Top M&A Entrepreneurs

Summary

In this conversation, Sharon Heaton, an M&A advisor, discusses various aspects of selling a business. She emphasizes the importance of building a transferable company and transitioning from an owner-dependent to a management-driven company. Sharon also explains the factors that affect the valuation of a business, including EBITDA and company characteristics. She provides insights into valuations in government contracting and the challenges of earnouts. Additionally, Sharon discusses the contentious issue of networking capital and the tax considerations involved in converting ordinary income to capital gains. In this conversation, Jon Stoddard and Sharon Heaton discuss the topic of seller financing and its implications for capital gains tax. They explore the concept of the installment sale doctrine and how it allows for the payment of taxes over time. They also highlight the importance of having an interest rate on seller financing to differentiate between ordinary income and capital gains. Overall, the conversation provides valuable insights into the tax considerations involved in seller financing.

Takeaways

Building a transferable company is crucial when considering selling a business.
Transitioning from an owner-dependent to a management-driven company increases the value of the business.
Factors such as EBITDA and company characteristics impact the valuation of a business.
Understanding valuations in government contracting requires industry-specific knowledge.
Earnouts can be challenging to structure and should be fair and clear.
Networking capital is essential for the functioning of a business and should be neither an increase nor decrease to the purchase price.
Converting ordinary income to capital gains can result in significant tax savings. Seller financing can be a strategy to manage capital gains tax by spreading the tax liability over a period of time.
The installment sale doctrine allows for the payment of taxes on seller financing as it is received, rather than upfront.
Having an interest rate on seller financing helps differentiate between ordinary income and capital gains.
It is important to consider the potential risks and benefits of paying taxes over time, as tax rates may fluctuate.

Chapters

00:00 Introduction and Background to Sharon
01:13 Deciding to Sell and Understanding the Value of the Company
04:44 Factors Affecting Valuation: EBITDA and Company Characteristics
07:06 Importance of Building a Transferable Company
08:49 Transitioning from Owner-Dependent to Management-Driven Company
10:12 Scoring Characteristics of a Business for Valuation
12:56 Negotiating the Purchase Price and Value of the Company
14:55 Determining Market Comps and Valuation in Government Contracting
17:35 Factors Driving Valuations in Government Contracting
20:22 Stock Sales vs. Asset Sales in Government Contracting
22:12 Considerations for Strategic Buyers in Government Contracting
24:56 Earnouts and Challenges in Structuring Deals
27:47 Valuation Examples and Importance of Recurring Revenue
35:06 Contentious Issues in M&A: Networking Capital
40:45 Tax Considerations: Converting Ordinary Income to Capital Gains
42:29 Seller Financing and Capital Gains Tax
43:26 The Installment Sale Doctrine
43:54 Paying Taxes Over Time
44:13 Interest Rates on Seller Financing

Summary

In this conversation, Jon Lowrance shares his journey of acquiring companies. He discusses his background in entrepreneurship and the decision to sell his grading and excavating business. Jon emphasizes the importance of taking action and not being afraid to make mistakes. He also highlights the conflict between traditional education and the skills needed for entrepreneurship. Jon shares the painful experience of selling his business and the lessons he learned from it. He then talks about finding the right business partner and the process of acquiring his first company, a retaining wall business. Finally, he discusses the importance of building connections and trust and evaluating the financials before making a deal. In this conversation, Jon Lowrance shares his experience and strategies for acquiring companies with growth potential. He discusses the process of negotiating the purchase, including valuing the business based on EBITDA and owner financing. Jon also talks about the importance of cleaning up the books and improving profitability after taking over the business. He highlights the need to increase prices and manage cash flow to pay down debt. Jon explains how he grew the business by adding crews and improving marketing. He emphasizes the importance of hiring a general manager and shares his approach to interviewing and assessing candidates. Finally, Jon discusses his plans for future acquisitions and financing. In this conversation, Jon Lowrance discusses the importance of learning through experience when it comes to running and buying businesses. He emphasizes that while academic knowledge is valuable, actually owning a business is the most important aspect for an entrepreneur. The conversation also touches on the difference between serial acquirers and one-time buyers, as well as the role of the owner operator in a business.




Chapters
00:00 Introduction and Background
00:37 Starting the Acquisition Journey
01:59 Selling the Grading and Excavating Business
05:44 The Importance of Taking Action
08:34 The Conflict Between Education and Entrepreneurship
11:22 The Painful Experience of Selling the Business
17:33 Finding the Right Business Partner
19:50 Acquiring the First Company: Retai

JOIN the DEALFLOWSYSTEM Community
Learn How to Buy a Business https://www.dealflowsystem.net

Adam Coffey's book, "Empire Builder: The Road to a Billion," serves as a comprehensive guide for businesses aspiring to scale from zero to a billion dollars in revenue, particularly focusing on the use of Private Equity. Key elements of the book include:

1. **30-20-10 Rule for Business Growth**: This rule is a central concept for scaling businesses, emphasizing a 30% gross margin, keeping SG&A expenses below 20%, and maintaining a minimum net profit of 10%

2. **Financial Literacy and Role Evolution**: The book addresses the common gap in financial understanding among entrepreneurs. It underscores the importance of understanding unit-level economics, business valuations based on earnings, and managing finances for long-term value. As businesses grow, entrepreneurs are encouraged to transition from hands-on roles to overseeing broader operations

3. **Investor Mindset and Understanding Private Equity**: Entrepreneurs are advised to adopt an investor mindset, focusing on cash flow growth and understanding their equity positions and growth strategies. The book also highlights the significance of private equity in scaling businesses, introducing the concept of the "P.E. pyramid".

4. **Holistic Business Growth Understanding**: Coffey emphasizes the need for a comprehensive understanding of business growth, covering strategic planning, people management, and financial literacy. He encourages entrepreneurs to make informed, strategic decisions at every stage of their business journey

5. **Roadmap for Growth Stages and Tools**: The book provides a detailed roadmap for the different stages of business growth and the necessary tools required for each stage, building upon the knowledge imparted in Coffey's initial book, "The Private Equity Playbook".

Adam Coffey, with his extensive experience as a CEO coach, author, and empire builder, brings valuable insights and practical strategies for entrepreneurs aiming to achieve significant growth and success in their ventures.

In a recent interview with Heather Endresen, a seasoned SBA Lender, a range of pertinent topics were discussed.

1. M&A Strategies: Discussing the importance of patience and strategy when merging and acquiring businesses, and methods to identify the right business to purchase.

2. SBA Regulations 2023: An overview of the new regulations introduced by the Small Business Administration (SBA) in 2023.

3. Personal Guarantees: Exploring the reasons behind the necessity of personal guarantees in SBA transactions.

4. SBA Seller's Guarantee: Delving into the implications and mechanisms of a seller retaining a 20% personal guarantee.

5. Seller's Contribution: The significance and mechanics of a seller's contribution towards the down payment.

6. Seller Note Insights: Understanding the structure and conditions of a seller note in SBA transactions.

7. SBA Standby Agreements: A deep dive into how SBA perceives standby agreements.

8. SBA Lender Guardrails* Emphasizing the protective measures in place to prevent overbidding and ensuring the financial feasibility of acquisitions.

9. Sellers, CIMS, and SDE: Understanding the correlation between sellers, Cashflow Information Memorandum (CIMS), and Seller's Discretionary Earnings (SDE).

10. Due Diligence Firms: Highlighting the role and importance of companies that conduct thorough evaluations before business transactions.

11. SBA Down Payments: A detailed look at the down payment requirements set by the SBA.

12. Investment Returns: Discussing investors' expectations of a 30% Internal Rate of Return and its relation to down payments.

13. SBA Ownership Transition: Procedures and requirements for changing business ownership under SBA guidelines.

14. Refinancing with the SBA: Exploring opportunities to refinance for better interest rates through the SBA.

15. SBA Investment Thesis: Discussing how the SBA evaluates M&A borrowers, the compatibility of real estate investments, and more.

16. Debt Service Coverage: Understanding the SBA's requirements concerning the Debt Service Coverage ratio.

17. SBA's New Credit Evaluations: A look at the SBA's new criteria for evaluating applicants based on credit reports, cash flow, and equity or collateral.

18. SBA Pre-Approval: The efficacy getting pre-approved by the SBA.

19. SDE Challenges with SBA: Addressing common issues related to Seller's Discretionary Earnings in SBA transactions.

JOIN the DEALFLOWSYSTEM Community
Learn How to Buy a Business https://www.dealflowsystem.net/

Investors for Your Acquisition: How FruitionCap Helps Self-Funded Searchers Buy a Business. In this interview we talk with Jason Ehrlich, principle at FruitionCap. Jason talks about a new fund to help Self-Funded Searchers buy a business. This new fund turns the search fund model upside down. The self funded searcher, the buyer, keeps the majority of the company.

Jason says, if your acquisition meets the parameters of Fruition Capital's investor thesis, they can invest the equity portion for your acquisition while at the same time, empowering you to retain complete control and the lion’s share of ownership.

The Key is to find good a good business to buy it must be: 10 years old+, B2B business, enduringly profitable, with +$750k ebidta, repeat or recurring revenue, but no tech or cyclical businesses.

JOIN the DEALFLOWSYSTEM Community
Learn How to Buy a Business https://www.dealflowsystem.net/

How to Invest in Online Businesses with Webstreet / EmpireFlippers. Jon talks with Justin Cooke, Co-Founder Empire Flippers & WebStreet about Webstreet.

Justin explains how WebStreet empowers investors to diversify their investments into passive and cash flowing portfolios of online content sites, Amazon storefronts and micro SAAS businesses.


JOIN the DEALFLOWSYSTEM Community
Learn How to Buy a Business https://www.dealflowsystem.net/

In this video, we have John Martinka, a seasoned M&A advisor with 20 years of experience and the author of 5 books on business buying. John has a no nonsense approach that comes from helping over 100 clients grow through acquisitions. John is here to shed light on the 7 most common mistakes (that almost every) first time business buyers make. Whether you're an experienced entrepreneur or new to the world of mergers and acquisitions, this discussion is packed with valuable insights you won't want to overlook.



📚 Books by John Martinka
1. Buying A Business That Makes You Rich: Toss Your Job Not The Dice
2. Getting the Deal Done: Tips & Strategies to Get Your Business Buy-Sell Deal Done—Successfully
3. Buying a Business That Makes You Rich
4. If They Can Sell Pet Rocks Why Can't You Sell Your Business (For What You Want)?
5. Company Growth By Acquisition Makes Dollars & Sense

Do you Feel like you would make a good acquisition partner with Robert? Click here: www.smallbizacquisitions.com/top-ma


In this video we delve into the world of private equity investment with Robert, the CEO of an investment group actively acquiring small businesses. Robert's first acquisition was a Mexican Meat Distributor bundled with a real estate purchase. Learn how and why Robert created his unique Floors & Ceilings Contract, which was designed to address hidden liabilities, and his strategies for mitigating such risks.

Learn about the importance of the balance sheet, Robert's criteria for selecting businesses over a decade old, and his core competencies in B2B Wholesale Companies. Robert talks about what he looks for in sellers, his approach to asset valuation, and the dynamics of PE funds.

Robert talks about on-market versus off-market deals, his rational approach to creating offers, and the intricacies of LOIs and partnership dynamics.

SHOW NOTES:
00:45 His 1st Acquisition Mexican Meat Distributor came with a Real Estate Buy
05:29 Targeting Specific Industries - with low multiples
07:01 What is he doing now
07:22 Process of learning, creating the contract, and never using SBA
08:27 Hidden liabilities - Why he created the Floors & Ceilings Contract
13:00 The LOI and Due Diligence time line
14:58 Click close clarification
15:38 How he mitigated the hidden liabilities: R&W and Owner Financing
18:30 The cap stack & skeletons are in the building
19:35 Seller Financing Tax benefits & Stock Purchase vs Asset
22:44 Why the Balance Sheet is more important
28:03 B2B Wholesale Companies - Core Competencies
29:38 The 1st thing he looks for in a seller...
32:11 What about mfg. - what about FF&E - why he does not pay twice
33:57 Why he only buys 10+ year old companies
37:25 The PE Fund - High Net Worth Individuals
40:40 ON market or OFF market deals?
41:30 Robert's Deal Criteria Financial Numbers?
42:29 Creating the "offer" from the "padded SDE" we win because its Rational
48:21 The LOI and What happens next & How to Subtract Inventory from Price
52:44 What to expect as 60/40 partner
54:20 What is the "Absenteeism Scale"
55:20 What he really needs: people that can manage people
56:27 Buy and Hold or turn it in 5 years?



LINKS to Robert Nance
www.smallbizacquisitions.com/top-ma

What are the characteristics of an irresistible acquisition? Learn the essential strategies on how to sell your business for millions from Randy Woods, who not only sold his company, Nonlinear Creations, to Valtech but also currently spearheads acquisitions for his acquirer.

Discover the key characteristics that make your business an irresistible acquisition target. Whether you're a seasoned entrepreneur or just starting out, understanding these traits can greatly enhance your chances of attracting high-value buyers. Watch now to gain valuable insights and expert tips that can help you maximize the value of your business and secure a lucrative deal. Don't miss out on this must-watch guide to achieving a successful business sale! Subscribe for more valuable content on entrepreneurship and business growth.


👉 Learn the No B.S. 7 Proven Steps on How to Buy a Million Dollar Business https://www.dealflowsystem.net