4/15/26 Exit Smarter: Business Strategy with Patrick Collins + Listener Q&A

The Moneywise Radio Show and Podcast Wednesday, April 15th BE MONEYWISE. Moneywise Wealth Management I "The Moneywise Radio Show & Podcast" call: 661-847-1000 text in anytime: 661-396-1000 website: www. MoneywiseGuys.com facebook: Moneywise_Wealth_Management LinkedIn: Moneywise_Wealth_Management Guest: Patrick Collins, Business Broker and Advisor for Collins Business The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Patrick Collins & Collins Business are not affiliated with nor endorsed by LPL Financial or Moneywise Wealth Management].

• 0:00Speaker 00

  Live from the basement inside the historic Woolworths Building in downtown Bakersfield. Call or text in at 661-396-1000.

• 0:29Speaker 01

  Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services offered through LPL Financial. LPL Financial and MoneyWise Wealth Management are independently owned and operated.

• 0:37Speaker 00

  Now, let's start the MoneyWise Show.

• 0:40Speaker 02

  Hey, welcome to the Wednesday edition of the MoneyWise Show, live from the basement of the historic Woolworths Building here in downtown Bakersfield. You know, we're, uh, we're here for the next hour on News Talk 96.1 FM and 1230 AM, KERN, streaming live on the interwebs at MoneyWiseGuys.com. You can pick up any of our past episodes, all there, commercial free. You can call or text into the show anytime, 24 hours a day, 661-396-1000, 661-396-1000. We do have a couple of questions that popped in. We're going to definitely get to those here in just a quick moment. And, uh, well, we're your hosts today.

• 1:25Speaker 02

  I'm Justin Leland here with, uh...

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  Steven Nicholas.

• 1:27Speaker 02

  Steven.

• 1:28Speaker 00

  It's just me and you.

• 1:29Speaker 02

  Just me and you today, buddy.

• 1:30Speaker 00

  And one of our favorite guests, it's been way too long.

• 1:33Speaker 02

  I think it's actually our favorite guest.

• 1:34Speaker 00

  It is. I mean, if I'm picking, of course. But, uh, yeah, Mr. Patty Boy will be back here joining us very, very soon. And, uh, like Justin said, you can call or text in anytime, 24 hours a day, at 661-396-1000, and I will answer the phone. It goes to me.

• 1:53Speaker 02

  Yeah. So, if he's in the middle of a thought and talking on the, on the show, he will have to mute his microphone to answer the...

• 2:01Speaker 00

  Our listeners go number one.

• 2:02Speaker 02

  Exactly.

• 2:03Speaker 00

  I don't care if I'm asleep, I will reply to you.

• 2:05Speaker 02

  Exactly. Service above self.

• 2:09Speaker 00

  Exactly.

• 2:10Speaker 02

  Service above sleep.

• 2:11Speaker 00

  The MoneyWise way.

• 2:15Speaker 02

  Hey, uh, happy tax day, by the way, Stephen.

• 2:17Speaker 00

  Happy, uh, Jackie Robinson's Day.

• 2:19Speaker 02

  Happy Jackie Robinson Day. Uh, everybody's gonna be wearing number 42 today. And, uh, no names on the back of jerseys.

• 2:26Speaker 00

  Nope.

• 2:26Speaker 02

  I like that.

• 2:28Speaker 00

  Hopefully my Mariners can find a win. So, uh, if we could only play the Astros every day. But that's the only team we can, uh, beat this year. So I'll take it.

• 2:37Speaker 02

  Seemingly. Yeah, you'll get, you guys will pick it up.

• 2:40Speaker 00

  We'll see.

• 2:41Speaker 02

  The Angels are playing pretty hot ball right now.

• 2:43Speaker 00

  I saw that. What is going on?

• 2:45Speaker 02

  I don't know. Something in the water there in New York.

• 2:47Speaker 00

  Oh, don't talk about water right now.

• 2:53Speaker 00

  But it's, uh, it's all cleaned up. We're good.

• 2:55Speaker 02

  Yeah.

• 2:55Speaker 00

  The diner's open.

• 2:56Speaker 02

  Yep.

• 2:56Speaker 00

  I just saw it.

• 2:57Speaker 02

  Yep. Yep. Definitely. So yeah, happy tax day. Did you get your taxes sent in?

• 3:02Speaker 00

  I did.

• 3:03Speaker 02

  You got it all done?

• 3:03Speaker 00

  Johnny D.

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  Jo- yeah.

• 3:06Speaker 00

  Definitely takes care of me every time.

• 3:08Speaker 02

  So here's the thing that was weird to me was I, I'm getting a little bit of a refund from both the federal and the state. I signed my tax returns last Monday. So a week, a week ago Monday. So only like 10 days ago.

• 3:22Speaker 00

  Cutting it close. Yep.

• 3:23Speaker 02

  Cutting it close, but hey, you know.

• 3:25Speaker 00

  It's done.

• 3:25Speaker 02

  Complex. It's, you know, signed my paperwork on Monday or Tuesday. Uh, they filed my taxes that afternoon. I got my state refunded my checking account this morning.

• 3:35Speaker 00

  Me too.

• 3:37Speaker 02

  I'm like, what the heck?

• 3:38Speaker 00

  I was like, what? Oh, look at that.

• 3:41Speaker 02

  What? In like five business days, I get the, uh, the refund.

• 3:44Speaker 00

  Babe, we can go grocery shopping again.

• 3:46Speaker 02

  I could put gas in my tank.

• 3:50Speaker 02

  I'll be getting the.

• 3:50Speaker 00

  And it's gone.

• 3:51Speaker 02

  I don't know when the federal will be, but it'll be like, you know, it's, yeah.

• 3:55Speaker 00

  And I've, I've, we've heard some, uh, from listeners. Some say are their returns are lower this year. Some are saying they're higher. I don't know how that works. I'll leave it to the experts, but, uh.

• 4:07Speaker 02

  Yeah. So refunds are actually, it's a good, good segue. We'll talk about that here real briefly, but right now we'll talk about the numbers. Uh, S and P 500 is actually at a record high right now. So forget about what we said about Iran. And, uh, the market's being down, uh, cause, uh, they, they rebounded immediately and now we're, we're back in positive territory for the year. Um, S and P is at a record high. NASDAQ is not far behind. And the Dow is still, you know, basically treading water. It's a little, it's a mixed market today. Dow is, Dow is down a touch. But we still have about 53 more minutes left in the trading day. But yeah, S and P as of right now is trading at the highs of the day and is currently in record territory.

• 4:52Speaker 02

  So there you go. Forget about what's happening in Iran and the gas prices being twice what they used to be. But.

• 5:01Speaker 00

  Is that gonna be the new norm?

• 5:03Speaker 02

  With the blockade that's happening, you have no idea. You know, oil prices have come back down a little bit. They've come back into some semblance of reality, but they're still elevated.

• 5:15Speaker 02

  But we'll have to see.

• 5:16Speaker 00

  Right, right when my son gets his license.

• 5:19Speaker 02

  And. Now he can't, can't afford to drive.

• 5:21Speaker 00

  Get a job.

• 5:23Speaker 02

  Get a job, you slob.

• 5:26Speaker 02

  Get off the, get off the PlayStation and go get a job washing cars.

• 5:30Speaker 00

  Yes.

• 5:31Speaker 02

  Yeah, so we did get, so tax day refunds are up and there's a couple of different reasons for this. Some people. Some people are getting a little bit of a less of a refund. Some people are getting more. Obviously, everybody's tax situation is a little bit different. But when you take into account the OB3, the one big beautiful bill act. And some of the, the, the changes and deductions and the no taxes on tips or the no taxes on overtime and all these other different. Additional deductions that were brought on. On average, more people are getting a bit more back from a refund than they did in the, than they did in previous years. Maybe not, not a huge amount.

• 6:16Speaker 02

  It might be marginal.

• 6:19Speaker 02

  But you know, that's a, again, everybody's situation is going to be slightly different. So to answer your question there, Stephen.

• 6:27Speaker 00

  Yeah, we've had, we've had multiple messages in the last week just saying, you know, what's going on this year? I made the same amount last year, same amount of deductions, blah, blah, blah, blah. But you know, one said there was a $1,600 difference from last year. And then another listener followed up saying theirs was $1,600 more.

• 6:46Speaker 02

  Right.

• 6:46Speaker 00

  So like you said, I, I think it's pretty much individual. It's everybody's a little bit different.

• 6:50Speaker 02

  Well, yeah, and I mean, everybody will say, oh, I did the exact same thing I did last year. Well, maybe you did, maybe, did you forget that you gave a thousand dollars to some charity that's now like? Not everything is exactly the same as it was the prior year, right? There's going to be some differences. So for everybody out there, you know, it's going to be a hit and miss for most people. I know I got a bit more this year. Steven, you get a little bit more this year?

• 7:16Speaker 00

  Mine was about the same.

• 7:17Speaker 02

  About the same.

• 7:18Speaker 00

  And it's been the same probably 10 years.

• 7:21Speaker 02

  Yeah, you need more deductions, man.

• 7:22Speaker 00

  Yes, that's what Duffield says. Like, you're the tax guy, come on.

• 7:27Speaker 02

  Right, so we had a couple of questions that popped in. Do you want to grab those real quick?

• 7:30Speaker 00

  We did. The first one says, "Good afternoon, guys. Glad to hear you guys back on the radio."

• 7:35Speaker 02

  We never left.

• 7:36Speaker 00

  We never did, but we are back where we started on Kern Radio.

• 7:41Speaker 02

  Full circle.

• 7:41Speaker 00

  But he says, "My question is, are hard money loans generally better for flips, rentals, or other real estate type of strategies? If not, what are those loans best for? Thanks, guys."

• 7:55Speaker 02

  Ooh, hard money loans. This is a difficult one from a compliance standpoint. We cannot advise on these types of things, but in general, hard money loans are going to be money, loans that are not basically generated by a bank, obviously. It's a private, it's a private loan.

• 8:16Speaker 02

  Most of the time, it's for people that want fast access to cash that they can use right now and whatever that utilization is for. And in most cases, it's going to be somebody buying a rental property or something like that, that they're going to turn around and flip. So they're okay with paying a 12% interest rate if they're only going to have it for 60 days.

• 8:36Speaker 02

  But there are people that are out there that maybe have a bad credit score, need a little bit of extra help, and they're going to be in a position where they're required to pay 10, 12, 15% loan on that home. And that's the only way they can get the money. And so there, there's multiple different strategies and different ways people use them. I would say predominantly, and maybe we'll ask, maybe we'll ask the, uh, the, the, uh, the hard money loan guru over here. Uh, Pat Collins.

• 9:08Speaker 00

  That might be able to help you in a minute.

• 9:09Speaker 02

  He'll be able to help with answering that question in a compliant way. So I don't get in trouble.

• 9:13Speaker 00

  The next one says, heard part of the show yesterday was in and out of my truck. I'm personally beginning to pay off a couple of credit cards. And a loan that I took out during a divorce, I went through.

• 9:25Speaker 02

  I don't know whether to say congratulations or I'm sorry to hear.

• 9:28Speaker 00

  But, uh, he said, what is the difference between a snowball and avalanche strategy to pay these off?

• 9:35Speaker 02

  Very simple. Great question. This is a great question and it's a very simple question. So if you take all of the different loans that you have, they all have a different, uh, one principal balance or value. And two, a different interest rate or potentially a different interest rate. The snowball strategy is for you to pick the one with regardless of interest rate is to pick the one with the lowest balance and, and tackle that immediately. And then take that, that payment that you're making on that snowball, that first snowball. And apply it to the next one and apply it. So it's like that snowball rolling downhill.

• 10:10Speaker 00

  Give it some momentum.

• 10:11Speaker 02

  Get you some momentum. You get some small wins in the very beginning because you pay off that lower balance first. And then you wind up using that to pay down the other higher balances from there. That's the, that's the debt snowball. The avalanche works a little bit differently. You're going after the one with the highest interest rate. Regardless of the balance, right? So if you have a, a, a, a loan or a credit card, that's a 26% interest rate. Regardless of the size of the balance, you want to get rid of that 26% interest rate fast. You use that one first and then you take that and once that's paid off, you apply it to the next, uh, highest interest rate and so on and so forth.

• 10:50Speaker 00

  And scratch them off.

• 10:51Speaker 02

  Really the, the difference is do you pay it based on balance and you start low and, and go high? Or do you start with interest rate and you start high and you go low? There, that's the, the, the basic strategy between the two.

• 11:03Speaker 00

  Either are good.

• 11:04Speaker 02

  Either are good. Cause you're getting out of debt.

• 11:06Speaker 00

  The next one says, how does life insurance integrate with a trust account?

• 11:12Speaker 02

  Wow. Uh, great. Again, great question. It depends.

• 11:19Speaker 00

  That's a good answer.

• 11:22Speaker 02

  So depending upon what kind of trust you have, so there's revocable trust, there's irrevocable trusts, there's different trust strategies as to, let's say you're a high net worth individual, you have a ton of real estate or something like that, and you have some very kind of exotic trust setups to kind of get some of those trusts maybe out of your estate, right, as an irrevocable trust. You may have a life insurance policy where the trust is the owner of the life insurance, and that's a completely, it's a valid strategy to pay potentially some estate taxes if you were to pass away. So there's all sorts of different ways. Other

• 12:04Speaker 02

  ways is if you just have a regular, like a revocable trust, like most people do, you may have, your life insurance policy may pay the proceeds instead of to a direct beneficiary, the trust itself may be a beneficiary of that tax-free death benefit. So there's a couple of different ways to look at it, but again, every single one of these winds up being a, there's no cookie cutter approach to this. We want to make sure, if you have a specific question, give us a call at 847-1000, 661-847-1000. We'll actually talk through it with you if you have an absolute, like, hey, this is a scenario I'm dealing with. How does this life insurance integrate with my trust?

• 12:45Speaker 00

  Exactly. And keep those questions coming, 661-396-1000.

• 12:50Speaker 02

  Absolutely. We're going to take a quick break. When we get back, Mr. Patrick Collins.

• 13:07Speaker 02

  Welcome back. Hey, wait, Pat Collins isn't from Boston. Shipping up to Boston, though?

• 13:16Speaker 00

  Boston, Ireland.

• 13:17Speaker 02

  Boston, Ireland.

• 13:20Speaker 02

  Boston Ash Road.

• 13:22Speaker 03

  It's a metaphysical reference.

• 13:24Speaker 02

  There you go.

• 13:26Speaker 02

  Hey, Pat, how are you?

• 13:27Speaker 03

  Doing great.

• 13:27Speaker 02

  Welcome back. It's been a minute since you've been on the show.

• 13:31Speaker 03

  Well, and welcome back to you guys, to your, uh, your roots on the, on the.

• 13:36Speaker 02

  On K E R N.

• 13:37Speaker 03

  On K E R N. So, good for you. But yeah, I went through a little transition there from, uh, one, one employment to starting my own.

• 13:45Speaker 02

  There you go.

• 13:46Speaker 03

  And, and I had a couple of other things to do besides come on and see my buddies.

• 13:52Speaker 02

  Yeah. So, I mean, it's been, uh, God, it's been a minute since we've had you on the show, but we've, we've missed you. It's, it's always fun to have you on the show, uh, cause I don't get enough Dropkick Murphys. And, uh, and so we only play that when you're on the show. So.

• 14:06Speaker 03

  Well, I have another one for you then too. And, and Stevie can do some research for you. I just got a, I, from the Cloverhearts.

• 14:13Speaker 02

  And Cloverhearts.

• 14:14Speaker 03

  I'm not promoting them or anything like that, but they were going, hey, if you love Dropkick and you love the Mackenzies.

• 14:21Speaker 02

  Oh, yeah.

• 14:22Speaker 03

  And this is Cloverhearts. They're a little bit newer on the scene, but yeah, you'll love their stuff too.

• 14:26Speaker 02

  All right. Well, we'll have some.

• 14:28Speaker 03

  Some rock and bash Irish stuff.

• 14:30Speaker 00

  As long as it's clean, I got you.

• 14:34Speaker 02

  Hey, we got the F-bomb, uh, button over here. We can.

• 14:37Speaker 00

  It's just a little out of reach.

• 14:38Speaker 02

  Right.

• 14:42Speaker 02

  Hey, so, uh, we had a, we had a question, uh, last segment that I, I, I needed to dance around for compliance reasons. So, uh, the question had to deal with hard money loans.

• 14:57Speaker 02

  In, in what way are those typically used? Uh, I see them more or less being used in a real estate transaction for flips and things like that. You've been in the business long as well. And so what do you, is it, am I right on that? Or do you see it in other ways as well?

• 15:12Speaker 03

  Well, let me just, I mean, the way that I see it, that's the way it is.

• 15:17Speaker 02

  Oh, yes.

• 15:17Speaker 03

  I am aware there are a lot of other hard money loan environments that, uh, that I'm not personally familiar with.

• 15:24Speaker 02

  Right, right.

• 15:25Speaker 03

  Uh, but most of the ones that, that we've been involved in, they're to do with, with real estate. And typically it is an investor or a homeowner who's trying to get in short term to get something settled, squared away.

• 15:39Speaker 02

  Right.

• 15:39Speaker 03

  And you can make it happen pretty quick.

• 15:41Speaker 02

  Yeah.

• 15:42Speaker 03

  Which, which timing on a lot of those. And, uh, you know, as you've mentioned, or you've experienced, I mean, there are a variety of things that can, you know, send people that way.

• 15:53Speaker 02

  Yeah.

• 15:53Speaker 03

  And it is a higher interest rate. Although, a year ago, hard money loans weren't any higher interest rate than a standard home loan.

• 16:00Speaker 02

  Right, right. Uh, standard home loan at seven percent, you're getting the hard money at eight and a half, and you're like, well, where's the spread?

• 16:08Speaker 03

  Exactly, you know? But, but yeah, typically, there, there's someone on the other side that has a motivation, and it is a short term in nature, most times.

• 16:18Speaker 02

  A bridge loan.

• 16:19Speaker 03

  So, so the, uh, but, but the reason the interest rate's high, and, and everybody should remember this, on a hard money loan, there's a reason, because there's risk.

• 16:28Speaker 02

  There's higher risk, exactly. It's, it's a risk premium, is what it is.

• 16:31Speaker 03

  So, as long as people understand that, then, and, and you work through, uh, and, and I think you mentioned compliance, that's the other really big part. That going through someone who does it professionally, uh, i- is the best way to go down that road, because the compliance, and not just the state of California, like federally, I mean, it's every which way to Sunday, the, the compliance and the reporting.

• 16:58Speaker 02

  Right, because it's, it's basically, it's another form of a, a, a bank note, right? That is being, but it's not being backed by a bank. So it-

• 17:06Speaker 03

  Right, it's secured.

• 17:08Speaker 02

  It's secured.

• 17:09Speaker 03

  It's secured typically, by real estate, but it is a personal loan.

• 17:14Speaker 02

  Right.

• 17:14Speaker 03

  And, so, the, the other parts that, from a reporting and a regulatory standpoint, there's a lot of parts you don't see, if you're just the guy-

• 17:23Speaker 02

  Just giving out the loan.

• 17:24Speaker 03

  Giving out the loan. And if you, if you were responsible to track that, you can, you can run yourself in a lot of trouble if you don't know what you're doing.

• 17:32Speaker 02

  Yeah, you don't know what you don't know, so don't do it, find a broker, somebody does it professionally.

• 17:36Speaker 03

  Yeah, and there's, there's multiple ones in, in our-

• 17:39Speaker 02

  We won't mention those, but-

• 17:40Speaker 03

  In our commu- no, not unless they want to call you and pay you.

• 17:43Speaker 02

  Right, no.

• 17:45Speaker 03

  I think that's called advertising.

• 17:46Speaker 02

  Yeah, we don't do that. But yeah, so you know, hard money loans or any of those kind of non-traditional loan structures, private credit, those types of things, that they can carry with them a lot of, a lot of additional risk, a lot of additional.

• 18:04Speaker 03

  Yeah, and you guys have seen it, I haven't done that deep of a dive, but all this private credit.

• 18:10Speaker 02

  I wouldn't touch that with a 20-foot pole at this point.

• 18:12Speaker 03

  In the market, and, and gosh, a lot of that was invested in businesses.

• 18:19Speaker 02

  Correct.

• 18:20Speaker 03

  And big ones in a lot of cases.

• 18:22Speaker 02

  Right.

• 18:23Speaker 03

  But rolled up and businesses in, in the, the higher end part of my market, that, that upper middle and corporate market, where again, it was sort of technically short-term money and they were buying it, investing and rolling these companies up.

• 18:40Speaker 02

  But then it became a long-term investment, then it, it was no longer short-term, and now you have companies that are starting to default on, on some of these loans, and that's concerning.

• 18:54Speaker 03

  Yeah, like I said, I have, you guys would have a deeper following because that is very institutional in one sense, but the reality is if they were buying companies when interest rates were three and a half percent, and you go to sell them, and business rates are in the eight, nine, and 10%.

• 19:12Speaker 02

  Right.

• 19:13Speaker 03

  Your math isn't gonna work the same.

• 19:15Speaker 02

  Math don't math at that point.

• 19:17Speaker 03

  You can, if you got in at that, and that's the number you get to use to get out, then you can, you can create the value, but you create value, and at the same time you're creating value, your interest rate is rising, your exit changes.

• 19:29Speaker 02

  Yeah, your exit strategy completely changes. We're joined here by Pat Collins of, what's the name of the company now, Collins?

• 19:37Speaker 03

  It's very creative. It's Collins Business Broker and Advisor.

• 19:41Speaker 02

  Collins Business.

• 19:42Speaker 03

  Sorry that name threw you, Justin.

• 19:44Speaker 02

  It totally threw me off.

• 19:45Speaker 03

  That was way too complicated.

• 19:47Speaker 02

  Way, yes, right, Collins Advisory.

• 19:51Speaker 02

  Right?

• 19:51Speaker 03

  Exactly.

• 19:52Speaker 02

  How did you come up with that? Yeah.

• 19:54Speaker 03

  That took a long, long, long time.

• 19:58Speaker 02

  I like it. How many Guinesses and Jamesons were consumed in creating that business?

• 20:04Speaker 03

  All right, we went through, I went through a corporate one about 30 years ago with then Coldwell Banker Commercial Real Estate and they put it out to bid when Sears bought them and they had to come up with a new name for the commercial side and they went on and on, spent a year and they came back with CB, which was what everybody called it.

• 20:23Speaker 02

  Called it anyways. Whoop-de-doo.

• 20:27Speaker 03

  Yeah.

• 20:27Speaker 02

  There we go.

• 20:28Speaker 03

  So mine was just as creative.

• 20:30Speaker 02

  Yeah, there you go. There you go. So tell us, I mean, that that transition obviously has happened over the past couple of years. We're going to have to take a quick break here in a minute, but you know, briefly, just talk about that transition and now opening your own business, jumping in on, you know, both feet, running your own show.

• 20:49Speaker 03

  Well, I think the really short version of that is that I've owned businesses before.

• 20:54Speaker 02

  Yeah.

• 20:55Speaker 03

  And so, so going out and designing it around more about sort of the client I'm after or the person I want to help, it just gives me that maximum flexibility to go add.

• 21:07Speaker 02

  Freedom.

• 21:08Speaker 03

  Go add value and not necessarily define the how, but, but go into a business owner and saying, hey, yeah, I can help from.

• 21:18Speaker 02

  And not having that, that top-down corporate kind of telling you how to do your business. You can do it your way.

• 21:25Speaker 03

  Well, and it wasn't that heavily handed before.

• 21:28Speaker 02

  Right, but still, right. You have a lot, maximum flexibility to do what you want to do. We're going to take a quick break. We're going to come back with Pat Collins in just a moment. Stay tuned.

• 21:57Speaker 02

  It's always about drinking with you, Pat.

• 21:59Speaker 03

  I got the bottle over here. Just saying. It's still got your name on it.

• 22:05Speaker 02

  Welcome back to the Money Wise Show. It's a beautiful Wednesday afternoon. About 25 minutes away from the markets closing. NASDAQ up 1.5%, S&P up 0.8%, and the Dow still briefly, you know, in negative territory by about point, yeah, about a 10th of a percent. We're joined here by Pat Collins of Collins Brokers and, you know, super creative name. But we did get a follow-up comment here from our friend who was talking about the hard money loans. Thanks, guys. And just to follow up, what are the biggest risks someone should know before taking a hard money loan?

• 22:47Speaker 02

  That's an interesting question. What are the biggest risks that we, that somebody who's never done it before should know about taking a hard money loan?

• 22:57Speaker 03

  The risk is the...

• 22:59Speaker 02

  You lose your property.

• 23:00Speaker 03

  Starts with the debt ratio.

• 23:02Speaker 02

  Right.

• 23:03Speaker 03

  So if I'm, and I'm sure, is the way that that's worded is if they're going to get the loan or provide the money for a loan?

• 23:10Speaker 02

  Yeah, that's kind of like, let's maybe talk about it from both sides. Let's say if you're the loanee or the, you know, the grantor or...

• 23:18Speaker 03

  Borrower.

• 23:19Speaker 02

  Right?

• 23:19Speaker 03

  Borrower.

• 23:19Speaker 02

  The borrower or the lender.

• 23:20Speaker 03

  Lender.

• 23:21Speaker 02

  Right. So...

• 23:23Speaker 03

  The lender and the way that in most cases, and at least that I've experienced, the lender who becomes maybe, it might be you individually, or you might be part of a group.

• 23:35Speaker 02

  Yeah.

• 23:36Speaker 03

  And that gets to a certain number, because you may not want to loan a million dollars, but you might want to loan 10% of that.

• 23:43Speaker 02

  Yeah, a hundred thousand or whatever, yeah.

• 23:45Speaker 03

  And typically, when that is put together, presented to you as the investor who's going to front for the lender, front the money for the lender. You're looking at what the asset is.

• 23:58Speaker 02

  Right.

• 23:59Speaker 03

  And what my loan to value percentage is.

• 24:03Speaker 02

  And most of these, you don't want to see a loan to value that's less than, say, 70%, right?

• 24:08Speaker 03

  And a lot of them are even lower than that.

• 24:10Speaker 02

  You might be 50% loan to value.

• 24:12Speaker 03

  You want to make sure you have some collateral in the game.

• 24:15Speaker 02

  Significant collateral.

• 24:18Speaker 03

  And if that ratio is way out of whack, that you're making 100% loan. I mean, let's go back to 07, 08.

• 24:27Speaker 02

  Yeah, your dog could get a loan.

• 24:29Speaker 03

  You were basically making 105% loans. Okay, well, that's where your risk and reward are going to be out of whack and you're kind of in the wind.

• 24:39Speaker 02

  Right, right.

• 24:40Speaker 03

  So the main thing on, regardless of what you're doing there is to figure out what that risk is and what that debt to asset value is.

• 24:49Speaker 02

  Yeah, as the lender. Now, speaking from the borrower standpoint, you obviously need the loan for a reason. And there's, let's say you've passed through that hurdle and there's a, the loan to value ratio is appropriate. And you're able to get a loan. What is the main risk for you?

• 25:08Speaker 03

  The main risk there is that whatever your strategy is.

• 25:12Speaker 02

  Right.

• 25:12Speaker 03

  Falls through.

• 25:13Speaker 02

  Right.

• 25:14Speaker 03

  And if I'm planning, and I'll stretch a point to make one a little bit, but if I'm planning to flip my investment in 30 days. And the market craters.

• 25:25Speaker 02

  And now it's 180 days and you're still holding it.

• 25:27Speaker 03

  And I can't flip, then all of a sudden that high interest rate becomes.

• 25:31Speaker 02

  A monthly expense.

• 25:32Speaker 03

  A much more impactful number.

• 25:35Speaker 02

  Right.

• 25:35Speaker 03

  So if I'm the one borrowing it, I have to have a really clear exit strategy that.

• 25:41Speaker 02

  In the event that it does.

• 25:42Speaker 03

  My risk is based on some assumptions. And if I've got sort of the goalie locks look about my assumptions and they don't all pan out, then I'm going to end up losing my real estate or my asset.

• 25:56Speaker 02

  Right, yeah, you're losing, whatever the collateral is, is bye bye.

• 26:01Speaker 03

  Correct.

• 26:01Speaker 02

  Right. So, thanks for that. Now, okay, so we're going to get to it. So it's tax day and.

• 26:10Speaker 02

  You know, talking to some CPAs, I think they're, they're about three quarters of a way into a bottle of Jameson themselves at about this point. But it is tax day and you as a business broker, talking to business owners as they're kind of exiting or figuring out how they're going to, you know, eventually successfully exit their business.

• 26:33Speaker 02

  What are some of the issues you've seen from, maybe from a tax perspective? That maybe most business owners maybe don't know.

• 26:43Speaker 03

  I think, and, and number one, my disclosure, I'm not providing tax advice.

• 26:48Speaker 02

  Exactly. We are not providing tax.

• 26:50Speaker 03

  And I'm not providing legal advice.

• 26:52Speaker 02

  Right.

• 26:52Speaker 03

  Okay.

• 26:53Speaker 02

  This is in our, right. So in our experience, what we have seen, however, your situation may be different.

• 26:59Speaker 03

  These are, these are opinions and observations.

• 27:02Speaker 02

  Right.

• 27:03Speaker 03

  That, and, and I get a lot of referrals from accountants. I mean, I'm working with them all the time.

• 27:10Speaker 02

  Right.

• 27:11Speaker 03

  And, and the, the key there for a business owner, if I take a step back is I run a business, I generate revenue and I have expenses. And so one of my goals, notwithstanding the IRS, is to minimize my, my tax impact on an annual basis.

• 27:29Speaker 02

  Right.

• 27:30Speaker 03

  And, and you know, in an above board way as possible.

• 27:34Speaker 02

  I think that's just universal, whether you're a business owner or not, you're trying to minimize your tax liability.

• 27:39Speaker 03

  So how, how can I reduce it?

• 27:41Speaker 02

  Yeah.

• 27:42Speaker 03

  Now, at the same time, if I'm, if I'm thinking about an exit from my business, that has a different approach. And not showing any income.

• 27:53Speaker 02

  Is detrimental.

• 27:54Speaker 03

  For 10 years is really good for your tax return.

• 27:58Speaker 02

  Horrible for our business valuation.

• 28:00Speaker 03

  But not so good for valuation.

• 28:02Speaker 02

  Right.

• 28:02Speaker 03

  If I'm thinking about an exit though, and I can identify those things, they're called discretionary expenses. For, for lack of a better term, but that's what's used in my valuation process. If I've identified those as I've gone along, then I can say, okay, that was, you know, for tax purposes, we were deducting that because it had impact XYZ.

• 28:28Speaker 02

  Right.

• 28:29Speaker 03

  But from a valuation standpoint, I could show someone who wants to look at my business that it didn't impact direct operational expenses.

• 28:38Speaker 02

  Right.

• 28:39Speaker 03

  And, and that makes

• 28:40Speaker 02

  So you just track that out.

• 28:42Speaker 03

  Net income.

• 28:43Speaker 02

  Right.

• 28:43Speaker 03

  It gets added to my net income.

• 28:45Speaker 02

  Right.

• 28:46Speaker 03

  And so even something, and I'll use something very simple and non-controversial, is, is depreciation.

• 28:53Speaker 02

  Right. Oh, that's not controversial at all.

• 28:55Speaker 03

  No, I mean, if I'm going to depreciate something on my tax return, when I go to sell the business, that is a direct add back to my bottom line because that's a non-cash

• 29:09Speaker 02

  Right.

• 29:09Speaker 03

  deal. That's a tax thing.

• 29:11Speaker 02

  Right.

• 29:12Speaker 03

  So if I view my business in that light and I'm not saying this doesn't happen overnight, you're not going to rewrite your taxes, I'm not talking about doing any of those things. What I'm talking about is kind of looking up a little bit with your attorney and your accountant.

• 29:27Speaker 02

  Yep.

• 29:27Speaker 03

  And saying, if I'm thinking about selling two or three years from now.

• 29:31Speaker 02

  Or four or five years.

• 29:32Speaker 03

  Whatever.

• 29:32Speaker 02

  Yeah, whatever that timeline is.

• 29:34Speaker 03

  Because hey, maybe it's not for a long, long time, but

• 29:37Speaker 02

  Right.

• 29:38Speaker 03

  Everyone that I know will eventually leave their business.

• 29:42Speaker 02

  Correct. One way or another, of their own accord or in a box, right?

• 29:46Speaker 03

  Exactly. So, so the thing to think about is the value of my business versus the, the benefits of owning my business. And, and those two, they can be fully aligned, but you have to, or should be, planning for those. And, and that usually involves your legal counsel and your accountant, as well as your business broker, to say, hey, here's what the market

• 30:13Speaker 02

  Your financial advisor and everybody else, right? Like, it's a team effort trying to figure out the way to do this.

• 30:18Speaker 03

  There's a whole group. And, and, you know, and the other part of that is, how is my company organized? Am I a sole proprietor? Am I a C corp? Am I an S corp? And I am LLC? Should I be walking through those structures?

• 30:35Speaker 03

  To how I'm gonna exit and what that looks like because the tax treatment for the exit from businesses owned those different ways are all different.

• 30:45Speaker 02

  They're all different.

• 30:46Speaker 03

  It's not the same.

• 30:49Speaker 02

  You know, and so from a tax perspective, like you're saying, it's, you know, that business owner is trying to reduce their tax liability and they're not doing anything necessarily malicious or fictitious by, you know, getting that that revenue down to zero or or less than zero. Right. It's a business expense or this or that or whatever, but there, but when you're trying to get, you know, set out the the landing gear to sell that business. What you're saying is that's not a good strategy. Long term because you're, it's very difficult than to be able to value the business.

• 31:22Speaker 03

  Well, if if you've premeditated it, it's a lot easier. And so your tax return might look exactly the same, but I've got over here, I've got a really good record of

• 31:33Speaker 02

  Of what's been actually spent.

• 31:35Speaker 03

  What's there and what's not. And like I said, depreciation is the cleanest, clearest one. Because the next person in, what I'm trying to do is value the business based on the next person coming in.

• 31:46Speaker 02

  And taking over.

• 31:47Speaker 03

  How much money is it gonna make?

• 31:49Speaker 02

  Right.

• 31:49Speaker 03

  Well, they get a new depreciation schedule too. That may get errors if you have, if they're, if they're taking over a new truck or an old truck.

• 31:56Speaker 02

  Right. It's still gonna be a seven year.

• 31:58Speaker 03

  They're gonna depreciate it or if I can accelerate it.

• 32:00Speaker 02

  If you can do the one eighty, yeah, the one, what is it? One seventy?

• 32:03Speaker 03

  One seventy nine.

• 32:04Speaker 02

  One seventy nine. Yeah. The the bonus depreciation over two and a half or three years. But yeah, it's, you know. I always like to wear like a T shirt says, you know, fully depreciated.

• 32:16Speaker 03

  Right. But the next owner in.

• 32:18Speaker 02

  Right.

• 32:21Speaker 02

  Yeah. So, okay. So we've got that part from the tax perspective. What would you say are the biggest, when you're putting together a deal, you've got a business that's an owner that's ready to sell, you may have a buyer on the other side, or you are working with another buyer. What is the biggest flaw that you can see that causes those deals to fail?

• 32:47Speaker 03

  Well, I happen to have my answer right here. But, but, but an end of survey, and it was very interesting because it pretty much repeats as I look annually over the years. So, number one cause for businesses not selling is the valuation, right? Is just not in line with the marketplace. And, and as businesses get smaller, that number gets even, the difference becomes even more finite. And people tend to, their blood and guts in their business don't add value.

• 33:28Speaker 02

  Yeah, they want to think it adds value.

• 33:31Speaker 03

  And, and it's

• 33:31Speaker 02

  But it doesn't.

• 33:32Speaker 03

  It doesn't really do it. Now, if you've built a business, so that's number one, it's just kind of that top line value.

• 33:40Speaker 03

  Number two, how dependent on that owner is the business?

• 33:46Speaker 02

  Okay.

• 33:47Speaker 03

  I can build a great business, but if it's all dependent on me,

• 33:53Speaker 02

  Right.

• 33:54Speaker 03

  Who's going to buy that business? And that's the easiest way. If I'm responsible for sales, and I'm responsible for design, and I'm responsible for this, that, and the other.

• 34:05Speaker 02

  All of that institutional knowledge rests with you, you're not for sale.

• 34:10Speaker 03

  Unless that's what you want to do, and then guess what? You built a business that you're going to sell and go to work for somebody else.

• 34:15Speaker 02

  Yeah, you're now a W2 employee. That's not exactly what you wanted to do.

• 34:19Speaker 03

  And I mean, yeah, and we're sort of oversimplifying, but, but a lot of people can build great businesses, and they could both be generating two businesses, same industry, same revenue.

• 34:32Speaker 03

  One of them has a great SOP on all their processes.

• 34:38Speaker 02

  Hmm, written down.

• 34:39Speaker 03

  The other one wings it.

• 34:42Speaker 02

  Yeah.

• 34:42Speaker 03

  Or the, or, or Bob or Judy know how to do that.

• 34:45Speaker 02

  They're the only one in the company that knows how to do it, right?

• 34:49Speaker 03

  So, so then you have risk in that capacity and that drives down the value. Same gross revenue.

• 34:58Speaker 02

  Mm hmm.

• 34:58Speaker 03

  Same bottom line.

• 35:00Speaker 02

  Yeah.

• 35:00Speaker 03

  But the one could be worth twice as much or three times as much. Or it's just flat out more marketable.

• 35:07Speaker 02

  You know, and I've heard the term bandied around a bit with, with some of these things of like valuation coaches, like third party people that come in and will value the business. And then, you know, not value the business, but actually take a look at the P and L and like massage things and move things around to, to make the business look more profitable maybe than it really is. By just changing some GL codes and stuff. What's your take on that process?

• 35:36Speaker 03

  Well, if, if they're changing it without a strategy going forward to improve it.

• 35:43Speaker 02

  Correct.

• 35:43Speaker 03

  Then you're just moving the chairs on the deck of the Titanic.

• 35:48Speaker 02

  I like that reference.

• 35:50Speaker 03

  Okay.

• 35:51Speaker 02

  So who's playing the violin?

• 35:52Speaker 03

  Yeah, it's, you know, that, that's not that productive, but there are, there are people. And even within when I first meet with a client and I don't know their timing when we first meet.

• 36:05Speaker 02

  Yeah.

• 36:05Speaker 03

  And I mean, I have a series of value drivers. It's like, okay, well, you know, what's it worth today?

• 36:11Speaker 02

  Mm hmm.

• 36:11Speaker 03

  And if that's a hundred, but you want to get to 200.

• 36:15Speaker 02

  Mm hmm.

• 36:16Speaker 03

  Well, here are steps.

• 36:18Speaker 02

  You gotta go through these steps to be able to get there.

• 36:20Speaker 03

  And it's, it's a lot of times, obviously it's increasing sales.

• 36:24Speaker 02

  Yeah.

• 36:25Speaker 03

  But how you increase the sales? Uh, we've got clients, the business that I want so.

• 36:32Speaker 02

  Yeah.

• 36:32Speaker 03

  Uh, we had a client concentration issue, which means I've got one client that's.

• 36:37Speaker 02

  That's through 30, 40, 50% of your revenue.

• 36:39Speaker 03

  Too much of your revenue. And, and if I'm the owner, I already own that risk.

• 36:45Speaker 02

  Right.

• 36:45Speaker 03

  I don't think about it as risk because I've got a great relationship with you and we're doing business together.

• 36:51Speaker 02

  You sell the business, that relationship's no longer there.

• 36:53Speaker 03

  That may not be there. So, so that's, that's a huge amount of risk. So client concentration.

• 37:01Speaker 03

  And if you think about that with a, with a fast food restaurant, okay, there isn't any. Everybody's going through and churning, right?

• 37:09Speaker 02

  Well, unless you have your one regular that's there 12, 12 times a day.

• 37:12Speaker 03

  Right. That's, that's possible, but even at that degree, there's very little risk if that person stops coming in.

• 37:19Speaker 02

  Right.

• 37:20Speaker 03

  But if I have a client that's responsible, I mean, at one point in time, they used to call it the, you know, the, the, uh, the, the Walmart or the Target, where they buy, you know, I develop a new widget.

• 37:34Speaker 02

  And they just buy you.

• 37:35Speaker 03

  And they're buying it from me and, and I, that year I win. And then the next year they're coming back and they kind of pay me a little less for it.

• 37:42Speaker 02

  Right. Exactly.

• 37:44Speaker 03

  So it's, it's understanding the dynamic of, of that revenue. And those are things I can work on over time. I can't change those in the next 90 days while I'm selling your business.

• 37:57Speaker 02

  Right. Now, have you ever run into a situation where, and I'm sure you have, but a situation where you're, you're working with a business owner, they're looking to sell the business in the next three, four years. And they've got a number in their head and they just will not budge from what they feel the, the business is worth. And all of the numbers show, no, it's, it's half what you think it is. Again, going back to your comment about the, the blood, sweat and tears. I built this business that has value. What do you do in, in talking to that individual to kind of say, hey, let's come back to reality when their reality is this, this is the bar?

• 38:39Speaker 03

  What's interesting is to ask them or to understand, not ask them, just to understand where their value proposition lies.

• 38:49Speaker 02

  Is coming from.

• 38:50Speaker 03

  Right. And so there's, I don't attack their idea of the value at all. I just need to understand their math. But usually when that valuation's off, their math includes the friend of a friend or something they read or whatever about somebody getting a multiple or the, hey, this kind of business should sell for this much. So. If they've got a formula or some math in there, well, that and that's the number. Then my responsibility there is to basically show them what the market thinks of those numbers. And and I have a lot of people that, you know, say, okay, well, wait a minute.

• 39:33Speaker 03

  I need to work on this because I got to get to my number.

• 39:37Speaker 02

  Right.

• 39:37Speaker 03

  And their number might be achievable, but it's going to take some serious work. And not just waiting. And we talked about it earlier, we talked about it with the with the with all the private market stuff and private equity. Interest rates, you could be running your business that three years ago at 3% interest rate. And running exactly the same or doing better even.

• 40:02Speaker 02

  But the loans now are 10%.

• 40:04Speaker 03

  The SBA loan is nine or 10%. Well, I'm not going to get as much for the business.

• 40:10Speaker 02

  Yeah, because there's that huge drag.

• 40:12Speaker 03

  Right. So when you talk about what else impacts it, there's a whole nother thing here that's, you know, the the real world economy. At the end of the day, impacts the valuation of the business.

• 40:23Speaker 02

  Right.

• 40:23Speaker 03

  And the industry.

• 40:25Speaker 02

  Right.

• 40:25Speaker 03

  I mean, what's going on in your industry? And I, you know, I use it that the buggy whip deal, you could make the best buggy whips in the world, but.

• 40:32Speaker 02

  But nobody's buying them now because of the Toyotas or they took you out of business.

• 40:35Speaker 03

  There's no buggies anymore. So. So so understanding the dynamic in the industry you're in. Is can be just as important. And if I hear a multiple. That's related to. Some high tech, high flying deal. Well, yeah. If that's what you're doing.

• 40:59Speaker 02

  Right.

• 40:59Speaker 03

  But you're not, you're plumbing over here.

• 41:03Speaker 02

  Right.

• 41:03Speaker 03

  And and those multiples are specific to industries. And all those other sort of macroeconomic, to use a big word.

• 41:12Speaker 02

  Right.

• 41:12Speaker 03

  But but those economic trends impact the valuation.

• 41:15Speaker 02

  But but even then, depending upon the industry that you're in. Those multiples fall within a range. It's not a hard and fast. Oh, you're in the HVAC industry, so your multiple is 2.5. Well, I'm just picking a number.

• 41:31Speaker 03

  Right.

• 41:31Speaker 02

  Right. It might be 2.2 to 3.2. Right. But the average is 2.5 and it's it's how. How profitable is your business? What does your clientele look like? There's all sorts of different variables that are part of that. And the, the industry average might be 2.5, but your business might be 2.8.

• 41:50Speaker 03

  And my, as there, as, as a business broker for an owner, my goal is, is to go find out what makes them successful and what is their niche?

• 42:00Speaker 02

  And capitalize on that.

• 42:01Speaker 03

  And be able to defend the higher multiple. But if you're doing a million dollars a year, or you're doing 10 million dollars a year, those multiples are really different.

• 42:12Speaker 02

  Right.

• 42:14Speaker 03

  And as they get larger, and it has to do with risk. I mean, as I get larger and I got a full staff in place and I'm just buying it as a, like those private market guys where I'm just buying it as an investment. I'm not going to be in the business.

• 42:28Speaker 02

  I'm absentee and you guys are going to run the business.

• 42:31Speaker 03

  And, and if I'm doing that and that thing can be owned and run, because I run into that when you mentioned the term absentee. I run into, you know, these absentee businesses that are for sale.

• 42:42Speaker 02

  Right.

• 42:43Speaker 03

  Well, if they're, if they're absentee, how are you? Why would, why would I sell it?

• 42:48Speaker 02

  Right. I'm going to buy it myself.

• 42:50Speaker 03

  And not that there aren't reasons to, to be, you know, to own businesses and not be operating in them. It's not that, but, but understanding that sort of series of, of parameters.

• 43:02Speaker 02

  Right.

• 43:02Speaker 03

  That all impact your business. And to what you said, yeah, I could be at the low end of that if I'm missing all these pieces. I could drive up the value of my business.

• 43:13Speaker 02

  If I get those things in line.

• 43:14Speaker 03

  Just if I have a better operating plan.

• 43:16Speaker 02

  No, that's the SOPs, right? We had an interesting comment that came in. Wells Fargo gave me a loan for $30,000 at 10% for three years, just on my signature. How did that happen? That's an easy question. It's a signature loan. They're, they're, they're basically looking at your, you know, on a personal loan. They're looking at your income. They're looking at your credit score. What kind of risk are you as a person? And they're willing to give you that loan. Now, the interest rate's pretty high because most signature loans, because they're not secured in most cases, they're not secured. And so you're going to pay a higher interest rate for that. So that's why you're seeing the 10% interest rate. And that's exactly what that is. It's a signature loan. Pure and simple.

• 44:00Speaker 02

  And now if you had collateral or something like that, be a different, different process. But that's, that's why that happened is that. You're obviously a relatively good risk. You probably have a credit score in the upper sevens or low eights and you're probably a good risk for the bank and they're saying, "Hey, yeah, we'll give you 30 grand."

• 44:19Speaker 03

  It's harder for them to collect on it, which is why they charge a premium.

• 44:23Speaker 02

  That's exactly right. Wells Fargo is not, they're not a multi-billion dollar company by being stupid. They make good risks. They make good calls. And that risk premium is there in that interest rate. So, you know, Pat, thank you very much for joining us today. I mean, it's, you know, kind of the crux and the overall theme that I'm hearing from this, though, is valuations. The business itself, if you don't have the right valuation, if you're selling the business, what causes these deals to fall through, or what causes these deals to be done, is almost always based on valuation of the business.

• 45:03Speaker 03

  It's the way I do business now. If we can't come to terms on what the value of it is, there's not much reason to go forward.

• 45:12Speaker 02

  Yeah, not, yeah.

• 45:14Speaker 03

  We can figure out how to improve it.

• 45:15Speaker 02

  Yeah.

• 45:16Speaker 03

  With time and effort.

• 45:17Speaker 02

  Right.

• 45:18Speaker 03

  And maybe even a higher or two.

• 45:21Speaker 02

  Right.

• 45:21Speaker 03

  But whatever that is, yes, it's a valuation deal.

• 45:26Speaker 02

  Yeah, I mean, if you're within striking distance of the buyer and the seller and within striking distance of what they feel that valuation is.

• 45:34Speaker 03

  Cause when you get.

• 45:35Speaker 02

  Then you probably can get a deal.

• 45:36Speaker 03

  When you get to the end of, when you're in the middle of due diligence and something's not right.

• 45:42Speaker 02

  You're gonna pull away.

• 45:43Speaker 03

  It's gonna come back to, well, wait, I could buy this, but not for that much money.

• 45:48Speaker 02

  Right.

• 45:48Speaker 03

  And that's where, that's where it's like, well.

• 45:50Speaker 02

  It doesn't pencil out.

• 45:51Speaker 03

  It doesn't work, or there's more risk than there appeared. But that's why you try to resolve all those issues or be working on them.

• 46:01Speaker 02

  Long and in advance.

• 46:02Speaker 03

  Before you go to market. And it's, it's not complex, per se, but it can be, it can be a strenuous effort.

• 46:14Speaker 02

  Well, let's put it this way. So if you're a business owner out there and you're listening to this and you're maybe not ready to sell your business just yet, but you're, hey, you're starting to put the landing gear down, you're kind of thinking about it, and you're about three or four years out, how do they get in touch with you, Pat?

• 46:29Speaker 03

  Hey, a quick 661-342-3436 and we'll figure out what we need to do and get the resources on board to help them out.

• 46:37Speaker 02

  And we'll make sure that that information is on the podcast notes. Again, thank you so much for joining us, Pat. We're getting close to the end of the day and it looks like the Dow is still down. We're going to have a mixed market for the day unless there's about a 10 second change. Be smart, be safe, be money wise. We will see you tomorrow. Thank you very much for joining.

• 46:59Speaker 01

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