Will your business be ready to sell when you are?
There is no doubt that 2020 has effected great change on the way we live our lives, what we do for fun, and where we choose to live. The stay-at-home orders of the Spring pushed many businesses to work remote and re-tool to provide more virtual services. While this came with its share of growing pains and Zoom-bombers, there has been some good that has come from this.
The new business landscape
Many businesses have announced that they will never return to full in-person workplaces, reducing their office costs, and creating happier employees. This is beginning to cause a shift in the way we view cities. With remote work spaces and the ability to attend face-to-face meetings from across the globe, many do not see the need to be close to the city center. Once upon a time you could not “make it” if you lived in a rural area. Today, it is becoming a viable reality.
With a growing workforce of remote employees, many armed with mobile hot-spots and their laptops took to the road in Recreational Vehicle’s (RVs) and have been enjoying a new office everywhere they park. In May and June, RV rentals were up over 1000%, compared to 2019 and sales in June were up 10%. My partner and I decided to seize the market of the moment and as RV campers with our own families, we decided to buy an RV park.
Doing what you love does not guarantee a fairy tale ending!
For those not familiar, an RV park is a campground with amenities for RV campers to park, connect to utilities, meet friends, and have a home base while they explore new areas. When you buy an RV park, very little of what you actually buy is tangible. The largest expense is the business itself. The real estate, buildings, and anything else, from utilities to golf carts and trucks, is a small portion of the purchase. Even though the sale of the business takes place in a real estate transaction, the most valuable asset can be transferred by email.
As we began our search, we identified an RV park, right here in Colorado, in a popular mountain town, which appeared to suit our needs. We loved the location and saw a lot of potential to modernize this park and to bring it up to speed. Just as you wouldn’t buy a car without knowing what’s under the hood, you wouldn’t buy a business without knowing what you are getting into. In the business, we call this due diligence. We were certainly glad we did ours as this little fixer upper had some devastating yet avoidable defects hidden behind its curtain.
The couple who owned this park were older and like many getting into this business did it to make friends, spend time outside, and own their own business. They had achieved these goals and had finally made the decision, in their 80’s to move from operator to guest. The gentleman reminded me of my grandfather, very smart, resourceful, and reserved. The woman was sweet, cheerful, and personable. She was an outstanding face for their business. Let’s call them Bob and Sue.
The proof is always in the pudding… or the P&L
Running a mostly cash business and doing most of the repairs and maintenance themselves, Bob and Sue were able to report very little income and still maintain a profit. No doubt this system saved them on their taxes, year over year, despite it being a risky play. Bob and Sue had regular friends who would come visit them for the entire summer to take advantage of the deeply discounted site rentals at the monthly rate and with the added cash discount.
While this helped Bob and Sue maintain long term friendships, they would soon find that it did not serve them in selling their business. When a business like an RV park is sold, as mentioned before, the minority of the price goes to the physical assets of the park and the majority goes to the business itself. Therefore, without a doubt any bank which is called upon to lend money for the purchase will want to give the business its own checkup. When my partner and I accessed the books for this business what we saw was not pretty.
Bob’s crafty workaround to avoid the tax-man and Sue’s clever bookkeeping, which had kept them under the radar for years was unavoidably exposed when we investigated the P&L ( Profit and Loss statement). The business did not generate enough income to support the purchase price and the bank can only assume that if the business continued to run as the books indicated it had, it would lose money when a large loan payment was added into the expenses.
Running out of options!
There are creative financing options in cases like this which allow for the seller to act as the bank and carry the note for the buyer, yet Bob and Sue saw it as they were too old and would not be around to see that loan to maturity, nor much of its benefit. They were stuck. Their only options were to sell the business well below the value of other well-run parks in the area or stay in business for another two years, into their 90’s, to run an above-board business and improve the financials.
When you’re ready to exit, will your business be an attractive product poised to fetch top-dollar? Or will it be a bargain barrel dent-and-ding special? Learn from Bob and Sue and leave on your terms, with confidence!
Key Lessons
- Budget – Your books cannot lie! You might lie on your books, however, they can always be verified. How much are you really saving in tax to take that risk which is in-fact digging into your wealth? In Bob and Sue’s case, their shortsighted ploy devalued their business by $700,000!
- Economics – Ensure that you are running a business and not a charity. Going into a business where you can make friends and your friends come back is about as rewarding as it gets. Just remember, you are still running a business. Bob and Sue had a nightly rate of $50 to stay the night at their RV park, yet their friends who visited and stayed all summer, the ones who capitalized on all of the discounts offered, were paying less than $5 per night. This drastically hurt their business. Where could yours be improved?
- Legacy Planning – A little bit of foresight and planning prevents heartache like this story. No one is too young to begin planning their legacy. Whether it is to pave the way for your retirement or to build a multi-generational trust, I can help you plan for your exit, ensure your business will be highly marketable at that time, and even put more money in your pocket, today.
If you’re ready to plan your legacy and prepare yourself to leave on your terms, with passive income, you can’t wait another year!
(Sources: https://www.forbes.com/sites/alexledsom/2020/07/12/all-aboard-the-land-yachts-as-rv-bookings-spike-1000/#222dbaa447d5, https://www.travelandleisure.com/travel-tips/travel-trends/rv-sales-increase-coronavirus)
