May 20, 2025 • 24 mins
Ever wonder what happens when the numbers don't add up during a business sale? When the quality of earnings report lands, it can either confirm your business valuation or send your deal into a tailspin of renegotiations.
Russell Cohen pulls back the curtain on what he calls "a colonoscopy on steroids" - the intensive financial investigation that private equity groups conduct before finalizing an acquisition. This critical phase exposes the gap between how entrepreneurs manage their books and the GAAP accounting standards institutional investors expect, often revealing uncomfortable truths about a business's true financial performance.
The podcast explores the red flags that commonly trigger post-QOE price adjustments: declining revenue trends, miscalculated job costs, improper worker classifications, inadequate insurance coverage, and ownership structures where real estate complicates valuation. Through real-world examples from his current deals, Russell demonstrates how these issues play out in practice and shares creative solutions for keeping deals alive despite financial discrepancies.
What becomes clear is that leverage in these sensitive negotiations often comes down to a simple question: who wants the deal more? A motivated buyer facing pressure to deploy capital by year-end may accept compromises that preserve headline valuations while adjusting payment structures. Conversely, a seller without urgency maintains significant power to hold firm on price or walk away entirely.
For business owners years away from selling, the message is simple but crucial: start preparing now. Invest in professional accounting, build management depth beyond yourself, ensure comprehensive insurance coverage, implement proper employee benefits, and maintain regulatory compliance. These foundations, established at least three years before a planned exit, create resilience that can withstand the scrutiny of acquisition due diligence.
Ready to start your exit planning journey? Contact Russell to begin positioning your business for a successful sale, whether your timeline is measured in months or years.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Welcome to the South Florida M&A Advisors Podcast,
your trusted M&A team.
Here's your host, Russell Cohen.
Speaker 2 (00:13):
You're deep in the deal, the numbers well, looking
pretty solid, until the qualityof earnings report drops.
Well, suddenly, things don'tlook quite as promised.
So what now?
Today we're talking about thedelicate yet high stakes move of
renegotiating price post QOEwhen to push back, how to keep
(00:35):
the deal alive and where buyersand sellers get it wrong.
Welcome everyone to the SouthFlorida M&A Advisors podcast,
jeremy Wolf, here joined by theman, the myth, the legend, your
host, russell Cohen.
Russell, always a pleasure tosee you, brother.
Hey, good morning, jeremy.
Speaker 3 (00:50):
Thanks for doing these podcasts with me.
It's a lot of fun and hopefullywe're educating one seller at a
time.
Speaker 2 (00:57):
Absolutely, man.
Education is key.
So with that in note, talk tothe listener out there that
maybe doesn't know what exactlyis a quality of earnings report
and why is it such a turningpoint in the deal process.
Speaker 3 (01:10):
Well, it's very simple.
You work your entire life tobuild your business.
You think your books areawesome, right, and sometimes
you know I mean you spend a lotof money on your books.
The private equity group isworking off gap accounting and,
and you're not, um.
So there definitely could bediscrepancies that you never
thought would be, and they'renot.
(01:30):
They're not expecting all youknow these smaller businesses
that are growing up to be nice,nice, really large businesses,
um, to be based on gapaccounting.
It's just just not there, um.
But you know the quality ofearnings.
You just you went through thatum, you know.
You bring the business tomarket, interview a whole bunch
(01:51):
of private equity groups.
You go into negotiations,multiple lois, you finally get
the deal.
You negotiate the deal.
The attorney is involved.
Your your your bill on theattorney, clock starts and so
everyone's spending money andyou get to the and you have this
incredible price.
You're really happy, everythingmakes sense, and then you go
(02:13):
through the quality of earnings,which is a colonoscopy on
steroids.
I always call it Crazy.
They're going to look ateverything.
They're going to ask you topull out documentation from 20
years ago.
It's incredible.
And the bigger the deal, thebigger the scope is basically so
(02:35):
from accounting, from legal,from benefits, from
environmental, from alldifferent types of insurance it
could be six differentcategories that go into your
business.
And then you just you spentlike 60 to 75 days providing all
this documentation.
You're getting burned out andthey come back with a quality of
(02:58):
earnings report and it may notmatch to what you thought it was
making.
So, yeah, so the quality ofearnings.
The private equity group hiresa very high powered accounting
firm and that's their job to gothrough everything in your
company because they haveexposure themselves Post-closing
(03:20):
.
You close on this deal andthey've missed it and they got
exposure.
So they are relentless to find,find out if your accounting is
accurate too.
So what you invest in in yourbusiness for your accounting, um
, you know, eventually willeither get you through or either
(03:41):
canceled or completelyrenegotiated.
So it's vital to have the rightplayers in place and to put the
money into the accounting tomake it work.
Speaker 2 (03:52):
Yeah, absolutely Now.
Is this commonplace?
I'd imagine it is.
Is this an issue that youencounter frequently in deals?
Speaker 3 (04:01):
Well, listen, if your business is growing and you're
on a hockey stick, growth you'renot concerned, You're, you know
, you know the business justexploded.
You'll never, you won't run intoa problem.
The private equity group wouldprobably clear, through the
diligence and and hoping thatyou're not going to renegotiate
and so, but you know, if you,even if you have a, a, a great
(04:25):
business, if the numbers are aretrending down meaning maybe if
you're in construction and thework has not kicked in and your,
your current year numbers arenot trailing 12 months or not
what you represented in thecalendar year, um, that will
cause a renegotiation.
So yeah, the private equitygroups definitely want to
(04:50):
renegotiate, but if you have abusiness that's so strong and
growing, they can't.
So that's where you want to be.
You want to be where they're ina position that they can't
negotiate with you, in aposition that they can't
negotiate with you.
Speaker 2 (05:05):
So you just mentioned a couple of kind of I guess red
flags You're talking about.
Obviously, if the business ison an uptrend, hockey stick
growth is not so much of anissue and obviously if it's
stagnating or even going down,it's going to bring some
concerns up for the buyer.
What are some other red flagsthat typically prompt the buyer
to reconsider the agreed uponprice?
Speaker 3 (05:25):
So I'm representing a plumbing company in South
Florida and the majority in newconstruction.
So in this particular scenario,their jobs, they miscalculated
their jobs, their jobs didn'tstart on time.
So you know, we're looking atthe first four months and the
revenues are down.
So the trailing 12 months arenot there, the first five months
(05:50):
are not there, so yeah.
So so when you enroll with me,you better keep your eye on the
prize and keep the businessrunning at full tilt, whatever
it takes, because during the QVthey're going to ask for a
trailing 12 months and if thenumbers are off, you're just
giving them reasons torenegotiate.
You know, a lot of timesbusiness owners might have 1099.
(06:12):
Let's say, in construction theymight have salespeople that are
1099.
The private equity group has toput everyone on workers comp,
w-2, put payroll taxes, so toconvert the employees over you
over, you wonder if you're goingto lose the employees, or
reference like that.
Yeah, I mean, there's so manyways that a business can go
(06:33):
sideways, but if you don't havethe proper insurances under
insured, that causes newexpenses.
If the owner owns the building,if they're not calculating a
fair market rent, and you'redealing with a 10,000 square
foot facility and you didn'tcalculate the proper rent, that
will dig into the numbers.
(06:54):
So that's why you hire aprofessional advisor, because if
you own the building, chancesare the private equity group is
not going to buy it, they'regoing to rent it.
So you got to put a regularrent in there.
So you know, I like, if I havean open-minded seller, I like to
bring in a fractional CFO to gothrough their books, just so
we're we kind of know what we'rewalking into.
(07:15):
I see the P&Ls, I see it veryclean.
But I'm not a CFO and I'm notan accounting expert.
But if I can get a fractionalCFO to dive into those
QuickBooks, we can really seewhere the hurdles will be in the
deal and how they're not tiedto Gap Accounting and what the
private equity group is going todo.
(07:36):
So you got to be willing tospend a little money up front to
kind of see where you'rerunning around the track.
And you got one hurdle here.
You know when they jump overthe hurdles.
There's so many hurdles to jumpover.
You just got to be flexible tospend a little money up front to
see where the challenges aregoing to be.
Speaker 2 (07:56):
Yeah, absolutely Best to lay it out on the table as
early as possible rather thandeal with issues on the back end
.
So this is obviously these canbe difficult conversations.
Right, you mentioned it.
You work your whole life.
You have this image in yourmind, as the business owner, of
what your business is, what it'sworth.
You've reviewed everything onyour end and it looks like it's
all right.
And then, all of a sudden, thequality of earnings turns up and
(08:19):
it's not what you expected.
Now, how do you typically like,how are you going to approach a
seller when these reports turnup issues?
What's the right tone, timing,how do you approach that
conversation?
Speaker 3 (08:30):
Well, I mean, it's a hard conversation.
Once again, once you get thatnumber, you think you're getting
that number, so it becomes whowants it more?
You know, in this scenariowhere I'm working on my current
deal, you know, we know thatthis private equity group this
is their first entry, so it'scalled a platform deal.
We discussed that in the pastwith my roofing company.
(08:52):
So this is their first entrywith my roofing company.
So this is their first entry.
So they got to buy this companyor they basically blew out 25
with no sales, because we'retrying to get this deal done in
a few months and there's notenough time to close the next
deal.
So this is this private equitygroup If they don't buy this
business, they show nothing forthe year of 25.
(09:13):
So, and then they got money todeploy.
They have to get it out.
They got investors.
So we're in a very goodposition because we could read.
We could read the scenario okay, and and we know they need to
buy.
But so what ends up happeninghere is you know, we have
discussion with the seller, weunderstand the need for them to
(09:34):
buy.
Seller really is, is in control, he understands the numbers are
not hitting the numbers becausethe jobs haven't started.
So a lot of time we try to keepthe top line and what?
The private equity group movemore money of the purchase price
into the earn out.
And so what will end uphappening?
(09:55):
If, let's say, the down paymentwas eight million, uh, and it's
a 14 million dollar deal, he,they moved the down payment down
to seven and they put anothermillion into the earn out.
And what we're doing is, inthis particular scenario, we
kept the integrity of the price,moved one million to an earn
out and the earn out begins uponclosing for the next trailing
(10:16):
12 months.
So there'll be like two earnout periods where they can get
their money.
And basically what you have hereis if the seller has the
pipeline which I know my sellerdoes and they can get the jobs
to start rolling in and workstarts billing, then they
believe they can get their earnout and not sacrifice.
(10:38):
So we kept, we were able tonegotiate and keep the price the
same, but we just they, theprivate equity needed to buy the
business, so they shifted somemoney to the earn out portion.
So you know, there's ways tosolve it If the private equity
needs to buy.
I, you know my seller does notneed to sell.
He would like to sell, but hecan wait another year, which is
(11:01):
not what I like, but it is whatit is.
That's kind of like do all thework and then get nothing and
maybe never see a dollar from it, but that's a good example of
solving it.
Speaker 2 (11:13):
Yeah, I mean the motivation is key, right, if
you're uh who wants it more.
Yeah, who wants it more?
That's right if you're notdesperate.
Speaker 3 (11:21):
You're gonna have more cards in your uh on the
table and a lot of times thesellers have this incredible
business.
They're making lots of moneyand, you know, unless it's
life-changing money, like thehundred million dollar deal, you
know something it's.
This particular deal is notlife-changing because there's
three partners and everything.
They have a runway left intheir career.
(11:43):
It's not like they're 69, theyneed to sell tomorrow.
They have time on the runwaythat they can keep working it
until they get the rightsituation for them.
That's's not good.
I mean, obviously, whatever theseller wants for me, you know,
what can I do?
I mean, yeah, I'm here tosatisfy the seller and if that's
what ends up happening, that'swhat ends up happening.
(12:03):
I go back to the drawing board,you know.
Speaker 2 (12:06):
So when should a buyer draw a line in the sand
and walk away, versus trying torestructure a deal Like there's
got to be a point where, yeah,it's time to just fold up shop
and move on.
Speaker 3 (12:19):
Well, in that particular scenario if the
seller drew a hard line orincreased the down payment, you
know then you could lose thedeal.
I think a lot of the deals are.
You know, if you're able to getpast that little negotiation
then you know you move into thecontract and that's where more
minefields are out there in thecontract.
(12:40):
So we got this contract fromthe private equity group and I
have like a three page responsefrom the seller and the attorney
on things they don't like andit's kind of like a 30,000
square foot view.
And if we can't get past this,you know the seller doesn't want
to, you know keep the tab goingfor the attorney bill.
(13:01):
So he's kind of like drawing aline in the sand because you
know there's a lot of parts onan LOI that never really get to
the seller Because it's so manynuances and it all shows up on
the contract.
So I try to educate the sellerway in advance because a lot of
(13:23):
times if it doesn't show up inthe LOI, we can put it in the
LOI, but if it doesn't, then Itry to make them aware of what's
coming in the contractbasically.
But I think it really comesdown to in the quality of
earning, who wants it more orwho wants it less, and in this
case, seller is okay, he'll moveon.
(13:43):
You know what I mean.
He'll move on if he has to.
Speaker 2 (13:46):
So many moving parts, russell.
That's why I've said thisvirtually every time we talk.
That's why it's so important tohave a team like yourself to
work with that's really superknowledgeable about this and
very creative, becauseoftentimes just the
communication alone can make orbreak a deal, and whether or not
you're able to come up with,like you mentioned, instead of
just reducing the price, comingup with workarounds and
(14:07):
solutions that can be effectivefor both parties involved is
really, really key.
Let's talk a little bit aboutprevention.
You mentioned bringing in afractional CEO.
Let's look a little bit earlieron in the process.
What can sellers do?
Talk to somebody out there thatmaybe is not even ready to sell
yet, but they know they'regoing to be selling in the
(14:27):
future, three, four, five yearsdown the road, maybe even 10
years down the road.
What are some of the thingsthat you can do early on in the
business to set the stage sothat, when it comes time to sell
, you can avoid these surpriseQOEs in the first place?
Speaker 3 (14:41):
Yeah, I mean it's obviously don't be the legend in
your business.
Try to pull yourself away fromthe business and have that
management team that is therefor you, that will be there for
the next owner Obviously theoriginal owner, obviously the
original owner is going to stayon for a couple of years.
But eventual exit, so kind ofprep one person in that team to
(15:04):
be the next, you know, keyperson.
So definitely have some keypeople.
Do not be the legend in yourown business.
Invest in accounting.
Make sure you got the right cfo, uh that really understands
quickbooks or understand theconstruction in this or any any
business that you're in.
Uh it, if you know you, you gota professional cpa, uh, your
(15:28):
cpa can probably tell you ifyour bookkeeper is A, b or C.
Make the investment in the A,because then you'll really be
backtracking and it's good youknow companies of this size.
You got to be looking at yourbalance sheet and your
financials.
You got to be looking at it allthe time.
So you can't run a company ofthat size without knowing what's
(15:51):
going on.
So if you're not, you'rerunning by the seat of your
pants, but you really have tomake the investment.
So you got a CFO.
Or if you're going to outsourceit, get an outsource accounting
company that's going to do theQuickBooks and really take
control of the books.
There's companies out there.
(16:11):
They act like a controller, butit's a lot less than 125 grand
to really run your books andeverything of that nature.
So accounting is very important.
Get your insurances in place.
Make you have all insurances.
Make sure you're offeringbenefits, because the private
equity groups have benefits.
Make sure you're in compliancewith what's going on, your I-9s,
(16:39):
all that stuff.
You know don't have anyillegals.
You know it's endless howpeople cut corners in business.
But as they get bigger andbigger they realize what they
were 10 years ago is they can'trun the business.
But the books and records arevital.
If you don't own the prop, ifyou don't own the property,
that's fine, get it.
(17:00):
Get a long-term lease, um, tryto see if you get off the
guarantee.
That's important.
And if you, if you do own theproperty, just understand you're
gonna you're gonna charge fairmarket rent and you cannot kill
the.
You don't want to kill the cashflow without land.
Just rent you.
You want fair market rent andthe private equity group is your
best tenant because you'regoing to have a long-term
(17:22):
residual effect and you'll beable to get market rent.
It's what they're expecting.
So many ways to deals to gosideways, sometimes out of your
control, unfortunately.
You have a lot of hands in thecookie jar.
You've got attorneys,accountants.
They're going to do all out ofyour control.
Unfortunately, you have a lotof hands in the cookie jar.
You got attorneys, accountants.
You know they're going to doall types of lien searches.
Make sure you don't have anyliens.
(17:43):
You know you're going todeliver the business debt free.
So make sure your debt is, youknow.
Just make sure there's.
You know the IRS is notbringing it down your back for
tax payments.
I mean all this comes out.
You know the irs was notbringing down your back for tax
payments.
I mean all this comes out.
You know lawsuits.
If lawsuits can kill deals too,there's so many ways that you
know you got to be upfront toyour advisor.
You got.
(18:03):
You know no one wants to findout later on that.
You know it's.
It's been horrible.
You know you got a lot of, alot of skeletons that we call.
So a lot of ways to skeletonsthat we call.
Speaker 2 (18:15):
So a lot of ways to make the deal go, a lot of dead
bodies buried, yeah yeah.
Speaker 3 (18:18):
And this past deal that we're working on, you know,
when we took the LOI, you knowthe private equity group came in
with a four times multiple ofthe EBITDA.
Okay, so they really didn't puta price on it, but we knew the
EBITDA was like three, five andso we knew we were getting a $14
million deal.
But you know, you know I'm notan expert in M&A and it was.
(18:43):
I kind of felt like it was asetup to get renegotiated,
because by the time you gothrough the quality of earnings,
sometimes you don't hit that3.5 because of the gap
accounting and how, how, whatthey see as the EBITDA.
And that sparked therenegotiation.
You know, next time or in thefuture, I'll never, I'll never
(19:05):
tell her seller to accept amultiple of EBITDA.
We need a price.
What is the price?
What are you offering?
Give me a number.
They never put a hard number onthe LOI.
So lesson learned, all right.
This particular plumber fell inlove with this private equity
group.
We had offers for 90% cash andthe seller wanted that earn out.
(19:29):
They wanted the rollover equity.
He had a son in the business sohe wanted the.
Speaker 2 (19:36):
They wanted the whole kit and caboodle, as they say.
Speaker 3 (19:39):
I brought him cash, 90%, 95% cash offers.
He went with an offer I neverthought he would take and it was
influenced by because the sonhas another 25-year runway and
he wanted to make sure that hewould have a piece of the action
going forward.
And that's fine.
But you know, I just want togive a lot of choices and you
(20:00):
know, these business owners areadults.
They'll make their owndecisions.
They'll pick what's right forthem, you know.
Speaker 2 (20:05):
You can only lead a horse to the water, you can't
make him drink, right.
Speaker 3 (20:08):
Yeah, I mean looking back.
You know, looking back.
You know, listen, we had a 13.5million cash.
But it's scary, by the time youunwind what you're getting down
, by the time you pay acommission, you pay capital
gains, there's multipleholdbacks in the deal, in the
deal, and by the time you get tothe, you look at the closing
statement, you're like, well,you know, maybe, maybe I made a
(20:35):
mistake by.
You know earn outs and rolloverequity, and that's what I'm
trying to avoid.
You know where a seller getsscared at the end.
You know.
Speaker 2 (20:41):
Yeah, okay, russell, before we wrap up here, I want
you to give one piece of advicefor buyers and one for sellers
that are entering into the QOEstage.
What would that be?
Speaker 3 (20:53):
Well, I mean, these buyers are professional buyers.
This is what they do all day.
They look at 700 companies ayear.
So I don't know what I couldtell them.
But obviously you know, theonly thing I can say to them is
that when I get a seller that'skind of focused on that price, I
will tell the buyer they're notmotivated.
(21:13):
This is it.
You're going to lose the dealif you start playing the
renegotiation game.
And I will tell them that I'mnot afraid to stand up to a
private equity group, and that'sgreat advice.
The private equity groups arecalling me.
They're asking me a lot ofquestions before we engage with
a seller and they're asking mewhere you think this will land.
(21:34):
And of course, we want themarketplace to give the final
number.
But we're selling businesses onplanet Earth, we're not selling
on Mars.
So we're going to hit amultiple.
That's fair and obviously everyindustry is different.
But but with the seller, youknow I I advise them it's going
(21:58):
to be a rollercoaster ride.
You're going to go through alot of emotions.
You just got to really rememberwhy you chose this particular
buyer and try to see it through,and I'll be there to kind of
give you, you know warnings ofthe deal and what is coming your
way.
You know.
Then you just got to.
You know I do this on aday-to-day basis.
(22:20):
A lot of people don't listen tome on my recommendations, but
it's really what's coming atthem.
So the quicker you know, thequicker you know, the quicker
you take my advice.
And and you know you don't youcan learn about what I'm saying
doesn't mean you have to do itbecause you have accounts and
cpa.
You know accounts, cpas andattorneys, but, um, if you do
take my advice, you'll be readyfor the uh, for the negotiation
(22:44):
and what's coming and that'simportant to get through the
deal.
Speaker 2 (22:51):
All right, very good, I think.
Unless there's anything else toadd, I think we'll leave it at
that.
You have anything else to?
Speaker 3 (22:55):
touch upon Russell.
Right now, there's still a lotof liquidity in the marketplace
until there isn't.
A lot of private equity groupswant your business.
They need to deploy capital bythe end of the year and there
are lots of private equitygroups that we're talking.
They want deals.
So get your business up to that$1.5 million, $2 million
(23:16):
magical number and the multiplesare still there.
Even though we're in anunstable, unpredictable economy,
the private equity world isstill going at a great neck
speed.
So there is still a very goodwindow to get very good
multiples until it's not.
Speaker 2 (23:38):
Absolutely so.
If you're listening to this outthere and maybe you're in that
twilight phase, you're gettingready, the thought crossed your
mind it might be time to sellthe business.
Reach out to Russell.
He has a wealth of knowledgeand it cannot hurt to have a
conversation and try to get allyour ducks in a row, even if
it's years out, just to starthaving the conversations earlier
.
You're kind of changing andshifting your mindset and
getting ready so that-.
Speaker 3 (23:58):
Three years out?
Yeah, gotta be three years outto start.
Speaker 2 (24:01):
It's very smooth.
Yeah, all right, if you foundthis content useful, you know
the drill.
Don't forget to like, subscribeall that fun stuff.
We appreciate you tuning in andwe will look forward to
catching you next time on thenext episode of the South
Florida M&A Advisors Podcast.
Everyone, take care, have agreat day.
Speaker 1 (24:19):
Thank you.
Thanks for listening to theSouth Florida M&A Advisors
Podcast.
For more information, visitsouthfloridamacom or contact
954-646-7651.
Welcome to the South Florida M&A Advisors Podcast,
your trusted M&A team.
Here's your host, Russell Cohen.
Speaker 2 (00:13):
You're deep in the deal, the numbers well, looking
pretty solid, until the qualityof earnings report drops.
Well, suddenly, things don'tlook quite as promised.
So what now?
Today we're talking about thedelicate yet high stakes move of
renegotiating price post QOEwhen to push back, how to keep
(00:35):
the deal alive and where buyersand sellers get it wrong.
Welcome everyone to the SouthFlorida M&A Advisors podcast,
jeremy Wolf, here joined by theman, the myth, the legend, your
host, russell Cohen.
Russell, always a pleasure tosee you, brother.
Hey, good morning, jeremy.
Speaker 3 (00:50):
Thanks for doing these podcasts with me.
It's a lot of fun and hopefullywe're educating one seller at a
time.
Speaker 2 (00:57):
Absolutely, man.
Education is key.
So with that in note, talk tothe listener out there that
maybe doesn't know what exactlyis a quality of earnings report
and why is it such a turningpoint in the deal process.
Speaker 3 (01:10):
Well, it's very simple.
You work your entire life tobuild your business.
You think your books areawesome, right, and sometimes
you know I mean you spend a lotof money on your books.
The private equity group isworking off gap accounting and,
and you're not, um.
So there definitely could bediscrepancies that you never
thought would be, and they'renot.
(01:30):
They're not expecting all youknow these smaller businesses
that are growing up to be nice,nice, really large businesses,
um, to be based on gapaccounting.
It's just just not there, um.
But you know the quality ofearnings.
You just you went through thatum, you know.
You bring the business tomarket, interview a whole bunch
(01:51):
of private equity groups.
You go into negotiations,multiple lois, you finally get
the deal.
You negotiate the deal.
The attorney is involved.
Your your your bill on theattorney, clock starts and so
everyone's spending money andyou get to the and you have this
incredible price.
You're really happy, everythingmakes sense, and then you go
(02:13):
through the quality of earnings,which is a colonoscopy on
steroids.
I always call it Crazy.
They're going to look ateverything.
They're going to ask you topull out documentation from 20
years ago.
It's incredible.
And the bigger the deal, thebigger the scope is basically so
(02:35):
from accounting, from legal,from benefits, from
environmental, from alldifferent types of insurance it
could be six differentcategories that go into your
business.
And then you just you spentlike 60 to 75 days providing all
this documentation.
You're getting burned out andthey come back with a quality of
(02:58):
earnings report and it may notmatch to what you thought it was
making.
So, yeah, so the quality ofearnings.
The private equity group hiresa very high powered accounting
firm and that's their job to gothrough everything in your
company because they haveexposure themselves Post-closing
(03:20):
.
You close on this deal andthey've missed it and they got
exposure.
So they are relentless to find,find out if your accounting is
accurate too.
So what you invest in in yourbusiness for your accounting, um
, you know, eventually willeither get you through or either
(03:41):
canceled or completelyrenegotiated.
So it's vital to have the rightplayers in place and to put the
money into the accounting tomake it work.
Speaker 2 (03:52):
Yeah, absolutely Now.
Is this commonplace?
I'd imagine it is.
Is this an issue that youencounter frequently in deals?
Speaker 3 (04:01):
Well, listen, if your business is growing and you're
on a hockey stick, growth you'renot concerned, You're, you know
, you know the business justexploded.
You'll never, you won't run intoa problem.
The private equity group wouldprobably clear, through the
diligence and and hoping thatyou're not going to renegotiate
and so, but you know, if you,even if you have a, a, a great
(04:25):
business, if the numbers are aretrending down meaning maybe if
you're in construction and thework has not kicked in and your,
your current year numbers arenot trailing 12 months or not
what you represented in thecalendar year, um, that will
cause a renegotiation.
So yeah, the private equitygroups definitely want to
(04:50):
renegotiate, but if you have abusiness that's so strong and
growing, they can't.
So that's where you want to be.
You want to be where they're ina position that they can't
negotiate with you, in aposition that they can't
negotiate with you.
Speaker 2 (05:05):
So you just mentioned a couple of kind of I guess red
flags You're talking about.
Obviously, if the business ison an uptrend, hockey stick
growth is not so much of anissue and obviously if it's
stagnating or even going down,it's going to bring some
concerns up for the buyer.
What are some other red flagsthat typically prompt the buyer
to reconsider the agreed uponprice?
Speaker 3 (05:25):
So I'm representing a plumbing company in South
Florida and the majority in newconstruction.
So in this particular scenario,their jobs, they miscalculated
their jobs, their jobs didn'tstart on time.
So you know, we're looking atthe first four months and the
revenues are down.
So the trailing 12 months arenot there, the first five months
(05:50):
are not there, so yeah.
So so when you enroll with me,you better keep your eye on the
prize and keep the businessrunning at full tilt, whatever
it takes, because during the QVthey're going to ask for a
trailing 12 months and if thenumbers are off, you're just
giving them reasons torenegotiate.
You know, a lot of timesbusiness owners might have 1099.
(06:12):
Let's say, in construction theymight have salespeople that are
1099.
The private equity group has toput everyone on workers comp,
w-2, put payroll taxes, so toconvert the employees over you
over, you wonder if you're goingto lose the employees, or
reference like that.
Yeah, I mean, there's so manyways that a business can go
(06:33):
sideways, but if you don't havethe proper insurances under
insured, that causes newexpenses.
If the owner owns the building,if they're not calculating a
fair market rent, and you'redealing with a 10,000 square
foot facility and you didn'tcalculate the proper rent, that
will dig into the numbers.
(06:54):
So that's why you hire aprofessional advisor, because if
you own the building, chancesare the private equity group is
not going to buy it, they'regoing to rent it.
So you got to put a regularrent in there.
So you know, I like, if I havean open-minded seller, I like to
bring in a fractional CFO to gothrough their books, just so
we're we kind of know what we'rewalking into.
(07:15):
I see the P&Ls, I see it veryclean.
But I'm not a CFO and I'm notan accounting expert.
But if I can get a fractionalCFO to dive into those
QuickBooks, we can really seewhere the hurdles will be in the
deal and how they're not tiedto Gap Accounting and what the
private equity group is going todo.
(07:36):
So you got to be willing tospend a little money up front to
kind of see where you'rerunning around the track.
And you got one hurdle here.
You know when they jump overthe hurdles.
There's so many hurdles to jumpover.
You just got to be flexible tospend a little money up front to
see where the challenges aregoing to be.
Speaker 2 (07:56):
Yeah, absolutely Best to lay it out on the table as
early as possible rather thandeal with issues on the back end
.
So this is obviously these canbe difficult conversations.
Right, you mentioned it.
You work your whole life.
You have this image in yourmind, as the business owner, of
what your business is, what it'sworth.
You've reviewed everything onyour end and it looks like it's
all right.
And then, all of a sudden, thequality of earnings turns up and
(08:19):
it's not what you expected.
Now, how do you typically like,how are you going to approach a
seller when these reports turnup issues?
What's the right tone, timing,how do you approach that
conversation?
Speaker 3 (08:30):
Well, I mean, it's a hard conversation.
Once again, once you get thatnumber, you think you're getting
that number, so it becomes whowants it more?
You know, in this scenariowhere I'm working on my current
deal, you know, we know thatthis private equity group this
is their first entry, so it'scalled a platform deal.
We discussed that in the pastwith my roofing company.
(08:52):
So this is their first entrywith my roofing company.
So this is their first entry.
So they got to buy this companyor they basically blew out 25
with no sales, because we'retrying to get this deal done in
a few months and there's notenough time to close the next
deal.
So this is this private equitygroup If they don't buy this
business, they show nothing forthe year of 25.
(09:13):
So, and then they got money todeploy.
They have to get it out.
They got investors.
So we're in a very goodposition because we could read.
We could read the scenario okay, and and we know they need to
buy.
But so what ends up happeninghere is you know, we have
discussion with the seller, weunderstand the need for them to
(09:34):
buy.
Seller really is, is in control, he understands the numbers are
not hitting the numbers becausethe jobs haven't started.
So a lot of time we try to keepthe top line and what?
The private equity group movemore money of the purchase price
into the earn out.
And so what will end uphappening?
(09:55):
If, let's say, the down paymentwas eight million, uh, and it's
a 14 million dollar deal, he,they moved the down payment down
to seven and they put anothermillion into the earn out.
And what we're doing is, inthis particular scenario, we
kept the integrity of the price,moved one million to an earn
out and the earn out begins uponclosing for the next trailing
(10:16):
12 months.
So there'll be like two earnout periods where they can get
their money.
And basically what you have hereis if the seller has the
pipeline which I know my sellerdoes and they can get the jobs
to start rolling in and workstarts billing, then they
believe they can get their earnout and not sacrifice.
(10:38):
So we kept, we were able tonegotiate and keep the price the
same, but we just they, theprivate equity needed to buy the
business, so they shifted somemoney to the earn out portion.
So you know, there's ways tosolve it If the private equity
needs to buy.
I, you know my seller does notneed to sell.
He would like to sell, but hecan wait another year, which is
(11:01):
not what I like, but it is whatit is.
That's kind of like do all thework and then get nothing and
maybe never see a dollar from it, but that's a good example of
solving it.
Speaker 2 (11:13):
Yeah, I mean the motivation is key, right, if
you're uh who wants it more.
Yeah, who wants it more?
That's right if you're notdesperate.
Speaker 3 (11:21):
You're gonna have more cards in your uh on the
table and a lot of times thesellers have this incredible
business.
They're making lots of moneyand, you know, unless it's
life-changing money, like thehundred million dollar deal, you
know something it's.
This particular deal is notlife-changing because there's
three partners and everything.
They have a runway left intheir career.
(11:43):
It's not like they're 69, theyneed to sell tomorrow.
They have time on the runwaythat they can keep working it
until they get the rightsituation for them.
That's's not good.
I mean, obviously, whatever theseller wants for me, you know,
what can I do?
I mean, yeah, I'm here tosatisfy the seller and if that's
what ends up happening, that'swhat ends up happening.
(12:03):
I go back to the drawing board,you know.
Speaker 2 (12:06):
So when should a buyer draw a line in the sand
and walk away, versus trying torestructure a deal Like there's
got to be a point where, yeah,it's time to just fold up shop
and move on.
Speaker 3 (12:19):
Well, in that particular scenario if the
seller drew a hard line orincreased the down payment, you
know then you could lose thedeal.
I think a lot of the deals are.
You know, if you're able to getpast that little negotiation
then you know you move into thecontract and that's where more
minefields are out there in thecontract.
(12:40):
So we got this contract fromthe private equity group and I
have like a three page responsefrom the seller and the attorney
on things they don't like andit's kind of like a 30,000
square foot view.
And if we can't get past this,you know the seller doesn't want
to, you know keep the tab goingfor the attorney bill.
(13:01):
So he's kind of like drawing aline in the sand because you
know there's a lot of parts onan LOI that never really get to
the seller Because it's so manynuances and it all shows up on
the contract.
So I try to educate the sellerway in advance because a lot of
(13:23):
times if it doesn't show up inthe LOI, we can put it in the
LOI, but if it doesn't, then Itry to make them aware of what's
coming in the contractbasically.
But I think it really comesdown to in the quality of
earning, who wants it more orwho wants it less, and in this
case, seller is okay, he'll moveon.
(13:43):
You know what I mean.
He'll move on if he has to.
Speaker 2 (13:46):
So many moving parts, russell.
That's why I've said thisvirtually every time we talk.
That's why it's so important tohave a team like yourself to
work with that's really superknowledgeable about this and
very creative, becauseoftentimes just the
communication alone can make orbreak a deal, and whether or not
you're able to come up with,like you mentioned, instead of
just reducing the price, comingup with workarounds and
(14:07):
solutions that can be effectivefor both parties involved is
really, really key.
Let's talk a little bit aboutprevention.
You mentioned bringing in afractional CEO.
Let's look a little bit earlieron in the process.
What can sellers do?
Talk to somebody out there thatmaybe is not even ready to sell
yet, but they know they'regoing to be selling in the
(14:27):
future, three, four, five yearsdown the road, maybe even 10
years down the road.
What are some of the thingsthat you can do early on in the
business to set the stage sothat, when it comes time to sell
, you can avoid these surpriseQOEs in the first place?
Speaker 3 (14:41):
Yeah, I mean it's obviously don't be the legend in
your business.
Try to pull yourself away fromthe business and have that
management team that is therefor you, that will be there for
the next owner Obviously theoriginal owner, obviously the
original owner is going to stayon for a couple of years.
But eventual exit, so kind ofprep one person in that team to
(15:04):
be the next, you know, keyperson.
So definitely have some keypeople.
Do not be the legend in yourown business.
Invest in accounting.
Make sure you got the right cfo, uh that really understands
quickbooks or understand theconstruction in this or any any
business that you're in.
Uh it, if you know you, you gota professional cpa, uh, your
(15:28):
cpa can probably tell you ifyour bookkeeper is A, b or C.
Make the investment in the A,because then you'll really be
backtracking and it's good youknow companies of this size.
You got to be looking at yourbalance sheet and your
financials.
You got to be looking at it allthe time.
So you can't run a company ofthat size without knowing what's
(15:51):
going on.
So if you're not, you'rerunning by the seat of your
pants, but you really have tomake the investment.
So you got a CFO.
Or if you're going to outsourceit, get an outsource accounting
company that's going to do theQuickBooks and really take
control of the books.
There's companies out there.
(16:11):
They act like a controller, butit's a lot less than 125 grand
to really run your books andeverything of that nature.
So accounting is very important.
Get your insurances in place.
Make you have all insurances.
Make sure you're offeringbenefits, because the private
equity groups have benefits.
Make sure you're in compliancewith what's going on, your I-9s,
(16:39):
all that stuff.
You know don't have anyillegals.
You know it's endless howpeople cut corners in business.
But as they get bigger andbigger they realize what they
were 10 years ago is they can'trun the business.
But the books and records arevital.
If you don't own the prop, ifyou don't own the property,
that's fine, get it.
(17:00):
Get a long-term lease, um, tryto see if you get off the
guarantee.
That's important.
And if you, if you do own theproperty, just understand you're
gonna you're gonna charge fairmarket rent and you cannot kill
the.
You don't want to kill the cashflow without land.
Just rent you.
You want fair market rent andthe private equity group is your
best tenant because you'regoing to have a long-term
(17:22):
residual effect and you'll beable to get market rent.
It's what they're expecting.
So many ways to deals to gosideways, sometimes out of your
control, unfortunately.
You have a lot of hands in thecookie jar.
You've got attorneys,accountants.
They're going to do all out ofyour control.
Unfortunately, you have a lotof hands in the cookie jar.
You got attorneys, accountants.
You know they're going to doall types of lien searches.
Make sure you don't have anyliens.
(17:43):
You know you're going todeliver the business debt free.
So make sure your debt is, youknow.
Just make sure there's.
You know the IRS is notbringing it down your back for
tax payments.
I mean all this comes out.
You know the irs was notbringing down your back for tax
payments.
I mean all this comes out.
You know lawsuits.
If lawsuits can kill deals too,there's so many ways that you
know you got to be upfront toyour advisor.
You got.
(18:03):
You know no one wants to findout later on that.
You know it's.
It's been horrible.
You know you got a lot of, alot of skeletons that we call.
So a lot of ways to skeletonsthat we call.
Speaker 2 (18:15):
So a lot of ways to make the deal go, a lot of dead
bodies buried, yeah yeah.
Speaker 3 (18:18):
And this past deal that we're working on, you know,
when we took the LOI, you knowthe private equity group came in
with a four times multiple ofthe EBITDA.
Okay, so they really didn't puta price on it, but we knew the
EBITDA was like three, five andso we knew we were getting a $14
million deal.
But you know, you know I'm notan expert in M&A and it was.
(18:43):
I kind of felt like it was asetup to get renegotiated,
because by the time you gothrough the quality of earnings,
sometimes you don't hit that3.5 because of the gap
accounting and how, how, whatthey see as the EBITDA.
And that sparked therenegotiation.
You know, next time or in thefuture, I'll never, I'll never
(19:05):
tell her seller to accept amultiple of EBITDA.
We need a price.
What is the price?
What are you offering?
Give me a number.
They never put a hard number onthe LOI.
So lesson learned, all right.
This particular plumber fell inlove with this private equity
group.
We had offers for 90% cash andthe seller wanted that earn out.
(19:29):
They wanted the rollover equity.
He had a son in the business sohe wanted the.
Speaker 2 (19:36):
They wanted the whole kit and caboodle, as they say.
Speaker 3 (19:39):
I brought him cash, 90%, 95% cash offers.
He went with an offer I neverthought he would take and it was
influenced by because the sonhas another 25-year runway and
he wanted to make sure that hewould have a piece of the action
going forward.
And that's fine.
But you know, I just want togive a lot of choices and you
(20:00):
know, these business owners areadults.
They'll make their owndecisions.
They'll pick what's right forthem, you know.
Speaker 2 (20:05):
You can only lead a horse to the water, you can't
make him drink, right.
Speaker 3 (20:08):
Yeah, I mean looking back.
You know, looking back.
You know, listen, we had a 13.5million cash.
But it's scary, by the time youunwind what you're getting down
, by the time you pay acommission, you pay capital
gains, there's multipleholdbacks in the deal, in the
deal, and by the time you get tothe, you look at the closing
statement, you're like, well,you know, maybe, maybe I made a
(20:35):
mistake by.
You know earn outs and rolloverequity, and that's what I'm
trying to avoid.
You know where a seller getsscared at the end.
You know.
Speaker 2 (20:41):
Yeah, okay, russell, before we wrap up here, I want
you to give one piece of advicefor buyers and one for sellers
that are entering into the QOEstage.
What would that be?
Speaker 3 (20:53):
Well, I mean, these buyers are professional buyers.
This is what they do all day.
They look at 700 companies ayear.
So I don't know what I couldtell them.
But obviously you know, theonly thing I can say to them is
that when I get a seller that'skind of focused on that price, I
will tell the buyer they're notmotivated.
(21:13):
This is it.
You're going to lose the dealif you start playing the
renegotiation game.
And I will tell them that I'mnot afraid to stand up to a
private equity group, and that'sgreat advice.
The private equity groups arecalling me.
They're asking me a lot ofquestions before we engage with
a seller and they're asking mewhere you think this will land.
(21:34):
And of course, we want themarketplace to give the final
number.
But we're selling businesses onplanet Earth, we're not selling
on Mars.
So we're going to hit amultiple.
That's fair and obviously everyindustry is different.
But but with the seller, youknow I I advise them it's going
(21:58):
to be a rollercoaster ride.
You're going to go through alot of emotions.
You just got to really rememberwhy you chose this particular
buyer and try to see it through,and I'll be there to kind of
give you, you know warnings ofthe deal and what is coming your
way.
You know.
Then you just got to.
You know I do this on aday-to-day basis.
(22:20):
A lot of people don't listen tome on my recommendations, but
it's really what's coming atthem.
So the quicker you know, thequicker you know, the quicker
you take my advice.
And and you know you don't youcan learn about what I'm saying
doesn't mean you have to do itbecause you have accounts and
cpa.
You know accounts, cpas andattorneys, but, um, if you do
take my advice, you'll be readyfor the uh, for the negotiation
(22:44):
and what's coming and that'simportant to get through the
deal.
Speaker 2 (22:51):
All right, very good, I think.
Unless there's anything else toadd, I think we'll leave it at
that.
You have anything else to?
Speaker 3 (22:55):
touch upon Russell.
Right now, there's still a lotof liquidity in the marketplace
until there isn't.
A lot of private equity groupswant your business.
They need to deploy capital bythe end of the year and there
are lots of private equitygroups that we're talking.
They want deals.
So get your business up to that$1.5 million, $2 million
(23:16):
magical number and the multiplesare still there.
Even though we're in anunstable, unpredictable economy,
the private equity world isstill going at a great neck
speed.
So there is still a very goodwindow to get very good
multiples until it's not.
Speaker 2 (23:38):
Absolutely so.
If you're listening to this outthere and maybe you're in that
twilight phase, you're gettingready, the thought crossed your
mind it might be time to sellthe business.
Reach out to Russell.
He has a wealth of knowledgeand it cannot hurt to have a
conversation and try to get allyour ducks in a row, even if
it's years out, just to starthaving the conversations earlier
.
You're kind of changing andshifting your mindset and
getting ready so that-.
Speaker 3 (23:58):
Three years out?
Yeah, gotta be three years outto start.
Speaker 2 (24:01):
It's very smooth.
Yeah, all right, if you foundthis content useful, you know
the drill.
Don't forget to like, subscribeall that fun stuff.
We appreciate you tuning in andwe will look forward to
catching you next time on thenext episode of the South
Florida M&A Advisors Podcast.
Everyone, take care, have agreat day.
Speaker 1 (24:19):
Thank you.
Thanks for listening to theSouth Florida M&A Advisors
Podcast.
For more information, visitsouthfloridamacom or contact
954-646-7651.
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