Who looks at the numbers before a business acquisition? What is business acquisition?
[Music] hello everyone out there in podcast world hope you're having a great day you're listening to or watching the service business mastery podcast i'm your host church blissett today we have elliott holland on the show excuse me clear my throat there and he is the the founder of guardian due diligence and this is a really cool topic because we talk acquisition and we've had like patrick lange on the show we've had several people who have talked acquisitions on the show before but uh elliot's kind of like the godsend that i've been looking for honestly because i have tons of questions before we actually acquire a business that i'm relying on people like uh patrick or or you know your business broker to kind of answer those questions and sometimes patrick's an honest guy so he's definitely not one of these people but there are definitely brokers out there that they just want to get the business sold so they're going to tell you what they want to hear and and elliot's the kind of guy that comes in and does the due diligence behind the other business that you're purchasing and so um i honestly didn't even know a guy like elliott existed and before we got we started recording he he said that's not uncommon but i'm super excited to pick his brain here for the next 20 or 30 minutes and and i hope you learned something here from the show but with that being said welcome to the show elliot so glad to be here you know it's interesting uh you focusing on hvac i think i mentioned i've done three hbac deals in the past 12 months so very interested in this conversation and then with your deal particularly i think this is going to be an amazing chat yeah so for those of you who are new to the podcast or maybe haven't followed along for a while back in 2018 i i quote unquote i'm doing using air quotes here uh purchased a business and basically i purchased this bad debt and um because the numbers that were originally allotted they were presented that that he that he was generating closer to uh three quarters of a million when we dove down deep into the numbers uh it was more like 200 225 000 and based on the bad debt that we ended up doing um ellie and i were just talking that that um whenever i tell people you know we purchased the bad debt we didn't we didn't go by multiples of of ebay or anything and he was like actually if you're on numbers you you were doing that and and i love some of the things that you mentioned even after after that but with with that being said give us a little background about you what makes you an expert and why someone should hire someone like you when they already have a business broker because um business brokers uh they're not like a real estate broker i mean real estate uh a realtor necessarily but we can kind of compare that because that's what we know um and and you know that realtors they don't have to have a ton ton of training like um like super know your numbers and and be able to inspect the building or anything like that so it's kind of like that with with the business broker in in that fashion so tell us just your background and what makes you an expert and everything yeah absolutely um so i think like the best uh nba coaches are former players yeah so for me i spent i spent the past 10 years and and six of the 10 in the cw of buying businesses so i did it for private equity firms on wall street i did it for myself with the business partner i did it for myself with no business partner and um through those six years you know i saw almost a thousand deals consummated for um seen a lot of things and then for the past four years i've ran guardian due diligence where we advise others and vet companies for investors who are looking to make purchases so all in all 10 years in this industry and i think for most people who have spent 10 years in something specific they understand the mastery that comes from seeing so much stuff so the reason i'm an expert is the player coach kind of component and just quickly what we do because you made a great point um and i'll go through this quickly when people sell businesses they typically sell them for a multiple of cash flow in this part of the market two to five times cash flow or ebitda is typically about right and what ends up happening is each dollar of ebitda or cash flow that the seller's able to convince a buyer that's there that isn't they don't get dollar for dollar benefit they get two to five times that benefit so if i convince you a hundred thousand dollars of cash flows in this business and it's not you don't pay me a hundred thousand dollars as the seller you pay me 200 to 500 000 nice so it creates an environment where the sellers in these situations have probably the highest motivation ever to air quotes tell stories and so my business is to vet the numbers bet the financials vet the operation to find all those stories that are being told so that buyers don't get into situations where they buy bad businesses and so what ends up happening oftentimes to your point there's business brokers that are in this marketplace but typically the business brokers work for the seller yeah and they get paid a portion of the deal so think about the motivation of a person that works for the guy who has the incentive to tell a story who gets paid a portion of the story being told does that person work for the buyer right right right right and i've even had so um we had a a business was presented to me and i felt like the numbers were inflated and so i went to my buddy who's a business broker and said hey i want you to be on my behalf and look at these numbers and tell me if this is legit or not and he's like i'll try but this isn't normal i'm like what do you mean it's not normal i want my own realtor and you they have their real you know that's what the mindset that i'm thinking and there and this the other guy is like i don't think i'm gonna split this with you like to to my guy and and i was like how am i protected in this scenario this seems like i'd get screwed so fast you did my pitch for me i mean it's legit exactly what i've experienced so i can say like there's nobody protecting the buyers and even the people who have seemingly the expertise you just so so if i'm sitting in that broker's seat what he probably was trying to tell you but didn't want to tell you i don't know how to check the numbers yeah i just sell stuff dude yeah yeah so can i you know can i you know yeah yeah but can i get into the numbers in a way that is material for the deal no and then also i can't tell you that because it undermines my whole sort of credibility as a professional to an extent and then the other thing is like in real estate the two brokers split the transaction well the sell side broker the one working for the seller was the one who sold the business he's not splitting with anyone yeah you have to pay your buy side broker which gets people into a bit of a tizzy but then it's sort of like well how quickly do you want to throw 60 100 a quarter million dollars down the tubes exactly so it can be because there is no buy side realtor that gets paid in traditional transactions the buyer must decide whether they know enough to vet the numbers whether they just are willing to take a chance without the numbers being vetted or whether they pay for an expert like myself and guardian due diligence to vet and depending on the size of the deal and how confident you are in the numbers you make a bet and you know we're 10 15 000 to get a project done so the question around you're putting up 60 is it worth 10 you're putting up 100 is it worth you know you got to kind of decide well i think what i did was um brandon he'll actually be on the show in a couple weeks maybe it might even be next week but he is a he is a realtor not a realtor i'm sorry he's a banker um with uh live oak and he's done a lot of business um business acquisition um money changing hands and stuff and so i kind of put it in his ballpark too and i was like hey does these numbers make sense to even get a loan and and that kind of thing and so that's kind of how i had to rely because i didn't have anybody you know i didn't have your number on speed dial at that time so um i um i really didn't know what the best route was to take i ended up not pulling the trigger because i still just had this gut feeling that something wasn't exactly on the up and up uh but um that was three years two years ago maybe um and i think that business actually might still be for sale too so um it's it's it is wild um how much insecurity comes along with that and then like in the facebook groups like the hvac facebook groups um there's guys that are just like every time you turn around they're like yeah we purchased another one we're acquiring another one we're acquiring one in this town i'm like how what in the hell like how's this happening like i'm trying to get my head wrapped around one acquisition and you're talking about doing three in a month or something crazy you know and it all depends so when i was buying companies i was a financial buyer who understood how to vet the numbers myself so then i'm buyer and diligence provider in one yeah i'm wearing both hats in my advisor's seat i'm helping and augmenting people who don't have the diligence and financial lens to help them and so a person who's not financial and a guy like me can do three deals in a month because we can vet three deals and it's not that big of a deal if you get through one or two deals with me you may be able to vet your own deal after that to a larger extent and so often times i sort of work myself out of a job but i'm i'm okay with that there's plenty of buyers in the market and then here's the other thing people say a bunch of stuff on facebook that's not true yeah good point good point i'm in a lot of those same groups on other business buying contacts and business selling contacts and some of the stuff i see is just like people's uh porsche truck that they just bought and they're selling you on a class oh yeah yeah no need no title just i promise you it's mine yeah right right they just rented it for a couple hours and take a picture with it no um dude that's that's awesome man um so at what point do we bring you into the conversation is it like hey i'm looking at buying this company they've given me an nda or a non-disclosure agreement and i've signed it here's the numbers does this make sense or is it after we've already put in in the uh the offer because sometimes like especially first-time people that are buying it maybe it's like your competitor down the street is going out of business or talking about retiring and you want to acquire them and you've never done this process before um when do i bring you in so two different times the the time that most most people choose is when they are about to submit a letter of intent or an offer on the business okay so when things get real when you've you've gotten past the non-disclosure you've looked at the business you talked to your friends you figured out do you have the capital now you're gonna put a letter to say i'm gonna pay a million bucks for this business i'm gonna pay it to you this way that's typically when people get us involved and we focus in those engagements primarily on purely just vetting the numbers of the business yeah but i think what i recommend people do is get us involved earlier and so for people who are just starting off particularly or this may be one of their first 20 deals they're looking at look at the nda send it over get the book on the business give us a shout we have weekly office hours from 12 to 1 on fridays east coast time where you can ask questions about your deals so you can even get that advice for free help us help you think through deals because my my knowledge tells me that people spend like 90 of their deal evaluation time looking at terrible deals yeah and you don't get that time back so for someone to be able to tell you hey this looks baloney in two weeks might save you two months of going around town asking others and that two months can be spent on other deals so you can still get the benefit of it i mean i'm talking to a guy right now that's looking at buying a business out of tampa and um the seller's a sales person right so he sells stuff online and he's really good at selling and he talks really quickly and things sort of make sense a little bit but not at all and i'm basically telling him this week that the deal's baloney and that's probably going to save him six months of his life so i encourage people to get us involved sooner in the process and we have sort of mechanisms through our weekly office hours and make it pretty easy to engage so what are those real quick because i'll ask you again when we wrap up but i'd like to get them right now too yeah 12 p.m to 1 p.m eastern every friday we spend an hour answering sort of client um submitted or just interested party submitted questions so this friday i've got four or five questions from folks who have come by my website guardian due diligence they've submitted a question i've sent them a zoom link we're going to hop on the phone and we'll just talk through their questions talk through how to think about it talk through the the different negotiations talk through what to be thinking about and it gives people a chance to understand the benefit of having an expert on your side because like you tersh like you may have recognized you needed a expert but when it came time to pay you might have said how much is it worth right and what i find is that people before the calls don't quite get it but once we get into the deep level of detail in the calls and also when i highlight this so you're going to pay four times what the story is to this guy and you don't know how to vet it you know you tell me how much how much you're willing to spend on a million dollar personal guarantee on a live debt where they're going to come take your house and ruin your life if you don't pay them back you tell me how much that's worth exactly yeah no i agree with that so it what happens if they've already put in an offer say we we we put in an offer for a million bucks um and then you go through the numbers and you're like hey look you shouldn't be paying more than four hundred thousand for this business or something like that like sure how do you present how does that conversation happen so first we would would call we would call you and say hey look um the typical multiples for businesses in this industry are three times so you went into this and they told you that the the ebitda was 333 000 bucks you offered a million it made sense based on what you saw the ebitda is really you know 170 000 bucks so this thing's worth 500 000 bucks so here's the data to back it up help me understand if you heard something that i didn't see that may be a justice at all and then the benefit of working with us versus other groups is we'll actually help you negotiate the price reduction so maybe we'll say hey you should get us on the phone with the seller yeah let's just first off talk through the numbers and level set on this is really 170 dollars worth of cash flow and not 333 because once we get there then you sort of get off the phone and say okay now what do we do about it and that becomes a negotiation and then there's oftentimes many different ways to adjust so you can just adjust the purchase price down outright you can say hey i'll pay you a half million and if the business performs at a certain level i pay you the other half out of cash flows of the business after i buy it or if you think it's worth a million i'll buy half of it um and then i'm only taking on half the risk and if um the business gets to the size that you say it's going to be then we'll pay you out for it if not that half purchase becomes a full purchase so ask them if they're going to go okay yeah yeah so they they leverage their like okay are you calling bs like if you if you're going to stand behind it like all right put your money where your mouth's at yeah because i tell people all the time you should not be betting against a seller somebody who's been in the business for 10 20 years absolutely knows it better than you yeah they know it better than me and so if they're not willing to bet on the outcome you shouldn't be betting on the outcome right yeah they've seen the trends if they've been in the industry that long they've they've seen the ebbs and flows of it um now if it's a business that's five years or ten years old maybe you haven't seen all the ebbs and flows necessarily but definitely if they've been in that long they've seen it um the full cycles i mean even this current cycle that we're going through like it's it the trends were a lot longer than they had been in the past and um but they're coming i mean you can see them you know over the past year and so but with that being said um what's the kind of the the red flags that you look for like what's one one thing that you're like um people try and stick this in to make it seem like there's more cash flow than there isn't than there actually is um in this part of the market the biggest ones are the sellers always absentee okay guy has an office he lives in the house that the business is in but i promise you he never spends a day or a minute of time it's it runs without me yeah yeah so i'd love to see all your policies and procedures if you you're able to make it run completely yeah and then why would you have a business co-located with your living quarters that is absentee right if it really ran without you you'd probably move the location um you'd also probably have a lieutenant in there that had a title that was better than service manager you know right but but but i digress the thing there is that what people do is they have add backs so they say hey look on the taxes we reported you know ten thousand dollars of profit but really i'm an absentee owner i pulled 150 000 out of this business so i'm gonna stick that back in there right and then you got to evaluate is the guy absentee and i promise you they'll they'll die on that vine telling you because they get three times that in valuation i can actually determine whether they are absentee or not pretty quickly so how about so how about if they um if they give their service manager the title of uh controller or something like that have you seen that before they've inflated titles inflated titles but also controllers that can't count to ten a lot of times controllers are dating the owner so then how much can you trust the numbers and then also you're in the precarious situation of asking questions to a person that lays next to the seller so be careful buddy i don't even think about that you think about that yeah you you because your number one relationship is with the seller even if you don't believe what they're saying and so blowing them up through their person yeah yeah can blow up your deal before you have a chance to negotiate so consider that the other thing about controllers is that they're not going to tell you they don't know so you have to figure it out the other thing that happens you'll assume oftentimes or people assume rather oh well they get their taxes done by a cpa so the cpa check them right for 100 bucks a year you can see pa checked a million dollar business yeah receipts invoices yeah those people on their reports they'll say it when nobody reads the page long disclosures it basically says we didn't check a gosh darn thing we took everything the seller gave us to be the truth um you cannot rely on this this is just representative that we got in um you have no financial or legal recourse against us for anything presented on page three through x yeah enjoy so yeah have fun with these numbers that's another one i think the third one just to be brief is people can say anything in their financials through quickbooks i've been in quickbooks yeah i can tell you all kinds of stories in quickbooks taxes are typically to minimize taxes right nobody wants to overpay uncle sam so they're typically understated in terms of they typically say less profit than the business actually has the bank statements don't tell lies you can't go into a bank and say hey i'm going to give you 100 bucks but i want you to say on my bank statement that i have 200 bucks so people i think miss the fact that the bank statements are arguably the best document to understand the true cash flows in and out of the business and is that did are they required to disclose all bank statements are all bank accounts because like we have multiple bank accounts but if you only looked at one of them you might see like either good or bad numbers yeah no not at all so that's where due diligence comes in so simple example you could give me 30 different industries and i could tell you the average profit margin like when we before we started you said hvac i was like about 10 margin you were like if you're lucky yeah i know the margins on those businesses are five to 18 maybe 20 yeah right right if i see one at 40 percent i know there's a bank statement missing right i know okay somebody else may not know and so what you do is you reconcile the financial statements to the bank statements the witness of happening is say you're looking at hvsc company right and they've got high profits you're trying to figure it out and you're like wait i don't see any any payments to to to train yeah right right where are you getting your equipment from right oh oops i forgot about this bank statement over here yeah you know i was going to tell you about it so you have to sort of look where's your payroll yeah i don't see payroll on here right wait where's where's your rent so when you sort of know how the income statement should look you can look for the big items and ask where they are the other thing is it's it's easy to tell a story on one set of financials like on the taxes or the financials it's really hard to tell them on the taxes the financials and the bank statements so what we do is we reconcile all three and then it's very sudden that we miss significant pieces of the financial picture gotcha cool man so where is ever where can everybody reach out to learn more about you and and even get signed up with your program or get you on board with them yeah guardian due diligence dot com let's d spell d-u-e um and just come onto the website like i said we have weekly office hours from 12 to 1 p.m eastern time every friday and so the easiest way to engage is just to on our website you can ask to be added to the office hour zoom call and you can submit a question and that's probably the easiest way to engage you can also book time with me on my website so that's a possibility too but i'm very responsive there and either myself or one of my assistants will get back to you quickly sweet man i really appreciate all this information and i'm glad that i'm glad we got connected because i had no idea that you even existed and it's uh it is really cool knowing that there is somebody there that can be on our side whenever it comes to you know vetting a business for sure i love to help people you know of course i'm in business but i also enjoy the work that i do yeah so i very much love to help anyone that i can so i'm looking forward to hearing from folks in your in your network and and church thanks for having me here on the on the podcast yeah absolutely man and anybody that has any questions don't forget guardian due diligence dot com reach out to elliot his team learn more um i if you are looking at purchasing a business acquiring a business i plead with you uh don't make the the costly mistakes that even i've made in the past and and lots of people who have purchased businesses have made there are a lot of very intelligent business brokers out there um but whenever you like uh it's to take it hvac for an example like there are really really good new construction guys there's really really good service guys there's really really good um indoor air quality guys and gals so uh these they're just another tool in your tool bag in your arsenal and so i plead with you to definitely use uh useless i'm not i'm not calling you a tool elliot oh no i am a tool as a business owner so so so i'm raising my hand use me also just so you guys can make it simple think about who the advisors you're working for or listening to who pays them good point that's who they're working for no matter what they tell you you want somebody working for you that you're paying that's watching your back you you don't want to go into a crazy crowd with security that that the artist paid for you want to go with your security guard that's exactly right man that's a good point i appreciate you being on the show man i appreciate everybody that's listening to this episode or watching it um if you have any questions don't forget to reach out to elliott or reach out to myself uh ter shetserviceemper.com is probably the easiest way to get in touch with me i'm on all the social media too so it's at tershblissa everywhere facebook instagram linkedin but with that being said i hope you have a wonderful day stay safe and um happy acquisitions like just purchase up some businesses buy them up happy acquisitions i like that all right guys y'all be good see you take care [Music]
2021-02-27 23:58
