Archive for category: General

You may have heard about NFTs in the news at some point in the past year.  These digital assets are in their first era of growth and exposure and big brands like Nike, Gucci, and Sotheby’s are jumping in on the fray.  We thought it would be worthwhile to give our readers a simple explanation of what NFTs are and how brands and businesses are taking advantage of them.

The Blockchain

NFT stands for non-fungible token.  Money, being interchangeable and indistinguishable, is an example of a fungible asset.  Your house or the Mona Lisa, for example, are unique and irreplaceable, making them non-fungible.  

NFTs are created on a blockchain.  The most popular blockchain that most people know at least something about is Bitcoin (BTC), which is primarily used as a store of value.  But many other blockchains have other use cases.  Ethereum (ETH), for example, rose to prominence for its use of smart contracts, which disintermediates buyers and sellers in various markets.  ETH is also the most popular blockchain for NFTs.

What Can Be an NFT?

Pretty much anything can be an NFT.  Let’s start in the physical world with the Mona Lisa, which we mentioned already.  While it’s true that you can go to see the Mona Lisa in Paris at the Louvre, you can also see it on your phone.  You can print it out, frame it, and put it on your wall.  You can make it the desktop wallpaper of your computer.  But you’ll never own it.

The Mona Lisa has value because we as a society have assigned it value and because most of us in the world live in economic systems in which the owners of private property can sell items of value that they own.  But since the Mona Lisa might be too extreme of an example, think of baseball cards.

Baseball cards are made of cardboard.  They were printed by computers, not designed by a famous Renaissance artist.  They are not inherently useful.  Yet our society still assigns them value, and they change hands to the tune of millions of dollars per year (if not more).

NFTs take these physical-world principles and put them into the digital space.  Think of them as digital certificates of authenticity which show the chain of custody all the way from the original creation of it on the blockchain (known as “minting”) all the way through every buyer until it’s ended up in your hands.  

Examples of Recent NFT Transactions

Yeah, okay, but who would do this, and what would it be for, you might ask.  Great question.  Some recent examples include:

• Jack Dorsey selling an NFT of his first tweet on Twitter for $2.9M (don’t worry, he donated all the proceeds to charity)
• Tom Brady creating an entire platform called Autograph which sells moments and autographs from sports legends, including Tiger Woods, Wayne Gretzky, and Naomi Osaka.
• The NBA creating a marketplace called Top Shot that sells all sorts of moments.  An NFT of a LeBron James dunk sold for just under $400,000 USD earlier this year.

Examples of NFT Use Cases

But NFTs aren’t just for global megastars and sports leagues, they can be created, bought, traded, and sold by anyone.  Foundation and OpenSea are examples of large marketplaces where NFTs are minted and sold everyday.  A fancy digital iteration that doesn’t exist in traditional art?  You can create a setting when minting an NFT that triggers secondary revenues to the original minter of the NFT everytime the NFT changes hands.  

Band Kings of Leon included software in an album they released as an NFT which allows the current holder four front row seats to every tour for life.

Nike recently filed a patent to allow for blockchain authentication of ownership of physical sneakers.

Perhaps the most fun and interesting use case of NFTs currently is in the Zed.run virtual horse racing marketplace.  You can buy virtual horses as NFTs and then run them (and win crypto) in various races which are running 24/7.  Seriously.

Bubble?

While some might throw up their hands and say they simply don’t understand, there are lessons to be learned (and money to be made) even during bubbles.  It’s too early to tell whether NFTs are a long-term trend or just a modern day version of Dutch tulips.  

The IRS has not yet offered guidance on them, but if you buy an NFT (which is a crypto asset) using crypto, the IRS has offered guidance on that, and as such it falls under capital gains (if your NFT appreciates).  Some speculate that the IRS may choose to classify it under the collectibles bracket, which is at an even higher rate than the current capital gains tax.

What’s clear is at the moment NFTs can be created, made scarce, bought, sold, and even serve as a source of residual income.  That makes them just like many other collectible objects which you may not care about or even understand the market for.  But hopefully after reading this you understand NFTs better, even if you have no desire to ever own one.

We don’t have any NFTs for sale here at Apex, but we have plenty of businesses that will be great assets for years to come.  Give us a call if you’d like to check a few out.

A provision to gradually increase the federal minimum wage to $15/hour was recently removed from a budget reconciliation bill in Congress.  While that pay increase doesn’t look like it will be coming at the federal level this year, the debate around the topic isn’t going away and has already led companies like Amazon and Target to announce their own moves to at least $15/hour for all new employees.  In the same vein, the State of California has announced a state minimum wage of $15/hour effective January 2022.  Whatever the starting pay is for your employees, you should know and understand the talking points of this debate.

Stats and Guesses

As part of the legislative process, the Congressional Budget Office (CBO) put out some projections on the effect of the move toward $15/hour:

• The cost to the government would be $54 billion dollars over a ten-year period
• 30 million Americans would get a pay raise
• Of those 30 million, 900,000 would be lifted out of poverty
• Possible job cuts as a result of this could be close to 1.4 million workers (.9%)
• Labor costs/Purchasing power (depending on your perspective) would increase by $333 billion over the same ten-year period

While the CBO is a nonpartisan body, that doesn’t shield them from criticism, and these numbers received their fair share of disagreement from both sides of the aisle.  What is clear already is that more than 29 states have minimum wages that are higher than the federal minimum wage, which was last adjusted in 2009 to $7.25/hour.

Your Business

We’ve talked before about different ways to financially reward employees and why hiring for cultural fit is an important part of making sure that your team isn’t only money motivated.  While not every business has the resources to simply double starting pay, and while the vast majority of our clients don’t have a single team member on minimum wage, it’s important to realize that such a dramatic change will affect everyone and every business.  Questions you should be asking include:

• Do any of my key vendors employ minimum wage workers?  Have they forecast how our prices would change if that minimum wage would change dramatically?  Do I have contingency plans in place in case they decide to cease operations?
• Using answers from the first set of questions, how would you deal with increased costs?  Would you pass that on to the customer?  If so, what percentage?  How does your business change as a result?
• How closely are the lowest-paid members of your team compensated in relation to the minimum wage?  What adjustments would you need to make to their salaries as a result?

Sometimes we can forget that changes we don’t think will affect us or our businesses will indeed affect us and our businesses, and in profound ways.  Rather than passively wait for changes to occur, the best business owners proactively attack challenges before they become problems.

Are you and your team happy with the compensation plan you have in place?  Have you thought about that plan in relation to a possible future sale?  Give us a call to talk about it.

In any business transaction, there are going to be key deal points that are deal breakers for the buyer or the seller. As brokers, we’re going to represent our client to the best of our ability. We also have one eye on the greater picture, the deal itself. And sometimes, we can come up with creative solutions to get a deal to the finish line and make both parties happy.

Real Estate

Sometimes a seller wants to include the real estate of a business along with the sale. But if it’s bundled together, it becomes too much for the buyer to take on. Sometimes the financing won’t cover it. Sometimes because the cash flow isn’t there. Owners will sometimes not pay themselves rent on the property and thus create an unattractive proposition to buyers who don’t have the luxury of owning the building the property is housed in.

A win/win solution can be to carve the real estate out of the deal and make the seller a landlord. In this way, the buyer doesn’t have to deal with the cost of the real estate. And the seller is incentivized to make sure the buyer succeeds so he gets additional cash flow via the tenancy.

Royalty

We’ve discussed the risks of an earnout on numerous occasions.  Sometimes a seller who isn’t happy with this option can ask for a royalty on a specific product or in a specific division of the company. The principle of the earnout is the same: money later instead of at the time of closing.  

This can be a win for a seller who doesn’t want to go down a  traditional seller financing route (for whatever reason) and for the buyer who can see that the seller believes in the product/company enough to defer compensation and base it on performance.

Assets

Over the years, the seller may have acquired assets that are either superfluous to the business (additional trucks that are simply being kept as “spares”) or not part of the buyer’s vision for the company. The seller doesn’t have to “take a loss” on these assets. He/she can simply carve them out of the transaction and sell them separately. The buyer wins by not paying for assets that he/she doesn’t feel the business needs going forward.

Spinoff

Sometimes a buyer might only be interested in a particular part of the business. This could be the fastest growing segment of the business. Or it might feature a method or technology that he/she is particularly interested in. This presents an opportunity to spin off that part of the company either as an entity owned solely by the seller or in some kind of partnership (allowing the buyer to fully buy out the seller at some point.)  This can allow the seller to take some money off the table and/or use some of those proceeds to package up the rest of the business for sale on its own.

There are many bespoke possibilities to get to the finish line of a transaction. But you can’t get there if you’re overly focused on “winning” a deal point and ignore its role in the transaction as a whole. That’s where we can (and do) help. Want to know more? Give us a call!

Here at Apex, we’ve been proactive in advising our clients as 2020 has unfolded. We began the year by discussing issues that might come in an election year. As the first wave of lockdowns occurred we encouraged people to look at federal funds (and followed up with detailed information on PPP). As the lockdowns continued we shared our long term outlook (don’t panic) while offering short-term changes that could help businesses adapt to the continuing chaos.

But now it’s the second half of 2020 and there’s no “normal” in sight.  What now?

We’ve heard many business owners say “2020 is a write-off.” While we understand that thinking, there’s also a danger in the phrase… It assumes that events know when December 31st comes and hence switch off just because it’s a new year. A new year may be something that we as humans pop champagne over, but the universe is indifferent. It just keeps going. Hence, with months of an unprecedented business climate, we should have more wisdom under our belts, and more importantly, we should use that wisdom.

Our position at Apex is unchanged. We look at the fundamentals and the transactions that we continue to handle. Our business has not stopped. There are still buyers and sellers looking to do deals. Every industry is different. While food and beverage and entertainment may be tougher to sell at the moment (yet some of them still continue to move), some businesses have temporarily put their listings on hold as they experience record years.

However, your position may have changed.

Leaving the Corporate World

You may have been someone who was already looking to leave the corporate world and enter business ownership, but now you have cold feet.  Is having a job any more secure in this environment? While business owners are indeed facing challenges, they do so knowing they have the most control over their destinies. They can live and die by that self-determination, and that’s preferable to waiting for an ax to fall. Does COVID-19 really change whether a business is the best vehicle to determine your own destiny?

Selling a Business

You might have been someone looking to sell a business. You still need to do what’s necessary to prepare that business for sale. And that includes guiding it through challenging circumstances. As we’ve discussed before, companies who showed good performance in 2009 and 2010, following the 2008 financial crisis, made for even more attractive acquisition targets. Those companies showed resilience, not just doing well when the sun was shining, but when the storms hit. Has COVID-19 changed your desire to sell your business, or just demanded more perseverance and resilience from you?

In this second half of the year, we aren’t waiting for events to “happen to” our clients. We are encouraging them to take matters into their own hands. If it feels like you’re trying to catch a falling knife, get some gloves on and reach those mitts out. Success in life doesn’t come to those who passively wait in fear for the next disaster, but those who, amidst setbacks and challenges, fill sandbags for what may come next. They keep their eyes on their environment close and far, watching for opportunities.

Feeling paralyzed about what to do in 2020? Talk to one of our advisors. While this is all of our first time through COVID-19, it’s not our first major financial shock. We have great advice and guidance for you.

Some time ago we wrote about adjustments you could make proactively in your business as COVID-19 started to make larger waves in the global economy. As the crisis grows and lingers, dynamics necessarily change for both buyers and sellers in the marketplace. What we continue to tell our clients here at Apex is: don’t panic. Those who can keep their heads when everyone is losing theirs will prosper when conditions improve. With that spirit of calm, let’s consider some things.

Short Term (the next 90 days)

We have deals in the pipeline and some of them will collapse due to a change for either buyer or seller that was unforeseen prior to these past few weeks. This has nothing specifically to do with the business but more to do with the general business climate. For example, a buyer may get cold feet about buying now or watched income which was going to be cashed out of stocks to finance the sale crater in value. They may see waiting as the best option.

That said, many deals will close, regardless. We saw some of this in 2008 during the financial crisis as well.

While the media may make it seem that fire is raining down from heaven, the reality is that business does go on in many sectors. And not just in the US but worldwide, including the supply chain for all businesses marked as “essential”. Indeed, some businesses are seeing their most profitable months in some years even as they move towards acquisition. Some of those sellers might delay a sale just to continue to ride some of those record profits a couple more months.

Medium Term (the next 6 to 18 months)

Should some kind of lockdown become national in the United States as it has in much smaller countries in Europe, there could be a hit to valuations of businesses, as those are based on earnings including the most recent financial statements.

On the other side, borrowing will be historically easy, as the Treasury and SBA make unprecedented guarantees and funds available. Rates are at historic lows. Some banks may put some additional provisions in the paperwork in relation to COVID-19 and its impact on certain types of businesses. But banks want businesses to move forward, not to freeze up, so they will likely be encouraging rather than discouraging.

Long Term (the next 24-48 months)

As with any shock to the economy of any country, there will be some necessary recovery time. But the realities of life go on.

The Baby Boomers continue to retire, and in record numbers, and many own businesses that have to be sold. Many people will begin to see their jobs through new lenses in a period of remote work. And the idea of buying a business, with its levels of control and opportunities for growth, may become even more appealing.

This isn’t to say that we don’t see some challenges ahead, but we tend to take the long view, because this isn’t the first economic shock we’ve experienced as advisors. Life does go on, despite great uncertainties, and indeed, this time, as any time in life and in business, is only as good as what you choose to do with it.

We look at facts and history and combine them with what we hear from our buyers and sellers and that leads us back to what we started this article with: not panicking.

Do you have questions about buying or selling a business right now?
We’re happy to talk through some of the challenges (and opportunities) with you!