has been deposited and you’ll get some lovely new fines and penalties to go along with what was already due.

Other small business owners don’t pay their estimated taxes, or fail to even regularly file taxes. If they’re thinking the government won’t notice… they will.

Inventory games

Inventory is only deductible when you sell it, and sometimes people want to make their balance sheet look better, so they fidget with the value of their inventory to “create” tax savings. Then they change inventory values back the following year. Sometimes they lose track of what they’ve done, and now the books don’t just look bad in the case of an audit, any potential buyer will be confused as well. Their suspicions will be rightfully aroused as to what else might be not quite right in the business. Check the new tax law to see if you’re eligible to treat inventory differently. Some businesses now are.

Have Low Revenues or Consistently Poor Profitability

We often say we’ve “seen it all” here at APEX, but the IRS not only has truly seen it all. The difference is that they have the legal power to make you pay for your mistakes, whereas we can only cringe around the office.

Suspiciously low revenues or consistent significant pass-through losses, especially in S-corporations, are blinking red lights that say, “Come audit me!” There are better ways to make tax savings than using a corporation beyond the limits of the fairly generous tax allowances that we get in the US.

Every business is different and has its own set of challenges. But they all answer to the IRS. And the lesson we’ve taken from dealing with so many businesses and transactions year after year is that taxes are what Mark Twain said they were years ago: as inevitable as death.

Have you made some of these mistakes but are hoping to sell your business?  We can connect you with the right people to get these issues handled so we can help your business go to market. Give us a call today.

Cautionary Tale #3: The Answer You Want Isn’t Always The Answer You Need

Questions and AnswersThis is a continuing series of stories we want to share with our clients so they don’t make the same very costly mistakes.

One of the many reasons you hire a business broker to help guide you through a sale is because we will tell you important truths without fear. We want a successful transaction and that can’t be done by hiding things or not being fully truthful. But that sometimes means that a client will want an answer you simply can’t give.

One of our clients had retired from a twenty year career in a field, and had decided to get into a food franchise. The first location that he picked was about thirty minutes from his home, so he had a general manager in place. The location wasn’t losing money, but it wasn’t making money at the rate he expected.

He also bought a second location of the franchise much closer to his house, which he had great expectations for. He wanted to get rid of the old location so he could focus all his energies on the second location. There was a problem, though. He didn’t have a sellable business.

There are many reasons to buy a franchise, but once you’ve committed and bought one, you simply have to put in the work.

Because the business wasn’t in a strong position, the sale price wouldn’t clear the debt that already existed. This meant that the deal couldn’t be financed. Worse, he still had an existing lease obligation that had some strings attached.

We told him the numbers had to be better so that we could help him sell his business. He disagreed.

Not only did he disagree, he went around asking for second and third opinions. Word kept coming back to us from friends and colleagues that he wanted someone to look at his business and give him the answer he wanted. We couldn’t give him that answer because it would have been a waste of everyone’s time.

Any business owner starts with dreams about possibilities. But once the business starts in earnest, those dreams meet with reality. Once you are ready for a sale, that reality has to pass the smell test of our team here at Apex before we will put it out on the market with our name behind it.

Sometimes, having a broker serves the purpose of telling you that you don’t have a business that’s ready to sell…yet. But if you take our advice about what to improve, you can have one sooner than you think. But that means you have to be willing to hear the answer you need, not the answer you want.

Want to avoid being part of a cautionary tale?  Give us a call so we can discuss implementing better systems in your business so you’ll be in a position to sell when you want.

Cautionary Tale #2: No Systems in Place

PlanThis is a continuing series of stories we want to share with our clients so they don’t make the same very costly mistakes.

We’ve discussed before that if you do well in one industry and decide to come back to it after a non-compete has ended, that there’s every likelihood you will do well again. You’ve already have a good position in knowledge and network against your competition. One of our recent clients had a seven figure exit from an equipment company over a decade ago. Once his non-compete ran out, he got back into the same business and in only six years he had grown the company from zero to $100M in annual revenue, against a 20% net profit.

That sort of business and that kind of profitability gets a lot of attention, and before too long he had an offer for a cool $100+M on the table from a serious buyer.

There was only one problem, the seller wasn’t serious. The reason we know he wasn’t serious was twofold.

Firstly, he wasn’t responsive. There was a period of eight weeks from when the offer came in before he even responded.

As we’ve said numerous times in various articles, successful transactions aren’t born, they’re made from cooperation, communication, and responsiveness to requests. If he was serious about selling the business and not just testing the waters, he would have reacted more appropriately to an offer that paid such respect to the hard work he had put in for the last six years (and even longer, as he didn’t mentally start from zero, but was building on previous experience, when he started the second business.)

Second, his lack of responsiveness didn’t come from a lack of seriousness alone. The reason he was gone for weeks at a time was because he was very busy working in the business instead of on the business.

He had a “management team” but it was really more for show than for go. He had a stranglehold on operations and no systems in place. This had already spooked the buyer early on, but the buyer thought about requesting an extended transition time, perhaps over a couple years, in order to ensure a successful handover.

Multiple Buyers

We encourage having multiple potential buyers looking at your business at any given time so that we don’t have to bet on one candidate.

In this case, the seller refused to allow us to market his business more broadly. He put restrictions in place about who could be shown the business. Also, he had to pre-approve every person we wanted to show the business to before we could move forward, waiting weeks for an approval. When the buyer withdrew his nine figure offer after a lack of responsiveness on the part of the seller, as well as an unanswerable fear about inability to transition, we had no other buyers we could offer to the seller… even if we believed he was serious, which we had come to realize he wasn’t.

This all goes to show that a successful build and exit in an industry can and does put you in the driver’s seat to do it all over again, but with that increased success can sometimes come a detachment from hard truths:

1) A business that can’t run without you is just a job you own. It’s not a sellable asset.

2) Your actions, not your words, dictate how serious you are about selling your business.

3) Your best chance of selling a business comes by having it be available to the largest number of serious buyers.

Want to avoid being part of a cautionary tale?  Give us a call so we can discuss implementing better systems in your business so you’ll be in a position to sell when you want.

Cautionary Tale #1: No Transition Plan… Ever

Time for ChangeThis is the first in a series of stories we want to share with our clients so they don’t make the same very costly mistakes.

Look, maybe it’s not time, let’s talk in another 4 months.” This is a quote we’ve heard many times before, and in itself, it’s totally neutral. But once you understand the context, you realize how strange it really is.

The call came from someone we had been speaking to for the last three years, who has a printing business in the Midwest. He’s in his early 80s, as is his wife. He has a daughter who is on the board of the business, who was only told about the idea of a sale in the last year. She has expressed a lack of certainty as to whether she would want to take over the business. But even if she did, there is no transition plan in place.

This is a failing that is common in family businesses, but in this particular case, we had been talking about a possible sale for three years already.

Because we’ve been doing this for many years, we can tell you the likely ending of this story.

We will get a call from a family member or from the client from a hospital bed, informing us that we need to sell the business quickly, or worse, that the client has already passed. Unfortunately, we will be working with a probate court to sell the business. It’s not our place to tell this client what to do with his life. If he thinks, in his early 80s, that with no transition plan, no clear family succession, and a wife who just had a second major surgery, that it’s “not time to sell,” then clearly it isn’t.

What we can do is use his story to caution our clients: have a plan or plan to fail, and don’t think you have guaranteed time. Every moment in this life is a gift. Take opportunities and options when they come your way.

Want to avoid being part of a cautionary tale?  Give us a call so we can discuss your transition plans.

Real Estate Gives You More Options

Commercial Real EstateOne of the challenges we sometimes face in putting together the sale of a business is real estate that is intertwined with the assets of the company.  Sometimes that’s the perfect way to run your company and you shouldn’t change it. Other times, the circumstances are such that rearranging things would be too costly and ineffective.  But given time, deliberation, and good advice, you can use the real estate that’s involved in your business to great advantage.

Control the Lease

We can tell you that we’ve seen deals that were on the way to the bank crash and burn because of mishandled landlord/lease situations.  This is why a lot of businesses situated in key real estate will seek to acquire the property and hence control the terms of the lease themselves.  Depending on how the property is being acquired (perhaps it will be with partners who are unrelated to the business) it could make sense to form an entity not related to the company that you’re operating so that there is a separation of assets, yet an alignment of interests.  By creating a different business entity, you’ve not only created a smart hedge against changing market conditions – either for your business or for real estate – but you’ve simplified a possible future sale of the business for a buyer.

Sell Either

The reason separating your real estate from your business makes things simple is that it provides more options.  You are free to, at any time, sell only the real estate and not the business, or only the business and not the real estate. Such a move allows you to take some money off the table right away while still watching how things play out.  It also means that a buyer interested in relocating the business can do so, since he/she no longer has to commit to buying real estate with your business.

Sell Both

But you may have an acquirer who seeks to have the same comfort you’ve had in owning these separate entities.  Because you’ve taken the time to separate them and keep them separate via responsible bookkeeping, accounting, and timely tax filings, now the real estate no longer becomes an “of course” part of the sale, but an option that can carry a premium.

There are many times in business when someone will say in retrospect, “I wish I had done it that way the first time.”  We know that business doesn’t always happen the way that it’s described in business books (or even blogs!) but real estate is one of the oldest and smartest forms of investment.  There’s every reason to put it to work for your business as a partner, in a separate entity.

We have a lot of real estate experience in our offices.  Give us a call to see if we can help offer some advice on your situation.

Should You Grow Through Acquisition?

growthThere are two ways you can grow your business: the fast way or the slow way.  What’s important is that there is no easy way.

Both have their pros and cons, and in this article, we’ll examine the question of whether you should grow your business through acquisitions.

Organic Growth

If you have the time and the money, organic growth is almost like compounding interest: it will happen as long as the fundamentals are sound.  

You can add new products or services, increase sales, increase market share, etc. This growth will be part of a narrative that will make for a valuable exit one day, but it is a day in the far future, as organic growth is slow.

Growth through Acquisition

On the other end of the spectrum is growth through acquisition.  You can instantly acquire new revenue, resources, and introductions to markets.  But you have to pay for it with time and money as well, just at a different pace.

  • You will have to pay for the acquisition.  Sometimes a good earnout can be negotiated with an outgoing seller, or good payment terms negotiated.  What is important is never to pay too much in cash or to take on too much debt.
  • You need to have a plan.  Since this business will need to be integrated with your existing one, you’ll need to have a plan as to how departments will come together, including the hard decisions to let some people go.  Those first 100 days after the acquisition are a key part of success.

Beware of Deal Fever

We’ve seen this illness before, and it can happen to the most rational and cool-blooded among us: like Ahab chasing the white whale, people can get lost chasing a deal.

  • Keep in mind that pursuing an acquisition can become a part-time job/project.  Don’t let yourself be distracted from your core business that you are looking to improve through this acquisition.  Either have someone (like a broker) help you through it, or make sure you delegate parts to your team so that you don’t take 2 steps forward only to take 2 steps back.
  • Don’t let deal fever blind you to the facts.  Sometimes we want a deal to happen badly enough that we will ignore our own due diligence and say our “gut” is telling us to move forward.  Deal fever can confuse you: that’s why it’s important to have an unbiased third party (like a broker) help you evaluate numbers and your integration plan.

It’s not binary.  You can grow organically and through acquisition.  What’s important is to stay focused and enjoy the journey, never letting present success go to our head as we plow forward to possible future success.

Are you considering making some acquisitions to grow your company?  Give us a call to see if we have any listings that are a good fit for you.

Alternative Financing for Growing Businesses

FinancingWe’ve said before how important it is to cultivate a relationship with your banker.  

Such a relationship will be important not just throughout the lifespan of your business but particularly when you want to craft an exit.  

That said, sometimes market conditions, or the conditions of your business, call for alternative forms of finance, and in this article we will discuss just three of the many possibilities in this growing space.

Lending Club

Of the many options in the fintech space, Lending Club is the most like a traditional bank.  They will require that you’ve been in business at least two years, with annual revenues of at least $75,000.

They will also make sure that the borrower has a minimum 620 credit score, with no recent bankruptcies, and at least 20% ownership of the business.  

All these factors get put into their internal rating system, and then once approved, your loan gets put into their marketplace, where various people can buy part of your loan. Once the note is fully funded, which can take as few as three days or as many as 21, the money is disbursed and you’re held to regular payments across terms like 36 months.

They don’t offer revolving credit and the rates can vary from 7.77% – 35.11%.  Depending on how good your credit profile is, it’s an interesting alternative if conditions don’t allow for a traditional bank loan.

Kabbage

If Lending Club is most like a bank, Kabbage is most like our future powered by artificial intelligence.  The platform is entirely algorithm-based, assisted by machine learning. There are no human parts in its credit decision process.  

You create an account and give Kabbage access to various accounts you use as a business owner, be it your credit card processor, your bank account, your email software, your social media accounts, and using all these different factors they will create a revolving offer against a 6-month repayment window.  

The effective interest rates can range from 15 – 50%, again depending on your business, rather than your personal credit, profile. There are no minimum revenue requirements, no personal guarantees, and with over $3B loaned since 2009, there is clearly a need for this type of financing.

PayPal Loans/PayPal Working Capital

The most specialized of the options we’re discussing in this article is Paypal Loans, which has also been called Paypal Working Capital.  This option is only available to you if any part of your business accepts payments via PayPal, because the funding mechanism examines your PayPal activity in the past 12 months and will allow you to borrow as much as 18% of topline revenue processed through PayPal (up to $97,000).  

Repayment is made as a percentage (which you can determine, depending on how quick/slow you want the repayment horizon to be) of each incoming sale, so repayments can be made daily if you’re processing payments at such a rate. PayPal provides the capital for a fixed fee, so there’s technically no interest charge, though you can calculate effective APRs to vary between 15 – 30%.

We also have access to some local resources that may be able to help you. Give us a call and let us see if we can help!

Three Key Questions When Considering the Leap to Business Ownership

three questionsThere are so many questions you might ask yourself when thinking about becoming a business owner.

In fact, we’ve addressed many of those concerns in previous articles, here and here.

But today we wanted to focus on three important ones that have to be answered.

Where will I get the money?

We’ve discussed various ways to get the money for buying a business in the past.

While it’s always best to just have a large amount of cash laying around, most of us are more likely to pull from multiple sources, including retirement accounts and SBA loans.

Exploring and understanding this step well (including a solid relationship with a banker) will give you the range of purchasing power you have. In addition, you’ll have a snapshot of the variety of businesses you could consider in that price range.

Do I buy a franchise or an existing business?

This has just as much to do with personality as anything else. Are you the sort of person who wants to follow a proven system or do you want to experiment, make mistakes (and find successes) through your own initiatives and trial and error?

Franchising offers the appeal of trial-tested methods, whereas your own business offers you flexibility and nimbleness that can’t exist at the level of a national brand.

Are the books in order?

On the broker side of the business, there’s nothing more unfortunate (or less surprising) than finding that a business doesn’t have its books in order. “Good enough” has been the standard for so many years, with no forethought of a future in which a buyer might want more than a box of receipts and incoherent financials.

A business with a solid and reliable set of books, not just for the current year, but for many years back in its history, tells you a lot about how the business is run and the priorities of the ownership and staff.

The books will show you where the opportunities and the weaknesses are. These are the medical records of that business. We try to avoid listing or representing a business that can’t supply historical financials or has troublesome tax issues. Make no mistake… you should be extra cautious when considering buying a business with those issues too.

Do you have follow up questions for any of the questions that we listed above, or any questions on any part of the buying process?  Give us a call at 913-383-2671. We’d love to help!

How SCORE Can Help You Build Your Business

mentoringSCORE, the Service Corps of Retired Executives, is a nonprofit supported by the SBA that offers counseling advice to business owners.

It’s powered by a network of 10,000 volunteers, mostly successful business owners and executives, who still love the sport of business and want a chance to help younger versions of themselves.

Because of the SBA funding and volunteer labor, a lot of this mentoring comes at no cost, whether in person at a local office, via email, or by video. They also offer workshops in person and on the web.  

While many entrepreneurs may form ad hoc advisory boards or lean on the advice of savvy investors who may be partnered with them, many more don’t really have a network to turn to in the early days.

SCORE can match that entrepreneur with someone of relevant experience or sometimes in the exact industry.  

Indeed, as you browse through the numerous success stories on their website, you get a sense of how diverse the mentorship can be… sometimes something as short as a few months, other times as long as a few years.

For example, Mutt’s Sauce was a Tennessee-based condiment company that had developed a local following. But when the recipe passed to his granddaughter after he passed away, with no other infrastructure or help, she turned to SCORE.

She got connected with someone who not only mentored her in how to start a food manufacturing business, but who also connected her with the right contacts to get her launched properly.

Sometimes it isn’t a new entrepreneur that needs mentorship, but one who has had a business for awhile and has run into a problem Karoun Yoga was just such a business, and after an initial explosion in growth, she found herself “drowning in expenses.”  

Her SCORE mentor walked her through Quickbooks so she knew her numbers better and she learned how to create financial reports that she not only understood but could use to improve her company. She also attended workshops on Google AdWords put on by her local SCORE chapter.

Even immigrants can benefit from SCORE, as Diego Tantardini discovered. He had two SCORE mentors meet with him regularly to go through numbers and helped him work on small-scale business plans, figuring out product/market fit.

What SCORE ultimately provides is trusted, dispassionate mentorship from those who’ve been there. If you’ve been wondering about mentorship as you build your company, it might be worth giving them a look.  

At Apex we can also provide you with connections to professional business coaches, networking groups, and other professionals to get you the help you need.

Is It Time to Revisit Why You’re Still Running Your Business?

As your business grows over the years, things change. You may come to find that the reasons you started the business aren’t the same reasons you’re running it now. Or even the reasons you aspire to in the years to come.

If you can’t easily answer “Why are you still running your business?”, it may be a good time to revisit why you started the business in the first place. Here are a few ideas:

Because you love the industry

If you were to look at some high profile industries, like surfing, coffee, or food, outsiders might look at them and say, “It would be so cool to have a business in that industry!” But in all likelihood those outsiders don’t realize these businesses aren’t just about celebrating something really enjoyable. They also have a lot of hidden challenges and difficulties that can’t be seen.

What keeps people in many companies year after year, decade after decade, generation after generation, is a true love of the industry.  If that love is still there through all the ups and downs of growing your company, you’ve got a good “why.”

Your Business WhyBecause you have great staff

Oftentimes people spend more time with their work colleagues than they do with their families and friends. Ideally that time shouldn’t just be tolerable, but enjoyable.

Camaraderie and a respectful spirit of collaboration often make all you do feel a lot less like work. Owners who are intentional about this process have created a great workplace that makes it a joy to be part of every day.  This is another good “why.”

Because you love the challenge

All business owners know that the sport of business is a daily, often hourly challenge. It will bring out the best in you and test your IQ (emotional and actual) in ways you couldn’t imagine.

The reality is that sometimes people are business owners simply because they couldn’t find a challenging-enough job to push them on a daily basis. Pushing yourself out of your comfort zone on a daily basis is another good “why.”

These are just three reasons to help you get the conversation started within yourself if you don’t really have a grasp on the “why.” As hard as you may work, you owe it to yourself to be able to answer that question when others ask.