Elon did it! Let's do the same

Foreign. Welcome, everybody, to this week's episode of the Main Street Business podcast. With yours truly, Mark Kohler out lavishing by the swimming pool and Matt Sorence in the office. No, there's no swimming pool. I. But it's a beautiful spring day, and I said I'm going to be in front of some green.

You might as well get outside and get a tan. I should take that advice because I'm looking pretty pasty right here on video. Mark's looking tan, you know, I want you to know it's because I wear sunscreen, you know.

Oh, yeah, that's problem. Matt's fiance, she's all into sunscreen. I've had to battle that. And I said I'm more worried about Matt's looks than a skin cancer issue. So can we really get back on track?

And she got it, like, spray tan or something, huh?

Yeah, she's having nothing. Nothing to do with that.

But anyways, who are these guys? Well, if you're new to the show, Mark and I are both attorneys. We're entrepreneurs out there living the American dream in the trenches, like many of you. And today we want to talk about Elon Musk buying Twitter. Really about, but more about how you could buy a business. We've had lots of clients buy businesses, sell businesses. Of course, it's more common to just start one up from zero, but a lot of people enter in and buy an existing business or franchise. So we thought it'd be great to talk about that and what we can learn from Elon and what he's doing.

Yeah, this is not how to buy Twitter. That might be out of some of your price ranges. It's out of mine.

I can pretty much subscribe to Twitter or sign up. That's as far as I'm getting.

Yeah, there's really a lot to say here, and I appreciate many of you that might be new to the show. We try to, for lack of a better word, ham this up, keep it interesting, have some fun. So we're going to talk about things in a creative way. Maybe you haven't heard your CPA or attorney talk about these things, but we really, really want to add a huge amount of value to your life with our podcast and specifically with this topic. So let's get into Tommy Boy. Now, Sandusky Enterprises was trying to. Was it. What was the name of Dan Aykroyd's business he was going to in and buy?

Oh, yeah, he was going to come

and buy the business. Okay, now I have a point. My point number one on Should I buy a business? Okay, now we got all sorts of tax and legal things to cover here too, but can I, Can I throw out my first why, Matt?

Can I start with why?

Okay, start with why. Some people say that's kind of a big deal. Who knows? But okay, I'm going to start with Tommy boy. Watched a clip Tommy boy today, in fact, you know, because, you know, it's life changing here.

Here's a business movie. It's about business.

Yeah, yeah. And I really want to get my facts here. You know, Matt, while you're in front of the computer there, you can help do some fact checking. I need I. Sandusky. Anyway, gosh, I'll help you out here. Yeah, we've got the auto. He's. They're making auto parts.

Callahan Auto.

Callahan Auto. Yeah. Now it's. It's a pretty funny movie for those that haven't had a chance to watch it. It's kind of your, you know, Saturday Night Live slapstick, but it's, it's pretty creative. Now here's the point though. This show that's really, really important. Tommy's dad dies and Tom Callahan Senior. And Tommy boy is hence his son and known as Tommy. And soon as his dad dies, the vultures come in and they're trying to buy this business. And we have Rob Lowe come into the scene and oh my gosh, what's her name? The 80s model. And then Dan Aykroyd comes in to buy the business. He says, I'm just going to buy it from you. I'm going to take over the business. Now here's my first point.

Now Dan Aykroyd is raise Zelensky, the auto parts king.

That's right. Ray Zelensky. Ray Zelensky. Now here's the first point that I think is really, really valid here. Ray Zelinski, AKA Dan Aykroyd, saw an opportunity. That's one of the first takeaways I want to make here, is that if you're going to buy a small business, maybe in your IRA, maybe in your 401k, maybe in your own name, maybe it's going to be a business that you want to just watch from afar. Maybe it's going to be your new career, maybe you're going to buy it for your children, you're going to buy it for you and your spouse. I don't know. But the first issue is, do we really want to go out and buy a rental property retail on the mls? Probably not. A wise real estate investor would say I want to look for an opportunity. There's a problem, there's a crisis. I want to find a real estate deal where I'm solving a problem because I know I'm going to get a good deal. Dan Aykroyd in this movie comes in and says big Tom dies. There's an opportunity here. Everybody's nervous. Can Tommy run the business? And he sees a bargain. And so the first takeaway I want to make here is when you're keeping your eyes open. We're going to. There's so much to say. I'm just going to say on this specific point is look for a problem or you have a solution and you're looking for some sort of bargain. You don't want to buy a fixer upper, but there still was a bargain there.

I don't know.

Matt, do you concur?

Well, I think there's a lot of profitable businesses. The business owner doesn't have family that can take it over. They just frankly are tired of it. They lost their passion for it, frankly. They weren't just a good business owner. How many people start a business that aren't a good business owner? And you can go in and really rock it, but you want to win. Just like we talked about with self directed IRAs and all other stuff. Invest in what you know. If you have no idea about auto parts, don't go buy in Callahan Auto. But if you happen to be Ray Zielinski and you're the auto parts king, you go buy auto parts stores and other companies that are in your lane that you know, you got relationships, you got people, you've got resources. You're not starting from scratch in it. So let's say you're an electrician and there's a business opportunity that has to relate to whatever you do as an electrician. Like that's in your lane and that's where you should be investing not only your money but also your time in starting a business. That would be my take.

Okay, that's stay in your lane is number two, stay in your lane, which I really like. I'm going to, we're going to debate that in a moment. But back on my point, number one is look for a strategic advantage. Look for a strategic opportunity. Now I know some of you might go say, I'm going to buy a franchise. There's nothing wrong with that. Now is there a strategic advantage in and of the franchise itself?

No.

But you may know a good location for that franchise. You might know something about that franchise in your market that would really be A steal like you, you got to have some sort. Just don't say, oh, that'd be a good business. No, no, no. Why are you buying it? The why of how is it going to make you more money? Yeah, that's fine.

Strategic, in other words, like, have an angle. Like, you have an angle on this. So. Because some people who buy a small business, frankly, just buy a job, you know, and that business, they don't make more money than what they could have made just working at some other job, the job they had before they bought this business. So either it's. But now some people do it for lifestyle. Some people, like, you know what? I want to be more in control. I want the lifestyle of a business owner that they think is easier. It's not. Trust me. Being a business owner, you're like, oh, I can do whatever I want. Yeah, not really.

There's flexibility. I like the flexibility.

Yeah, maybe some flexibility. A little more control on what you do and the upside of building something great. So also the satisfaction of it being a business owner is awesome. Like, there's a lot of satisfaction in it. But. All right, let me come back to Elon Musk if I. Oh, yeah, no,

I just want to make sure, because

we already got on Tom Callahan.

Yeah, we're going to come back to Elon. Okay. All right. I just think it's ironic here because many of you don't know, moments before the show started, I said, you know, I don't know why Elon bought Twitter because it's not in his lane. And Matt says, oh, yes, it is, because he's smart and a billionaire. I go, well, that freaking doesn't makes any sense. Now, what does Matt come out of the gate do and say, stay in your lane? I would like to say to Elon, now, I'm not. I'm not posting, buying Twitter. I'm kind of excited about it. And I know that may offend some of you, but we'll keep politics out of it. But is it in his lane? Matt, come on.

Okay. When you're Elon Musk, all lanes are accessible to you. You can do whatever you want. You're a genius, right? I mean, he's probably got to be one of the smartest guys on earth right now. And maybe you don't like him, but are you kidding me? Like, all the stuff that he's done, the innovation he's done, like the electric cars that are on the road today, if there's one person responsible for, it's Elon Musk. Okay? Building electric cars Hard. All these companies that could never do it, that have built cars for like a century.

Okay, so he's smart. Okay.

So he also happens to be like one of the biggest super users of Twitter, period. Like, the guy is a major customer of Twitter.

Oh, okay. Be a customer.

Yeah.

Okay. I'm gonna put that as number three. I like that. Okay, keep going.

If you're gonna. Let's just say if you're gonna buy a restaurant, that better be a restaurant you go and eat at and that you like, you know, or you gotta have some transformational change you're gonna make. But he's already a super user of it, and I think he sees things in it that make it more valuable. And I have to say, Twitter is probably one of the biggest brands in tech that's had the worst performance. They haven't figured out how to make money. You know, Facebook has. Google has all these other companies that figure out how to make money. Twitter just hasn't really figured out how to make money yet. But it's this huge brand and huge base. So I really think it's actually an awesome opportunity for the right person.

Okay, all right. You know what? You know, I already see where this show's going and I'm kind of liking it. Matt and I are going to pretty much debate every one of these so far. This is good. I'm going to take issue with Matt's comment. Yeah, okay, here's this. All right, let's think real estate. Am I going to go live in a low income housing unit? No, but it could still be a good business deal. Just because I don't live or want to live in low income housing doesn't mean that it could be a good investment from a real estate investor standpoint. Hence, I've had clients go buy laundromats as a strategic advantage. Now, do they use the laundromat? No, but they.

So.

But they see an opportunity there. And so I think there's counter. I love your point, Matt. Seriously, you know, be a user. The framework that I would give here is understand what you're buying as much as the. Are you a user? Now, you may not use laundromats, you might not use low income housing, but I understand the model.

But if it's a, if it's a consumer product, to me, if you're not a user of it, like, I'm kind of like, are you the chef that doesn't eat your own food in the kitchen? Like, if you want to own something and like, you should be a customer of it now, sure. There's businesses that are out there that make stuff that you may not be a customer of. And the low income housing is a great example. So these ideas are not universal.

Yeah, yeah. Good debates.

Yeah, yeah. So. But I do what I have found, though, is the clients have the most success in buying a business. It's an industry they know it's in something they know they've worked in. And the ones that I see that crash and burn when buying a business. And this is over, you know, 17 years as an attorney, 16, you know, I lose track, you know. But the ones that fail are the ones that get into something. They don't know what the hell they're doing. It's just some business opportunity that they got excited about, but they didn't understand the products. They weren't really a customer of it. They had no experience in the industry whatsoever. And I think you can make bad decisions in just buying the business because you don't know enough about it and the typical customer and what they want and where to make money and where to save expenses.

Okay, fair enough. I put that as number four, understand the business. I put number three, be a customer.

All right.

I remember in billions, Bobby Axelrod said, you know, I'm gonna. He was talking about, what were those, those little danishes. He's like, have you eaten one of these lately? They don't taste the same, you know, and he, he was pointing out that as a customer, there's something wrong here, you know, and he saw an option, he saw an opportunity. Okay, so I'm gonna put, okay, let's change veins here from a tax legal standpoint. Okay? So in my book, the. The Business Owner's Guide to Financial Freedom, if I may tout it.

So, yeah, it's a great book.

Thank you very much. I have, I think it's five chapters and 50 pages plus on selling your business. And because one of the business owners guides to financial freedom is I'm going to sell my business at some point. So. But what's interesting is when I was looking over those chapters in preparation for this show, as a buyer, you're going to take each one of those principles and flip it because you're on the other side of the table. And I think understanding your seller is another major point because you want to come to that seller knowing, how are they valuing this? Why are they valuing it this way? Is there a multiple involved? If I'm going to go make an offer on this, you're playing poker and you got to know your Seller, what are they motivated by? Is that money? Is it the legacy? Is it cash flow? Do they want to stay involved? Is it. It's interesting. Some sellers have really unique reasons why they're selling. And you want to appeal to that. Know what your seller's really wanting. I think that's a big deal.

Yeah, I agree. You want to know why the seller's selling. Like, if they've got, you know, critical employees that have left, that ran, that were important in the business, if they've got, you know, big industry trends that they see because they've been in this for 10 or 20 years that you're unaware of, or we know, whatever it is. I mean, get to the. Why are they getting out? As much as you understand the why you're trying to get in. All right, here's an important point, and this is the. This is the lawyer mat here, you know, for a minute, is buy assets, not liabilities. So I got like three key legal tips to any client, from lawyer Matt to you. Buying a business. Buy assets, not liabilities. When you're buying a small business, you want to buy the assets of the business. Don't buy their corporation or their llc. When you do that, you assume all the liabilities of whatever they've done over however long they've owned that business. You don't want that. You don't know what's happened, and you're going to. You don't want that. So just take the assets, their customers, their inventory, their websites, their intellectual property, all that, just buy it and put it into your new entity. That's what we're doing, not liabilities. Now, when Elon Musk is buying Twitter, he's buying all the corporate stock. He's buying the assets and the liabilities because that's how it works in the big public trade companies. But in the small business, nobody really does that. It's rare that you're going to buy the ass. Sorry, you're going to buy the corporation or the LLC itself. Just buy the assets now.

And just to add before you to your number two and three. I love where you're going. I will just say this, folks. What that means in technical terms, too, is you're creating an asset purchase agreement. An asset purchase agreement, not a stock or a membership agreement.

Yeah.

And one of the key documents I'll just say to. To get on the table is the LOI or letter of intent. And we'll come to maybe due diligence here in a moment. And point number three.

Point number three.

Okay, let's Go to two. What's two? Okay. I don't want to steal your thunder. Okay.

Okay. In the small business world, and even this is what Elon Musk is doing, well, not as much, but in the small business world, get seller finance terms. So when you're buying a business, buy under seller finance terms, make the seller finance a portion of the purchase. So if the business is for sale for 300 grand, maybe you put down 50 or 100 in cash and the other 250 or 200 is going to be a loan that you're going to owe that seller. Make them payments over time. There's a couple of reasons why I like that. One, it's better than going to a bank for the money. It's easier. Two, you want the seller of that business to be invested in your success because they want to get paid out on the rest of the money you owe them. So if you have seller finance terms, they're going to be motivated to make sure the business transitions. Right. They want to make sure they're going to get paid next month and next year as these payments are rolling in. So seller finance is very popular for small businesses being purchased for their be some seller finance in it. So try to negotiate for that as a buyer. Okay?

All right. And I'm going to go with two or three taxes perspectives here in a moment. But finish number three, which I think you're going down due diligence loi.

All right, tip three is make sure you've conducted adequate due diligence. So, and what we mean by due diligence is you're going to get into the details. Okay, you might hire some professionals for this, an attorney, a cpa. You might need some help with this. But we're going to do a due diligence is you're going to get a breakdown of what assets do they have. There's inventory doesn't truly exist. You're going to verify, okay, we trust, but we also verify all this crap. When they give you financials, ask for tax returns and other documents and bank records that back up those financials, they don't just take their word for it. Another thing, when you're looking at the financials and you're looking at how valuable is this business? Does this owner of the business operate this business every day and work in it, do they take a separate salary or are they just taking out profit? Right. If a lot of people buy a business and they're not intending to run it every day, but the person they bought it from was like running it Every day. And if you pull them out of the mix, well, you got to go replace that and pay someone to make a big salary for that. That's going to cut into the profit you think is coming out of this small business. So we want to pay attention to a number of those things.

And I had a personal experience of this is 10, 15 years ago. I was helping a family member buy a business and it was a franchise. I don't want to disclose too much. Let's just say it was a franchise business with two or three locations. And I was, I'll be blunt, and I was still a rookie. I was in my third to fifth year as a tax lawyer and cut my teeth. And we pulled the records on the tax returns for the seller to see really in that due diligence period, what the profit take home was. And then we pulled the records from the franchise software system so we can see what were the gross sales, cost of goods sold, what was the profit. Now those. When you hear in movies 2 sets of books and it's kind of referred to as a bad thing, like two sets of books, like you're cheating someone. No, no, it's very, very common to have two sets of books, maybe three or four. In fact, you've got a set of books that tells you, here's my actual cash flow, profit. But what goes on the tax return could be very different. This seller had written off home office, written off some mileage, written off travel, written off things that we weren't going to write off if we bought the business. He also was taking money under the table here and there from, you know, which you're going to hear from sellers. Oh yeah, but I still make some money over here, you know. And frankly, I'll be blunt, I think the seller kind of hometowned me a little bit. He understood the franchise software better than I did. He had, I understood the tax return and what write offs he was taking, but everywhere in between was a little gray. And he had a slick answer for every reason. And I bought into some of them, not others. But when the dust settled and we owned the business, it wasn't making as much money as we thought. And I was so upset at myself and I learned a hard lesson that round. Ultimately we ran the business for a few years, sold the business again. We were okay. We were generally unscathed, but it could have been a lot better move. And so I'm just echoing a little story to Matt's point of due diligence that you just, if you got it, you got to understand what's going on, just do.

Yeah, Cool.

Okay. Oh, go ahead.

Okay. Well, what I was going to say is pricing on this. A lot of people start, well, what's a good price for this? What should I pay for this? You know, and I think in the small business world, you want to know, what is the net income? What is, I should say, the cash flow or free cash. What's the cash flow kicking out of this business that you get to take home, you know, every month added up for the end of the year. What's the annual cash flow business? Now, that number should not, if you work the business that should not have your salary in it, okay? Your salary is going to be an expense, all right? Because you don't want to buy a job. You know, you're buying the cash flow.

That's what you want to pay.

You want to own the business. So if you're going to work that business, pay yourself 100,000 salary or whatever it's going to take to replace you in that business, make sure that's allocated as an expense. The rest is cash flow to you. Now, in the small business, sometimes it's three, five. There's different multiples of what people will pay, you know, even higher than five, depending if it's recurring revenue business or all these different factors. But you're usually not going to see the 100 plus price to earnings ratio or otherwise, you know, multiple here that Elon Musk is paying for Twitter. That's what it is. No one's going to pay you 100x of the cash flow. So just be careful in what you're paying for the business. Now, you may see opportunity where you think, I can boost, I can double this cash flow or whatever it is. And be certain of yourself before you pay too much for the business. But also if you're a seller of a business, we've seen a lot of people who think they have this amazing small business and they're trying to sell it for 10 times their cash flow and no one wants to buy it. All right? So in the small business world, you got to be reasonable too, man.

I want to unpack all that in some big ways. I love what you said, Everything you said. In fact, my number nine on the list and everybody, if you're listening, I'll list. I'll, I'll reiterate the number of points we make here. We're at number nine. Learn how to value a business. That's, that's what I want to say. Learn how to value a business. Now in my book Financial Freedom, there's a whole chapter on how to value a business for sale. Well, the same principles apply on how to value a business to buy. And I've got little stories on all three of these points that Matt was making. I deal with this all the time. People that are coming to me that are got a text last night from someone that was like, I'm trying to buy a business. I'm like, oh, my gosh. But I had an interesting experience in the last year. I had a chance to work directly with a hedge fund manager and a home office manager. Now, home offices, for those that don't know, is that these are kind of like family office. Family office. Sorry, family office. A family office. These are people that are worth $100 million or more, and they hire someone to manage their money. And I got to work directly with one of these guys, and it was kind of neat to see how they operate at that level. You know, when you're negotiating across the table from someone that's got 100 mil in their bank account to deploy, you're going to learn some things. And what was interesting, the biggest takeaway I had, is how sly he was on the first one to offer. Now, some of you may have heard this principle. The first one to offer loses. And so he would come to the buyer. Sorry. He would go to the seller and be like, well, here's what I think it's worth under this model. Here's what I think it's under this model. Here's what I think it's worth under this model. What do you want? And none of it was ever a real offer. It was kind of like, here's what I think is worth. Here's what I think is. Here's what. What do you want? You know, And I just thought it was. So the buyers were trying to get it. Give us a damn price. You know, I mean, the sellers were like, give me a price, you know, and he just wouldn't. He was just so tricky, tricky that way. Now, he ended up losing, which I thought was interesting, because I think he played that sly card too hard. And a small business owner isn't going to have that. But I think when you're going out to value a business and you're negotiating, if you're in a. Which brings me. This is brief. This is second story. Real quick. I had a client that was. He was like, and this will be fast, Matt, you've heard me tell this story.

He's like, mark, good stories. So keep running.

This other story. This Guy was. And they come together. They come together. I learned this years ago, and I thought it was so interesting. There's Mark, you know, and this guy was out of Texas, and he was doing real estate deals, and he was. He was worth millions. And he. He said he was talking about this deal, and he was like, should I set up an llc? Should I do this? And I was like, tell me about the deal. And in the middle of the call, he goes, you know what? Bag it. I'm out. And I'm like, wow, that was abrupt. I learned a long time ago, you're sitting at the table, and you're the. And everybody around there knows what's going on, and you don't. You're the sucker at the table, and someone's the sucker. Money at the table. And if you can't figure out who it is, it's you. And all of a sudden, he realized he didn't understand what the hell was going on.

Yeah.

And I thought that was so interesting. Which goes to understanding the business. Number four. But learning how to value a business and negotiating. And so if you're over your head in the negotiation phase of this, hire someone.

Yeah. Get some help or study up. And I've seen that with clients that wanted to invest and into funds or deals or other people's business, and they'll try to explain it to me, and they quickly realize they don't know what the hell they're talking about because I'm asking them questions like, so what do they sell? Well, I'm like, you don't even know how they make money. Like, what their product is. You've gotten sold on some hype about some app or some cool real estate deal that's going to be flipped. And like, what? Like, you don't even understand the details of this. So before you invest your money, make sure you do understand. And if you don't know, don't invest. Oh, that's like my. If you don't know, don't invest. Yeah.

Yeah. And a little bit of number five.

Might as well just go buy lottery tickets, you know.

Now number 10 is on that point. Matt, too. And you and I've talked about it. Now, this is subtle. Everybody talk yourself into buying the business, not talk yourself out of not buying the business. It's interesting. I get on the phone with clients who are like, okay, I'm going to buy this business, but I'm thinking, I've got to get over this issue. And I'm like, whoa, you just said you're going to buy It. Why don't we start with I don't know if I'm going to buy this. Let's talk about the reason why I should. And see, it's a whole different approach that I think mentally puts you in the right space.

Yeah. I think when people think about due diligence, they think about checking stuff to make sure it's accurate and you know, getting some paperwork done. No, this is the process where you're confirming and you're telling yourself who I should buy. Like this is the, this is the, like, are you not.

Why should it.

Yeah. Not like bail out. This is like the confirmed that you're really going to pull the trigger.

Yeah.

So. Okay, love that.

Okay. And I'm going to come to two tax tips here in a minute, but the one that Matt said a moment ago that I want to mention too, and this is a large part of my book, Financial Freedom is that sellers out there a lot of times need a wake up call. Because if you're going to. This is part of knowing your seller. So this is a little comment on this because Matt jumped back to that one on knowing your seller is go in knowing that a small business owner is emotional. They're going to value the business more than it really is worth. They just are.

They just are.

They put their lifeblood into this thing and they think it's worth millions and it's not even their own kids won't buy the business, you know, which is, you know, that's typical. They're like, I'm going to sell the business to the kids. Here's what I want. Because like through that I'm going to pay that much. And so they go out into the open market thinking they'll find a sucker and they might. But any savvy buyer is going to be like, I ain't paying that. Yeah. So just, it can be very emotional for the seller. Know that and have answers to help them. Yeah.

Now here's another one that's really important. When you do buy, okay. You're pulling the trigger now. You're doing the asset purchase agreement like we talked about. There's some other things we want you to have in there. You need to have a non compete agreement. You have a non solicitation agreement. You don't want the seller of the business to go open up the same thing right down the street that you just bought. And now you're competing with them when you thought they were getting out of the business. You also don't want them to solicit the employees or the people, the vendors or other subcontractors that may be key and instrumental in running this business. When you step in, she wants some agreements. I remember I had a client that sold like a commercial insurance business, independent and came back to me later. We didn't help him with the seller or anything and is like, hey, I need some help. I bought this guy's insurance business, but he opened right back up and took pretty much all the clients. And frankly a lot of the customers were like his family and friends. And I bought this little book of business from him and they stayed with me for six months. And then he opened up his own other business and they all followed him and I lost all this business that I thought I just bought. Did you have a non compete? Nope. Did you have like, there was no contractual restrictions on it? Of course. This was like the one pager like bill of sale. I'm buying this book a business and here's what it's worth. And they didn't get the legal details included. Now sometimes you might feel frustrated because that asset purchase agreement is going to have a number of pieces to it. A non compete, probably a consulting agreement that requires the seller.

You're going to my number 12. So.

Okay, all right, I'll. I'll leave that for you. But it's going to have other pieces and a lot of times people are frustrated. Like I got to get all those documents done. Yeah. If you're throwing out money and you're going to put all your time into this business, you better be getting the details right because this is what's going to protect you once you actually own the thing.

Yeah. Okay, let's come to consulting agreement is number 13. But I want to stay on the legal documents. Matt just again alluded to this, which I think is another major point. What he's saying in another way is don't cut corners on legal when you're buying a business. You're going to want to, but don't. It was funny. I had another story. This is true. I'm not kidding you. This was a. Back in the day when magazines were a little more important. Gosh. And so this was in the 2000s. So almost 15 years ago, again, this young couple came in and said, we just sold our business and the guy hasn't paid us yet and we're a little upset. And they had sold this magazine subscription business and so they were supposed to get 10 to 15 grand. It was a small little deal and the guy had only given them five and he was stiffing them for the other 10. And I said, okay, okay, show me your agreement. Let's see what we got. I kid you not, it was literally the top of a, like a sheet of paper with lines on it and handwritten. And it was about four sentences, maybe one paragraph. And I go, okay, where's the real agreement? No, that's it. And this was kind of before major emailing taking place, you know, and they're like, we have an email here and there, but this is it. You need to go collect based on this paragraph. Are you kidding me? Well, we didn't want to pay for a lawyer. Now, this was a big deal for them. 15 grand. I mean, you could have spent maybe 500 bucks or a thousand getting it done. Right now they couldn't collect. I mean, there was literally no way to collect. They were able to take the business back. They had to start over. The guy had destroyed this, that, and another relationship. It was really sad. But you got to have good legal docs. It's just part of that nonsense.

Absolute. It's an absolute. I mean, but you're going to pay like a thousand bucks for a business or something, but you're going to throw out tens, hundreds of thousands of dollars or get on the hook with some debt with a bank or some seller financing even. Just all the time you're going to put into this. Do it right. Don't cut.

Now let me tee this up.

By the way, I'll just say this. We do have attorneys at kqs. Lawyers, of course, that can help with that. And Mark Fetzer is one of the attorneys, worked a lot of clients on buying businesses can help you look at it and value it, too. He's one of the attorneys in our office. So just know we're here as a resource if you need it. But get someone if it ain't us.

And I'll repeat that. Mark Fetzer. We have two marks in the office. Yours truly, and we call him Fets. And that's actually was his nickname before he even come to the firm, Fets. But he literally spent time as a business appraiser and is also going to be passing the CPA exams shortly. So he's a really valuable asset for many of you that might be looking at buying or selling a business. So meet with Fets. Okay, Matt, I'm going to tee this up for you. If I was a buyer, why would I want a consulting agreement with the seller as part of the purchase price?

Okay, there's a couple reasons why. There's some practical business reasons why, and there's some tax reasons too. Yeah, yeah. So on the. I'll leave the tax one to you.

I haven't got my tax point out yet. I'm making a list here.

Okay. All right. Because that's a good. There's a little tax benefit for you as the buyer doing that. But you need once that the keys pass over. Right. The customers are yours. You got the key to the store, whatever you want to call it. You're running the business now. It's your show. There's going to be stuff that's going to come up here like I don't know what this is. What happened here? This customer says I owe them a refund. This customer says they always do it this way. And I don't know what you know, they're going to need some consulting with the prior business owner if they were the one operating the business, to be like, hey, how does this work? I need some help on this. I need access to this that I don't have access to. You know, all these little things that are going to come up. And trust me, they come up. You're at least want this for three months, and a lot of people do six months. Make sure you have that. And that the seller of the business is contractually bound to you and that they're financially motivated. Right. So don't just give them the whole purchase price, even if there's some seller financing, have some payments in that consulting agreement because you want them to be motivated to actually fulfill on it and pass that information back to you. They're not going into retirement, you know, and like checking out and they. You can't reach them by phone or do anything. Yeah.

And I think if you. Let's put some numbers on it. And I'd say maybe an average small business purchase might be between 2 to $800,000, something like. So let's say 500,000 as a buyer, you might put down to maybe even 300,000 to get the seller to move. They want that big cash payout. And then you get them to sign a note for the other maybe 150 to 200. But you keep a consulting agreement in that for the remaining 50 grand. So you might have cash down 250 grand, 200 grand note from the seller carrying back because now they're really motivated that you succeed with that note as well. And then another 50 that says I'll pay you five grand a month for 10 months. That if I need anything at all. And here, and be specific. Actually, I don't want this. You're on call. Crap. Say, I need you to come by the office five hours a week. I need you to have a lunch with. I've literally written in this contract before, I want two lunches a week with the seller where they introduce me to customers for the next four months, where they know I'm going to lunch twice a week with this seller. Yeah. And I'm going to go with a customer twice a week. And they're going to introduce you, you know, and that's specific. Be specific.

Yeah. Think of the practical things was you're cutting this deal. Think of like, okay, tomorrow I'm, I'm in the driver's seat and this seller's gone. Like, what are the practical things you're going to need to know? And a lot of it's going to be stuff you don't know. But I love that one. That's a great one. That almost every business could, could use is introductions and help the, you know, these customers. And I'm kind of the guy or gal for now. Let them feel comfortable with me. Give me some intros. Let's do some FaceTime together. That's a great idea.

Oh, and I. Well, thank you, Matt. When I put it in a contract too, was in the consulting agreement that there's an open house hosted by the seller. Yeah. The seller gets up and says, hey, I've sold the business. I'm so excited for John Doe or Mary Jane to buy this business. It could be a bakery, it could be a manufacturing facility, whatever. And the seller is the ambassador to introduce you to the employees, to the customers, to the community. And the community, your customers and buyers and blah, blah. I mean, customers and clients and patients. I've seen doctors do this too. I want the doctor leaving to host an open house and all the patients can see, oh, the seller trusts this person. Yeah. Maybe I should too, but like it. Okay. All right.

Where are you on your list?

All right, I'm going to hit number 14. Let's hit some tax items.

Okay.

And I think the more savvy you are from the tax perspective as a buyer, it's going to give you a strategic advantage as you negotiate. The first thing is you want. There's a competing interest here. Just so all of you are on notice, a seller really does want to just sell their stock. Don't want that. Because like Matt said, you don't.

Capital gain, easy. I'm out. Long term capital gain as a seller.

I'm out.

I'm out.

That's it for me, George Costanza. I'm Out. They want to pull a George Costanza. They just want to look good, walk out the door. And selling the stock is their best tax strategy as well. They love that. Buyer is going to find out. I mean, sorry, a seller is going to find out real quick that they're probably not going to get that. So as a buyer, what you want is an asset purchase agreement. Like Matt said, from a legal standpoint, you don't want the liabilities and blah, blah, blah. But from a tax standpoint, that allows you to depreciate those assets. Now, when you buy a business, there's an IRS form that both parties have to sign that says, here's what I bought, here's what I'm going to depreciate. Because the seller's got to go, here's what I sold. Here's what's capital gain, here's what's ordinary. What the IRS figured out real quick is sellers would tell the IRS what they sold. Very different. What the buyer said they bought.

Yeah. And this is called allocation of purchase price.

Yes. There's a specific form at the IRS that you have to file in this process because the IRS wants to kind

of make sure we want it to match. They know.

Yeah. The other. And what I've done, literally and over the years a number of times is the seller's stuck on a price, the buyer stuck on a price. And I'll say, okay, if we do asset purchase, here's the tax benefit to the buyer. If we do a stock sale, here's the tax benefit to the seller. And I'll go, here's halfway. Adjust the purchase price. Let's just bring it up a little bit. Buyer gets a little. Seller gets a little more money to make up for the tax hit. Buyer's like, well, I'll pay a little bit more, but I'm going to get a tax benefit there to make up for that. And so there's a compromise. And as a tax professional, or you should have a tax professional that gets that, that can run those numbers. Okay, number two, Matt, when he said have the seller carry paper, he was talking very strategically because the seller can now get installment sale treatment. They only pay taxes when they receive money. And so that's a good thing. The seller doesn't want to. They may not get.

Win win. That's good for the buyer, good for the seller. Hurts nobody. Good for the buyer hurts nobody. That's why we should be. Definitely be doing that. Yeah. And I think the. That's a good negotiating tip for the buyer, too, is like, hey, I'll pay you over time because you only get taxes. You get the money from me over time, too. So the seller financing is actually a good tax planning strategy for you.

Yeah. And what I like about that, there's so many strategies, is that when you get the seller to carry the note as a buyer, that seller is highly motivated to really make sure you're succeeding. And even if you don't have that consulting agreement, you can call them up and go, hey, you know, help.

Gotta be able to make the payment next month.

Yeah. What the hell's going on? All right. Now, the third one was the consulting agreement, which has a major tax point that Matt May alluded to, and that is as the buyer, when you're paying this consulting agreement, it's going to be a 1099 write off. Bam.

Yeah. 100% expense.

100% expense. So if. If the purchase price was 500 grand and you can allocate 50 of that to a consulting agreement, your. Your tax benefits, huge. They're going to get a 1099. They're going to have some benefits there. I'd love to talk to a seller about that because they can take some personal write offs for that they carry on their small business entity sometimes because remember, they just sold the assets, they didn't sell the business. So that 1099 usually goes into the seller's entity. That's now a shell. But I'd like it. Maybe when you're negotiating as a buyer, you'll say you want 500. I'll give you 520. You will, but 20 of that's a consulting agreement. You mean I got to come back to work? Yes. Two to three months. Let's make this work.

Yeah.

Anyway, there's some good tax things there.

All right.

Well, man, it'd be cool if we got to 15. That's 14.

Where are we at 13? 14.

We are 14. We need one more. Okay, let's think. If I was sitting at lunch with a buyer that was going to buy a business and we'd already covered these 14 things, what would I. Here's.

I got one.

Okay.

I'm all yours, people. And you need. If you're the buyer of this business, you need to start talking to the people. If this is a business has employees, you want to also maybe talk to some of the bigger customers before you buy.

Well, you've got this non. You're going to have a non disclosure agreement in the loi. That letter of intent where this usually the seller doesn't want, even the employees to get wind of a sell.

Yeah.

Let alone customers. That can be hard. But maybe there's some things you can. You know, this is all I'm going to say. Matt, let me say this.

It depends on the business. Let's say you're a dentist buying a practice, okay. It's got hygienists, and it's got another dentist that's in there and all this. That business, you're definitely going in. You're like, I got to make sure that these hygienists aren't crazy. I got to make sure this other dentist that's in here, I like, you know, like, you're going to go kind of get a feel for this. Let's say you're. You're buying some other type of business that's on the market. But I don't know, even if. Even if I can't go in and, like, say, hey, I'm the buyer business, I'd like to come in and be like, undercover a little bit as a customer, I want to see that operation. I also want to see the customer list. Is there, like, three customers that represent half the revenue of this business? I want to know those companies and those businesses. I want to know what they do and, you know, whatever it is. So get a feel for the people and the significant customers of that business so that you're. So you're not surprised when you jump in now.

This is Matt. I've got a better 15. I better got a better one, which you're going to love.

Okay.

What Matt's talking about, I really have to say, goes back to the due diligence comment. Being a secret shopper. Being a secret shopper, Matt, that's probably on Matt's mind because he's been a secret shopper before. Victoria's Secret hired him to be a secret shopper. And so for years, he just, okay, you know, I'll go play like I'm buying lingerie for.

You know, it was unofficial. It wasn't officially hired, but, you know, hey, somebody's got to do it.

I thought you were official secret shopper. Okay, so all those times you diverted in the mall to say, I gotta go to Victoria's Secret and secret shop, that was really a ploy. You were okay.

Yeah, I was. You know, it was. It was a trick.

Okay, you got me. You got me. Okay, now number 15.

Kidding. Of course.

Yeah. The disclaimer 15. Here it is. Buy the business in your retirement account. A lot to see. Some people take their IRA or 401k, say oh, I'm going to buy an ETF in small cap. I'm going to buy small business this or small business that. Those are not small businesses. Those are huge hedge funds that they call small business. But they ain't. They're not.

They're just $1 billion businesses. They're not 100 billion or trillion dollar business.

So sometimes. Oh my gosh, I've got a 16. I've got a great story, but I'm going to try to sweet 16.

Nothing wrong with that. Yeah, that's true.

Okay, 15. But see, here's the thing. If there's a small business in town that you again, you're in your lane, you do the due diligence, yada yada, you're not going to go work in it, you don't want to go work in it, but you know it's going to create some good rate of return. Do it in your IRA. Do it in your 401k.

Love that. Yeah.

And if you're like, well, I got ubit, no, just set up a blocker C corp. All the dividends from this business are tax free and you're capped at a 21% federal rate. Go look at the return on investment. That's what matters. Put your IRA in a real small business down the street that you can look at and you can shop at it, generally as a normal customer. Within reason. There's some prohibited transaction rules, but. But it can be a good thing.

Yeah, love that.

Okay, use your ira. Now, here's the one that's going to. This is going to be a sweet 16. Oh, my gosh. No pun intended. Number 16. Keep your eyes open and your ears to the ground. Now that's kind of a Lone Ranger thing. Ears to the ground.

Eyes open, ears to the ground.

That's Lone Ranger. And Tonto.

Tonto.

Okay, okay, okay. Here's the reason my story. I was getting my haircut and I've got two stories fast. I was getting my haircut at my salon. This was about a year ago. And the ladies are like, yeah, the sell. The owner of the salon, her husband just died. She's done. She's going to sell the salon. I might buy it. And I was like, really? You might buy it? She goes, yeah, but I don't have enough money and I really want it. She's done it poorly. I know it could be better. And I was like. And I was like doing the math in the room. How many stations? Okay. How many haircuts, colors, cuts? There's a pedicure station. Manicure. I'm doing the math. I'm just like. And I was like, need an investor? Do you want a partner? And we were so close to inking a deal where my Roth IRA was going to come in and partner with her, let her run the business. She'd get a salary off the top and my IRA would own 50% of the business. Now, the IRA piece, that's back on point 15. But the point 16 here is a lot of times you're never going to buy a business that just is on the retail market. You're gonna hear something.

Exactly.

You're gonna hear it. You know?

Yeah, this is like great deals and great investments aren't sold, they're found and created. Like that one you found. Right. Just chat people up, you know, and maybe if you're looking for a business, this is what I tell a lot of my real estate clients. It's like, how many of your friends and family know that you're looking for a real estate investment? How many of your friends and family know you're looking for a business to buy? Like, if they don't know that, no one's going to bring it up to you. You're just out there hoping it's just going to flash on or it's going to be on some website listing of buying a business. That's not how most people buy these things.

Ooh, that sounds good. What's the soup du jour?

What's the soup of the day?

I'll have that. That sounds good.

We did that joke some other attendees. It's classic.

I know. I had a guy walk up to me at the summit and be like, hey, Mark, what's this? What's the soup du jour? I'm like, soup today. He's like, I love when you guys do that. It was awesome. Okay, if some of you missed the summit, by the way, I've got that last story I'm going to share too. So don't go one more story.

Okay?

But it's good. It's on number 16. It's another fast one.

But we can't do 17. There's nothing like, no, that's not good. 17 or no, 17. That's the only thing you get at 17.

Oh, gosh. I'm not going to make another joke to the inside, boys. Okay? Now, those that missed the summit, which was this last weekend, the SD IRA summit on how to self direct your retirement accounts, day and a half of material, it's been recorded. You can get that@sdirasummit.com check it out. It's freaking awesome. It was a great day and a half of material. Yeah, those guys joking about the soup du jour were a lot of fun at the event. Okay, last story on number 16. Keeping your eyes open. I was at a soup shop now. Nicer guy than the Soup Nazi on Seinfeld, but very similar. You walk up, you've been a little bag, you're out the door. I mean, yeah, yeah. You've been there with me.

Right?

Okay, so that guy who you've met. Yeah, this is another couple of years ago. I was in there getting my soup, and really nice guy, but not the biggest on customer service. I mean, kind of Soup Nazi guy, you know, whatever.

More mellow. Soup Nazi.

Yeah. So he tells me where we were talking. He goes, yeah, I'm getting a divorce, and my wife wants out, and she wants her half of the business. And he was kind of like, he knew what I did. So he's like, what do I do? And I go, well, do you have anybody that wants to partner with you? And he goes, I don't know. He goes, I need more money to make the place nicer. I could do better marketing. I'm here at the front. He was like the Soup Nazi. He literally was at the front handing me your soup, which was nice, but I said, I might be interested. And again, just right there, just keeping my eyes open, my ears to the ground. And I was like. I go, let me know what your wife wants, and my Ira will buy her out.

And he's like, mark, what do you know about buying soup? You're like, Elon Musk buying Twitter.

Oh, my gosh.

I'm using it back on you.

I knew the product. I was testing the product.

That's what I said. Like, elon, super.

I'm smart enough. All my lanes are open, baby.

That's true. You can do soup. I mean, if Elon Musk can do Twitter, you can do soup.

I can do soup. Um, the long story short, he and his wife, they did. I did. They still got divorced, but she's like, I'll stay partners with you. And she was. She was there the other day. I was like, get sued. They're working together and getting along, and they have young kids and really nice couple, but they. She didn't want to sell out, so my Roth lost out. But you never know. You just never know. Never know. Well, folks, 16 tips to be like Elon Musk.

Yeah.

Some of you buy a business and

be cool like Elon Musk. It doesn't have to Be Twitter. You know, it could be soup of the day. Whatever.

Yeah.

Down the street.

Yeah. We're on the verge of some political backlash here, saying all those good things about Elon. But, folks, just, you know, don't hate the player. Just hate the game. You know, you can play the game. And my new mantra is know the game. Just know the game. That's our theme for the crypto tax summit coming up next month in May in Miami. We've already sold out the yacht club

tickets, and we were. We were hoping for a segue to that. You just. You just made that bridge right across you like that. I thought it was perfect.

My lanes are open, baby. I know the game. I know the game.

Yeah. Yeah.

All right, well, everybody. Okay, Matt, you take us out. I brought us in.

Yeah. Thanks, everyone, of course. For listening in to another amazing episode of the Main Street Business podcast. Please share it with other people. Like it, subscribe, comment, you know, whatever. Whatever you want to do. If they're negative comments, though, keep them to yourself. And remember, the crypto tax summit is coming up. You know, you need to learn how crypto's taxed. If you've owned it or you bought it like most Americans have, you probably ran into it already. We're having a great time, and it'll be a party. Even if you don't like crypto or learn about tax, you know, it'll be a party, too. Crypto tax Summit.

Seriously, after tax party with a live band. We're not kidding. And it's very affordable. It's not a sales fest. You're not going to get upsold. Mark Kohler's personal boot camp for 20 grand. You just can come and learn. Have a good time, good food, networking. It's going to rock. Yeah.

All right, we'll see you there. And we'll be back, of course, next week with another amazing episode of the Main Street Business Podcast. Thanks, guys.