Pod Insights The Moneywise Guys 4/29/26 Hard Money Loans + Checklist When Selling Your Business with Patrick Collins About this episode The Moneywise Radio Show and Podcast Wednesday, April 29th 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].
Transcript 0:00 Speaker 00 Live from the basement inside the historic Woolworths Building in downtown Bakersfield.
0:05 Speaker 01 Call or text in at 661-396-1000.
0:09 Speaker 02 I need a dollar, dollar, dollar, that's what I need. Hey, hey. Well, I need a dollar, dollar, dollar, that's what I need. Hey, hey. Said I need a dollar, dollar, dollar, that's what I need. And if I share with you my story, would you share your dollar with me? 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.
0:37 Speaker 00 Now, let's start the MoneyWise Show.
0:40 Speaker 03 Hey, welcome to the Wednesday edition of the MoneyWise Show, live from the basement of the historic Woolworths Building here in downtown Bakersfield.
0:51 Speaker 03 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. I'm Justin Leland here with, uh...
1:26 Speaker 00 Steven Nicholas.
1:27 Speaker 03 Steven.
1:28 Speaker 00 It's just me and you.
1:29 Speaker 03 Just me and you today, buddy.
1:30 Speaker 00 And one of our favorite guests, it's been way too long.
1:33 Speaker 03 I think it's actually our favorite guest.
1:35 Speaker 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.
1:53 Speaker 03 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...
2:01 Speaker 00 Our listeners go number one.
2:02 Speaker 03 Exactly.
2:03 Speaker 00 I don't care if I'm asleep. I will reply to you.
2:06 Speaker 03 Exactly. Service above self.
2:09 Speaker 00 Exactly.
2:10 Speaker 03 Service above sleep.
2:11 Speaker 00 The MoneyWise way.
2:15 Speaker 03 Hey, uh, happy tax day, by the way, Stephen.
2:17 Speaker 00 Happy, uh, Jackie Robinson's day.
2:19 Speaker 03 Happy Jackie Robinson day. Uh, everybody's gonna be wearing number 42 today. And, uh, no names on the back of jerseys.
2:26 Speaker 00 Nope.
2:26 Speaker 03 I like that.
2:28 Speaker 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.
2:37 Speaker 03 Seemingly. Yeah, you'll get, you guys will pick it up.
2:40 Speaker 00 We'll see.
2:41 Speaker 03 The Angels are playing pretty hot ball right now.
2:43 Speaker 00 I saw that. What is going on?
2:45 Speaker 03 I don't know. Something in the water there in New York.
2:47 Speaker 00 Oh, don't talk about water right now.
2:53 Speaker 00 But it's, uh, it's all cleaned up. We're good.
2:55 Speaker 03 Yeah.
2:55 Speaker 00 The diner's open.
2:56 Speaker 03 Yeah.
2:56 Speaker 00 I just saw it.
2:57 Speaker 03 Yep. Yep. Definitely. So yeah, happy tax day. Did you get your taxes sent in?
3:02 Speaker 00 I did.
3:03 Speaker 03 You got it all done?
3:04 Speaker 00 Johnny D.
3:04 Speaker 03 Jo- yeah.
3:06 Speaker 00 Definitely takes care of me every time.
3:08 Speaker 03 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.
3:22 Speaker 00 Cutting it close. Yep.
3:23 Speaker 03 Cutting it close, but hey, you know.
3:25 Speaker 00 It's done.
3:26 Speaker 03 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.
3:35 Speaker 00 Me too.
3:37 Speaker 03 I'm like, what the heck?
3:38 Speaker 00 I was like, what? Oh, look at that.
3:41 Speaker 03 What? In like five business days, I get the, uh, the refund.
3:44 Speaker 00 Babe, we can go grocery shopping again.
3:46 Speaker 03 I could put gas in my tank.
3:50 Speaker 03 I'll be getting the.
3:50 Speaker 00 And it's gone.
3:51 Speaker 03 I don't know when the federal will be, but it'll be like, you know, it's, yeah.
3:55 Speaker 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.
4:07 Speaker 03 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.
4:52 Speaker 03 So there you go. Forget about what's happening in Iran and the gas prices being twice what they used to be. But.
5:01 Speaker 00 Is that gonna be the new norm?
5:03 Speaker 03 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.
5:15 Speaker 03 But we'll have to see.
5:16 Speaker 00 Right, right when my son gets his license.
5:19 Speaker 03 And. Now he can't, can't afford to drive.
5:21 Speaker 00 Get a job.
5:23 Speaker 03 Get a job, you slob.
5:26 Speaker 03 Get off the, get off the PlayStation and go get a job washing cars.
5:30 Speaker 00 Yes.
5:31 Speaker 03 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 OB three, the one big beautiful bill act.
5:53 Speaker 03 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. It might be marginal.
6:19 Speaker 03 But you know, that's a, again, everybody's situation is going to be slightly different. So to answer your question there, Stephen.
6:27 Speaker 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.
6:46 Speaker 03 Right.
6:46 Speaker 00 So like you said, I, I think it's pretty much individual. It's everybody's a little bit different.
6:50 Speaker 03 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?
7:16 Speaker 00 Mine was about the same.
7:17 Speaker 03 About the same.
7:18 Speaker 00 And it's been the same probably 10 years.
7:21 Speaker 03 Yeah, you need more deductions, man.
7:22 Speaker 00 Yes, that's what Duffield says. Like, you're the tax guy, come on.
7:27 Speaker 03 Right, so we had a couple of questions that popped in. Do you want to grab those real quick?
7:30 Speaker 00 We did. The first one says, good afternoon, guys. Glad to hear you guys back on the radio.
7:36 Speaker 03 We never left.
7:36 Speaker 00 We never did, but we are back where we started on Kern Radio.
7:41 Speaker 03 Full circle.
7:41 Speaker 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.
7:55 Speaker 03 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.
8:16 Speaker 03 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.
8:36 Speaker 03 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, when he gets on.
9:08 Speaker 00 I'll be able to help you in a minute.
9:10 Speaker 03 He'll be able to help with answering that question in a compliant way. So I don't get in trouble.
9:14 Speaker 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.
9:25 Speaker 03 I don't know whether to say congratulations or I'm sorry to hear.
9:28 Speaker 00 But, uh, he said, what is the difference between a snowball and avalanche strategy to pay these off?
9:35 Speaker 03 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.
10:10 Speaker 00 Give it some momentum.
10:11 Speaker 03 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.
10:50 Speaker 00 And scratch them off.
10:51 Speaker 03 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.
11:03 Speaker 00 Either are good.
11:04 Speaker 03 Either are good because you're getting out of debt.
11:06 Speaker 00 The next one says, how does life insurance integrate with a trust account?
11:12 Speaker 03 Wow. Uh, great. Again, great question. It depends.
11:19 Speaker 00 That's a good answer.
11:23 Speaker 03 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
12:04 Speaker 03 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?
12:45 Speaker 00 Exactly. And keep those questions coming, 661-396-1000.
12:50 Speaker 03 Absolutely. We're going to take a quick break. When we get back, Mr. Patrick Collins.
13:07 Speaker 03 Welcome back.
13:10 Speaker 03 Hey, wait, Pat Collins isn't from Boston. Shipping up to Boston now?
13:16 Speaker 00 Boston, Ireland.
13:17 Speaker 03 Boston, Ireland.
13:20 Speaker 03 Boston Ash Road.
13:22 Speaker 04 It's a metaphysical reference.
13:24 Speaker 03 There you go.
13:26 Speaker 03 Hey, Pat, how are you?
13:27 Speaker 04 Doing great.
13:27 Speaker 03 Welcome back. It's been a minute since you've been on the show.
13:31 Speaker 04 Well, and welcome back to you guys, to your, uh, your roots on the, on the.
13:36 Speaker 03 On K E R N.
13:37 Speaker 04 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.
13:45 Speaker 03 There you go.
13:46 Speaker 04 And, and I had a couple of other things to do besides come on and see my buddies.
13:52 Speaker 03 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.
14:06 Speaker 04 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.
14:13 Speaker 03 And Cloverhearts.
14:14 Speaker 04 I'm not promoting them or anything like that. But they were going, hey, if you love Dropkick and you love the Mackenzies.
14:21 Speaker 03 Oh, yeah.
14:22 Speaker 04 And this is Cloverhearts. They're a little bit newer on the scene, but yeah, you'll love their stuff too.
14:26 Speaker 03 All right. Well, we'll have.
14:28 Speaker 04 Some rock and bash Irish stuff.
14:30 Speaker 00 As long as it's clean, I got you.
14:34 Speaker 03 Hey, we got the F-bomb, uh, button over here. We can.
14:37 Speaker 00 It's just a little out of reach.
14:38 Speaker 03 Right.
14:42 Speaker 03 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.
14:57 Speaker 03 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?
15:12 Speaker 04 Well, let me just, I mean, the way that I see it, that's the way it is.
15:17 Speaker 03 Oh, yes.
15:17 Speaker 04 I am aware there are a lot of other hard money loan environments that, uh, that I'm not personally familiar with.
15:24 Speaker 03 Right, right.
15:25 Speaker 04 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.
15:39 Speaker 03 Right.
15:39 Speaker 04 And you can make it happen pretty quick.
15:41 Speaker 03 Yeah.
15:42 Speaker 04 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.
15:53 Speaker 03 Yeah.
15:53 Speaker 04 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.
16:00 Speaker 03 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?
16:08 Speaker 04 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.
16:18 Speaker 03 A bridge loan.
16:19 Speaker 04 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.
16:28 Speaker 03 There's higher risk, exactly. It's, it's a risk premium, is what it is.
16:31 Speaker 04 So, as long as people understand that, then, 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.
16:58 Speaker 03 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-
17:06 Speaker 04 Right, it's secured.
17:08 Speaker 03 It's secured.
17:09 Speaker 04 It's secured typically, by real estate, but it is a personal loan.
17:14 Speaker 03 Right.
17:14 Speaker 04 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-
17:23 Speaker 03 Just giving out the loan.
17:24 Speaker 04 Giving out the loan. And if you, if you were responsible to track that, you can, you can get yourself in a lot of trouble if you don't know what you're doing.
17:32 Speaker 03 Yeah, you don't know what you don't know, so don't do it, find a broker, somebody does it professionally.
17:36 Speaker 04 Yeah, and there's, there's multiple ones in, in our-
17:39 Speaker 03 We won't mention those, but-
17:40 Speaker 04 In our commu- no, not unless they want to call you and pay you.
17:43 Speaker 03 Right, no.
17:45 Speaker 04 I think that's called advertising.
17:46 Speaker 03 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.
18:00 Speaker 03 They can carry with them a lot of, a lot of additional risk. A lot of additional.
18:04 Speaker 04 Yeah, and you guys have seen it. I haven't done that deep dive, but all this private credit.
18:10 Speaker 03 I wouldn't touch that with a 20-foot pole at this point.
18:12 Speaker 04 In the market. And, and gosh, a lot of that was invested in businesses.
18:19 Speaker 03 Correct.
18:20 Speaker 04 And big ones in a lot of cases.
18:22 Speaker 03 Right.
18:22 Speaker 04 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.
18:40 Speaker 03 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.
18:54 Speaker 04 I, yeah, like I said, I have, you guys would have a, a deeper following because that, 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%.
19:12 Speaker 03 Right.
19:13 Speaker 04 Your math isn't gonna work the same.
19:15 Speaker 03 Math don't math at that point.
19:17 Speaker 04 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.
19:29 Speaker 03 Yeah, your exit strategy completely changes. We're joined here by Pat Collins of, what's the name of the company now? Collins?
19:37 Speaker 04 It's very creative. It's Collins Business Broker and Advisor.
19:40 Speaker 03 Collins, Collins Business.
19:42 Speaker 04 Sorry that name threw you, Justin.
19:44 Speaker 03 It totally threw me off.
19:45 Speaker 04 That was way too complicated.
19:47 Speaker 03 Way, yes. Right, Collins Advisory.
19:51 Speaker 03 Right?
19:51 Speaker 04 Exactly.
19:52 Speaker 03 How did you come up with that? Yeah.
19:54 Speaker 04 That took a long, long, long time.
19:58 Speaker 03 I like it. How many Guinnesses and Jamesons were consumed in creating that business?
20:04 Speaker 04 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.
20:23 Speaker 03 Whatever you called it anyways. Whoop-de-doo.
20:27 Speaker 04 Yeah.
20:27 Speaker 03 There we go.
20:28 Speaker 04 So mine was just as creative.
20:30 Speaker 03 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.
20:49 Speaker 04 Well, I think the really short version of that is that I've owned businesses before.
20:54 Speaker 03 Oh, yeah.
20:55 Speaker 04 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.
21:07 Speaker 03 Freedom.
21:08 Speaker 04 Go add value and not necessarily define the how, but, but go into a business owner and saying, hey, yeah, I can help from.
21:18 Speaker 03 And not having that, that top-down corporate kind of telling you how to do your business. You can do it your way.
21:25 Speaker 04 Well, and it wasn't that heavily handed before.
21:28 Speaker 03 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.
21:54 Speaker 04 It's always about drinking with you, Pat.
21:57 Speaker 00 I got the bottle over here. Just saying. It's still got your name on it.
22:03 Speaker 04 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?
22:45 Speaker 04 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? The risk is the... You lose your property. Starts with the debt ratio. Right. 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? 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. Borrower. Right. Borrower. The borrower or the lender. Right. So... The lender and the way that in most cases, and at least that I've experienced, the lender
23:28 Speaker 04 who becomes maybe, it might be you individually, or you might be part of a group. Yeah. 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. Yeah, a hundred thousand or whatever. Yeah. 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.
23:56 Speaker 03 Right.
23:56 Speaker 04 And what my loan to value percentage is.
24:00 Speaker 03 And most of these, you don't want to see a loan to value that's less than, say, 70%, right?
24:05 Speaker 04 And a lot of them are even lower than that.
24:08 Speaker 03 You might be 50% loan to value.
24:10 Speaker 04 You want to make sure you have some collateral in the game.
24:13 Speaker 03 Significant collateral.
24:15 Speaker 04 And if that ratio is way out of whack, that you're making 100% loan. I mean, let's go back to 07, 08.
24:25 Speaker 03 Yeah, your dog could get a loan.
24:26 Speaker 04 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.
24:37 Speaker 03 Right, right.
24:37 Speaker 04 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.
24:47 Speaker 03 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?
25:05 Speaker 04 The main risk there is that whatever your strategy is.
25:10 Speaker 03 Right.
25:10 Speaker 04 Falls through.
25:11 Speaker 03 Right.
25:11 Speaker 04 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.
25:22 Speaker 03 And now it's 180 days and you're still holding it.
25:24 Speaker 04 And I can't flip, then all of a sudden that high interest rate becomes.
25:28 Speaker 03 A monthly expense.
25:29 Speaker 04 A much more impactful number.
25:33 Speaker 03 Right.
25:33 Speaker 04 So if I'm the one borrowing it, I have to have a really clear exit strategy that.
25:39 Speaker 03 In the event that it does.
25:40 Speaker 04 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.
25:54 Speaker 03 Right, yeah, you're losing, whatever the collateral is, is bye bye.
25:58 Speaker 04 Correct.
25:59 Speaker 03 Right. So, thanks for that. Now, okay, so we're going to get to it. So it's tax day and.
26:07 Speaker 03 You know, talking to some CPAs, I think they're, they're about three quarters of a way into a bottle of Jameson themselves. Uh, at about this point, um, 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 six, you know, successfully exit their business.
26:31 Speaker 03 What are some of the issues you've seen from, maybe from a tax perspective? That maybe most business owners maybe don't know.
26:40 Speaker 04 I think, and, and number one, my disclosure, I'm not providing tax advice.
26:46 Speaker 03 Exactly. We are not providing tax advice.
26:48 Speaker 04 And I'm not providing legal advice.
26:50 Speaker 03 Right.
26:50 Speaker 04 Okay.
26:50 Speaker 03 This is in our, right. So these are. Experience, what we have seen, however, your situation may be different.
26:57 Speaker 04 These are, these are opinions and observations.
26:59 Speaker 03 Right.
27:01 Speaker 04 That, uh, and, and I get a lot of referrals from accountants. I mean, I'm working with them all the time.
27:08 Speaker 03 Right.
27:08 Speaker 04 And, and the, the key there for a business owner, if I take a step back is I've, 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.
27:27 Speaker 03 Right.
27:28 Speaker 04 And, uh, you know, in an above board way as possible.
27:32 Speaker 03 I think that's just universal, whether you're a business owner or not, you're trying to minimize your tax liability.
27:37 Speaker 04 So how, how can I reduce it?
27:39 Speaker 03 Yeah.
27:39 Speaker 04 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.
27:51 Speaker 03 Is detrimental.
27:52 Speaker 04 For 10 years is really good for your tax return.
27:56 Speaker 03 Horrible for our business valuation.
27:57 Speaker 04 But not so good for valuation.
27:59 Speaker 03 Right.
28:00 Speaker 04 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 occurred of.
28:20 Speaker 03 Of what's been actually spent.
28:22 Speaker 04 What's there and what's not. And like I said, depreciation's the cleanest, clearest one. Cause the next person in. What I'm trying to do is value the business based on the next person coming in and taking over. How much money is it gonna make?
28:36 Speaker 03 Right.
28:36 Speaker 04 Well, they get a new depreciation schedule, too.
28:38 Speaker 03 Right.
28:38 Speaker 04 That make any difference if you have, if they're, if they're taking over a new truck or an old truck?
28:43 Speaker 03 Right, it's still gonna be a seven year.
28:45 Speaker 04 They're gonna depreciate it, or if I can accelerate it.
28:47 Speaker 03 If you can do the 180, yeah, the one, what is it, 170?
28:50 Speaker 04 179.
28:51 Speaker 03 179, yeah. The, the bonus depreciation over two and a half or three years. But yeah, it's, you know, I, I always like to wear like a t-shirt says, you know, fully depreciated.
29:03 Speaker 04 Right, but the next owner in.
29:05 Speaker 03 Right. Hey. Yeah, so, okay. So we've got that part from the tax perspective. What would you say are the biggest, um, when you're putting together a deal? You, you got us, you got a, 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?
29:34 Speaker 04 Well, uh, I happen to have my answer right here. But the, but, but and in a survey, and it was very interesting, cause it pretty much repeats as I look annually over the years. So number one cause for businesses not selling is the valuation.
29:52 Speaker 03 Right.
29:53 Speaker 04 Is just not in line with the marketplace. And, and as businesses get smaller, that number gets even, the, the difference becomes even more finite. And people tend to, they, their blood and guts in their business don't add value.
30:16 Speaker 03 Yeah, they, they want, they want to think it adds value.
30:18 Speaker 04 And, and it's.
30:19 Speaker 03 But it doesn't.
30:19 Speaker 04 It, it doesn't really do it. Now, if you've built a business, so that, that's number one, it's just kind of that top line value. Number two, how dependent on that owner is the business?
30:32 Speaker 03 Hmm, okay.
30:34 Speaker 04 I can build a great business, but if it's all dependent on me.
30:40 Speaker 03 Right.
30:41 Speaker 04 Who's gonna 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.
30:52 Speaker 03 All of that institutional knowledge rests with you. You're not for sale.
30:57 Speaker 04 And unless that's what you want to do. And then guess what? You built a business that you're gonna sell and go to work for somebody else.
31:03 Speaker 03 Yeah, you're now a W2 employee. That's not exactly what you wanted to do.
31:07 Speaker 04 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.
31:20 Speaker 04 One of them has a great SOP on all their processes.
31:25 Speaker 03 Hmm.
31:26 Speaker 04 Written down. The other one wings it.
31:29 Speaker 03 Yeah.
31:29 Speaker 04 Or the, or, or Bob or Judy know how to do that.
31:33 Speaker 03 They're the only one in the company that knows how to do it. Right?
31:36 Speaker 04 So, so then you have risk in that capacity and that drives down the value. Same gross revenue. Same bottom line.
31:47 Speaker 03 Yeah.
31:47 Speaker 04 But the one could be worth twice as much or three times as much. Or it's just flat out more marketable.
31:55 Speaker 03 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?
32:23 Speaker 04 Well, if, if they're changing it without a strategy going forward to improve it.
32:30 Speaker 03 Correct.
32:31 Speaker 04 Then you're just moving the chairs on the deck of the Titanic. I like that reference. Okay.
32:38 Speaker 03 So who's playing the violin?
32:39 Speaker 04 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.
32:52 Speaker 03 Yeah.
32:52 Speaker 04 And I mean, I have a series of value drivers. It's like, okay, well, you know, what's it worth today? And if that's a hundred, but you want to get to 200. Well, here are steps.
33:06 Speaker 03 You got to go through these steps to be able to get there.
33:08 Speaker 04 And it's, it's a lot of times, obviously it's increasing sales.
33:12 Speaker 03 Yeah.
33:12 Speaker 04 But how you increase the sales? We've got clients, the business that I once owned.
33:19 Speaker 03 Yeah.
33:20 Speaker 04 We had a client concentration issue, which means I've got one client that's
33:24 Speaker 03 So 30, 40, 50% of your revenue.
33:26 Speaker 04 Too much of your revenue and, and if I'm the owner, I already own that risk.
33:32 Speaker 03 Right.
33:33 Speaker 04 I don't think about it as risk because I've got a great relationship with you and we're doing business together.
33:38 Speaker 03 You sell the business, that relationship's no longer there.
33:40 Speaker 04 That may not be there. So, so that's, that's a huge amount of risk. So client concentration, 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?
33:56 Speaker 03 Well, unless you have your one regular that's there 12, 12 times a day.
34:00 Speaker 04 Right. That's, that's possible, but even at that degree, there's very little risk if that person stops coming in.
34:06 Speaker 03 Right.
34:07 Speaker 04 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, the Walmart or the Target, where they buy, you know, I develop a new widget.
34:21 Speaker 03 And they just buy you.
34:22 Speaker 04 And they're buying it from me 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.
34:30 Speaker 03 Right. Exactly.
34:31 Speaker 04 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.
34:45 Speaker 03 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 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?
35:26 Speaker 04 What's interesting is to ask them or to understand, not ask them, just to understand where their value proposition lies.
35:36 Speaker 03 Is coming from.
35:37 Speaker 04 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 then, 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,
36:20 Speaker 04 you know, say, okay, well, wait a minute, I need to work on this because I got to get to my number.
36:24 Speaker 03 Right.
36:25 Speaker 04 And their number might be achievable, but it's going to take some work.
36:28 Speaker 03 Serious work.
36:30 Speaker 04 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.
36:50 Speaker 03 But the loans now are 10%.
36:51 Speaker 04 The SBA loan is nine or 10%. Well, I'm not going to get as much for the business.
36:58 Speaker 03 Yeah, because there's that huge drag.
37:00 Speaker 04 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. And the industry.
37:12 Speaker 03 Right.
37:12 Speaker 04 I mean, what's going on in your industry? And I, you know, I use the buggy whip deal. You could make the best buggy whips in the world, but
37:19 Speaker 03 But nobody's buying them now because of the Toyotas or they took you out of business.
37:23 Speaker 04 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.
37:46 Speaker 03 Right.
37:46 Speaker 04 But you're not. You're plumbing over here.
37:51 Speaker 03 Right.
37:51 Speaker 04 And, and those multiples are specific to industries and all those other sort of macroeconomic, to use a big word.
37:59 Speaker 03 Right.
38:00 Speaker 04 But, but those economic trends impact the valuation.
38:03 Speaker 03 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.
38:17 Speaker 04 Right.
38:18 Speaker 03 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.
38:37 Speaker 04 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?
38:47 Speaker 03 And capitalize on that.
38:48 Speaker 04 And be able to defend the higher multiple. But if you're doing a million dollars a year, or you're doing $10 million a year, those multiples are really different.
38:59 Speaker 03 Right.
39:00 Speaker 04 And, 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.
39:15 Speaker 03 I'm absentee and you guys are going to run the business.
39:18 Speaker 04 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.
39:29 Speaker 03 Right.
39:30 Speaker 04 Well, if they're if they're absentee.
39:32 Speaker 03 How are you?
39:33 Speaker 04 Why would why would I sell it?
39:35 Speaker 03 Right. I'm gonna buy it myself.
39:37 Speaker 04 And not that there aren't reasons to
39:39 Speaker 03 Right.
39:39 Speaker 04 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.
39:49 Speaker 03 Right.
39:49 Speaker 04 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.
39:57 Speaker 03 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 is 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.
40:40 Speaker 03 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 you're 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.
40:59 Speaker 04 It's just it's harder for them to collect on it, which is why they charge a premium.
41:02 Speaker 03 That's exactly right. Wells Fargo is not they 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 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, you you what what causes these deals to fall through? Or what causes these deals to to be done? Is almost always based on valuation of the business.
41:42 Speaker 04 I it's 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.
41:52 Speaker 03 Yeah, not, yeah.
41:53 Speaker 04 We can figure out how to improve it.
41:55 Speaker 03 Yeah.
41:55 Speaker 04 With time and effort.
41:57 Speaker 03 Right.
41:58 Speaker 04 And maybe even a higher or two.
42:00 Speaker 03 Right.
42:00 Speaker 04 But but whatever that is, yes, it's it's a valuation deal.
42:06 Speaker 03 Yeah, I mean, and if you're within striking distance of with the buyer and the seller and within striking distance of what they feel that valuation is.
42:14 Speaker 04 Cause when you.
42:14 Speaker 03 Then you probably get a deal.
42:15 Speaker 04 When you get to the end of when you when you're in the middle of due diligence and and something's not right.
42:21 Speaker 03 You're gonna pull away.
42:22 Speaker 04 It's gonna come back to, well, wait, I could buy this, but not for that much money.
42:27 Speaker 03 Right.
42:27 Speaker 04 And that's where that's where it's like, well.
42:29 Speaker 03 It doesn't pencil out.
42:30 Speaker 04 It it doesn't work or there's more risk than there appeared or but that that's why you try to resolve all those issues or be working on them.
42:40 Speaker 03 Long and in advance.
42:42 Speaker 04 Before you go to market and it and it's it's not a complex per se, but it but it can be it can be a strenuous effort.
42:53 Speaker 03 Well, let's put it this way. So if you're a business owner owner out there and you're listening to this and you're you're maybe not ready to sell your business just yet, but you're hey, you're starting to put the landing gear down and 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?
43:08 Speaker 04 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.
43:17 Speaker 03 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 gonna 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.
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