WE CREATED THE DEAL ARCHITECTS AS A FORUM TO BRING TOGETHER LEADING EXPERTS, ADVISORS, OWNERS AND INVESTORS IN THE ACQUISITION AND SALE OF SMALL AND MIDDLE MARKET BUSINESSES. WE HOPE YOU ENJOY OUR INAUGURAL ISSUE!
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Todd Corbett Smith, founder of CORBETT BRANDS, looks to the future in his first feature article. Over the next decade, over 10 Trillion dollars in business assets will be sold.
In “The Great EXIT,” he shares his thoughts on this MEGA-TREND and what it may mean for Corbett’s clients.
Christopher A. Farrell has been a TRADER in the financial markets for nearly 30 years.
In “SELL WHEN YOU CAN”, he shares his LESSONS from the trading floors of WALL STREET on the ART of the PROFITABLE EXIT.
MARTY BLOOM has owned 38 restaurantsintheB BOOSSTOTON Narea overthepast45years. Hehas mademoneyon37 37ofthem.
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By Todd Corbett Smith
It is no secret that the baby boomers are retiring as the wealthiest generation in American history. While those born between 1946 and 1964 only make up a bit over 20% of the population, they have amassed a majority of the tens of trillions of dollars of investment portfolio and real estate value.
While much attention has been paid to their effect on the stock market, and the pending wealth transfer that will take place as this generation ages into their 80’s and 90’s, much less has been said about the consequences of their retirement on small business.
“OVER THE NEXT DECADE, OVER 10 TRILLION DOLLARS IN BUSINESS ASSETS WILL BE SOLD. “
Trends create opportunities. It is estimated that over 10 trillion dollars in business assets may change hands over the next decade. At Corbett Brands, we call this phenomenon “The Great Exit.”
In my first feature article for the inaugural issue of The Deal Architects, I would like discuss this mega-trend, and what it might mean for the future.
While no one has a crystal ball, there are risks looming on the horizon for buyers and sellers of small businesses that are worth exploring. The first risk is likely the most obvious: will there be a new wave of sellers in the small business marketplace over the next decade, and will this have a negative impact on prices?
“AT CORBETT BRANDS, WE CALL THIS PHENOMENON
“THE GREAT EXIT,” WHAT DOES IT MEAN FOR THE FUTURE?
Unlike a stock portfolio, it is much more challenging to transfer the ownership of a small business to your children. An issue that we see often at Corbett are owners of family businesses that are forced to sell because their own children do not want to take over the business.
While there is no way to know for sure, it does not hurt to
be aware of this risk if you are deciding to sell your business in the near future. With the economy currently in good shape (inflation notwithstanding), it might be worth imagining a time in the next few years when economic conditions are not quite as good. The logical questions are: what is your business worth? Is it sale-able?
“THE LOGICAL QUESTIONS ARE: WHAT IS YOUR BUSINESS WORTH?
Imagine the challenges that a business owner might face trying to sell his or her business when a poor economy is compounded with a crowded marketplace of retiring baby boomers trying to exit their businesses. It is important to keep in mind that you never truly “win” until you take your money out of the casino. I’ve witnessed 30 year old businesses go under in the blink of an eye. I’ve also seen
business owners stay with their businesses well into their retirement years, only to be forced into selling by health issues.
All of these risks can be managed ahead of time with the right plan and the right set of advisors. Every problem has a solution. Do you understand your circumstances and options? The most important question is: are you prepared?
“EVERY PROBLEM HAS A SOLUTION. THE MOST IMPORTANT QUESTION IS: ARE YOU PREPARED”
By Christopher A. Farrell
Sell when you can.... not when you have to.
I f irst heard those words as a young trader on a crowded trading floor on Wall Street nearly 30 years ago. The year was 1995. I was 22 years old, on the preferred stock desk at Gruntal and Company, at the time one of the oldest brokerage firms in New York City with a history dating back to the 1880’s.
Gruntal was located right across the street from the New York Stock Exchange at 14 Wall Street. I learned many lessons from that trading floor that still serve me well to this day.
Trading is an extremely challenging way to earn a living. Timing the market successfully is one of the most elusive and difficult skills to develop in part because it requires a bit of contrarian thinking. You have to react before others. This is why most people fail. By time you get “proof” that it is the right time to sell, it might be too late.
“SELL WHEN YOU CAN, NOT WHEN YOU HAVE TO. “
Are lessons learned on the trading floors of Wall Street applicable to private deals? In my opinion, the answer is yes. When I joined the Corbett team and got involved in buying and selling businesses, I kept thinking about the similarities between these two worlds.
Both the public and the private markets are at the mercy of the economic forces of supply and demand. But businessowners, in many ways, are in an even more precarious situation. Unlike the financial markets, private businesses are not liquid assets. Fewer available buyers can create a much more volatile pricing dynamic with a much smaller margin for error. This is a reality that sellers must be prepared for.
“ARE LESSONS LEARNED ON THE TRADING FLOORS OF WALL STREET APPLICABLE TO PRIVATE DEALS?”
There may literally only be one buyer and thus, only one chance to sell near the price you want. The window to safely exit your business, at a good price, can be extremely narrow. In financial market terms, we call this a “thin market” with a “wide bid-ask spread.”
So how do you navigate this kind of market risk? With caution. While there are some deal terms that are worth walking away from, it is always prudent to think about worst case scenarios upfront. Everything has a price. If I lose this buyer, what are the financial consequences? How difficult will it be to find another buyer?
“There may literally only be one buyer and thus, only one chance to sell near the price you want.”
“The window to safely exit your business at a good price can be extremely narrow.”
We created The Deal Architects as a platform to bring together advisors and experts to discuss the benefits and risks of buying and selling businesses. Ultimately, to help our clients to better navigate those risks. At the end of the day, human psychology does play a role in this process. Fight the urge to go with the herd. The perfect price and the perfect time to sell may not exist. Waiting just a bit too long to get the perfect price carries risks that can jeopardize your exit .
A little contrarian thinking can go a long way.
“The perfect price and the perfect time to sell may not exist. Waiting just a bit too long to get the perfect price carries risks that can jeopardize your exit.”
“A little contrarian thinking can go a long way.”
Our number one job as advisors is to make our clients successful.
When I was asked to contribute to the inaugural issue of The Deal Architects, I was thinking about the many lessons I have learned over 4 decades in the restaurant business, both as an owner and an advisor. I would like to share some of those lessons here.
Owning a restaurant, as many of you are all too aware, is among the hardest businesses to make
successful. No one knows this better than me. I have owned 38 of them, and advised on dozens of others. In 45 years in the industry, I have seen the same mistakes made over and over again.
Why is the failure rate among restaurants so high? In my opinion, there are several main reasons. First and foremost, investors sometimes enter the restaurant industry for all the wrong reasons.
“WHY IS THE FAILURE RATE AMONG RESTAURANTS SO HIGH?”
Many simply don’t understand the level of financial sophistication that is required, or the complexities that go into a successful restaurant. Instead, these investors want to go to their bar and buy their freinds drinks. This is what their dream is. This can be a very costly dream.
Third, the restaurant can play a strategic role in the overall vision of the building for the landlord in providing services for their tenants. For this reason, landlords might be willing to cut a more rational deal for a restaurant. A good broker will understand this and negotiate favorable lease terms.
Secondly, the ability to understand and negotiate a commercial lease is essential. That is why commercial brokers are such a valuable part of the process. Not only for keeping their clients on the right path and creating value for them. But equally as important, knowing when to advise them to walk away from a lease. In fact, we walk away from landlords all the time .
“WE WALK AWAY FROM LANDLORDS ALL THE TIME”
Another angle to consider is whether you are bringing a new concept to an existing location. Of the 38 restaurants that I have owned, I have never relied upon someone else’s existing concept in that location.
One of the most important aspects is location selection. People who are new struggle with this more than anything else. They don’t know the difference between a good location and a poor one.
I have seen so many people get sucked into terrible deals and blow their life savings by putting their money on the wrong venture in the wrong location. If you have never opened a 250 seat restauarnt before, as a first time owner, your chance of survival is minimal. Seek outside advice.
Always remember, if you can’t tell who the mark is, it is you.
“IF YOU HAVE NEVER OPENED A 250 SEAT RESTAURANT BEFORE, YOUR CHANCE OF SURVIVAL IS MINIMAL”