Quality of Earnings Analysis in M&A with Ben Hernandez

April 19, 2023

In this episode, M&A advisor Ben Hernandez discusses the various phases business owners typically go through when getting ready to sell their business and seek out potential buyers. Ben emphasizes the importance of a Quality of Earnings (QOE) analysis during the due diligence phase, as it provides valuable insights into the company’s financial performance and helps to identify any potential risks or issues that may impact the transaction. Tune in for Ben’s insights into the challenges sellers may face during the process and tips on how to navigate them successfully.

Ben is the founder and a partner at Skytale Group, a full-service strategic, financial, and M&A advisory firm. Learn more about Skytale at https://skytalegroup.com/.

Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.

Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.

Brad: Welcome back to another episode of the Legal 123s with ByrdAdatto. I’m your host, Brad Adatto with my co-host Michael Byrd.

Michael: Thanks Brad. As a business and healthcare law firm, we meet many interesting people in various stages of their business. This season, we get to focus on the high stakes implications of selling a business. This season’s theme is the Hitchhikers Guide to M&A. We will be guest-heavy in bringing in different professionals to offer their experiences and perspectives on M&A.

Brad: Yeah, and for those of don’t know, the vocabulary M&A stands for mergers and acquisitions, and it’s slang for either buying and selling a business or buying and selling substantially all the assets of that business.

Michael: Way to go, Brad. Well, Brad, I was recently reminded of an article I read and actually saved for you [00:01:00] almost a year ago, I think the subject of the article would want to make the owner of the business in that article actually go ahead and sell their business.

Brad: Well, first off, I’m happy that for over a year, you can remember that far back. So we’re very proud of you since your birthday’s tomorrow and you’re turning 709. So you look great, by the way.

Michael: I apologize, Brad. I forgot about it and just recently was reminded about this article.

Brad: Okay. All right. Well, first off, happy early birthday, but second, I’m glad that this article is so important that you had to reach back in that memory bank to pull it out.

Michael: Yes. Yes, Brad. So the headline for the article is, you ready?

Brad: Mm-hmm.

Michael: Worker Who Was Accidentally Paid 330 Times His Salary Offers Resignation and Vanishes Without A Trace.

Brad: That is pretty bad. Sounds pretty terrible. I’m hoping nothing bad actually happened to that worker since he vanished without a trace. So what happened?

Michael: Well, this happened [00:02:00] in Chile to a dispatch assistant for a cold meets manufacturer. His paycheck was supposed to be $545.

Brad: Okay, well first, if this was in New York and he was working for a meat manufacturer, I think Rocco and Vinny might have made a visit to this guy and vanished him for taking the employer’s money, but second, I know that today’s guest likes numbers, but I was told there’d be no math today. So what does that actually come out to?

Michael: $180,000.

Brad: Wow. Did you just do that off the top of your head?

Michael: No, no, no, no. Siri. I had the article.

Brad: Oh, okay.

Michael: Yeah.

Brad: Very good. So what happened after that?

Michael: So, they, apparently, the company identified the error and asked the worker to return the excess money, and so he was polite and promised to do so.

Brad: Sure.

Michael: Tomorrow. The next day. And then he ignored the calls. Did not show up for work for three days. Finally, [00:03:00] surprise, surprise, an attorney on behalf of the worker sent a notice of resignation for him, and the worker has not been seen or heard from since.

Brad: All right. So I guess he got away with it.

Michael: Well, Brad, I think we have to leave the possibility that you mentioned in New York that maybe they did find him and we just don’t know it, but, according to Siri, he did get away with it.

Brad: Okay.

Michael: There’s an article in February of this year noting that the worker had disappeared without a trace and the company had not been able to locate the worker to get the money back. So it appears that this guy’s living large off his $180,000 payday.

Brad: Sounds like a great payday for him. So let’s go back to where I started at the beginning of this podcast. What made you think of this from a year ago?

Michael: Well, we actually had something similar happen to a client.

Brad: Yeah.

Michael: Our client called recently to tell us that his practice had accidentally paid [00:04:00] a $180,000 bonus twice to an executive of the company.

Brad: So asking for a friend here, are they looking for any extra employees right now?

Michael: Brad, you’re getting distracted again.

Brad: Okay.

Michael: Okay. That’s not the point.

Brad: No.

Michael: Okay. Yeah. The point is that this person received an extra $180,000 from our client.

Brad: So just like the guy in South America. Did he get away with it?

Michael: No. Money’s returned.

Brad: Oh, okay.

Michael: I’m pretty sure the reason is that the client had better lawyers.

Brad: Michael, you’re always supposed to say humbly or humility first and then it’s not bragging, but I think you sound like you’re bragging there.

Michael: So I guess I should not hold up the number one finger while I’m talking about that. No? Okay. Well, let’s flip the switch. What is the biggest boneheaded financial mistake you have made to cost ByrdAdatto?

Brad: So unless picking you as a partner is [00:05:00] an option.

Michael: Ouch. That’s hurtful.

Brad: Kind of stumped in this question. Honestly. I have, full disclosure audience, made a ton of boneheaded financial mistakes in my lifetime that are personal which I always chalk up as lessons learned, but I can’t think of one that affected the firm on its point. What about you?

Michael: Well, you know, I have a story, I don’t know if you remember this, but when we started our firm we had big dreams.

Brad: We did.

Michael: And when you got big dreams, you want to have a nice brand new, shiny laptop to go with it.

Brad: Oh yeah.

Michael: And so we went and bought Mac Airs.

Brad: Yes, we did.

Michael: Because we figured that would make us do our best lawyering and best business start-uping.

Brad: We did.

Michael: And I spilled water on mine and ruined it the first month we were open. And I had to buy a brand new one because the warranty did not cover the water damage.

Brad: Yeah. Yeah. I agree. That was pretty bad. I think you apologized earlier to me. I’d like you to try that again and Riley, make sure when he apologizes [00:06:00] you just hit it on a loop so every single time I give you this signal, you can say, I apologize to you, Brad.

Michael: Riley, you can put this in quotes, no, thank you.

Brad: No, don’t do that. Don’t do that.

Michael: Oh, okay.

Brad: Well, let’s bring on this guest who’s been patiently sitting next to you for those watching us on our YouTube channel.

Michael: Okay. Once again, we have a friend on. Surprise. Surprise. And a second-time guest.

Brad: Woohoo.

Michael: And many who are listening to this podcast will know Ben Hernandez. Ben is the founder and a partner of the Skytale Group. Skytale is a strategic financial and M&A advisory firm. Earlier in Ben’s career, he worked with an international banking group with a hedge fund and financial services and advisory institutions. Even before that, he went to undergrad at Texas A&M. He has a BBA in finance, and then he has an MBA from the SMU Cox School of Business. Ben is married and has a boy named Benny and a girl named Celeste. And [00:07:00] we are very glad you’re here today, Ben. Welcome.

Ben: Thank you guys for having me. That was an interesting story, by the way.

Brad: Yeah, well, you know, first off, I think we have to let you know that, well, if audience members remember that this is the Hitchhiker’s Guide to M&A and, you know, one of the questions I think probably everyone wants to know right now, Ben, is have you accidentally ever overpaid any of your employees, and if so, do you have any job openings?

Ben: Not accidentally, but, you know, given my job, I don’t believe in the term overpayment. We are hiring right now, so if you’re asking for a friend, you know, let’s just say his name is Brad, I think, you know, probably current market comp for Brad is a billion dollars or so a year, I would think.

Brad: That sounds very reasonable actually.

Michael: Yeah. Right. Yeah. You’re just, you know how to butter Brad up. Well, I’m glad we got that cleared up.

Brad: Yeah, I feel better.

Michael: Yeah. Okay.

Brad: Agreed. So Michael, you know, from a context which we all know that you love, you know, we talked about different seasons of a [00:08:00] business and then we also talked about the five phases in M&A, maybe for our audience members who are hearing this for the first time, just give a quick recap so we can then bring Ben on.

Michael: Yeah, so we are really honing in on M&A this season, and it can become easy to get caught in the weeds.

Brad: Yeah.

Michael: And so if you take a step back, and really we want people to understand that every business is in one of four seasons. They’re either in the building season, so they’re getting things going, they’re creating the infrastructure or they’re in the operating season, which is the day-to-day grind, and they’re getting their processes done and navigating the different fires and crises that pop up.

Brad: Yep.

Michael: Or they’re scaling, that’s another season. And at that point, there’s any number of things that can happen for them to grow whether that’s through hiring, opening new offices, raising capital to help fund it, all sorts of pretty heavy activity.

Brad: Yeah.

Michael: And then finally, you know, there’s the buying and selling season. So you may be buying a [00:09:00] business to add on to your business or it is time for your exit.

Brad: Yeah and that season tends to be heavy on the M&A side, and we kind of break that up in the five phases.

Michael: Yeah and so when you’re talking about M&A, kind of the five phases of an M&A transaction, you have the letter of intent or the LOI as we say on the streets, due diligence, definitive agreements, which is the legal paperwork.

Brad: Yeah.

Michael: And then you have a closing, which is a little less ceremonious these days than it used to be, but it’s the final part of the deal.

Brad: Yeah.

Michael: And then you have kind of post-closing obligations that arise, but for today’s show, we’re going to kind of spotlight the due diligence phase.

Brad: Yeah and speaking of LOI, Ben likes it so much. He has it tattooed on his bicep. So the next time you’re seeing Ben, just make sure you see the LOI tattoo. Well, Ben, you know, we’re excited that you’re with us today and before we really jump into the second phase was due diligence, [00:10:00] talk a little bit about Skytale so the audience members understand why, you know, well, why are you here then, I guess, right?

Ben: Yeah. I’m not sure exactly why I’m here, but, you know, Skytale, what we do, we do two things. We do management consulting and that you can kind of think of when we were talking about the phases earlier, the scaling phase is really where our clients utilize us, where they’re typically growing, scaling their organization, so they’re professionalizing it. Think of it as business building. That’s not as much as what we are here for today. So I’ll move on. The other piece of what we do is we do sell-side M&A which means that we represent our clients as we take them to market, and typically the buyer, our retort for them is going to be either a strategic, which, you know, generally speaking, means, a group that’s backed by private equity, but already built out or we’re selling to private equity or family offices themselves. [00:11:00]

Brad: Very cool.

Michael: Awesome. Well, you know, let’s kind of shift into, you know, kind of the M&A process, and the first part, at least the way we talk about it is the LOI and the LOI negotiations, but, you know, talk about your perspective on that, I hope that’ll help us build up to some due diligence questions and even maybe talk about what you do, you know, prior to the LOI with your clients.

Ben: Yeah. So in order to even get to the LOI phase the way that we like to work with our clients is I think we can break it down into generally four phases. And phase one is going to be, think of it as internal building and marketing. So what that means is before we show our house, if you will think of it as selling a house, you know, you probably want to stage it right? You want to take pictures of your family out, things of that nature. You want to be sure that when someone walks in, [00:12:00] you know, the bed is made at the very least. So what we’re doing here is we’re building what’s called a virtual data room, and essentially what that is, is think of it as a vault of documents of everything we know buyers are going to ask for. Accounting information, finance, tax documents, legal documents, formation documents, anything you can think of. We gather all the things that we know buyers will ask for. The second thing we’re doing, some of the marketing piece, it’s called a sim. Basically, it’s a 50-60-page book on your business, it describes your business. It describes the leadership within it, the owners within it, what the preferred deal structure might be, and historical and future earnings. Really, the goal here is that when a buyer reads it, they could, in theory, put an LOI right in front of you. They don’t, but that’s the goal that we’re aiming for here. When all that is ready to go, we’re ready to go to market. And now we’re getting into the IOI phase. I’ll define that in just a [00:13:00] second. When we have all that ready, we present our client with the buyer list. By then, keep in mind we’ve talked to our client. We know, generally speaking, what that ideal buyer is going to look like for them. So we put together a list. Typically it’s 30 to 60 buyers that we pitch to, and when they say it’s good to go, we turn it on. We turn it on the same day. And the thought here is if you have 30 to 60 eyeballs looking at you, you’re going to get not only the right valuation, but the right deal structure as well, and the right partner for you personally because you’ll be spending the next four or five plus years with them. So at this phase, we’re highly protective of our clients’ time. Typically, our buyers aren’t talking to them at this point in time. We’re answering questions on their behalf. Then we get the IOIs. We set a specific date. So what is that? It’s an indication of interest and generally what that means. It’s not an LOI. It’s a very loose letter that states, based [00:14:00] on the things that I’ve seen, I’m going to value you in this range, here is a theoretical potential deal structure of what you should expect from us. What we do then is, let’s say we have 10, we’ll take 10 IOIs side by side and try to compare apples to apples, valuation deal structure, you know, non-compete, non-solicit terms, and a little biography on each of the buyers with the goal being now we’re about to go into the LOI phase and our client needs to tell us, let’s just say that they want to talk to eight of the 10, these are the eight of the ten that look reasonable. Let’s go there. Our job then is to call the buyers and let them know you’ve made it to the LOI round. And what happens there is management meetings potentially where we update the buyers on the last few months of the business. In addition to a dinner and a site visit, pretty typical, this is where the buyer also gets to interact with the seller and vice versa, and they can both due diligence [00:15:00] on one another with the goal being coming out of that meeting. Think of all the work you’ve done ahead of this. The goal is that the buyer put a very solid LOI in front of you, the seller. And that’s when we get the LOIs. We get them a couple weeks after that. Final negotiating points, and ideally, this is when we like to joke with our clients. This is where we try to make their life difficult, where if we have a few really good solid LOIs for them to choose from and partners that they really like. And then you sign the LOI and you go into exclusivity, which basically means you’re engaged, getting ready to get married over the next 90 days.

Brad: Well, and I have one, I have several follow-ups, but I know we have other things to cover and I think when you were talking about a lot of different points, which were all great, probably the one question I think most people want to know is, who pays for that dinner?

Ben: Yeah, it should be the buyer.

Brad: Yeah. Okay.

Ben: Although, we’ve had one that slipped up and we had to pay for it, but definitely not the seller.

Brad: I think that’s a good point because if you show up and they want to buy you and they’re staring at you and I’m like, I don’t know how this [00:16:00] is going to work out if you’re not going to buy me my dinner too, right?

Ben: Yeah. Maybe they don’t have capital.

Brad: Right.

Ben: Might be a problem.

Brad: Exactly.

Michael: Red flag.

Brad: Exactly. That is a red flag. And, you know, that’s just stage one of this LOI and you know, you were talking about, you’re preparing them in that, prior even to going to that stage of really getting their house in order as you described it because what they don’t realize is once that LOI is inked, this is when they move that next level, which is the phase we call the due diligence phase, which is our term of art. We always talk about it being the underwear drawer moment where you had to open the underwear drawer and show the good, bad, and ugly. So I guess in your analogy, you got the house in order, but you shoved all the crap in the back room and once you open it all comes falling out and you’re like, this kind of looks bad, but from your perspective, one of the areas that you really focus on is really doing a deeper dive on their financials because that’s what the seller wants to see is like, hey, this is what you said you’re worth and now we want to really get a better idea and a term of art that [00:17:00] we hear often in this industry is QE, Q of E, or quality of earnings. And then during this due diligence process, tell our audience what they should expect during this M&A deal when that happens.

Ben: Oh yeah, this is a big point we discussed with them very early on, and first of all, I resemble that remark when you were talking about the house. It sounds just like my house, but, yeah. So what quality of earnings is, you know, to your point when you inked the LOI, the very first thing that happens is the financial diligence part of due diligence. And you know, the reason that it goes first is if there’s a possibility that a deal is going to fall apart, it’s at this point in time. Usually, if we get over Q of E, we feel pretty good about ourselves, but quality of earnings, it’s basically the buyer hiring an accounting firm to effectively redo your financials almost. They’re assessing and analyzing the quality of your revenue, expenses, and ultimately [00:18:00] down to your EBITDA historically, and they’re providing that report to the buyer. So you know to people listening, wait a minute, we’ve already provided the buyer all this information, what’s going on here? So let’s keep in mind we play in the lower to lower middle market, which means there’s high variability of the quality of work done on accounting. So what this firm’s going to do, let’s start at the revenue level, they’re going to typically change it from cash to accrual accounting. So what does that mean? Let’s say that I leave here today and I say, hey, you know Michael, Brad, I have a few legal things coming up. Here’s a $75,000 check. I’ll go ahead and just leave it here.

Michael: It’s a great idea.

Brad: Yeah, keep going. I like it.

Ben: If you’re on cash accounting, you’re going to be looking at this month’s revenue and it’ll be there. If it’s on accrual, however, they’re going to say, wait a minute you have Ben’s check here that you’ve cashed, but it’s going to go as a liability on the balance sheet because you haven’t done the work. As you do the work…

Brad: Oh, wait, did you want us to [00:19:00] work for that 75? I thought you were just giving it to us.

Ben: Ideally.

Brad: Okay.

Ben: Ideally.

Brad: So needy.

Michael: I know.

Ben: Yeah, I hear that a lot. So what they’ll do is they’ll adjust that revenue downward in this case because you haven’t yet earned it. Expenses are usually where the adjustments come into play so really popular ones really quickly would be owners. You know, these are founder owned businesses, typically. They pay themselves every which way. You’re going to adjust for market. So think of the get hit by a bus theory. If we had to replace you today, what would you cost at market if you weren’t an owner? Some of the clients will own their land and building, so we adjust for market rent. One-time expenses are adjusted for personal expenses. Like I know ByrdAdatto. I see ByrdAdatto yachts and jets everywhere. So those would be added back because it’s not normal operating activity, and then you get to know…

Brad: Whoa, whoa, whoa. That’s not normal?

Ben: I mean, in ByrdAdatto’s world.

Brad: Okay, yeah.

Ben: But that’s like top [00:20:00] 0.1% of the world ever. So then you get to adjust the EBITDA and hopefully, everything is fine. However, two points here. One, if your EBITDA’s actually higher, buyer’s not ever going to call you and say, hey, turns out I owe you a million dollars. However, if it’s lower, let’s take an example of a hundred thousand dollar EBITDA drop, which think of all the adjustments I just mentioned. Not very unrealistic, depending on deal size, but, it doesn’t sound like a lot either, does it? But when you talk about market multiples, you’re talking an adjustment of 600 to 1.1 million dollars on evaluation level. You’re probably going to get a phone call to come back to the table. So that’s where the buyer’s quality of earning comes in and you know, there are ways to safeguard against that if you’re a seller.

Michael: So one follow-up question for the audience, because Brad and I would really butcher, I know Brad would, I would probably get up to 75. Tell the audience what EBITDA means.

Ben: Yeah. So [00:21:00] EBITDA is earnings before interest, taxes, depreciation, and amortization. And effectively what that means is you’re taking your net income and adding all those things back because they’re basically accounting and tax decisions that mess a little bit with the actual earnings of the business. So it’s a very rough, it’s not perfectly cash flow, but it’s a rough way to estimate what cash flow of the business is.

Brad: Yeah.

Michael: Gotcha. Cool. Well, so let’s kind of move on to the next thing. Are there things, kind of jumping off on this Q of E conversation, are there things that the sellers can do proactively to best position themselves for kind of the best outcome here? I’m kind of thinking back to your beginning phases before you took the client to market.

Ben: Yes. So very early on we mentioned buy-side Q of E because it’s a [00:22:00] big deal. Our first suggestion, and it’s not for every business, if the deal is too small or not very complex, maybe not worthwhile or worth the investment, but 95% of the time, our suggestion is that our sellers at least consider doing their own sell side quality of earnings. This has a few benefits. One, at this point in time, you as a seller know exactly what your EBITDA should be. By the way, as mentioned earlier, oftentimes the EBITDA’s actually higher than we think, or you think so that’s not uncommon. Number two, it allows the buyers to then have much more confidence when they’re putting forward an LOI, a bid for your business because they know that this has been vetted. And, you know, do buyers bring you back to the table? Some do. Do they enjoy it? Most do not. It’s not a pleasant conversation when you’re trying to close and partner, so it gives great confidence, which therefore the third [00:23:00] benefit is it increases the probability of closing. So this is a long process, you know, having it fall apart is usually an emotional and psychological drain on you as the seller. So that’s number one what we would suggest. And if something does go wrong at the Q of E phase, guess what? The two quality of earning firms can speak together to figure out where the discrepancy is. And sometimes it’s on their side, not ours. If that’s not an option or of interest to our sellers, the other thing I would suggest would be at least work with someone who knows how to quasi get you there. All the adjustments that we mentioned earlier, like if our clients don’t want to do it. What we do is we try to do as best we can, a poor man’s version of it. We’re asking them, we’re going through the PNL, asking them, is this personal? Is it not? What’s this one time looking expense? Show me your gift cards, and your pre-paids. These are some of the revenue adjustments [00:24:00] from an accrual perspective. So we can talk to them about what to expect there to at least come up with, oh, and then rent, of course, we mentioned, to at least come up with what we think is an adjusted EBITDA figure to at least get us closer. But those are a couple of things if you’re about to go to market, If you’re thinking of going to market, but you’re saying I’m two, three years away, then my suggestion would be, get a really high quality bookkeeper or CPA who understands the industry and ask that they do your books the right way because you are thinking of selling someday down the road.

Brad: Did you, and I know we probably only have a few minutes left, but part of that process when you’re trying to get on board with someone, would you talk to them about moving from cash to accrual? Because it seems like most small businesses are cash based, and is that a hard conversation when you’re trying to tell someone to do that switch?

Ben: It is a hard conversation. Usually, they would’ve had to be a client of ours, and that trust has been highly, highly established because it’s a [00:25:00] very different way from looking at your business.

Brad: Yeah.

Ben: You know, you’re not looking at your bank account, basically. You’re looking at, have I produced the work and so forth. There are times when we suggest it. We try to be very conscious of the expense and everything else that goes with accrual accounting. Usually, we suggest looking into that when you’re at about 3 to 5 million of EBITDA. So, you know, roughly translate that to 10 to 20 million, you know, top-line revenue and you’re still growing and you’re still interested in scaling. That might be a good time to start researching it. Even outside of selling the business, if you’re looking at raising capital, Michael mentioned that before on the scaling, if you’re thinking of raising capital, doing things of that nature, some banks at that level will ask that you flip to that anyway. So we try to be very careful. It’s not for most, but, if it’s a significantly sized business, it would be something worthwhile.

Michael: Well, Brad, I’m gonna give you credit for [00:26:00] actually asking a good question. I mean, you can almost go home now.

Brad: Loop that, loop that.

Ben: I thought you gave it to him, Michael.

Michael: Well, you saw the note about, oh, well, Brad, I tried to help you.

Brad: Dang it, Ben.

Michael: Okay. All right. Well, we have quickly ran outta time. That was awesome.

Brad: Yes.

Michael: So Ben, thank you for joining us for the second time on the Legal 123s with ByrdAdatto. We are grateful for you. And so what we’ll do next is we’ll go to break and then Brad and I will come back on the other side and offer some legal insights.

Ben: Thank you so much for having me and what do I need to do to get a third time?

Brad: Ooh, well, there will be an unemployment law.

Ben: Oh, perfect. I’m an expert.

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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my co-host Michael Byrd. Now Michael, this season, our theme is, The Hitchhiker’s Guide to M&A. On today’s show, we had our guest, Ben Hernandez, join us and we were kind of, I use the term, we were talking about the underwear drawer phrase. You like to call it the proctology exam phase, but we’re really talking about due diligence and you know, and Ben brought up really the focus of the financial aspects of due diligence and really the focus on quality of earnings analysis.

Michael: Yeah. I mean, just to recap, you know, I’ll take us from 50,000 feet down to Ben and [00:28:00] quickly, I mean, we started by talking about every business is in one of four seasons of a business. And then, you know, if you’re in that fourth season, which is the, you’re buying or selling a business, that’s really where we’re talking about mergers and acquisitions. And then even Ben drilled down there and really talked about, you know, his journey when they’re helping someone as a seller trying to take things to market and there’s, you know, getting the house in order from their view of the world. And that’s, you know, getting the documents together and getting the financials together. And then, you know, you have this process that gets you to a letter of intent. And then we get to this time period where there’s due diligence and it starts, as you know, with the financial due diligence. And it was really fascinating because Ben broke [00:29:00] down this term that we all hear and we just kind of run from, cause we don’t know what it means, Q of E. We think, ooh, that’s fancy. Quality of earnings and I loved how Ben broke down for us today really, you know, what we’re trying to get to is the buyer wants to understand what the cash flow is, and they’re trying to weed through all the ways that you have reported your income and your expenses and get to the true number.

Brad: Yeah, and you know, Ben was talking about certain things that they might start looking at, so, other things that during this phase that may impact, again, the way the guys with the fancy little hats on, or the bean counter start looking at stuff. There’s so many things they could be looking at. Could they be looking at your liens or other encumbrances? Could they be looking at certain employment contracts that have certain guarantees that are part of it? Are they going to look at litigation claims and potential outcomes of those claims? I know that regulatory compliance we talk about all the time. [00:30:00] I was part of a deal where it blew up because they couldn’t quantify what the impact of that would be. They might be even looking at other aspects or certain documents missing, but they know it exists and how does that then impact the magic numbers Ben mentioned, like, he didn’t say Groupons, but other gift cards and stuff like that, that can kind of deal with it. And then maybe you have so many investors that can convert their ownership or you have options or you have large loans out there, everything like that. And that’s why I think what Ben said in the very beginning was so important. If you have your house in order beforehand and you know what’s out there, that actually will help you either clean it up before you go to market. And then how it most likely has a higher impact on the overall valuation. But Michael, we’re really almost at time, so what are some of your final takeaways?

Michael: Yeah, I mean, if you think about, you know, the way we started today was someone got overpaid $180,000. Sometimes those gotchas come up in the Q [00:31:00] of E phase and those are big deals to deal with, but I loved how Ben talked about there are things you can do to prepare and make sure everything’s in order. And oftentimes it’s not the big gotcha like that, it’s what is the quality of the way you’re reporting your income on your books. You know, money’s coming in. Do you have someone that knows the industry and is accurately capturing what that is so that later when you’re doing a, you know, doing a Q of E, you can more quickly get to the real number? That’s the goal, is to get to the real number. And we’ve just seen through all the deals that we’ve done over the years that, that can be the real hiccup is the deal falls apart because, you know, the buyer thought they were getting X and it turns out that it was really something less.

Brad: Yeah, absolutely. Well, audience members, that’s all the time we have today. Next Wednesday, we have Dr. Rachel Walker joining us [00:32:00] as we continue down this journey of the Hitchhiker’s Guide to M&A, and we’re going to learn her perspective of being on the buyer side of a medical practice.

Outro: Thanks again for joining us today, and remember, if you like this episode, please subscribe. Make sure to give us a five star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at ByrdAdatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues. [00:33:00]

ByrdAdatto founding partner Michael Byrd

Michael S. Byrd

ByrdAdatto Founding Partner Bradford E. Adatto

Bradford E. Adatto