EP 68: How To Maximize Your Value Using Quality of Earnings Reports, Elliott Holland, Guardian Due Diligence

Ed Mysogland  0:00  
to 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. On today's show, I got to interview and it was my pleasure. And it really was because I got to interview Elliot Hollen Elliot is 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. And so I think what you'll find, and and certainly I did, is just just how important establishing quality of earnings is, whether you're a buyer or seller, or an institution, relying on financial data that being shared is imperative to the success of a deal. And Elliot, oh my gosh, he he shared so much and so many good stories about his application and and the value that he brings to a transaction. So I hope you enjoy my conversation with Elliot Holland, of guardian due diligence. I'm your host, Ed Mysogland. I help business owners learn what creates value in their business by interviewing people, people ended people and advisors and buyers and sellers, who have been in the trenches of acquiring and selling businesses today. You know, it's gonna be a special episode, because one of the things that in my, in my world we're seeing more and more is a thing called Q and E. And I have been following this guy along on twitter for for quite some time. It's named Elliot Holland. And you heard his bio before we got started. But he is he's the guy for this, this work. And I have learned so much, and I'm certain you will, too. So Elliot, welcome to the show.

Elliott Holland  2:35  
Glad to be here. It's exciting information. And I'm gonna I'm gonna make it live. We're

Ed Mysogland  2:39  
gonna have some right on. Well, I like I said, I talked a little bit about your background before we got started. But is there anything you want to talk about just a high level about guardian?

Elliott Holland  2:50  
Um, 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 they're going to use it. And I think that increases the value of the work product substantially.

Ed Mysogland  3:38  
Well, one of the things that, that I was telling you before we got started is a lot of people don't know what QE is, where it came from, and how, why now why, why are we seeing so much of it now? So you might start from the beginning?

Elliott Holland  3:54  
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 wanted to buy the whole thing, there's infinitely well known financial information at all times on these companies. For small private companies, there's zero of that. There's no audit requirement. I'm an owner, or the owners know this. Taxes are meant to be efficient, sure, and we make them very efficient. financials are our best representation of what happened in the business. So the quality of earnings is no more complicated than an audit light tool to help owners, buyers and advisors and these lower middle market deals. Understand the cash flow and the financials of a business, particularly ahead of a big transaction. 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 10, or 11 times earnings is what you will fetch under price. 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  5:51  
So I'm curious to know whether or not by doing this, if risk changes, like, like if I'm if Oh, don't tremendous,

Elliott Holland  6:02  
right, you know,

Ed Mysogland  6:04  
so. So a multiple just reflects risk. And I'm curious to know, you know, and we'll talk about it down down the road here. But I'm just curious to know how, how the conclusion of your services changes the risk profile of the acquisition target?

Elliott Holland  6:26  
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 $40 million. For most of my buyers, they are first time buyers. So I work primarily for buyers, buying companies, and 75% 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. 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 that's just a tremendous risk, because it's a $5 million dollar transaction. $5 million worth the risk, 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% 10%. Now we're talking a quarter million dollars, or a half million dollars of risk. And I could get more complex than that, surely it goes from 400% of enterprise value to five or 10% or less. And so now as a buyer or my client, I'm not worried about should I do the deal or not? And it 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

Ed Mysogland  8:10  
say, well, it's not going up? If I'm with the buyer, the beta? It's not going up?

Elliott Holland  8:17  
Well, that's where your job is. And I mean, I gotta be honest. It all depends. And in negotiation, I have seen it go both ways. But yeah, for my clients, I wouldn't I mean, negotiate.

Ed Mysogland  8:30  
You know, one thing that comes to mind, and I know, and I'm no, I'm going out of order, and I have my have kind of my talking points, but I'm curious to know whether or not the, you know, does during a quality of earnings report, if I'm a buyer, and I'm using SBA financing, does this count as buyers equity toward the transaction? That's a real that's a real interesting, dynamic, if I'm if I'm the buyer, and I can apply this to, to my deal.

Elliott Holland  9:02  
So it, 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, I guess no, but added on as a expense or cost in the transaction. So that when the transaction goes for 5 million, they may tack on an extra couple 100 grand for expenses, and you can pay that fee through the deal.

Ed Mysogland  9:28  
Yeah, I get it. I bought. Yeah, I felt

Elliott Holland  9:31  
well, well, here we go even further. So to your point, and I didn't see through it as quickly. Sorry, man, I, it's earlier, you're wiser than Yeah, I need a cup of coffee. I doubt it. If I pay if I'm a buyer, and I pay for the quality of earnings. So I pay, you know, 2030 grand for quality of earnings and then 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 and out of pocket expense to equity. Yes.

Ed Mysogland  10:08  
Well, I'm just I'm just curious, because if I'm, if I'm a buyer, and if, you know, if I can apply this, this, you know, scrutinizing what I'm buying to my equity, as opposed to tacking it on on the back end, I, I would have to imagine the SBA and and the powers that be would find that a favorable strategy by most buyers.

Elliott Holland  10:32  
And here's what happens that people don't recognize so on over half the deals, I'm just gonna say your ad, this is your the buyer, your SBA lender is calling me, Elliot and saying, what's up with this? What does this mean? Why is this represented here and that financial? So what happens when there's not a quality of earnings and your deal? What it means is your bankers are making up negative answers to all these questions and Daqing either the price of your deal, the interest rate, the speed of your deal, how quickly I 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  11:36  
So do you have any kind of exposure, but for doing this kind of work? I mean, I, I mean, I gotta imagine, you know, just your normal errors and omissions and negligence kind of thing, right?

Elliott Holland  11:49  
Yeah, I think there's two or three types of exposure, I think there's the absolute legal exposure, I think, and that is, in my engagement letter, I clearly state that, hey, there's no way in, you know, 30 days, I'm gonna get to the bottom of 30 years of financials. For 1.1 or 1% of the transaction value, I will do my best to given what the client is willing to pay for. So that's kind of the strict legal liability, then there's like the document liability, right? So this document travels, your lender sees a your equity investor 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. Have we done more procedures, we could have gotten a more accurate answer, then I think there's reputational risks. Yep. 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, there's liability. And it's also you know, for me, I'm an entrepreneur, I've been on the buy side, now I'm an adviser. All of my clients are putting up over a million dollars based on my advice. I take all of that series

Ed Mysogland  13:07  
100%. Now I, and I'm with you. And and my my point from the exposure standpoint, was was procedurally I mean, this isn't this doesn't conform, like, like, as an appraiser, I conform to use pap. So the uniform standards of professional appraisal practice, I gotta adhere to these. This is how I build a report, or how I can deviate. So I just curious to know, the process and the where, where, where does the level of assurance stop for someone like you? You don't? I mean, sure,

Elliott Holland  13:47  
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 and transactions against other security providers and testified to the the help that a quality earnings provides, but that is not a silver bullet solution. The assurance level is, 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. So what I would say after doing this for almost 15 years, you know, you're from almost any 90 minutes for most providers, if you get a good referral, you're gonna get at least like a C, you know, a c value, piece of analysis, right? If you are sort of financially inclined or you get like 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 that procedures that you're getting done match the risk in the business that you're buying. So like this As with a lot of inventory, you need to make sure that your provider is good with inventory. For a business that has, you know, like upfront payments for quarterly services, you need to make sure that that that provider understands prepaids and unearned revenue. And when you get to that level, again, I think, and here's where I love entrepreneurship and acquisition, because it doesn't have to be audit, accuracy, sure, you just need to know is is the business earning plus or minus 5%, relative to what you've thought, given all the rest, you know, as a buyer, and the multiple you apply to the business. So within that sort of 5%, and I'm using five, maybe it's three or seven, I think any good provider can get to that level of insurance, minus the what I would say, you know, 1%, that are out there, that if someone's been spending 25 years to be fraudulent and their financials, you have to be wary that some things are just really hard to catch.

Ed Mysogland  16:02  
100% Yeah. So what exactly I mean, what is the process? I mean, I'm certain some people have had reviews and audit, but I mean, what generally is the process to for for a quality of earnings report?

Elliott Holland  16:19  
Sure. So we'll send out a due diligence list that has information about the financials that'll have bank statements will ask for those financials, taxes, payroll statements, and other pieces of data inventory lists, or charts. And what we do in our process is sort of triangulate data through different sources of the same information. So what does that mean, Elliot? So on a recent deal, ecommerce business in the Midwest, so their revenue was coming through the financial statements, you can see revenue, it's the deposits in their bank statement, not a lot of transfers, and it's representing 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. 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 again, and when they don't, when they were 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, I

Ed Mysogland  17:35  
got it. So I'm assuming everybody that that you work with tends to use virtual data rooms, I, I can only fathom. Here, I'm gonna, I'm gonna start emailing you all of this,

Elliott Holland  17:53  
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 you know, the buyers can be, you know, at their retirement age. And the guy was like, alright, well, what's your address? 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's like, no, Elliot, he wants to send all the finance.

Ed Mysogland  18:21  
We get we get that.

Elliott Holland  18:23  
So you can scan him. So every once in a while you get an old school, man 99% of the time virtual data. So

Ed Mysogland  18:34  
how? I know a lot like when when we have been faced with quality variance, you know, or someone has requested it. You know, everybody's like, well, I've got a CPA. So how do I mean, tell me the difference? You know, how do you respond to that? I'm not because you are a CPA, right? Yeah, you I'm not I have teammates.

Elliott Holland  18:59  
Plus that work for me. I'm a Harvard MBA. So people tend to give me a pass. I know a little bit of right. Yeah, you know, your way around it books. I get it. Um, so I tend to use an example, in their industry. So you know, I'll say, you know, and divorce attorneys do your contracts and your business. But do you have a divorce attorney doing your contract? And estate planning folks could draw up your real estate trust, but that hey, 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 with the person no general? How to run a race? Sure. But what ends up happening is and this is my general point of view on this. There's always like the cost basis bottoms up, like why would I spend any incremental dollar on him? Right, which is the entrepreneurs first disposition, but I push them on bottoms down. So This is a $20 million paycheck. And you're crawling over 20,000. But 100.1,

Ed Mysogland  20:06  
you know, but they do. And you sit there and you're like I How in the world? And again, you understanding that the business owner likely has has pinched and saved and scrimped and made those types of decisions and that it doesn't matter how many zeros it is, it's, it's, it's the, you know, just the prospect. I'm spending money, you know,

Elliott Holland  20:35  
you know, and I think when I started guardian, I used to lay out the logical base 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 when I started doing this, make a one or two statements, so like, you know, like, say, a person is doing like HVAC. I'm like, Oh, well, I could just get my plumber handyman to do my AC system in my new house, right. And I tend to just stop now. Yeah. And typically, the person I argue, is too expensive rah, rah, rah. And then a huge portion will come back a couple of days later, when they've had a chance to think about it, and, and realize the air and their ways. And then that was one random example. But you know, like people who are experts in their craft, you know, it's like, hey, you've been doing, 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  21:38  
100% I do I do something similar. I sit there and I'm like it. I've never gone wrong going first rate it but no matter what I've bought, and and it's the same thing here. But the risk is so much greater. And it's it's astounding that you would even consider going on the cheap. When this when there's so much at stake. But

Elliott Holland  22:03  
I can't tell you how many times this year somebody went with a cheaper Curie 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 close they ring in me Hey, man, can you fix all this crap that this person for all this crap that I screwed up? And it's always like, Hey, I just got this one question about working capital. And I got on the phone with them. I was like, No, your whole analysis is off, buddy. And you're supposed to close in 30 days. And I think 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 know these deals. And 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. Yeah, 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 When the other reality is a third of my clients 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 operation 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  23:48  
Well, you know, and the funny thing is that you sit there and you're like, how, how is it that you that you do not see this? How, why would you if you can minimize risk? Why wouldn't you do that? Especially I think

Elliott Holland  24:03  
I have a I have a hypothesis. And because I you know people always call different folks in this business, unsophisticated brokers, sellers, buyers, everybody's stupid. No, I think everybody goes by their incentives, even when they're skewed, I think a lot of owners have minimize 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 1000 bucks 3000 bucks in any given year could have minimized 10 $100,000 worth the risk, right. And so they've gotten away with those $1,000 lack of investments and maybe I have $3,000 of risk 10,000 Now it's a $20 million deal and nobody calibrated at the new risk on the table that was 20 minutes ago. 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 468 times that, and I think people just don't recalibrate.

Ed Mysogland  25:13  
Oh, that that. So far, that might be the best thing that that's come out of your mouth. That's a That's a good one. Because, because you're right, I mean, most business owners look at look at this kind of work as not this kind of work, but their CPA and attorney. I mean, it's a toll booth, I gotta, I gotta pay it to get to the other side. Now, it's now it's no, we're, we're sizing up risk. This is this is quantifying, and justifying the risk associated with your business and the earnings obviously, that go along with it,

Elliott Holland  25:44  
you know, or something like this, how much would you pay if people don't do this, but if there was a service to really get like a 10 year go forward, read on a potential business partner, right, we're some other thing. I want to talk about other partnerships, personal nature, I got it. 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. I think the other thing that gets people caught up is they have lost faith in their accounting, but they're still paying them. And they won't, they may not tell you that. And then 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 own businesses call me because they're trying to figure out whether quality workers will help straighten out their accounting stack. So they're paying a couple grand, 10 grand 20 grand a year for this stack of accountants that they still don't try it. 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  27:04  
Well, and the funny thing is, it it's, I guess, the way I the way I was looking at it is I just don't understand that. Like, for example, this a couple of weeks ago, my kid she was having abdominal pain, alright. And, and it doesn't matter. It didn't matter. I didn't ask how much it was costing, I wanted to make sure whatever was wrong with her was going to get fixed. And

Elliott Holland  27:34  
you had a better example than me, I didn't you go to a head doctor about your abdomen, and you go to a foot doctor about your heart, right?

Ed Mysogland  27:41  
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 you know, what we've got to you got to how 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  28:07  
And 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. Yeah, buttoned up, go get a guy to do quality earnings. I know this guy had a guardian. So we're doing his work. And he was gunning for a certain eBUY mark, because somebody had given him a above 10x Multiple, I mean, he was gonna get paid, you know, 30 plus million dollars 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. And then we got close to the end of the year. And instead of this $3 million EBIT, da 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 firms to give me a valuation. And then he has a conversation with one of the private equity buyers, and he's like, look, Elliott, if I can just get this to $2.1 million of EBIT, da, they'll still pay me the above 10x Multiple, and I can get this thing done in 30 days. And 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. Yeah. Let me tell you another example. So on the buyer side, representing a buyer and client, I had a client who and a good adviser on the sell side whenever we do this, but it was a Canadian company operating probably 100 miles north of the US Canadian border, but they had financials and you know, of course Canadian dollars and A reported to the Canadian equivalent to IRS. Well, this broker thought it was a wise idea to instead of Ask the Canadian accountant to do a US dollar set of books, choose to ask a brand new friendly to the business brokerage, US 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 US based firm hired by the brokerage had left out 35% of the expenses such that EBIT da was affected by a bigger percentage than that. And so when we're looking at them, apples to apples, just Canadian to US dollars, they're 40% off. Now, here's the issue with that. Now, do I believe the Canadian version, the US dollar version, something else now you have seller broker, Canadian accountant, US accountant on the same phone call. And none of them can say, hey, the other person is lying. And so for my buyer, what they what they earned by paying for their quality of earnings was they walked away from a $5 million catastrophe? Sure. I mean, those folks would have been able to tell him cash basis accounting, accrual basis, accounting, Canadians, a US dollar Forex adjustments, EBIT, da 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. 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 down without a bunch of shenanigans?

Ed Mysogland  32:13  
Yeah, oh, man. Did? Did you ever follow it? Did it ever close? Not with necessarily with your client? But did it ever close? Ever?

Elliott Holland  32:23  
I'm almost scared to ask because I'd have to call the broker again. I don't, and I don't want my client didn't.

Ed Mysogland  32:31  
Well, so I've got four CPAs on staff here. And, and, and the funny thing is, they all run around and say, you know, the CPA was is is the most trusted adviser to the business owner. And there's, and there's statistics about about that. And, but at the same time, I think an accountant has a lane, you know, and I don't and, and I'm just I think there's a I hate to dump my, my accountants in with generalists. But I think they're specialists in this kind of a county, you know, and because I'm looking so good, you're so right, I'm getting ready to jam it to him. I'm not this isn't for you. This is for me, because I'm gonna walk down and I'm gonna say, Yeah, you guys aren't. You may be the trusted advisor for for QuickBooks, but I'm just kidding.

Elliott Holland  33:29  
That's it for QuickBooks. Just kidding. Your taxes, valuation opinions for audits. Absolutely. But accountants and lawyers have terrible abilities to process any nonzero risk. At the top of the call, I said I'm a Deal Guy, entrepreneur who manages account so what that says is I manage a group of people who cannot do well with any nonzero risk and I'm a person who am used to paying you know $2 And getting you know, and dealing with you know, $1 or two, I get a risk and so I think when they come to this trusted advisor piece, I think what accountants, lawyers and other conservative compliance base advisors miss is a lot of businesses taking risks, and there's not really an advisor that can help people understand risks.

Ed Mysogland  34:23  
Yeah, yeah. And as we've been in, in our sell side work, and you know, I'm the Grim Reaper, a business valuation, you know, we sit down and we talk about, you know, this is this is the mechanics of how this deal is going to work, you know, just on the top on a high level, you 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. Um, yeah. So you you have a choice, you can go back and fix it and and reduce that risk and then come back to the market or you can go to the market and understand how The buyers gonna see it. And that's, to me that that is the, at least on the front end. And that's where I'm heading with this is how, if I'm a sell side person, and we and we started to talk about this earlier, if I can minimize the the, the the back end Retrade, after your work is done, why wouldn't I do that? I mean, you so, you know, your 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 retreat. On the back end, I have to imagine that

Elliott Holland  35:45  
oh, by orders of magnitude, so let me 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 that competing with other firms, so they're gonna 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 gonna say subject to due diligence, they're gonna 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 sellers representation will be, typically only because of manpower. So then they're gonna start not just finding real things, which I think any of us would say, Hey, we should find the real stuff. But what private equity will often do is they'll start nickel and diming about stuff and doing things like well, you know, when I thought the top customer was, was 15%, I was okay, but now they're 17 and a half. 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, right. But what it does is it delays the deal two weeks, and you're talking about 2.5% of your revenue is if it was, you know, God coming to earth and then putting some stones and breaking them apart. 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, nuanced thing that didn't really matter. Let me talk about a different process for seller gets a 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 gotten my foot and a couple of weeks. I snore when I sleep. And here's the stuff that you need to know

Ed Mysogland  37:52  
you love me, you still got me. That's who I am. That's who I

Elliott Holland  37:57  
am. But I make good money. You know, I'm consistent. I go to church every Sunday, I take care of my kids. I'm funny. Look at all these great people are spoken about me. So here's the packet of real information. Do you want to deal with me or not? And in a business context, what that does for the seller is here's the money I've spent to give you a clearer look at my business. And here's the revenue by customer, here's how an 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%. And it really was 17 and a half. You say Oh no. We said we were doing this deal. On an accrual basis. The accrual basis is 15%. 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 mister private equity guy. And so for your 20 to $30,000 without having to do any incremental work on a Tuesday when you got some crazy call? Yeah, 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 myself securely clients, their processes go so quick, because they already have the playbook.

Ed Mysogland  39:12  
I was wondering whether that was one of my questions is is how much faster does it go when, when you can have this as an amendment or an addendum to your Sim? And you just hand it? I mean, I gotta imagine if it goes substantially fetch

Elliott Holland  39:27  
tremendously quicker and it's months yeah. Here's, 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 bla bla bla I'm going to try to go it alone. I got these already got a buyer sent me a letter of intent. We've signed up, we're good to go. We're good to go. 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 doing when they Found this or what they found that their quality of earning said this, they say my, 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. And the reality is, uh, some of those times I am able to get in there and help kind of reconcile sort of BIAs are curious, sell side QE 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 stopped the 60 day process for 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. And oh, by the way, here's how deal psychology works. If I think I'm buying, you know, a great property on Park Avenue. And I find out that there's one leak and 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 234 months, six months quicker when you do the work upfront.

Ed Mysogland  41:11  
So if I'm a seller, I mean, how long does it cuvee? What's the shelf life?

Elliott Holland  41:17  
So that's a great question. Probably a year, but let me tell you why. Okay, that'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 statement, which somebody shouldn't be able to get in 24 hours. Let's say I do the quality range, that's a 30 day process one month, what the quality of earnings does is it goes back three years. So as a buyer, let's say I get a quality of earnings through November of 2022. Right, 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. Okay, let's say I go all the way to next October, right? What I know is through November 2022, the numbers are good. I know all the adjustments. I know all the ways that the way a buyer, according to GAAP would look at the business is different than how they recorded it in their QuickBooks. So it can sit on shelves for a year or more when I was a buyer, I would see. And you've seen this all the time. There's a data packet that was done November 2022, they have projections for the full year 2022 When it's November 2023. And you're still looking at the same data. So that gives you a year of coverage for that one fee. And also, and we do roll forwards for costs. Yeah, so I've got a couple of guys where each month we do a row for and we just charge entitlements or

Ed Mysogland  42:54  
I get well and that's why I'm saying I'm so I'm looking at say alright, it's gonna be it's from engagement to close, you know, let's say average six to nine months. And I, at beginning of the process, you know, how do we know how, how does somebody do this and have the assurance that it's still good when I get to the back end of this? I get what I want to be sensitive to your time. And so does tell me I guess this is the I don't wanna say the elevator pitch. But you know, tell me about Guardian you know, all the all the stuff that you're doing, where you're doing it how how someone can work with you all the things that I should have asked you before?

Elliott Holland  43:40  
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 ourselves. Like clients are making a bunch of money our biocide clients have a bunch of money to invest. So they need to be able to deal with us quickly. So you can go to Guardian due diligence.com or type in Google Elliott Holland or guardian due diligence or anything close. I think I've done enough work on Google. Give me up there first. Yeah. 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 on my website. In terms of how we function and different I mentioned that we bring sort of a deal lends to quality of earnings and accounting products. So what that means is whether you're a sell side owner or a buy side investor, we'll be speaking 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'll help you make a business decision. And then I think particularly for your audience, and we wanted to do something special. So we have a 25% discount for anybody who's listening to this podcasts are 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% If you're willing to put up the other 75% And that's, that's protect your $10 million. That's and do that, right.

Ed Mysogland  45:19  
That's, that's sweet of you. And, and I really do appreciate it. I'm certain the audience does, too. And I, 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 I believe that, you know, we started talking about the SBA SOPs, and the business valuations and I and having done them for years, you know, way back early in the career. I mean, I just, you know, doesn't pay for itself doesn't pay for pay a salary, does it? You know, capex? And do I get the debt coverage ratio? To me, I read a statistic like 97% of the business valuations that are done, actually make it, you know, it's like, Eureka, imagine that. So I'm just

Elliott Holland  46:15  
way smaller than the percentage of deals that don't do. So what happened? Right,

Ed Mysogland  46:19  
and that's where I'm heading with this is like, I mean, do you ever foresee that this becomes kind of the standard of deal making? Yeah, I mean,

Elliott Holland  46:32  
I think it will, I think what's happening 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 like the buyer and the banks. You know, if you lend, you know, 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 there, backstopping 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% 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. 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 curIs, 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 by the way, they take too much time for a bank to do on every deal they look at because the deal, a bank only does some portion of those deals, let somebody else manage that take on that risk, so that when we get at the bank, it's a clean set of financials, it's clearly knowing what's up. And we can make better credit decisions as a lender and less risk. And I think the other pieces come in, and 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 about these old school standards and not take into account some of this data that's available?

Ed Mysogland  48:28  
100%? Well, and I'll tell you, and the point of the question was, I mean, at least two times this year, we got we got a commitment letter from a bank that said oh, by the way, you're going to supply us a QB. Yeah, and and that we hadn't seen that before. And we've been doing it a long time. So

Elliott Holland  48:46  
Well, I'll tell you this on Twitter, you've seen it. I 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 Quito ease on deals under 2 million bucks, 5 million bucks in purchase price. And that's what everybody was saying. And I kept asking people so who out here can lose a million bucks? Yeah. Who out here can lose a million but can you lose a million bucks and 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. And now the top lenders have also said you need to get a QE. So they've said it in terms of their favorable and that's what they desire, I think soon is gonna get written into standards because here's the other thing and you know this, a novice will call a banker, a financial expert, but a banker that P most people interact with is a salesperson who works at a bank. So they're not super financially inclined like my CPAs are So I think as that information starts getting out and people start realizing some of the promises Baker's are making or only to the depth of their financial understanding, they'll start realizing I need to protect myself.

Ed Mysogland  50:12  
Well, and at the same time, I mean, as a taxpayer, I, if you're lending my taxpayer money for somebody to buy a business, I want you to, I don't want you to default. I mean, as a taxpayer, am I really grateful for all the the cost of capital and what happened? Thumbs up all the way. You know, as a dealmaker, thumbs up as a taxpayer, it's like, Man, I really would like some assurances, you know,

Elliott Holland  50:40  
I don't want people taking rest of my money, and Reena, right now, the SBA is lending out, only requiring a 10% equity, so 90% debt on all these deals, and the government is backing in covering guaranteeing 90% of that you're absolutely right. I don't want to do that on speculative transaction. I want to do that on home runs on Sure thing all day

Ed Mysogland  51:01  
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  51:15  
You know, so I gotta say something that's related to my business, and not generally. But I would say, Don't be cheap on a $10 million transaction. Yeah, I get that. That's just just 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? That's not gonna buy or seller, anyone when you're doing stuff of this magnitude? Make sure you get it right.

Ed Mysogland  51:46  
So you shared a little bit about where we can find you. Out, make sure that's in the show notes. You know, I, I've been following you a long time. And I'm well for certainly the last year and it was just great to talk with you, man. I, I appreciate you going way over time, I. But I really enjoyed and I'm certain listeners, both you

Elliott Holland  52:10  
and I've enjoyed this. You can hear it on my voice. I love what I do. The stories aren't just accounting spreadsheets. These are 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 you gave me the chance to be honest,

Ed Mysogland  52:38  
man, you're the real deal. I you know, you'd never you've never really no but you. You absolutely blew it out of the water. So I appreciate your time. Thank you.