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Unread 24th July 2013, 10:39 AM   #1
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Default A $4 Billion Problem

I found this to be really really interesting. There's links on this stuff, but reading is boring so this video sums it up:


Based on the QTY of businesses that actually do sell, this is a problem that presents a HUGE market opportunity.

Based on the numbers in that report, using quick math, I calculate a $4BN market opportunity...

Any ideas on solutions?

Anyone want to brainstorm around this?

EDIT: I ADDED VIDEO FROM MOBILE ORIGINALLY - LINK WAS BAD. SHOULD WORK NOW!
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Unread 24th July 2013, 11:29 AM   #2
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Default Re: A $4 Billion Problem

Bee,

I couldn't get the video to play, although the darn commercial played fine.
I did get the report and will take a look.

Thanks!
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Unread 24th July 2013, 12:16 PM   #3
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Default Re: A $4 Billion Problem

It's a huge opportunity but a HUGER problem to solve.

Why?

The prep work to properly set up and market a small biz takes a lot of time.

Often due diligence and prep is pretty much the same amount of work for businesses with revenue of $1-$5million as it is for $20-$100million. So with the smaller business the transaction costs can be very high.

If one can develop a step by step largely automated system to lead the owner to do much of their own prep that might help. Except how many will take the time to do it?

Then if a broker steps in to do it, the business does not want to pay the fees to do so.

It is a dilemma(opportunity) but a really tough one.

Not to mention the flighty business owners thinking their baby is very special. They are tough to deal with. It's much easier dealing with a public company CFO and buying a $1billion divsion from them. Much less emotional attachment.

The trick is automating as much of the prep/due diligence as possible to keep transaction costs down.

In a moment of decision the best thing you can do is the right thing. The worst thing you can do is nothing. ~ Theodore Roosevelt "Trust, BUT VERIFY" ~ Ronald Reagan
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Unread 24th July 2013, 02:47 PM   #4
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Default Re: A $4 Billion Problem

Quote:
Originally Posted by NewParadigm View Post
It's a huge opportunity but a HUGER problem to solve.

Why?

The prep work to properly set up and market a small biz takes a lot of time.

Often due diligence and prep is pretty much the same amount of work for businesses with revenue of $1-$5million as it is for $20-$100million. So with the smaller business the transaction costs can be very high.

If one can develop a step by step largely automated system to lead the owner to do much of their own prep that might help. Except how many will take the time to do it?

Then if a broker steps in to do it, the business does not want to pay the fees to do so.

It is a dilemma(opportunity) but a really tough one.

Not to mention the flighty business owners thinking their baby is very special. They are tough to deal with. It's much easier dealing with a public company CFO and buying a $1billion divsion from them. Much less emotional attachment.

The trick is automating as much of the prep/due diligence as possible to keep transaction costs down.

My guess would be that a prospective buyers' lack of access to capital is THE leading factor.

If guys have figured out how to lend money to business owners who have 500 FICO scores and tax liens, certainly they can figure out how to lend well qualified buyers money "merchant cash advance" style.

I see a way where a company can step in and manage owner financed transactions, where perhaps the buyer agrees to basically be accountable to the collections firm. The collections firm arranges and schedules automatic debits from the person bought the business, to the person who sold the business...

Former owner never has to "wait and pray" for a check to come in every month (only 60% of owner financed transactions are paid in full) because there is someone handling it.

Preparing the buyer to sell is definitely a key component... Tough one, but if they want out - badly, they'll pay for help getting out I would imagine.
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Unread 24th July 2013, 06:10 PM   #5
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Default Re: A $4 Billion Problem

All of the cases I have seen where the owner finances, the business goes under rapidly, or the owner has had to take the business back. This has been with hotels and restaurants.

I suspect most sellers of viable businesses do not want to take the risk of financing and would prefer to get the cash.

If someone cannot get financing and does not really have the cash reserves to operate a business or get a loan, it's likely a telling sign about their inability to operate a business.

On the other side of the coin, most businesses for sale seem to be worth nothing more than the current value of the physical assets.

I think the 80/20 Pareto Principle is really at play here. Not what a business broker is saying.
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Unread 24th July 2013, 07:36 PM   #6
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Default Re: A $4 Billion Problem

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Originally Posted by bizgrower View Post
All of the cases I have seen where the owner finances, the business goes under rapidly, or the owner has had to take the business back. This has been with hotels and restaurants.

I suspect most sellers of viable businesses do not want to take the risk of financing and would prefer to get the cash.

If someone cannot get financing and does not really have the cash reserves to operate a business or get a loan, it's likely a telling sign about their inability to operate a business.
I disagree with this.
If I saw potential, I would buy every business I came across that offered owner financing. With my marketing knowledge, I could increase the value in a short amount of time. Then, resell the business at a higher valuation and pocket the difference for my time.

I choose to let the business pay for itself until I cash out.


EDIT: The video isn't loading for me... ?

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Unread 24th July 2013, 07:48 PM   #7
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Default Re: A $4 Billion Problem

As a small business owner, I have been on both the sell and buy side of the transactions. Depending on the size of the transaction, there may or may not be lawyers and accountants involved early on. Personally, I do all my own initial negotiations. And I can tell you that the reason about 1 in 5 potential sales go through is inability to agree on value. I'm in the middle of a deal right now that is 7 figures. I think it will happen but it is complicated, involves non-competes, consulting contracts, sales commissions and some stock ownership. I want to go light on cash, seller wants lots of cash. we'll meet somewhere on my side of the "middle" (only because seller is motivated).

So the short answer is even small deals have tons of details that can derail the process. 80/20 definitely applies.

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Unread 24th July 2013, 08:39 PM   #8
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Default Re: A $4 Billion Problem

The video SHOULD work for everyone now. Sorry about the screw up. Great feedback.

What if owner financed transactions were secured by split funding arrangements? What if the transfer of power happened and the exiting owner knew that every day, each time a card was swiped, he or she would be getting paid??
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Unread 24th July 2013, 08:54 PM   #9
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Default Re: A $4 Billion Problem

Quote:
Originally Posted by TheBigBee View Post
The video SHOULD work for everyone now. Sorry about the screw up. Great feedback.

What if owner financed transactions were secured by split funding arrangements? What if the transfer of power happened and the exiting owner knew that every day, each time a card was swiped, he or she would be getting paid??

that is interesting as far as payment mechanism, a lockbox escrow account to provide some security, but the big problem for seller providing seller financing is now they are the "investor" in their own business with a stranger running it. They have to do due diligence on the buyer/manager. These transactions are much more complicated when selling a business vs. a piece of commercial RE offering seller financing.

Obviously there is big pain in this area, lots of inefficiencies, so potentially lots of opportunity. A lot of people have been trying to figure this out for a long time! I think about it a lot as well.

In a moment of decision the best thing you can do is the right thing. The worst thing you can do is nothing. ~ Theodore Roosevelt "Trust, BUT VERIFY" ~ Ronald Reagan
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Unread 24th July 2013, 10:54 PM   #10
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Default Re: A $4 Billion Problem

Quote:
Originally Posted by NewParadigm View Post
that is interesting as far as payment mechanism, a lockbox escrow account to provide some security, but the big problem for seller providing seller financing is now they are the "investor" in their own business with a stranger running it. They have to do due diligence on the buyer/manager. These transactions are much more complicated when selling a business vs. a piece of commercial RE offering seller financing.

Obviously there is big pain in this area, lots of inefficiencies, so potentially lots of opportunity. A lot of people have been trying to figure this out for a long time! I think about it a lot as well.
"with a stranger running it" is a very key point. I have seen businesses go under quickly that would have done fine under the new operator if they just kept doing the same thing the original owner did. I have also seen businesses fail after the owners try to pass the business on to their kids. Just like good help is hard to find, so is a good operator.
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Unread 24th July 2013, 11:21 PM   #11
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Default Re: A $4 Billion Problem

Quote:
Originally Posted by TheBigBee View Post
The video SHOULD work for everyone now. Sorry about the screw up. Great feedback.

What if owner financed transactions were secured by split funding arrangements? What if the transfer of power happened and the exiting owner knew that every day, each time a card was swiped, he or she would be getting paid??
It would depend on a lot of things, such as when or if property taxes are due and how much they are. Ditto for any other large bill that fluctuates in amount or due date, such as insurance, utilities and water, income taxes, etc.

Some months in some businesses, the revenues may not cover operational expenses and what is owed to the seller. Which is why the new owner has to be financially sound to begin with - especially the first year of operations.

My hotel makes a lot more in July than in May or November. So we need summer and ski season revenues to cover the slow months operations and the large bills such as property taxes.

Many retail business need December revenues to stay above water.

So these cash flow and reserve issues need to be worked out for your scenario to work out.

Also, the competency and experience of the new owner/operator or manager is very difficult. For example, you would think that a person who has been competent in their field or profession should be able - and have the pockets - to take over a "simple" business such as a hotel, Bed and Breakfast, or restaurant and run it well. That's when they find out what they don't know, or find they don't have the aptitude or attitude or "taste" needed to run the business successfully.

Dan
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