Main Street Business

#545 The Tax & Legal Playbook To Buying Businesses Part 3

• Mark J Kohler and Mat Sorensen

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In this episode of the Main Street Business Podcast, hosts Mark J. Kohler and Mat Sorensen share the ultimate toolkit for buying and running a small business. Whether it's managing payroll, setting up the right entity, or preparing for the unexpected, they’ve got you covered. Tune in for tips on creating a thriving company culture, building strong employee relationships, and ensuring operational excellence in the critical first 100 days

Here are some of the highlights:

  • Mark and Mat discuss the importance of the seller's involvement in the transition, especially if the business has a strong brand associated with the seller.
  • Mat emphasizes the need to document processes and procedures to ensure smooth operations and growth.
  • The importance of understanding the business's current state and making necessary changes.
  • Employee interviews are recommended to understand the current culture and identify areas for improvement.
  • Focus on the need for a transition budget to cover expenses and improvements in the first six months.
  • The need to add value to customers and the potential for increasing revenue through new products or services.
  • The importance and realization of being in control of one's destiny as a business owner.
Speaker 1:

Welcome to the Main Street Business Podcast with your distinguished hosts, mark J Kohler and Matt Sorenson. Both are best-selling authors and have over 25 years of industry experience, with 10,000 client consultations, making them the leading tax and legal experts in the nation. Together, they'll unpack the most complex tax, legal and financial strategies crucial for saving more, stressing less and building generational wealth. Today they're your personal advisors, ready to break it down for you and make the tax and legal game easier than ever. Here is Mark and Matt.

Speaker 2:

Expect some unexpected. When you buy a small business, I'll tell you right now something is going to blindside you, and it could be big, medium or small. You know you're bringing value and if this company makes $100,000 a year, you want to make it $200,000 a year. Well, that doesn't happen with pixie dust. You need to be the visionary and you coming in and being the guy on the chopping block, you're getting rid of employees and you could ruin your reputation with the employees quite quickly.

Speaker 2:

You don't grow and scale a business, you grow and scale people and the people grow and scale your business for you. Welcome everybody to another episode of the Main Street Business Podcast. My name is Mark Kohler. I'm here with the illustrious Matt Sorenson in part three of our series of buying a business Very important topic.

Speaker 3:

Yeah, part three, the final chapter. This is the final episode, folks, but this is the important one. We promise there will be not another sequel.

Speaker 2:

I don't know how many times you've seen Fast and the Furious. We might have a prequel. We might have a prequel we could do a prequel?

Speaker 3:

We could do one, yeah, but so where we're at right now is we already talked about kind of making the offer, negotiating terms, closing of the actual small business. Now we're in step three. You freaking own it. You own this small business now, and how do we transition this and move it forward? We've had a lot of clients buy small businesses and many have success. Some of them have some missteps here, so we want to go through some common practices and things you should know about as you're taking over the small business.

Speaker 2:

Yeah, and we've alluded to this in part one and two. We'd highly recommend, if you haven't already listened to part one and two, please do so, because I think part three and I'm hoping so many of you that are listening to this haven't already inked the deal and you're like okay, I'm in. You know I'm in crisis here. What do I do now? Well, a lot of part three is what you're planning for in part one and two. For example, I'll bring up one of the first topics is the involvement of the seller in the transition.

Speaker 2:

I think it is so important and sometimes there's not a brand that is tied to a person when you buy a business. It may be something as simple as the average customer enjoys the food or they enjoy the product. There's not a brand, a seller person that's kind of created this small business. But if there is we talked about it in a prior episode was having that seller help you with their farewell tour. They're there for a few months. I think you should have them involved to some degree, helping with the employee transition and the customer transition, and it could look a lot. It could look very different, yeah, and also like how does this business run?

Speaker 3:

Who does what? What softwares are we using? What's the process and procedure for this versus that? A lot of small businesses don't have this written down. Okay, a lot of big businesses are like, like you know, we have a policy and procedure for that, we have a standard operating procedure, you know. But a lot of small businesses, let's be honest, it's like oh, judy news knows that. Uh, oh, that's a Jeff thing, you know, and it's like you know it's a mess.

Speaker 2:

Let's be honest. You want to get the vending machine to work. You got to hit it on the side three times and then you know dah, dah, dah, yeah.

Speaker 3:

And so, um, so that might be some of this process is making sure you understand that maybe starting to document this is going to be helpful if you're trying to grow and scale this business. So, um, uh, learning that, I think, is important. Um, and I think that the seller's involvement and we talked about this earlier if there was some seller financing or some payments over time in a consulting agreement, we want to keep them financially incentivized with you to have that success and to freaking show up next week after they got a big check from you to buy the business.

Speaker 2:

I still want them showing up and being financially incentivized to do that too, and I think this is a transitionary point to be saying, okay, I bought the business, what's my plan for the business? I would think many of you have a three to five or a 10 year exit as well. So, as soon as you can get the training completed, you've got new standard operating procedures in place, you've got you build a relationship with your employees, things are rolling you immediately need to be thinking about okay, how am I going to add the value? Why did I do this? And what is my exit? And you talked about that too. It's a good time to remember why you even freaking did this.

Speaker 3:

Yeah, Like why did I buy this business? What was my strategy? What did I see in this business that I thought would be valuable if I bought it? And I think the best thing to do is this 100-day plan. A lot of private equity or companies doing M&A on kind of the big scale they're coming in with like a 100-day plan when they buy the business. They're like we saw some value here and things we wanted to immediately implement to help grow this business, streamline it, cut costs, whatever it may be. So have that 100-day plan documented. Let's make sure it's freaking realistic, but that's what you need to start executing in the business from a business standpoint, and it's different.

Speaker 3:

Your 100-day plan may have been I know an additional product or service I could add in. I know a partnership or relationship I could go make. I have an incredible referral source that's going to send business here. I have a marketing program or technique or strategy that's going to drive more business. I think this business is bloated and has way too many employees. I can let go and I can add some technology or I can leverage other resources. Whatever it may be like, have that plan ready, but also have the steps on how you're going to do it. You're not going to freaking conquer this thing in a week, in a month, maybe not even a hundred days.

Speaker 2:

Well, and I think if you go in with the mindset that when I buy this business, I'm going to take other things off my plate for a good six months, I'm really going to go hard.

Speaker 2:

I want to get it systemized because, remember, one of the things we talked about in the first part of this entire three-part series was you're not buying a job, you're buying a business that should be self-sustainable with proper management. Now, it doesn't mean you can just buy it on day two, turn the key and walk away one of these turnkey-type concepts but you should be within six months, engaged, able to come in, provide that additional value you've foreseen and that you wanted to do, that you foresaw doing, and you're also going to be trying to build that systemization and protocol so that you can be doing weekly meetings, monthly meetings and sitting back and letting it run itself with the right management. But it doesn't happen automatically. I think you've got to go in realistically and say, all right, six months of my life is going to suck. I'm going to have to multitask everything else on my plate and make sure I launch this properly.

Speaker 3:

Yeah, and I think that's a great point. Some of you need a fricking reality checked on buying a business and this is the time when reality hits. You're like I fricking own this thing and you don't want to know what the greatest ROI on your time is going to be figuring out how this business works. What are the movers of this business? What adds value to this business? What are the problems in this business? Who do I need to recruit to bring into this business? Understanding that being able to make great decisions is going to be a huge return on investment for what you're putting into this business. But I do think it's going to be your time. Let's be honest. Your time is going to be needed to grow this and you might be there for three, four, five years, 10 years. It's going to be a decade, I don't know. But maybe this business goes and grows 10x because of your involvement and care in it and that could be the greatest return on investment of your time. Oh, I love it.

Speaker 2:

Now I got a big one I wanted to bring this up earlier and I didn't give you kind of a heads up on it. I think there's. We underestimate the value of company culture. What is going to be your fingerprint on this company from a company culture standpoint, and I think you need to be very intentional about it. I want more food in the fridges. I want more barbecues on Friday. I want more of this, that or another, and I think this all starts with doing some immediate employee interviews.

Speaker 2:

If you're going to come in and buy this business, your team members are your first and most valuable asset. Start interviewing them one-on-one. What do they like about the culture? What don't they like? Let them have their wishlist, have them tell you what they think and I'll just give a quick example is the big Bud Light debacle, the tractor supply debacle? I mean all of these big corporations that were doing DEI this last year and had someone that they thought was going to be the best spokesman for Bud Light sitting in a bathtub and Bud Light consumers are like we're not having it, and so they missed the culture of the corporation altogether. And I think so. Even though you might want to implement your culture that you want to do, is that what your customers or employees are going to want. They may not want flowers on the reception desk every day, they just want a barbecue and a Bud Light on Friday afternoons. Know what your culture is. Don't disrupt it either.

Speaker 3:

There's so much to be said there yeah, and I think the culture is tricky because when you buy a business, you're inheriting the existing culture and it could be good, and you're like I just need to maintain this, and you might be like I just want to roll with it.

Speaker 3:

It's not broken, yeah, and so fit in, get in where you fit in there.

Speaker 3:

On the other hand, the culture might be one of the problems and issues of this business, why it's not been successful, why the person selling the business is actually selling, and you're going to need to go fix that.

Speaker 3:

But I think culture is a lot. It's not just like programs or food in the fridge or an activity. Culture is like people and understanding them, getting to know them, recruiting people, getting rid of the cancerous people, I mean, and every company is a little different in their culture. And there's the fun things. Don't get me wrong. But that's going to be critical in growing the business and getting the other people in the company to trust you as well, because you're going to be the new guy coming in and they might have loved that old business owner, they might have been a friend of theirs, they might have, you know, had a great relationship with that person and they got a lot of leeway on certain things, and so you want to be aware of these kind of soft things in the business that are just as important as the tax and legal list, which I do have here too, yeah, absolutely, and I'd like to stay with this.

Speaker 2:

For one other comment, you need to be the visionary and you coming in and being the guy on the chopping block, you know you're getting rid of employees and you could ruin your reputation with the employees quite quickly. I think you could bring in and we've seen this before a business consultant Say it could be a transition consultant. I've heard that term used before. So you buy a business, you're going to have a consultant come in and help interview all the employees, find out what that culture is, make some recommendations to you and maybe be the good guy. Bad guy, good girl, bad girl. Because you need someone that can maybe get the straight, honest answers from the employees as to what's going on and what's going on in the culture.

Speaker 2:

I've seen a lot of business owners sell a business and and they don't get rid of the employer too. They know that they need to get rid of, they don't want to get rid of them and they sell the business. So they're like good luck, you've got Judy or you've got Tom, have fun, you know. And so you got to come in and be the bad guy and sometimes you can win points with. A lot of employers are like, holy hell, finally someone got rid of this employee. That's a cancer, and other times you could come in and make a misstep and get rid of someone that's the the mom of the office or the dad of the shop, and so, uh, you've got to really and this is not my strong suit, you know this matt, so I'm a little more sensitive to it is, um, being careful with the relationships, understanding the culture, implementing it slowly, or maybe quickly if necessary?

Speaker 3:

yeah, I don't know. Yeah, I mean, the fact of the matter is you don't grow and scale a business, you grow and scale people, and the people grow and scale your business for you. And so understanding the people component is important. It might not from a two tax and legal guys. You might be like, ah, why are you guys talking about this? Give me the checklist on the tax and legal guys. This is what's going to make the business succeed. It's going to come down to the people. This other tax and legal stuff I'm going to talk about here in a second. It's important, but we're talking about a business that people are going to run. All right.

Speaker 1:

Let me hit the tax and legal list because I want to throw it out there.

Speaker 3:

I know some of you you know tax and legal fans and we are, too want this list. Okay, here's a couple of things to think about. You need a new entity. Remember when we talked about earlier probably doing an asset purchase agreement and buying a small business? You didn't have their entity. You're not inheriting their entity, so we want to get a new entity going.

Speaker 3:

We typically love an S corporation. This could be an LLC with a partnership If you've got a partner involved, or maybe an LLC taxes an S corp. Talk to your tax or legal advisor about that. The lawyers at KQS lawyers, our law firm, can definitely help with this. The next thing you're going to need to do you need accounting instead of books being done. You also need payroll set up, because that old payroll account and that old payroll returns that were going off that old employer EIN you're not using that anymore and you know what's coming up in two weeks it could be even three days away, depending on when you close in the business payroll for these employees and you don't want to miss that as your first week as being the new boss.

Speaker 2:

That would not win points. Well, in this transitionary point of the financial, you're getting merchant accounts set up, getting the payroll ID numbers set up and all those procedures. You're going to hopefully see this train coming. You're going to be dealing with this a month before or more before the day you take over. But if you have the inability to take a customer payment or make a payroll on day two, that's a problem. So be thinking about this financial transition one to two months in advance. And we see this with dental practices or physician practices where they've got to get Medicare billing in place, insurance billing in place. Sometimes getting that procedure working takes longer than five days.

Speaker 3:

Yeah, yeah, it's like, oh, 20% of the customer base uses this insurance. And then one in five patients showing up for their dental exam is like, oh, you don't take my insurance anymore, new doctor. So really critical to think of those things. That would have been part of your due diligence making sure you don't take my insurance anymore, new doctor. So really critical to think of those things that would have been part of your due diligence making sure you understood that and the timelines on when this stuff's going to hit, whether it's payroll, whether it's insurance stuff. And also, did you have working capital?

Speaker 2:

Yeah, that's our next topic. Yeah, why don't you hit that? Yeah?

Speaker 3:

and so typically the AR accounts receivable is going to be an asset of the seller. Ar accounts receivable is going to be an asset of the seller so they can collect any AR. You might have negotiated that and you might be getting that as a new business, but there should be some working capital set aside. Maybe this is 50 grand, 100 grand, 20 grand it depends on the size of the small business here. But there's some working capital that should be there because you're going to have bills coming in right. You're going to have some expenses immediately on day one. Again, you could have payroll in two or three days a week away, and so there should be some amount of working capital in the business that you would get as the buyer and this is a good thing to make sure you're getting and arguing for negotiating in the deal was a certain amount to get you through maybe the first month of expenses that'll come up on the business.

Speaker 2:

Yeah, and let's get realistic. If you're buying a business for a million dollars and you're asking the seller to leave 200 grand in the bank account, they're going to want 1.2 million for the business. They're not typically going to leave money in a bank account. They're going to say set up your own entity, put your own money into it. You get the assets, you get the employees, the customer list, everything you get to take over on November 1st, knock yourself out. They're not going to leave money in the bank for you unless you pay for it. So it's good, one way or another you're going to have to have it Now.

Speaker 2:

This is an important transitionary point. So many people buy a business and think on day two it's going to be status quo. This is back to my point that you have to over deliver that first six months. You should have some working capital for a marketing plan, a little extra working capital. Maybe you're doing some improvements with some of the equipment that's dilapidated in the building. What is this? Is this extra value you're adding? Are you doing new printing, new menus for the restaurant? Are you going to take all the employees away for a day retreat? These are little things that, if you don't budget, for you're going to be like, oh my gosh, you're going to regret not having that stuff ready. So I think having a transition budget just like maybe even having a transition consultant where you've got some money set aside to make this transition really rock, Because your whole goal is you want to 2X the bottom line, you know you're bringing value and if this company makes $100,000 a year, you want to make $200,000 a year. Well, that doesn't happen with pixie dust.

Speaker 3:

You've got to put some money in to make money. If it did, we'd be selling pixie dust man.

Speaker 2:

Yeah, we've got some here for you. Just look at the number below. Click on that.

Speaker 3:

Yeah, yeah, so all right. Well, you're just hitting customers there and how to add value to customers there for a second. I think that's really important. Some businesses you might have thousands of customers and they pay you $20 a year. You know, Some of you might have 10 customers and they're paying you tens of thousands of dollars a year, and so every business is a little bit different about how much touch you're going to need to have with the customers. But one thing I would say, too, is the key referral sources or the key influencers that give this business. You know there might be referral relationships that the business has, and so making sure that those relationships are also being considered and you understand how the business gets its existing customers is important too Well, I have just one more thing.

Speaker 2:

I know in some of these three-part series we always think of something else because this really is kind of the never-ending story.

Speaker 2:

But here's my last point I want to make for all of you Expect some unexpected. When you buy a small business, I'll tell you right now something is going to blindside you and it could be big, medium or small, but there's going to and it may be intentional by the seller, it may be like oh, forgot to tell you, or it could just be something that's unforeseen. It could be a market condition change. It could be a political change in local politics or national politics. It could be a market condition change. It could be a political change in local politics or national politics. It could be just some weird act of God. A storm comes through. So you know. In fact, on this note, my father and my brother and I we bought a commercial building about 15 years ago in North Salt Lake. It was a commercial warehouse building and we hadn't even owned the building one year in a tornado.

Speaker 3:

This is Utah, utah does not get tornadoes, they do not get tornadoes.

Speaker 2:

A tornado lands in North Salt Lake. It was in Layton and the news covered it like what the hell? This never happens. But it only hit about a four block area on top of our new building and it ripped the ceiling off. I remember our tenant calling us going um, I'm looking at the sky right now and I'm sitting in my office. We've got an issue. Can you call your insurance agent? And we were like what? And so anyway, the point being is, when you buy a small business, medium or large, there's going to be something that's going to go wrong. Keep your wits. The sky's not falling. Maybe the sky's taking your ceiling away, but just keep your wits about you, Expect it and know that you're in this for the long haul. You're adding additional value and there might be a bump in the road, but it's okay, Life will go on.

Speaker 3:

Yeah, I would say, not only expect to embrace it. Okay, because this is what life is now. This is entrepreneurs and small business, and maybe you're coming from corporate America into buying this small business and you're new to entrepreneurship. This is what it's all about. But you know what. There's highs too. Okay, there's a lot of highs and cool wins and things that come from owning a business, but make sure you do realize and be realistic about it. There are some lows too. You'll have to slug through some things. You'll have some unexpected things happen, but the nice thing about it is up to you. Now you're in control of your destiny more than you ever have been as a business owner, and that's why we love entrepreneurship and business owners, why Mark and I do it and why we love serving them in our different companies every day.

Speaker 2:

Well, at the end of this series, I want to encourage all of you to continue your search for that perfect small business that you might buy or start. Sometimes it's cheaper to start the business from scratch rather than go buy someone else's. Sometimes vice versa. And the point being is don't stick in paralysis analysis where you're, just like I, can't find the perfect business. Sometimes it takes a leap of faith. We hope that this three-part series has helped you in some way, form or fashion. At our law firm, we have a practice group to help you go through the acquisition. Mark Fetzer is the lead in that practice group. We have different price points based on the value of what you're buying, so that you can budget for the acquisition, get real support with real tax lawyers that aren't going to take advantage of you in the process. So we hope to be a part of your life in this journey. But the American dream is alive and well. Don't give up. Take action, and the more you learn, the less fear you'll have.

Speaker 3:

Yeah, All right. Well, let's end it there. Thanks guys. We'll see you next time.

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