Franchises

So using that, for every 1 franchise, there’s about 10 independent small businesses in the United States. At Visa Franchise, we’re really focused on just franchises, where for Vetted Biz, our forte is into franchising and working with business brokers like Russell Cohen from Murphy Business, we’re expanding more into the business for sale information marketplace. So I’m really excited to have Russell Cohen on who has participated since 2000 in 636 businesses.

So who’s counting? He’s sold a lot of businesses, principally in South Florida. So that includes Miami, Fort Lauderdale, Palm Beach area, Delray Beach. All over Broward, Palm Beach, and Miami-Dade County, he’s sold businesses as low as $100,000 up to $5 million-plus. So he’s a top dealmaker in the State of Florida. Obviously, there’s some firms that focus more on lower middle market investment banking, where they’ve sold higher-value businesses. But he’s the guy to go to if you’re looking for a business to purchase in the lower market space, or if you’re looking to sell your business, particularly in South Florida.

Russell Cohen

So I wanna bring Russell on. And if anyone has any questions, please just enter it into the comment box.  And if you liked the video, like it on YouTube, LinkedIn, Facebook, share it with your friends and subscribe to our page on Vetted Biz or on Visa Franchise. So Russell, I really appreciate you taking the time to join us today.

Russell: Thanks, Patrick, thanks for having me. Glad to be here.

P: So tell me a little bit about…we were chatting before we started you. You grew up in Long Island, New York. I have strong family ties in Long Island, New York as well. Both my parents are from there. When did you move to South Florida and how did you enter in this industry?

Becoming a Business Broker

R: So I moved to South Florida in 1988, went to college at University of Miami. How can you leave South Florida? The weather’s beautiful, great quality of life. The cost of living was dirt cheap back in 1988. So I just stay down here, I got a job out of college selling copiers, lugging copiers around, then moved my way into the PO industry selling payroll benefits and workers’ comp. I landed at Transworld Business Advisors in 1999, worked there to 2013, and I spent 14 years telling everyone to buy a business. Now it was my turn to buy a business. And it was time for me to be an entrepreneur.

So I left Transworld Business Advisors. I bought a Murphy Business franchise, 2013, now I’m in my 7th year, nothing has changed. I’m still doing exactly what I’m doing. I’m doing it for myself, helping business owners sell their business, and helping buyers buy by the American dream. And it’s a great industry, very challenging, but that’s my chosen path. So here I am.

P: How did you find out about business brokerage and what motivated you to get in that space?

Russell: I was looking for a high ticket item to sell because it really would take very long…if you tried to get into a residual type of insurance-type industry, it would take years, and years, and years, to build a residual. So I went to a chamber meeting, I met the owner of Transworld at a chamber meeting, and there I interviewed with him. And I noticed that the industry was full of business people in their 50s, 60s, and 70s, really not aggressive. I was 29 years old, hotshot out of corporate America. I just felt like, you know what this industry needed, like, a shot in the arm. And here we are 20 years later, 636 businesses sold, done by myself. And really, you know, you grow up. From 29 to 50, you really, really grow up and become a different person, becoming an entrepreneur, no doubt.

P: And I think some of the listeners right now work for companies, maybe work in a family business. How do you make the step from acting as an independent business broker for Transworld to starting your own business with Murphy Business?

The Road to Owning Your Own Business

R: No doubt. When you’re in your 20s, it’s tough to be an entrepreneur, to start a business, you don’t have the capital, you may not be mature enough to do it. In your 30s, you start having kids and the expenses start getting kind of high. In your 40s, you start getting a little risk-taking, and you gotta make that jump. If you want financial independence and you wanna control your destiny, it has to happen in your 40s, early 50s. Because as you get deeper into your 50s and 60s, your risk-taking tolerance gets really, really small.

So if you’re mature enough to jump into owning a business in the 20s and 30s, that’s fantastic, but that move has to happen in the 40s because that’s where that business acumen that you’ve been able to build or working for someone, learning an industry, learning about business can really take off in your 40s. So that’s what I did, at 43, I jumped into the business. I came from a family of entrepreneurs, and it was just meant to be.

P: That’s great. And tell us a little bit, you know, it’s 2020, who could have thought this is how we were gonna be wrapping up the year, what are people investing in?

R: The market started to slow down, I saw the market slowing down in the first couple months of ’20. And then we got hit with COVID, which completely changed the world, obviously, and we’re still dealing with it. And the evolution of the essential business has now arrived into our vocabulary. What is an essential business? Essential businesses was a business that was 

operating at 100% during when there was a lockdown. And those businesses are continuing to do well and strive and succeed in these times. Where the non-essential business, someone like myself, or a restaurant, or white-collar businesses were really, really…had struggled and are struggling to come back. So those are the distinctions, especially in South Florida, we’re heavily in construction. We have a lot of service businesses, pest control, lawn maintenance, you name it, anyone that is working outside has done well, no doubt. It’s nothing like I’ve ever seen.

P: That’s well said. We do work with some franchises in the landscaping and property management space that they’ve done all right, and also firms that focus on delivery and takeout. I’m sure maybe you’ve seen some restaurant clients where if they’ve had just a very small space and they change over to doing more delivery and takeout they might have been doing fine this year.

R: Yeah, the delivery service is definitely cranking out revenue. I don’t think they’re making…they’re hemorrhaging money, these delivery services, a bunch of them went public, and they’re just hemorrhaging money. But the restaurants had to pivot, which has helped the restaurants. I am not sold on the delivery service for a profitable business to be in. But there are a lot of other businesses out there that have better margins, and you’re dealing with better opportunities to make money.

P: I think you said it well. Services, and there are some people that are not in the U.S. right now and are foreign nationals, and the U.S. has such a big service market where you compare that to other markets that might be developing and it’s more manufacturing. And the U.S. is much more on the service side, and especially hospitality here in South Florida.

R: No doubt. When you’re in your 20s, it’s tough to be an entrepreneur, to start a business, you don’t have the capital, you may not be mature enough to do it. In your 30s, you start having kids and the expenses start getting kind of high. In your 40s, you start getting a little risk-taking, and you gotta make that jump. If you want financial independence and you wanna control your destiny, it has to happen in your 40s, early 50s. Because as you get deeper into your 50s and 60s, your risk-taking tolerance gets really, really small.

So if you’re mature enough to jump into owning a business in the 20s and 30s, that’s fantastic, but that move has to happen in the 40s because that’s where that business acumen that you’ve been able to build or working for someone, learning an industry, learning about business can really take off in your 40s. So that’s what I did, at 43, I jumped into the business. I came from a family of entrepreneurs, and it was just meant to be.

P: That’s great. And tell us a little bit, you know, it’s 2020, who could have thought this is how we were gonna be wrapping up the year, what are people investing in?

R: The market started to slow down, I saw the market slowing down in the first couple months of ’20. And then we got hit with COVID, which completely changed the world, obviously, and we’re still dealing with it. The evolution of the essential business has now arrived into our vocabulary. And what is an essential business?

Essential businesses was a business that was operating at 100% during when there was a lockdown. And those businesses are continuing to do well and strive and succeed in these times. Where the non-essential business, someone like myself, or a restaurant, or white-collar businesses were really, really…had struggled and are struggling to come back. So those are the distinctions, especially in South Florida, we’re heavily in construction. We have a lot of service businesses, pest control, lawn maintenance, you name it, anyone that is working outside has done well, no doubt. It’s nothing like I’ve ever seen.

P: That’s well said. We do work with some franchises in the landscaping and property management space that they’ve done all right, and also firms that focus on delivery and takeout. I’m sure maybe you’ve seen some restaurant clients where if they’ve had just a very small space and they change over to doing more delivery and takeout they might have been doing fine this year.

R: Yeah, the delivery service is definitely cranking out revenue. I don’t think they’re making…they’re hemorrhaging money, these delivery services, a bunch of them went public, and they’re just hemorrhaging money. But the restaurants had to pivot, which has helped the restaurants. I am not sold on the delivery service for a profitable business to be in. But there are a lot of other businesses out there that have better margins, and you’re dealing with better opportunities to make money.

P: I think you said it well. Services, and there are some people that are not in the U.S. right now and are foreign nationals, and the U.S. has such a big service market where you compare that to other markets that might be developing and it’s more manufacturing. And the U.S. is much more on the service side, and especially hospitality here in South Florida.

R: Yeah, we really don’t really manufacture much here in South Florida. Maybe distribution, wholesale services. Medicine is big down here. Travel is big down here. Yeah, I don’t get caught up in the manufacturing side of what’s going on here in South Florida. The most manufacturing is probably in Dade County where the labor is a little cheaper. But most importantly, if you’re buying a business buy something that you enjoy doing because you’re gonna be putting a lot of hours in this business. So you better like what you do and make enough money to support your family.

And you should have experience, some type of experience to what you’re gonna buy because of the learning curve, trying to buy…you’re replacing the legend in the business. So if you’re gonna replace the legend, and the legend is gonna leave within 30 days to 6 months, you better learn fast, you better take it seriously because there’s no…just because you bought the business does not guarantee future earnings. And the owner is working real hard to pay those bills. So this is not a vacation, you’re gonna buy a business, you’re gonna go to work, try to buy a business that you don’t have to work on Saturday and Sunday so you can enjoy the South Florida lifestyle.

P: So there’s some listings like by sellers, by realtors, people that aren’t focused and professional business brokers that say it’s fully absentee. Does that exist, like a business that people aren’t really working in?

R: Rarely. Rarely. An owner is always gonna have their hands on the beat and pulse. Maybe there’s a few of them out there. But if you’re coming to the United States to find an absentee run business, good luck, there’s not many of them out there. And if they were, then I should buy them. So you know what, there’s not many of them out there. So just like I said, when you’re buying a business, you’re buying a glorified job with a salary, entrepreneurial, with opportunity to grow. If you wanna buy a company, and when I say a company with management in place, there’s a price tag to that.

P: It’s gonna cost you.

R: It’s gonna cost you.

P: Where would you say the threshold starts? Someone that wants to invest $200k, they’re more buying a job. What threshold is it you’re buying a business with professional management?

Tips to Buy a Better E2 Visa Business

R: Yeah, you start going into a million-dollar EBITDA or more. There’s gonna be layers, there should be layers of management in there, you’re gonna start talking $3 million to $5 million minimum. So the dollars do add up. So once again, I am a glorified employment agency with entrepreneurial risk. And you know what, you’re doing it for yourself. And you’re reporting to yourself, you make your own destiny, the ball’s in your court.

P: And then in terms of like, because even the nomenclature changes, like where you might see a business listing and it says, “Seller discretionary earnings,” or, “Owner compensation,” that’s more for a small business that the owner is working full time where you see EBITDA offer for bigger businesses, right?

R: Most business brokers are gonna prepare the business for owner-operator, okay, and you have to read the little paragraph that the broker writes up, it will state that the owner works or not, the owner benefits for a working owner. Very rarely do we prepare these businesses for absentee, it is very difficult to be absent. So once again, I have to work, just because you paid for the business does not guarantee future income. You’re gonna have to work harder than the owner did. Just be prepared for that.

P: And what’s typical in terms of like seller training, how long are they willing to stay on and help to try to have the transition as smooth as possible to the buyer?

R: So in that first meeting, the buyer wants 6 months, 90 days because they’re uncertain, you know, the first time they’re learning about the business. Typically, the seller will give 30 days free, depending on the complexity of the business. Distributor, wholesalers have relationships, that’s gonna take longer to transfer. So it should go longer, three months, six months. Listen, bottom line, the sellers can’t wait to get out of there. You know, they’ve been on the market a year, year-and-a-half, they sold their business, they’re gonna transition, they’re gonna wanna help you.

P: They might be wanting to retire, move…

R: Yeah, they’re ready to move on. They’ve been doing it 20, 30 years. They’ll help you sell but eventually, you gotta break the cord, you gotta jump in, you gotta learn, you gotta learn fast, and you gotta take it seriously. And you’re like a plane taking off, you got to take off because if you don’t take off, you’re gonna crash. So the first 30 days are very important. You’ll get 60, you might get 90, depending…

The Team to Surround You

P: You know, besides working with yourself on the broker side, what’s like the all-star list of, like, advisors? Who else…they have an accountant, maybe a corporate attorney, who’s gonna be working with you?

R: Every buyer needs a good CPA. Every buyer needs a great business attorney, you gotta have a business attorney. Don’t hire an estate attorney, don’t hire a personal injury attorney, I wouldn’t send you to a…if you had a heart problem, I wouldn’t send you to a podiatrist, okay. Hire professionals that know the niche, okay. You’re gonna hire a business broker to help you buy the business, you’re gonna hire a CPA because they’re gonna do due diligence and help you understand the numbers, you’re gonna hire a business attorney because they know what paperwork and what the contract needs to entail. You get yourself a team of great advisors to get you through this roller coaster that you’re gonna get aboard, okay. So if you can get through the buying process, then the next roller coaster begins with business ownership.

The Process and the Relationship with Your Client

P: So taking a step back to the buyer process, how does that work? And I imagine you’re kind of acting as the quarterback, you have the CPA, the corporate attorney. How do you manage the process for…a Vetted Biz or Visa Franchise client wants to buy a business, they have up to $500k to invest. How do you handle that relationship?

R: Okay, so you gotta…every buyer wants to make as much money as humanly possible. And they slowly raise the limits of the earnings that they go after. But what they forget is what they’re capable of buying and what their abilities allow them to do. So what I recommend is we put them in a box. What counties do you wanna be in? What’s your down payment? What’s your earnings expectation levels? And most importantly, the quality of books because I will tell you, there is a very large percentage of the businesses that are on the market that don’t have perfect books and records.

There’s cash in the business, we’re still in a cash society. We’re gonna get to the digital society but we’re in a cash society. Retail businesses have cash. So if you don’t wanna buy a business that has cash in the books, you got to eliminate all the businesses that have poor books and records, you gotta focus on the businesses that have tax returns, that have profit and loss statements, that report everything, that have owners that have high integrity, they put everything in the bank.

Remember, if the seller is not concerned, if they can lie to the IRS, they can lie to you. So if you’re a buyer that needs to see fully documented books and records, only look at businesses that have fully documented books and records. Every business owner pulls a salary, they all pay their personal living expenses out of the business, they run personal schools, they run their cars, they pay health insurance, they pay life insurance, they’re running their entire life out of the business, that’s what they do. If you hire a professional, they will audit the books, they will go through the general ledgers, they will look through three years of financials, they will find all the add-backs that the broker tries to find. Now, we don’t physically, as a business broker, go into their general ledger and verify every nook and cranny.

P: Yeah, that’s pretty specialized.

R: Okay. Now, if I get it, if I get the general ledger, then I will do it. A lot of times, I don’t get the general ledger. So we are getting some estimates from the seller. Those perks are a moving target. So chances are, it’s never ever gonna land exactly on the numbers. Sometimes it’s higher, sometimes it’s lower, sometimes we hit it on the mark, but your CPA is looking for them putting personal money into the business to make it support itself. They’re looking for issues in the business. So you gotta hire a CPA, you gotta have your legal team, you gotta have a business broker.

2020 numbers are so important. If you can find a business that has got back to pre-COVID numbers, you found the winner. If they’re still struggling, and they’re still down 30%, 40%, okay, the business hasn’t recovered. But if a business was doing $100,000 a month in January and February, and in October and November, they did $100 grand, you found it, they’re recovered, they are able to retain the clients, it’s now, in due time, as we come out of this COVID environment, the business will even get better. So, look at the monthly sales, see how much they’re down in ’20. And then you gotta decide, okay, you gotta take that leap of faith to buy that business. Is it right for you? Is it the right situation? So it’s a big decision.

What You Should Know about Costs

P: And so in terms of, like, just general costs, and I guess what is the general cost of a CPA to do due diligence, like a range, and then how often and when are your clients doing that? Is it just a one-time thing and or they’re averaging one or two?

R: Yeah, I would say minimum $2,500 bucks minimum, and that’s cheap. Buyers only come back…a lot of buyers…if they make an offer, and they have to do due diligence and it fails, a lot of buyers disappear. Some buyers come back for the second time, then they disappear. Very few buyers come back for the third time.

P: Would you say, I guess, sorry, to set the client expectation, someone that has half a million, they wanna buy a business in South Florida, if they’re working with you, how many times are they gonna have to pay for due diligence? I know, it could be one, it could be five, but what do you generally see?

R: You only have so many shots at it because you’re gonna spend money on a CPA, an attorney, it’s gonna get expensive. And after a few times, you’re gonna think everyone’s a fraud. So you only have a few bullets in the gun, use them wisely. So typically, if you have the right broker who’s preparing the business for sale, they’ll put together an executive summary. And the executive summary will have detailed recast analysis, they’ll give you P&Ls. And they should be able to give you the tax returns before the offer. You know, so you’re kind of…you know, you’re not gonna be able to go in and audit the books before there’s an offer in place and a contract in place.

But if you’re buying one of my businesses, if I have the tax returns, you’re gonna have them, if I have the P&Ls, you’re gonna have them, if I have the lease, you’re gonna have it, if I have the equipment list, you’re gonna have it. But it all depends on what the broker prepares the business for sale. If they do a crappy job, it’s gonna blow up in due diligence. If they do a very thorough job upfront, then it’s just the blueprint to prove out. But most important is if you can’t get a P&L from the seller for 2020 or ’21, let’s say, it’s now [inaudible 00:21:45], get the gross sales, at least know what the gross sales are.

P: They should have the point of sale software, right?

R: Something, add up the bank statements, you know, just tell me what your gross sales are. So you know…and compare it to the same timeframe last year so you know if they’re off. The margins are 10%, 20%, 25%, 15%. You know, no one’s making crazy margins here. You know what I mean?

P: Yeah.

R: So just ask those questions. I try, when I meet with a seller, I am digging for information, no doubt.

P: And then you probably have just a lot of market color. I’m sure over the last 21 years, you’ve seen business brokers come and go, business brokers retire. And you’ve seen some super ethical ones, some unethical ones, and you can probably tell what type of businesses a broker might take on or not.

R: So when you look at a listing, and you see zeros, nothing rounds to zero on the tax return. A bunch of zeros on a listing shows the broker did nothing, zero. If you start seeing $600,000, $651,122 okay, that makes sense, right? No one business should round to zero, okay, no expenses round to zero, okay. So if you see an owner’s estimate, the broker’s saying it’s an estimate, that means the books are garbage. If it says the owners approved, that means the owners have cash, and they have to prove it to you via invoices, POS, sitting in the business. There are just so many businesses out there that are…

The Buyer’s Responsibilities

P: Are there liabilities, like could the buyer of one of these businesses that was operating off cash have issues down the line? Or I guess it’s structured as an asset sale, or just depends on what the attorney thinks is the best method?

R: Most sales are structured as an asset sale. So once again, it’s your risk tolerance, you gotta define what type of buyer are you? Are you a buyer that needs to see…if you’re hiring a CPA and letting your CPA do the work, you need fully documented. If you’re the type of buyer that wants a cash business because they like cash, then you can prove the cash sales by invoices, point of sale. I’ve sold many cash businesses, I’ve sold plenty of restaurants undocumented. Sometimes the sellers will let you in the business. I’m representing a vending company, the guy has no books and records. He will let the buyer ride with him for one month. You know, it’s like turning back the clock to 2002.

P: That’s wild. I guess not all industries are the same. And controls, business owners have different controls on financial controls and everything.

R: Yeah, a lot of these sellers are very unsophisticated. The bigger the deal, the more sophistication we’re gonna get, the more investment into the books and records. You know, deals get done but you have to understand what type of buyer you are. And if you can put yourself in the right situation to succeed, you’ll buy a business.

P: I think you set the expectations very straightforward, which is really important. And we just have a couple of questions coming in. So from Sunny Bay Immigration, “Only $2,500?” I think that’s for due diligence, definitely on the low end. I mean, it could go up to, what, $10,000, $7,500?

R: Well, like I said, it all depends on the size of the business. You can buy a $100,000 business, $2,500 is low. You’re buying a million dollar business, it’s gonna get higher. If you start going into a quality of earnings report, that could run $50,000 to $75,000. It just all depends what business you’re looking at. It all depends on the quality of the accounting firm you’re hiring too. There’s many different types of quality accounting firms, CPAs you can hire.

P: Exactly.

The Key to Focus on Your Business

P: And then Fahad had a question, “When we buy an existing business, should the multiple be based on owners compensation or seller discretionary earnings? Apart from the business broker, who is also required to complete the acquisition, like attorney, accountant? And what one needs to budget in addition to asking price? When someone buys a business through a broker, does the broker himself conduct the…?” So yeah, the last question, it’s the CPA. But there’s a couple of questions maybe Russell could address.

R: Yeah, leave it up there so I can answer it. So the owner’s benefit is the seller’s discretionary earnings. If it was a fully documented business, we take the tax returns, we add back the owner salary, the depreciation interest, and the profit on the tax return or the P&L, and we take all the add-backs, the life insurance, the car payments, the non-recurring expenses. Let’s say someone put $10,000 building a brand new website, and that website, you won’t have that expense next year, there might be some non-recurring charges, they might have some legal fees that are non-recurring or accounting fees that are non-recurring. So non-recurring charges, we also add back.

So the owner’s benefit, the seller’s discretionary earnings, is a combination of all those. If we’re dealing with a cash business, it’s everything plus the cash, but there’s a but. If the seller is collecting cash, they’re also paying out in cash, they’re paying labor in cash, they’re paying cost of goods in cash, there’s other expenses paid in cash. So if there’s a cash business, more than likely, most of the cash does not go in the pocket, it goes to pay other expenses. So keep that in mind. Your deal team should be an attorney that closes the deal. On the smaller deals, sometimes there’s transaction attorneys where the buyer and seller split the fee. But if you want representation, hire a business transaction attorney that will represent your side, that will do the deal right, that will pay for it right.

You gotta hire a CPA or an accountant to audit the books. Unless you are financially knowledgeable about accounting and bookkeeping then go for it yourself, you can save yourself some money. And then does the business broker audit the books? Probably not, okay. But I will tell you, when I get the tax returns, I enter all the data into my software, I send it back to the seller, the seller will pinpoint the add-backs that are the seller’s discretionary earnings. I know they add back the officer salary. I know they add back the interest because they’re delivering it free and clear. We add back the depreciation. We add back the profit from the P&L or tax return. And then I start going through the expense, the auto expense.

Well, you know, it’s a dentist, well, why is there a $20,000 auto? We know they’re running their Mercedes through the business, it’s obvious. So insurance, workers’ comp and general liability are only so much. And if their insurance is $30 grand, they might be running their life insurance, their medical insurance through the business. So we try to pull that out. But what we’re not doing is taking the bank statements, we’re not matching it up to the sales tax. We’re not going through the general…

P: You’re not doing forensic accounting.

R: We’re not doing forensic accounting. But a good business broker should get three years of tax returns, should get P&Ls, they should get year-to-date financials, they should package it together in one beautiful executive summary and give it to the buyer. 

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So you then determine if you’re running for the hills, or you are opening the door to a phone conversation or meeting.

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