Donald Trump becomes President January 20, 2017. With his inauguration, for the first time in about ten years, there will be a Republican President, a Republican dominated House, and a Republican Senate. A number of people have asked if this is a good time to sell their Adult Club.
The easy answer: Sure, and it depends.
On the Yes side, here are some pluses to consider:
From a recent BizBuySell report on Buyer-Seller Confidence.
“This year’s results showed sellers feeling more confident that they can successfully exit their businesses as the Seller Confidence Score grew to 62 after two consecutive years at 56. Not only did a majority of owners (58 percent) believe they can receive more money for their businesses than they could last year [2015], but more than 90 percent were optimistic enough to say they will be able to achieve the same or higher sale price next year. Respondents to both questions responded with higher, more optimistic percentages than did the same last year. “
(Just FYI: BBS DOES NOT follow or list ADULT Businesses)
This index is pretty much a gold standard in measuring confidence in any general small business survey. The takeaway from the entire report is that there are more financially CAPABLE, more potential Buyers ready to move into business ownership, more Sellers comfortable with their asking prices and their actual expectations.
Jeff Snell, a nationally recognized Business Broker, goes further in an article he published December 3:
“They (Sellers) generally believe that the rate of State and Federal regulations will not continue to rise and that in time many regulations may even be abated making it less expensive and less administratively burdensome to conduct business. I believe this will lead to more buyer interest especially in the under $1 million owner benefit range. [underline mine] I also believe this will lead to reduced seller interest thus moving the supply demand curve in favor of sellers. If the future looks brighter to a business owner than it has in the past 8 years why sell now? If my logic holds true, multiples will go up perhaps even to pre-recession levels or higher. Again, I think this will be most pronounced in the main street market.”
In other words, you, the Potential Seller, should achieve a more acceptable Sale Price. Just remember : Sale Price, not Asking Price. The one caveat on that last statement: a realistic, reasonable, and defensible Asking Price will get you much closer to a deal, and an acceptable Sale Price a lot more quickly if your income and expense numbers are going to derive to a mainstream multiple of net earnings.
Snell goes on to address two other issues we face in this industry: minimum wage and ObamaCare (or the Affordable Care Act –a textbook oxymoron, if you prefer).
General thinking is that Trump and Congress are not going to jump wholehog at a $15/hour minimum wage scale. As opposed to a manufacturing operation, a retail or service operation, such as an Adult Club, is much more sensitive at the bottom line to labor costs or …and this drags us directly into this related clusterf**ed issue: Independent Contractor vs. Employee treatment of Entertainers. This article is not going to delve into the various ramifications of either side of this economic model. (Come to the ED Expo in August for more on that!) Do understand that that now when I or another experienced business broker dig into a Seller’s cash flow numbers, a legitimate question is how Entertainers are considered, because that will make a lot of difference in looking at insurance costs, a breakdown of labor costs, in essence, how cashflow is tracked and treated. It becomes a very serious legitimate consideration for a Buyer now.
ObamaCare will be toast shortly. Trump and Congress will for sure wind up with some kind of beast of healthcare reform that will combine the worst traits of a jackass and an elephant in the room. What is hoped is that the new and improved healthcare act will back off from that low “full time equivalent employee” definition threshold, and a disconnect from the more than one location, but try not to hold your breath too long.
He winds up expecting that we will see a reduction in income taxes, both business and personal. This will work for both a Seller and a Buyer. The better a reduction we see in capital gains taxes, the better for the Seller, and the better for the Buyer to reach an acceptable Purchase Price if the Seller does get to keep more of his or her price.
December 2, the Bureau of Labor posted the unemployment rate at 4.6%. That is considered to be right at a “Full Employment” level. More people at work, more people looking for some place to go party, right? True enough by itself, but just remember retention and/or recruitment of Entertainers might get a bit more problematic. You may have more people coming in the front door, but find less Entertainers coming in the dressing room door.
All of these above will help a Seller ask a strong number-NOT some crazy, maybe some fool will come along number for his Club. No matter what, the basics still rule: What is the percentage return on this investment and how long will it take me to earn back my investment?
In economic cycles, this is it. A strong pro-business elected government, a relatively healthy economy compared, to the recession years, stock markets hitting strong highs, consumer confidence up. If you are a Seller, why would you want to sell your Club after you have weathered the Recession, put up with all the other forms of entertainment that compete for your door dollars, figured out how to do social media marketing, and even put a few dollars in the mattress for a rainy day?
You will be selling at the best possible time. Your gross sales numbers should be solid and climbing from the last few years, your potential Buyer base will have expanded, and a pro-business, reduce taxes, reduce governmental interference mindset looks very promising. Not just for you personally, but the above are all considerations and perspectives with which a Buyer will come to the table dance.
What I have written above for the Seller, applies to the Buyer.
A potential Buyer can and should expect a strengthened economy and more butts in the seats to translate into a better outlook for that Purchase, and in the near future. Calculations for future earnings will always be a crapshoot if the Buyer rolls in without adequate preparation or due diligence. …and I emphasize this again: due diligence, taking the time to really examine what is going on in that particular location, that particular area market, and taking good advice from counsel and advisors, make for a solid Purchase-and therefore, a solid Sale by the Seller. I have seen Buyers spend more time deciding about the car they’re gonna buy, than the Club into which they’re gonna sink a big ole potful of cash…and time…and effort.
Final consideration: Financing. The Adult Club Industry is what it is. Just about no one is going to get a bank loan, and in the highly unlikely event a Buyer does, you can fairley well expect that it is going to be directed only at the basis of the Real Estate, and with a major downstroke. And for crying out loud, if someone says they’re going for an SBA loan, back away: they’re smoking some high grade crap.
The vast majority of Purchases of Adult Clubs in 2017, as they have in the past have necessitated some form of Owner Financing, or private mortgage. Do some serious consulting with a trusted CPA on the structure of a Purchase: for both Seller’s and Buyer’s sake BEFORE you are at the closing table. How that Owner Financing is designed, and implemented after the Sale, will largely determine the quality of that relationship between Seller and Buyer through the end of the contract.
That being said about Owner Financing, there are some independent financing platforms in place now that were not available even a half year ago, that address the cost of owning the Real Estate.
Now, let’s do some deals in 2017!!!
H. Winston Hines
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