(Note: This story appears in the January 2022 issue of ED Magazine)
*Story by Winston Hines
Whether it’s closed or been a bit neglected for whatever reason, according to Broker Winston Hines, “every club can be rationally valued and sold.”
Are you considering the sale of your club, but are just, maybe, a little bit, hesitant about what a potential buyer will think about your sale price or even before you put it on the market, apprehensive about its valuation? Your club can get to a fair value, even if you have been a graduate of, shall we say, creative accounting 101.
Consider this statement seen in the Great Smoky Mountains: “Stay calm and play dead.”
That’s excellent advice if you’ve attracted the attention of a black bear, not great if you’re thinking of selling your club! I am presently working with two owners who are looking at selling their respective clubs but have not reopened since the COVID pandemic.
In both cases, I have convinced these owners to get on track to reopen, including getting their permits in order. Any buyer or broker will say you have much less to sell, much less negotiating room, if you’re thinking about selling a supposedly ongoing business that is closed. This understanding is not business brokerage 101!
If you have closed your club for whatever reason and now want to sell it, even if it’s just for the real estate value, please do yourself a favor, contact one of us adult club industry specific brokers* or even a mainstream business or commercial real estate broker and get it on the market properly now, not later … I’ll explain why in a minute.
When it comes to the sale of your club, you need to understand that there really is no “ugly baby.” Every business (or club) can be rationally valued and sold. That really is the case even if you have used “creative accounting” practices. Generally accepted accounting principles ought to be your standard practice for you and your accountant, but there are and always will be times when everyone sways toward a more flexible approach to various reports.
Such is life, and, oh yeah, duh!
There are many reasons why owners will say they’re not interested in selling their club. They may feel uncertain about the future of the economy, or tax rate modifications, or even what interest rates are doing. They may feel the time is just not perfect.
One of the most common excuses involves concern about how a club’s accounting practices will be perceived. But guess what? That is the one concern club owners generally don’t need to worry about. For the most part, the buyers and other brokers we deal with are industry-experienced, industry-grounded. In short, they understand where you’re coming from. They have been there, too.
A club owner might say they want to wait to sell for a year or two to “clean up” their financials.
Perhaps there is a vice president of marketing who hasn’t started the first grade yet (or some other non-essential employee) on the payroll who doesn’t actually do anything but collect a check from the club. They might be worried that the 2020 roller coaster in revenue during the pandemic is going to be used against the asking price — forget about it!
The professional term we use is called ‘rationalization.’ The more accurate a picture of the cash flow on the club I can give, the stronger the negotiating position is for my seller, and the more acceptable the sale price is to a buyer. — Winston Hines
The current business brokerage practice I stick to, (and the current industry practice) is to look at 2018 and 2019 numbers and the first and second quarter of 2021 reports. There was just too much disruption on too many levels to give 2020 numbers more than a glance. This is true not for just our industry or even the greater bar & restaurant industry, but across just about every aspect of the mainstream business brokerage, as well as the M&A, profession.
It’s a great idea, but not exactly a deal killer must-have, to have squeaky clean books to show a fair market value snapshot of the club’s cash flow. Your possible buyer will come in and do back-of-the-envelope calculations or even a more detailed examination to question, to understand, and then to adjust — up or down — for any fuzziness in the bookkeeping or daily reports, or short-term gaps in profitability.
The number one job of your CPA is to get your annual tax liability to as close to zero as possible. That’s it. But that is not what is necessarily the true picture of what the club is doing cash-flow wise: You can’t put “depreciation” in your pocket but it sure helps you and your accountant to get to that magic zero tax liability. A knowledgeable buyer, or a trained and experienced broker, can go through the income/expense reports and tweak the business’s value to a more accurate, more precise number.
The professional term we use is called “rationalization.” The more accurate a picture of the cash flow on the club I can give, the stronger the negotiating position is for my seller, and the more acceptable the sale price is to a buyer.
Example: Maybe the club purchased all-new barrel chairs or new carpet or had to replace AC units or reroof the building, resulting in a significant ding to the net number on paper. Such an expense is considered a CAPEX (a capital expense) and as such is “added-back” to cash flow, as a one-time purchase, and therefore should not affect the valuation of the club. Your accountant knows how to handle these expenses properly for your individual circumstance.
“There is one massive caveat: A buyer is not going to adjust ‘misreported’ or ‘mishandled’ cash for your benefit. You don’t get to say, ‘I took out a little bit of cash off the door or VIP,’ or say, ‘I paid some staff in cash,’ and expect that to lead to an uptick shift in the on-paper value of your club.” — Winston Hines
It’s critical for you to understand that a buyer is not the IRS. That buyer is not looking for improprieties to report. That buyer just wants to make sure that all the cash streams coming in have been accounted for, and that all the expenses are there to get the clearest picture to that fair value number.
There is one massive caveat: A buyer is not going to adjust “misreported” or “mishandled” cash for your benefit. You don’t get to say, “I took out a little bit of cash off the door or VIP,” or say, “I paid some staff in cash,” and expect that to lead to an uptick shift in the on-paper value of your club.
If that money cannot be verified and/or tracked, don’t chump yourself now. Values these days can be calculated from either a percentage of gross sales or as a multiple of net earnings and does factor into the valuation. Any club, even if it the net earnings are not that great or with some creative accounting, can be fairly valued and sold.
The bottom line is if you’re about ready to sell, get with a licensed, knowledgeable, experienced broker now.
As a licensed commercial real estate broker and business broker, I read a lot of commercial real estate and business brokerage industry articles. Over the last month or so, there has been a very real, very definite shift from, “It’ll never happen” to a mounting acceptance of a real possibility that Congress and the Senate will jack up the long-term capital gains tax rates significantly to pay for their spending bills.
I am not trying to play politics here, nor jump up on a soap box to gin up some extra work. But as I write this, several heavy-duty commercial real estate industry sources I really trust have turned decidedly negative as to just keeping capital gains rates untouched. There are even mutterings about hitting the 1031 tax deferred exchange or the opportunity zone funds, both of which are absolutely legitimate tax shelters for real estate and personal capital gains.
In short, like Nike says: Just do it. Now.
Winston Hines, Broker in Charge of HWH Properties, is a licensed commercial Real Estate and Business Broker, specializing in the purchase and sale of adult nightclubs throughout the U.S. for almost 20 years. He is a member of the International Business Brokers Association (IBBA) and American Business Brokers Association (ABBA). He holds a Certified Business Intermediary (CBI) designation, as well as an (ABI). He can be contacted at either (864) 580-3826 or firstname.lastname@example.org.