Intro: [00:00:00] Business owners likely will have only one shot to sell a business. Most don’t understand what drives value and how buyers look at a business. Until now. Welcome to the How to Sell a Business Podcast, where, every week, we talk to the subject matter experts, advisors, and those around the deal table about how to sell at maximum value. Every business will go to sell one day. It’s only a matter of when. We’re glad you’re here. The podcast starts now.

Ed Mysogland: [00:00:36] On today’s show, I got to interview, and it was my pleasure and it really was, because I got to interview Elliott Holland. I’ve been following him on Twitter for quite some time, and he always has some thoughtful comments about due diligence, and in particular quality of earnings. And you may not know that term, but it’s becoming more and more prevalent in the deal making lexicon.

Ed Mysogland: [00:01:04] And so, I think what you’ll find, and certainly I did, is just how important establishing quality of earnings is, whether you’re a buyer or seller or an institution, relying on financial data that’s being shared is imperative to the success of a deal. And Elliot – oh, my gosh – he shared so much and so many good stories about its application and the value that he brings to a transaction. So, I hope you enjoy my conversation with Elliott Holland of Guardian Due Diligence.

Ed Mysogland: [00:01:44] I’m your host, Ed Mysogland. I help business owners learn what creates value in their business by interviewing people and advisors and buyers and sellers who have been in the trenches of acquiring and selling businesses.

Ed Mysogland: [00:02:04] Today, you know, it’s going to be a special episode because one of the things that, in my world, we’re seeing more and more is a thing called QoE. And I have been following this guy along on Twitter for quite some time. His name is Elliott Holland. And you heard his bio before we got started. But he’s the guy for this work. And I have learned so much. And I’m certain you will, too. So, Elliott, welcome to the show.

Elliott Holland: [00:02:33] I’m glad to be here. It’s exciting information and I’m going to make it lively. We’re going to have some fun.

Ed Mysogland: [00:02:38] Right on. Well, like I said, I talked a little bit about your background before we got started, but is there anything you want to talk just at high level about Guardian?

Elliott Holland: [00:02:49] Yeah. We do lower middle market and main street deals, I believe, better than anyone, because I come from the buy side where I used to be making acquisitions in that part of the market. And what I mean is sort of under $30 million in purchase price or enterprise value. And so, it’s not just an accounting firm with CPAs used to audit who are doing these analyses, but it’s a deal guy who used to sit for, work with, execute transactions, now managing a team of accountants. Which means that the report is not just a piece of paper, but I can actually explain to the client what’s important, what’s not, how are they going to use it. And I think that increases the value of the work product substantially.

Ed Mysogland: [00:03:36] Well, one of the things that I was telling you before we got started is, a lot of people don’t know what QoE is, where it came from. And why now? Why are we seeing so much of it now? So, you might start from the beginning?

Elliott Holland: [00:03:53] Sure. So, in public deals, if I’m buying Coca-Cola, Pepsi, Home Depot, Ford, those companies get audited every single year by two top four accounting firms. So, when I go buy a share or if I want to buy the whole thing, there’s infinitely well-known financial information at all times on these companies.

Elliott Holland: [00:04:16] For small private companies, there is zero of that. There’s no audit requirement. I’m an owner. Other owners know this. Taxes are meant to be efficient and we make them very efficient. Financials are our best representation of what happened in the business.

Elliott Holland: [00:04:40] So, the quality of earnings is no more complicated than an audit-like tool to help owners, buyers, and advisors in these lower middle market deals understand the cash flow and the financials of a business, particularly ahead of a big transaction.

Elliott Holland: [00:04:59] So, why do they call it quality of earnings? The reason people call it quality of earnings is because businesses are valued off of a multiple of earnings. Earnings is no more complicated than profit. So, if you’re in business, depending on the size, you know, three to maybe ten or eleven times earnings is what you will fetch in a price.

Elliott Holland: [00:05:20] And so, for a buyer or a seller in a transaction, it’s very important to understand what the true earnings are, which means unraveling some of the good enough stuff that can be in financials of all owners to make it specific enough so a financially inclined buyer can very quickly get to the price of a business and pay owners the big checks that come with these deals.

Ed Mysogland: [00:05:49] So, I’m curious to know whether or not by doing this if risk changes.

Elliott Holland: [00:06:00] Tremendously.

Ed Mysogland: [00:06:02] Right. So, a multiple just reflects risk. And I’m curious to know – and we’ll talk about it down the road here – how the conclusion of your services changes the risk profile of the acquisition target.

Elliott Holland: [00:06:24] Sure. So, my average deal is typically a sort of sub $5 million enterprise value transaction. But we do many deals that are up to $30 or 40 million. For most of my buyers, they are first time buyers. So, I work primarily for buyers buying companies, and 75 percent are first time buyers. So, they come into the market saying, “I want to buy a business. I think it’s a wise investment. I’m not a financial person. I see a lot of risk around this financial area I don’t understand.”

Elliott Holland: [00:07:04] And even my buyers who are very financial, private equity buyers, experienced buyers, they know that the packet of information they saw from the business owner or from the broker is going to be in a very favorable state. So, let’s just say tremendous risk because it’s a $5 million transaction. It’s $5 million worth of risk.

Elliott Holland: [00:07:24] After you do a quality of earnings and you know that the earnings, and so therefore the multiple you’re going to put on the earnings are within a very, like, small tolerance, the $5 million risk goes down to, I think, this is plus or minus 5 percent or 10 percent. So, now, we’re talking a-quarter-million dollars or a-half-million dollars of risk. And I could get more complex than that, but it goes from the full 100 percent of enterprise value to 5 or 10 percent or less.

Elliott Holland: [00:07:54] And so, now, as a buyer or my client, I’m not worried about should I do the deal or not. It’s should I ratchet the thing up or down a-quarter-million dollars? Should I structure it differently plus or minus a-quarter-million dollars? And that just puts everybody to sleep.

Ed Mysogland: [00:08:09] Well, it’s not going up. If I’m with the buyer, it’s not going up.

Elliott Holland: [00:08:15] Well, that’s where your job is, Ed. I mean, I got to be honest, it all depends on the negotiation. I have seen it go both ways. But yeah, for my clients I would not mean negotiating for the up on that.

Ed Mysogland: [00:08:28] You know, one thing that comes to mind – and I know I’m going out of order of kind of my talking points – I’m curious to know whether or not does doing a quality of earnings report, if I’m a buyer and I’m using SBA financing, does this count as buyer’s equity toward the transaction? That’s a real interesting dynamic if I’m the buyer and I can apply this to my deal.

Elliott Holland: [00:09:00] So, my understanding is it doesn’t apply to equity. However, about half of my clients end up paying for the quality of earnings service through the transaction. So, they added on as an expense a cost in the transaction so that when the transaction goes for 5 million, they may tack on an extra couple of hundred grand for expenses and you can pay that fee through the deal.

Ed Mysogland: [00:09:27] Yeah. I get it.

Elliott Holland: [00:09:30] Well, here we go even further. So, to your point, Ed, and I didn’t see through it as quickly. Sorry, man.

Ed Mysogland: [00:09:37] It’s early.

Elliott Holland: [00:09:38] You’re wiser than me. Yeah, I need another cup of coffee.

Ed Mysogland: [00:09:41] I doubt it.

Elliott Holland: [00:09:41] If I’m a buyer and I pay for the quality of earnings, so I pay the 20 or 30 grand for a quality of earnings out of pocket. And then, I get reimbursed for that because I do that quite often and the transaction pays my provider. Then, essentially, that money that I would have paid out of pocket I can now put into the deal as equity. So, effectively you do move an out of pocket expense to equity. Yes.

Ed Mysogland: [00:10:07] Well, I’m just curious because if I’m a buyer and if I can apply this, you know, scrutinizing what I’m buying to my equity as opposed to tacking it on, on the backend, I would have to imagine the SBA and the powers that be would find that a favorable strategy by most buyers.

Elliott Holland: [00:10:30] And here’s what happens that people don’t recognize. So, over half the deals – I’m just going to say your, Ed, as if you’re the buyer – your SBA lender is calling me early and saying, “What’s up with this? What did this mean? Why is this represented here in the financials?” So, what happens when there’s not a quality of earnings in your deal?

Elliott Holland: [00:10:58] What it means is your bankers are making up negative answers to all these questions and docking either the price of your deal, the interest rate, the speed of your deal, how quickly it can get closed, or whether they want to do your deal at all. And so, I think there’s the equity piece of it, but it’s also the SBA does not always require a quality of earnings. Sometimes they do. But even when they don’t, the reality is the SBA can ingest a quality of earnings so much easier than the typical stack of financials from a private business.

Ed Mysogland: [00:11:35] So, do you have any kind of exposure for doing this kind of work? I mean, I’ve got to imagine, you know, just your normal errors and omissions and negligence kind of thing, right?

Elliott Holland: [00:11:47] Yeah. I think there’s two or three types of exposure. I think there’s the absolute legal exposure. And that is, in my engagement letter, I clearly state that there’s no way in 30 days I’m going to get to the bottom of 30 years of financials for 0.1 or 1 percent of the transaction value. I will do my best given what the clients are willing to pay for. So, that’s kind of the strict legal liability.

Elliott Holland: [00:12:17] Then, there’s like the document liability. So, this document travels, your lender sees it, your equity investors see it. And the first two pages kind of say, “Hey, look. We did these procedures, but we didn’t do these procedures. So, you should understand that had we done more procedures, we would have gotten a more accurate answer.”

Elliott Holland: [00:12:36] Then, I think there’s reputational risk, which is, if you start doing poor work and you’re in the market as often as I am, people start questioning your work, and then the value of the work diminishes. So, there’s liability.

Elliott Holland: [00:12:53] And it’s also, for me, I’m an entrepreneur, I’ve been on the buy side, now I’m an advisor. All of my clients are putting up over $1,000,000 based on my advice, I take all of that seriously.

Ed Mysogland: [00:13:05] A hundred percent. And I’m with you. And my point from the exposure standpoint was procedurally. I mean, as an appraiser, I conform to USPAP, the Uniform Standards of Professional Appraisal Practice. I got to adhere to this is how I build a report or how I can deviate. So, I was just curious to know the process and where does the level of assurance stop for someone like you? You know what I mean?

Elliott Holland: [00:13:44] Sure. Yeah. No, I do. That’s a great question. Here’s what I would say, and I’ve been an expert witness on cases where fraud has been claimed in transactions against other QoE providers and testified to the help that a quality of earnings provides, but that is not a silver bullet solution. The assurance level is a lot of times tied to how good your provider is and how many procedures you have done, which typically also implies a cost.

Elliott Holland: [00:14:24] So, what I would say after doing this for almost 15 years, you know, for most providers, if you get a good referral, you’re going to get at least like a C valuable piece of analysis. If you are sort of financially inclined or you get someone who has really good ratings, you’re probably at a B level. I think to get to an A level, you really just need to be sure the procedures that you’re getting done match the risk in the business that you’re buying.

Elliott Holland: [00:14:57] So, like, a business with a lot of inventory, you need to make sure that your provider is good with inventory. For a business that has, you know, upfront payments for quarterly services, you need to make sure that that provider understands prepays and unearned revenue. And when you get to that level – and here’s where I love entrepreneurship and acquisition because it doesn’t have to be audit accuracy – you just need to know is the business earning plus or minus 5 percent relative to what you thought, given all the risks you know as a buyer and the multiple you apply to the business.

Elliott Holland: [00:15:37] So, within that sort of 5 percent – and I’m using five, maybe it’s three or seven – I think any good provider can get to that level of insurance minus, what I would say, 1 percent that are out there, that if someone’s been spending 25 years to be fraudulent in their financials, you have to be wary that some things are just really hard to catch.

Ed Mysogland: [00:16:01] A hundred percent. Yeah. So, what is the process? I mean, I’m certain some people had reviews and audits, but what generally is the process for a quality of earnings report?

Elliott Holland: [00:16:17] Sure. So, we’ll send out a due diligence list that has information about the financials. It’ll have bank statements, we’ll ask for those, financials, taxes, payroll statements, and other pieces of data inventory lists, org charts. And what we do in our process is sort of triangulate data through different sources of the same information.

Elliott Holland: [00:16:41] So, what does that mean, Elliot? So, on a recent deal, ecommerce business in the Midwest. So, their revenue is coming through their financial statements. You can see revenue. It’s the deposits in their bank statement. Not a lot of transfers. And it’s represented on their taxes, net of tax stuff that you can do from that perspective. It’s also in their operating system from sales aggregated across all their customers. So, now I’ve got four different areas to see revenue.

Elliott Holland: [00:17:12] And what I do is, you know, there’s typically always two to four areas where I can get any particular number of importance. And we’re triangulating the data to see if all the different pieces of information are saying the same thing. And when they don’t or when they’re a little off, we start asking questions to dig into more data to validate. When they all say the same thing, we feel more confident that they’re accurate.

Ed Mysogland: [00:17:33] I got it. So, I’m assuming everybody that you work with tends to use virtual data rooms.

Elliott Holland: [00:17:45] Oh, yeah.

Ed Mysogland: [00:17:45] I can only fathom, you know, here I’m going to start emailing you all of that.

Elliott Holland: [00:17:51] Although, I have to tell a funny story. When I started years ago on the buy side, I had a partner who was in his upper 50s and the buyers can be, you know, at their retirement age. And the guy was like, “All right. Well, what’s your address?” “Like, what?” “Oh, you want me to send all this data, what’s your address so I can send it?” And I’m on the phone, I’m like, “Flash drive.” And my partner is like, “No, Elliot. He wants to send all the financial through the mail so you can scan them.” So, every once in a while, you get an old school situation. Ninety-nine percent of the time virtual data room.

Ed Mysogland: [00:18:29] So, I know when we have been faced with quality of earnings or someone has requested it, everybody’s like, “Well, I’ve got a CPA.” So, tell me the difference. You know, how do you respond to that? Because you are a CPA, right?

Elliott Holland: [00:18:55] I’m not.

Ed Mysogland: [00:18:56] No, your team is.

Elliott Holland: [00:18:57] I have 20 plus that work for me. I’m a Harvard MBA, so people tend to give me a pass. I know a little bit about it.

Ed Mysogland: [00:19:03] Yeah. You know your way around the books.

Elliott Holland: [00:19:05] So, I tend to use an example in their industry. So, I’ll say, “You know, divorce attorneys could do your contracts in your business, but do you have a divorce attorney doing your contracts? And estate planning folks could draw up your real estate trust, but is that who you have do it? I mean, a runner in the 100 meters could also run a marathon, would you bet on 100 meter sprinters to do your marathon? Now, would the person know general how to run a race? Sure.”

Elliott Holland: [00:19:42] But what ends up happening is, and this is my general point of view on this, there’s always the cost basis bottoms up. Like, why would I spend any incremental dollar on anything, which is the entrepreneur’s first disposition. But I push them on bottoms down. So, this is a $20 million paycheck and they’re squabbling over 20,000 bucks, 0.1 percent.

Ed Mysogland: [00:20:04] But they do. And you sit there and you’re like, “How in the world?” And, again, understanding that the business owner likely has pinched and saved and scrimped and made those types of decisions. And it doesn’t matter how many zeros it is, it’s just the prospect I’m spending money.

Elliott Holland: [00:20:32] Ed, I think when I started Guardian, I used to lay out the logical based argument. And I started realizing, like, who am I talking to? These are people who have, in a rugged way, made their own decisions their whole career. And then, what I started doing is making one or two statements.

Elliott Holland: [00:20:51] So, say, a person is doing HVAC. I’m like, “Oh. Well, I can just get my plumber handyman to do my AC system in my new house.” And I tend to just stop now. And, typically, the person will argue why it’s too expensive, rah, rah, rah. And then, a huge portion will come back a couple of days later when they have had a chance to think about it and realize the error in their ways. And that was one random example.

Elliott Holland: [00:21:20] But people who are experts in their craft, it’s like, “Hey. You’ve been doing professional excavating services for 30 years. How about I go get a guy that’s been out for two years to do the same job? What would you say to me about that?”

Ed Mysogland: [00:21:37] A hundred percent. And I do something similar. I sit there and, like, I’ve never gone wrong going first rate no matter what I’ve bought. And it’s the same thing here, but the risk is so much greater. And it’s astounding that you would even consider going on the cheap when there’s so much at stake.

Elliott Holland: [00:22:01] Ed, I can’t tell you how many times this year somebody went with a cheaper QoE provider or their own financial analysis or somebody’s best friend’s cousin CPA or accountant, wink, wink, with no designation. And then, 30 days before they closed, they’re ringing me, “Hey, man. Can you fix all this crap that I screwed up?” And it’s always like, “Hey, I just got this one question about working capital.” And I get on the phone with them, it’s like, “No. Your whole analysis is off, buddy. And you’re supposed to close in 30 days.”

Elliott Holland: [00:22:36] And I think some folks believe that, “Hey, I’ll go as far as I can with X resource, and then if I get stuck, I can always – ” no. Ed, you make sure these deals move at a healthy pace. And when the pace starts slowing down for any reason in these deals, everybody starts getting nervous. But they’re not getting nervous about $20,000. They’re getting nervous about my $20 million check that I don’t think buyer X has the money or – what we call – the heart to bring to the table. And now you’ve created $20 million worth of risk buyer by skimping on $20,000.

Elliott Holland: [00:23:16] The other reality is a third of my clients, Ed, are probably smarter than me in this stuff, investment bankers, private equity folks, industry experts. But in a 60 to 90 day process to close, they need to go understand the seller, get to know the seller, get to know the operations, get to know the industry better, find a house in this new area, convince their family, wife, and kids to move. And their highest and best use isn’t sitting in a bunch of financials doing accounting work.

Ed Mysogland: [00:23:46] Yeah. Well, the funny thing is that you sit there and you’re like, “How is it that you do not see this? If you can minimize risk, why wouldn’t you do that?”

Elliott Holland: [00:24:01] I think I have a hypothesis.

Ed Mysogland: [00:24:04] Hit it.

Elliott Holland: [00:24:05] Because people always call different folks in this business unsophisticated. Ed, you’ve heard it. Brokers, sellers, buyers, everybody is stupid. No. I think everybody goes by their incentives even when they’re skewed. I think a lot of owners have minimized their payment to accountants and lawyers for 30 years. And they have not paid a cent more than what they absolutely have had to in these areas where an extra 1,000 bucks or 3,000 bucks in any given year could have minimized $10,000 or 100,000 worth of risk.

Elliott Holland: [00:24:45] And so, they’ve got no way with those $1,000 lack of investments and maybe I have $3,000 of risk or 10,000. Now, it’s a $20 million deal and nobody calibrated that the new risk on the table was 20 million. The maximum risk most business owners have is the sum of their profit for that year. Now, it’s not the sum of the profit. It’s four, six, eight times that. And I think people just don’t recalibrate.

Ed Mysogland: [00:25:11] Oh, so far that might be the best thing that’s come out of your mouth. That’s a good one, because you’re right. I mean, most business owners look at this kind of work – not this kind of work – their CPA and attorney, it’s a toll booth. I got to pay to get to the other side. Now, it’s, no, we’re sizing up risk. This is quantifying and justifying the risk associated with your business and the earnings, obviously, that go along with it.

Elliott Holland: [00:25:42] Or something like this, how much would you pay? And people don’t do this, but if there was a service to really get, like, a ten year go forward read on a potential business partner or some other thing of that huge magnitude – I won’t talk about other partnerships with personal nature – but if you could actually really do this level of work, most of those things don’t have anyone or don’t have data at the level that you do in this.

Elliott Holland: [00:26:09] I think the other thing that gets people caught up, Ed, is they have lost faith in their accountant, but they’re still paying them. And they may not tell you that. They’re definitely not going to tell my client, the buyer, that. Their accountant may not even know that. But a huge portion of my friends that owned businesses call me because they’re trying to figure out whether a quality of earnings will help straighten out their accounting stacks.

Elliott Holland: [00:26:36] So, they’re paying a couple of grand, 10 grand, 20 grand a year for the stack of accountants that they still don’t trust. And so, now you’re asking the owner to pay another sum of money to a group of people who have messed up their trust over years. And I think that may be a secondary reason that we don’t pry into enough around why folks try to skimp on this, what I would almost call, mission critical service.

Ed Mysogland: [00:27:02] And the funny thing is, I guess the way I was looking at it is I just don’t understand that – for example, a couple of weeks ago, my kid, she was having abdominal pain. And I didn’t ask how much it was costing. I wanted to make sure whatever was wrong with her was going to get fixed.

Elliott Holland: [00:27:31] You had a better example than me. Do you go to a head doctor about your abdomen? Do you go to a foot doctor about your heart?

Ed Mysogland: [00:27:39] Right. Well, I don’t know if it was better, but I was thinking about from a cost standpoint – oh, my gosh – it mattered nothing. All I wanted to do was make sure that whatever happened to her, she was okay. And the same thing from a deal standpoint that if this is the deal you want, you should be willing to pay in order to ensure that you’re getting the deal that you think you’re getting.

Elliott Holland: [00:28:06] Well, let me tell you a couple of examples, because I think people love stories. So, I had a client about a year ago. This was a sell side quality of earnings. So, this is where I was working for a person who was selling their company and they had had a friend who was in private equity who said, “Dude, you do not want to be fighting the equivalent of me without your numbers buttoned up. Go get a guy to do quality of earnings. I know this guy Elliot of Guardian.”

Elliott Holland: [00:28:30] So, we’re doing his work and he was gunning for a certain EBITDA mark because somebody had given him above 10X multiple. I mean, he was going to get paid, you know, $30 million plus for this business. And he was kind of meandering through with a slow bookkeeper, and limited access, and didn’t want to make himself available.

Elliott Holland: [00:28:53] And then, we got closer to the end of the year and instead of this $3 million EBITDA mark he thought he was going to hit, it was almost questions of whether the efficacy of his whole accounting stack was even reliable. So, now he’s like, “Well, I just need to get a number so I can get these private equity folks to give me a valuation.” And then, he has a conversation with one of the private equity buyers and he’s like, “Look, Elliot. If I can just get this to $2.1 million of EBITDA, they’ll still pay me the above 10X multiple and I can get this thing done in 30 days.”

Elliott Holland: [00:29:24] In that case, had that person just been real about their true situation, gotten their numbers in order quickly and been more available, they would have gotten a bigger paycheck sooner.

Elliott Holland: [00:29:36] Let me tell you another example. So, on the buyer side representing a buying client, and a good advisor on the sell side would never do this. It was a Canadian company operating probably 100 miles north of the U.S. Canadian border. But they had financials and, of course, Canadian dollars and they had reported to the Canadian equivalent of IRS.

Elliott Holland: [00:30:02] Well, this broker thought it was a wise idea to instead of asked a Canadian accountant to do a U.S. dollar set of books, to ask a brand new friendly to the business brokerage U.S.- based accounting firm to completely redo the books, not using the old books as a basis, but going back to bank statements. What they said was invoices and the rest. So, initially, we’re thinking, “Oh, it’s just two versions of the same truth.” No. These financials were completely different. And oh, by the way, the U.S.-based firm hired by the brokerage had left out 35 percent of the expenses, such that EBITDA was affected by a bigger percentage than that.

Elliott Holland: [00:30:47] And so, when we’re looking at them apples to apples, just Canadian to U.S. dollars, they’re 40 percent off. Now, here’s the issue with that. Now, do I believe the Canadian version, the U.S. dollar version, or something else? Now, you have seller, broker, Canadian account, U.S. account on the same phone call, and none of them can say, “Hey, the other person is lying.”

Elliott Holland: [00:31:14] And so, for my buyer, what they earned by paying for their quality of earnings was they walked away from a $5 million catastrophe. I mean, those folks would have been able to tell him cash basis accounting, accrual basis accounting, Canadians, the U.S. dollar, Forex adjustments, EBITDA adjustments. They could have ran circles around my client with enough excuses than any person that was reasonably going through the process would have given up. But the quality of earnings said, “Hey, there’s no way this set of financials and this one can be true at the same time. Stop.”

Elliott Holland: [00:31:54] And so, that’s what people are actually buying. They’re buying how do I get my behind out of $5 million, $10 million of risk. Or as a seller, how do I keep my $5 million or $20 million check coming without a bunch of shenanigans.

Ed Mysogland: [00:32:12] Yeah. Oh, man. Did you ever follow it? Did it ever close? Not necessarily with your client, but did it ever close ever?

Elliott Holland: [00:32:21] I’m almost scared to ask because I’d have to call the brokerage.

Ed Mysogland: [00:32:25] I get it. I get it.

Elliott Holland: [00:32:26] And my client didn’t buy it, I’d say that.

Ed Mysogland: [00:32:29] Well, so I’ve got four CPAs on staff here. And the funny thing is they all run around and say the CPA is the most trusted advisor to the business owner, and there’s statistics about that. But at the same time I think an accountant has a lane. And I hate to dump my accountants in with generalists, but I think there’s specialists in this kind of accounting.

Elliott Holland: [00:33:13] Ed, you’re so right.

Ed Mysogland: [00:33:15] I’m getting ready to jam it to them. This isn’t for you. This is for me. Because I’m going to walk down and I’m going to say you may be the trusted advisor for QuickBooks, but – I’m just kidding.

Elliott Holland: [00:33:27] That’s it. For QuickBooks, for taxes, for valuation opinions, for audits, absolutely. But accountants and lawyers have terrible abilities to process any non-zero risk.

Elliott Holland: [00:33:44] At the top of the call, I said I’m a deal guy entrepreneur who manages accountants. So, what that says is I manage a group of people who cannot do well with any non-zero risk. And I’m a person who I’m used to paying, you know, $2 and dealing with a dollar or two of risk.

Elliott Holland: [00:34:04] And so, I think when they come to this trusted advisor piece, I think what accountants, lawyers, and other conservative compliance based advisors miss, is, a lot of business is taking risks and there’s not really an advisor that can help people understand risk.

Ed Mysogland: [00:34:21] Yeah. And as we’ve been in our sell side work – and I’m the Grim Reaper of business valuation – we sit down and we talk about this is the mechanics of how this deal is going to work just on a high level. You’ve got to warm up to the fact that these are the risk areas and someone is going to scrutinize them and suppress your value. That’s just the way the program works. So, you have a choice. You can go back and fix it and reduce that risk and then come back to the market. Or, you can go to the market and understand how the buyer is going to see it. And, to me, that is at least on the frontend.

Ed Mysogland: [00:35:07] And where I’m heading with this is, if I’m a sell side person – and we started to talk about this earlier – if I can minimize the backend re-trade after your work is done, why wouldn’t I do that? I mean, your fees, I’m certain they get scoped depending on the size and complexity. But generally speaking, I have to assume that whatever I’m going to pay is going to be less than the consequence of the re-trade on the backend, I have to imagine.

Elliott Holland: [00:35:43] Oh, by orders of magnitude. So, very quickly – and I’m sure you tell people this all the time – let me walk through a typical process of selling to private equity. They come in, they give valuations, and they know they’re competing with other firms so they’re going to give the most favorable valuation that they think that they can actually stand up and not laugh about to get the deal locked up. And they’re going to say subject to due diligence.

Elliott Holland: [00:36:10] They’re going to know that most often their team of due diligence providers, both on staff and folks like me that work for them, are going to be way more sophisticated, have way more time, are going to be better at finding nuanced things and talking about the risk of them than the seller’s representation will be typically only because of manpower. So then, they’re going to start not just finding real things, which I think any of us would say, “Hey, we should find the real stuff.”

Elliott Holland: [00:36:36] But what private equity will often do is to start nickel and diming about stuff and doing things like, “Well, when I thought the top customer was 15 percent, I was okay. But now, they’re 17-1/2 and I’m having trepidations about this. And I need to go back to my committee and see if we can still -” and it’s bull crap. But what it does is it delays the deal two weeks and you’re talking about 2.5 percent of your revenue as if it was, you know, God coming to Earth and then putting in some stones and breaking them apart.

Elliott Holland: [00:37:11] And then, also, what’s happening is, it can be a situation where a deal closes or doesn’t close, not because of real risk on a real deal, but because somebody was allowed to talk themselves out of a deal over some funky nuance thing that didn’t really matter.

Elliott Holland: [00:37:27] Let me talk about a different process for seller gets quality of earnings. It’s almost like airing your dirty laundry before the thing starts. So, it’s like, “Hey, I’m 30 pounds overweight. I’m probably going to have gout in my foot in a couple of weeks. I snore when I sleep. And here’s the stuff that you need to know.”

Ed Mysogland: [00:37:50] “Don’t you love me? You still got to love me. That’s who I am.”

Elliott Holland: [00:37:54] That’s who I am. But I make good money. I’m consistent. I go to church every Sunday. I take care of my kids. I’m funny. Look at all these great people that spoken about me. So, here’s the packet of real information. Do you want to deal with me or not?

Elliott Holland: [00:38:10] And in the business context, what that does for the seller is, here’s the money I’ve spent to give you a clear look at my business. Here’s the revenue by customer. Here’s how our income statement should look, how the balance sheet should look. So, now, when that same private equity buyer comes and says, “Oh, well. I thought it was 15 percent and it really was 17-1/2.” We say, “Oh, no. We said we were doing this deal on an accrual basis. The accrual basis is 15 percent. If you’re telling me a 17.5 on a cash basis, then we’re blowing up the whole deal because you’re going against your contract. Is that what you’re telling me, Mr. Private Equity Guy?”

Elliott Holland: [00:38:48] And so, we are $20,000 to 30,000 without having to do any incremental work on a Tuesday. And when you got some crazy call, you push them right back to the page in the analysis like, “No. You knew this going in.” And it makes it so much easier for, like, my sell side QoE clients, their process can go so quick because they already have the playbook.

Ed Mysogland: [00:39:10] Well, that was one of my questions, is, how much faster does it go when you can have this as an amendment or an addendum to your SIM and you just hand it? I mean, I got to imagine it goes substantially.

Elliott Holland: [00:39:24] Tremendously quicker. And it’s months. Here’s why. I had two deals in this past year where I get called, “Hey, I’m going to be selling my business later this year. I think I want to, but I’m not sure, blah, blah, blah. I’m going to try to go it alone. I already got a buyer that sent me a letter of intent. We’ve signed up. We’re good to go. We’re good to go.”

Elliott Holland: [00:39:47] So, I’ve marked the calendar because it always comes back. And it’s like, “Okay. So, how long is your deal, 60 days? Cool. Got it.” So, day 50, I’m like, “Hey, how’s the deal going?” “Oh. Well, they found this all. Oh. Well, they found that. Their quality of earnings said this. They said my income statement is totally that.” And then, they’re like, “Hey, man. I should have got you in. Can you come in here now and do something?”

Elliott Holland: [00:40:10] And the reality is, some of those times I am able to get in there and help kind of reconcile sort of buy side QoE to sell side QoE and get all the stuff going. But here’s what the delay is, so out of the 60 days, 30 days into the 60, somebody said, “I smell something I don’t like.” So, now they stop their 60 day process at 30 days. And until you justify that what they thought going into the deal is actually true, that deal doesn’t pick back up. So, that may be two months, four months.

Elliott Holland: [00:40:43] And oh, by the way, here’s how deal psychology works. If I think I’m buying A grade property on Park Avenue and I find out that there’s one leak in one bathroom on the third floor, now I want to check everything as a buyer. So, you’ve given me carte blanche. And that’s why those deals slow. It can be two, three, four months, six months quicker when you do the work upfront.

Ed Mysogland: [00:41:09] So, if I’m a seller, I mean, how long does a QoE – what’s the shelf life?

Elliott Holland: [00:41:15] So, that’s a great question. Probably a year, but let me tell you why. It’ll take us 30 days to do. Let’s say I had a full data room today. And that just means access to your QuickBooks, taxes, bank statements, which somebody should be able to get in 24 hours. Let’s say I do the quality of earnings. That’s a 30 day process, one month. What the quality of earnings does is it goes back three years.

Elliott Holland: [00:41:45] So, as a buyer, let’s say I get a quality of earnings through November of 2022. A couple of those I just finished. It can be June of 2023. What I know is through November of 2022, the numbers were good. And all I need to do now is check December through June. Let’s say, I go all the way to next October. What I know is through November 2022, the numbers are good. I know all the adjustments. I know all the ways, the way a buyer according to GAAP would look at the business is different than how they recorded in their QuickBooks. So, it can sit on shelves for a year or more.

Elliott Holland: [00:42:27] When I was a buyer I would see – and you’ve seen this all the time – there’s a data packet that was done in November of 2022. They had projections for the full year, 2022. And it’s November of 2023 and you’re still looking at the same data. So, that gives you a year of coverage for that one fee. And, also, we do roll forwards for cost. So, I’ve got a couple of guys where each month we do a roll for and we just charge them time and materials.

Ed Mysogland: [00:42:53] I get you. Well, and that’s what I was saying, so I’m looking at, say, it’s from engagement to close, let’s say, average six to nine months. And at the beginning of the process, how does somebody do this and have the assurance that it’s still good when I get to the backend of this. I get it.

Ed Mysogland: [00:43:17] Well, I want to be sensitive to your time, so just tell me, I guess – I don’t want to say the elevator pitch, but tell me about Guardian, all the stuff that you’re doing, where you’re doing it, how someone can work with you. All the things that I should have asked you before.

Elliott Holland: [00:43:38] No. So, we made this business to be the most transparent, easy to work with firm out there because none of our clients have time to play around. Our sell side clients are making a bunch of money. Our buy side clients have a bunch of money to invest, so they need to be able to deal with us quickly.

Elliott Holland: [00:43:54] So, you can go to guardianduediligence.com or type in Google, Elliott Holland or Guardian Due Diligence, or anything close. I think I’ve done enough work on Google to get me up there first. And on our website, you can see all about me. You can download our sample reports. You can not only see what services we do, but we have our prices transparently stated on our site, so there’s no guesswork there. You can set up a call with me or you can tell me to call you within 24 hours, all on my website.

Elliott Holland: [00:44:25] In terms of how we function and different, I mentioned that we bring sort of a deal lens to quality of earnings and accounting products. So, what that means is whether you’re a sell side owner or a buy side investor, I’ll be speaking to you because I still talk to each of my clients as a risk understanding individual talking to you about an accounting service that I help you make a business decision.

Elliott Holland: [00:44:49] And then, I think particularly for your audience, Ed, we wanted to do something special. So, we have a 25 percent discount for anybody who’s listening to this podcast or you end up referring to us. And I think what that is to do is just, you know, it’s one thing to say, “Hey, it’s worth your investment to do my service.” What I’m saying is I’m willing to invest 25 percent if you’re willing to put up the other 75 percent, and let’s protect your $10 million and do the right thing.

Ed Mysogland: [00:45:17] That’s sweet of you. And I really do appreciate it. And I’m sure the audience does too. And I jumped ahead and I shouldn’t have and I’m not going to make you say it all over again. But one of the things, we started talking about the SBA, SOPs, and the business valuations. And having done them for years, you know, way back early in the career, I mean, does it pay for itself? Does it pay a salary? CapEx? And do I get the debt coverage ratio? To me, I read a statistic, like, 97 percent of the business valuations that are done actually make it.

Elliott Holland: [00:46:10] Right. Eureka.

Ed Mysogland: [00:46:11] Yeah. Imagine that.

Elliott Holland: [00:46:14] Which is way smaller than the percentage of deals that don’t do well. So, what happened?

Ed Mysogland: [00:46:17] Right. And that’s where I’m heading with this, I mean, do you ever foresee that this becomes kind of the standard of deal making? You know what I mean?

Elliott Holland: [00:46:30] I think it will. I think what’s happening, Ed, is it used to be the buyers and the sellers were all millionaires. And so, people didn’t feel so bad about either one of them losing money, particularly the buyers. And the banks, if you lend 100 bucks, you’re only going to do it if somebody on the equity side is putting up, you know, 50 bucks. So, typically, the banks could look at a private equity firm, a very well capitalized, known capitalized entity to say they’re backstopping.

Elliott Holland: [00:47:05] In 2022, we’re getting a lot of independent sponsors, independent business buyers, search funders, and the rest that are coming into the market. And so, these lenders, they may still get, you know, 20 percent equity, but it’s from a single person who can declare bankruptcy, who can be hard to collect from, who you don’t know how well capitalized they are.

Elliott Holland: [00:47:27] So, I think what’s going to happen is SBA and other lenders over time are going to say, “Hey, look. We used to be able to not worry about QoEs for deals under 20 million, 30 million. But now, why would we not put ourselves behind the eight ball to not require these things.” And oh, by the way, they take too much time for a bank to do on every deal they look at because the bank only does some portion of those deals. Let somebody else manage their take on that risk so that when we get at the bank, it’s a clean set of financials, it’s cleanly knowing what’s up. And we can make better credit decisions as a lender and less risk.

Elliott Holland: [00:48:09] And I think the other piece that’s come in, Ed, we’re getting so much better data as online systems and tax systems get aggregated and people are AI and everything. How can you go by these old school standards and not take into account some of this data that’s available?

Ed Mysogland: [00:48:27] A hundred percent Well, and the point of the question was, I mean, at least two times a year, we got a commitment letter from a bank that said, “Oh, by the way, you’re going to supply us a QoE.” And we hadn’t seen that before and we’ve been doing it a long time.

Elliott Holland: [00:48:44] Well, I’ll tell you this, on Twitter you’ve seen it. I wasn’t a fan of Twitter. I thought it was all fake. And some buddies in the small and medium business world said, “Hey, there’s a whole community here you got to check out.” So, I got on Twitter a little under a year ago. And when I first got on, the general consensus was you don’t need to do QoEs on deals under 2 million bucks, 5 million bucks, and purchase price. And that’s what everybody was saying.

Elliott Holland: [00:49:11] And I kept asking people, “So, who out here can lose a million bucks?” Who out here can lose a million bucks? Can you lose a million bucks, particularly when it’s personally guaranteed, personally you got your family’s house, your kid. You can’t even take your kid to the abdomen doctor because you got to pay the bank. And now the top lenders have also said you need to get a QoE. So, they’ve said it in terms of their favorable and that’s what they desire.

Elliott Holland: [00:49:37] I think soon it’s going to get written into standards because here’s the other thing, Ed, and you know this. A novice will call a banker a financial expert. But a banker that most people interact with is a salesperson who works at a bank. So, they’re not super financially inclined like my CPAs are. And so, I think as that information starts getting out and people start realizing that some of the promises bankers are making are only to the depth of their financial understanding, they’ll start realizing, I need to protect myself.

Ed Mysogland: [00:50:10] Well, and at the same time, I mean, as a taxpayer, if you’re lending my taxpayer money for somebody to buy a business, I don’t want you to default. I mean, as a taxpayer, am I really grateful for the cost of capital and thumbs up all the way? You know, as a deal maker, thumbs up. As a taxpayer, it’s like, oh, man. I really would like some assurances.

Elliott Holland: [00:50:38] I don’t want people taking risks with my money. And, you know, right now the SBA is only requiring a 10 percent equity. So, 90 percent debt on all these deals. And the government is back in guaranteeing 90 percent of that. You’re absolutely right, I don’t want to do that on speculative transactions. I want to do that on homeruns on sure things.

Ed Mysogland: [00:50:59] All day long. All right. Well, as I finish this thing up, I always ask everybody one final question. So, what is the one piece of advice you could give listeners that would have the most immediate impact on their business?

Elliott Holland: [00:51:13] You know, so I got to say something that’s related to my business and not general. But I would say, don’t be cheap on a $10 million transaction. Just go home and think about all the times that you were cheap on a transaction way bigger than the other ones you typically do and how did that work out. Not well. Buyer, seller, anyone. When you’re doing stuff of this magnitude, make sure you get it right.

Ed Mysogland: [00:51:43] So, you shared a little bit about where we can find you. I’ll make sure that’s in the show notes. You know, I’ve been following you a long time – well, certainly the last year. And, you know, it was just great to talk with you, man. I appreciate you going way over time, but I really enjoyed it and I’m certain the listeners will, too.

Elliott Holland: [00:52:08] Ed, I’ve enjoyed this. You can hear it on my voice I love what I do. These stories aren’t just accounting spreadsheet things. These people’s real lives, real money. And I built this thing to help people get paid on these deals, but also make wise investments, and I stand by that every day that we go to work. So, I’m excited to work for any and all of you and serve you in your transactions. And I’m glad you gave me a chance to be on this podcast.

Ed Mysogland: [00:52:36] Oh, man. You’re the real deal. You never really know, but you absolutely blew it out of the water, so I appreciate your time.

Elliott Holland: [00:52:46] Thank you, Ed.

Outro: [00:52:48] Thank you for joining us today on the How to Sell a Business Podcast. If you want more episodes packed with strategies to help sell your business for the maximum value, visit howtosellabusinesspodcast.com for tips and best practices to make your exit life changing. Better yet, subscribe now so you never miss future episodes. This program is copyrighted by Myso, Inc. All rights reserved.