Successful business acquisition requires rigorous financial due diligence, focusing on verifying revenue authenticity through invoice sampling, reconciling tax returns with financial statements, analyzing cash flow patterns rather than just profits, and identifying customer concentration risks; buyers must challenge every add-back in EBITDA calculations and understand that clean financial reporting creates business value while disorganized books signal operational risks.
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How to Buy a Business Without Losing Your Shirt: Expert Acquisition Secrets RevealedAdded:
Thank you for joining us today. Welcome to Business Acquisition Catalyst. Our mission in today's episode and future episodes is to provide you the knowledge resources to get you to the next step and to take action. So, these future episodes will be much more interactive, close setting where you'll be on camera asking questions. We'll do case studies.
So, this is not going to be passive in the future. Today, we have a panel of experts on and this is very, very deliberate. So, let me frame today for you. What we want to do today is going to be action-packed and I have a feeling you'll feel like you're drinking out of a firehose. So, let me give you the first nugget of the day is taking notes.
The You don't want to get stuck taking granular notes cuz you're going to miss the next bit of expert information. What you truly want to do is take topical notes. So, jot down the main focus and maybe a reference to it. So, later on when you read it, that conversation will come back and and very, very helpful to take notes that way, very topical in that regard and it will serve you much better later on and you won't get so distracted today. The reason why I brought these experts on today is we've all heard it many times, your network is your net worth. So, the panel today will be made up of a group of millionaires that have done extremely well in business and the reason why I tell you this is not to impress you, but to impress upon you. I heard when I was a a younger man in college, people say that, you know, if you want to make $250,000 a year, don't ask somebody who makes $150.
They can't tell you how to get there.
You want to become a millionaire, don't ask the person who's living paycheck to paycheck. And unfortunately for most people, that's usually your family, your friends, and the people you're closest with. So, it's very important not that you abandon those people in your life, but you expand your network. Cuz the other opposing factor that I see people who shut out those limited belief people, right? The scarcity mindset because you you you can't have a scarcity mindset if you're going to be a business ownership. And then they go the lone wolf road. And that lone wolf lone wolf road is very dangerous. A lot of pitfalls in business ownership. So it's very important to use your network, your resources, and a team of people. So I bring you today what I find to be the most treacherous path for a lot of people who have skills in some aspect of business, whether it be in in food, in automotive, or in sales. And they think that's enough. And the biggest pitfall is finance. So today's Today's panel is made up of all financial experts and different aspects of financial categories. So that's why there might be a little overlap, but I want to make sure that you understand the breadth of business is finance. There There are other buckets of business, and we're going to categorize those and discuss those later on, but finance is the breadth of business. So business ownership is not everyone. You need the right attitude, so your mindset is so important, and aptitude, the ability to retain knowledge, implement it, and consistently pour out that action even when things aren't necessarily going your way. So with that said, I really want to make sure that people understand that business ownership is What am I saying? Okay, the Cody Sanchez world I respect and and have the utmost respect for Cody Sanchez. She's incredibly smart and done great things. I I was in her acquisition group before she blew up.
The problem today with that group of of experts is a little information is a dangerous thing. So the buy a boring business and collect mailbox money isn't the reality of it. So people go off of that, and it gets very very dangerous.
So we're here and the ongoing conversations we're going to have on this platform are about providing you the right resources, the right knowledge to go forward. So, what I'm going to do today is introduce We're going to go one by one, but the first the first gentleman we have coming up today after I introduce my partner co-host Paul Lakteen is going to be Paul LaJoy. Paul graduated from Notre Dame, graduate finance degree, went into accounting for one of the big four firms, I believe, decided he didn't want to do that his entire life and he got bored with that, so he sought to buy business with his brother. I think their initial business he bought he still owns today. I'll let him tell his story and uh he took his hits and and came out on top and I think over time, and he'll correct me, he's owned or operated and sold bought sold about 15 different businesses. He owns a few and operates them today. After Paul we'll have Alex Velasquez. Alex is a a global accountant, KPMG, traveled the world and uh did high-level accounting, but he has brought his expertise in his own firm down to the middle market and smaller businesses. He is a strategic thinking accountant. And the reason why I say that is you cannot own and operate and scale a business with an accountant that is your W-2, put the numbers in a box, file your tax accountant. You need strategic thinking people. And that's every area, whether it be on the finance side, on the lawyering side, and we'll get to that in later episodes. So, that's what Alex brings. He's very strategic in his approach in helping businesses. He has uh many services within his synergistic company from the bookkeeping side to financial accounting and strategic accounting work as well.
And then rounding out the day we have Tom Daley. Tom Daley is also a Notre Dame graduate, a finance degree, and he has He had really a great opportunity.
Coming out of school, he worked with I think the gentleman is close to being a billionaire today, with a B, and he got to be his right-hand man doing family office, like private equity kind of stuff, buying businesses for his own family office. And Tom was able to evaluate deals, acquire those deals, operate and grow those businesses, and maybe even sold a few off. Tom learned a great deal. Then he started buying his own companies and doing it on his own.
And Tom's still doing that today. In addition, he is also formed a synergistic financial firm that handles bookkeeping, payroll, quality of earnings, a fractional CFO work. But today Tom is going to speak more of about buy-side advisory work. So he's going to bring some really great examples in that area for you. My partner in business and my co-host today, Bo Eckstein, brings a array of expertise, first and foremost in SBA financing. He is absolutely an expert in that and this ever-changing world of the SBA. I think they recently changed some some limits recently in the last couple of weeks. Bo also does franchise brokering nationwide from resale to startup. In addition, he is a marketing expert. So Bo Bo brings a a toolbox of skills to the business ownership world. And my name is RJ Galbrisi. I've been an entrepreneur since graduating from college, owned several businesses, often at the same time. I've at any given time had hundreds of employees. I've had thousands over the years. And everything from hospitality to insurance to private lending, car leasing, brokerage business, real estate, the list goes on, e-commerce, list goes on. But I'm going to default to the experts today for the sake of time. And in future episodes, I'll I'll give you the wisdom I learned mostly from doing it the wrong way. And that's what I'm going to bestow upon you as well as the other experts. You don't have to lose money. You don't have to make those mistakes. So with with that said, one little teaser. If we have time at the end, I'm going to tell you a case study, Beau, XT and I, young man Nestor came into our mastermind just talking and he was a perfect example of the Cody Sanchez wealth today with a little bit of knowledge and he was going down a treacherous road. He was not prepared for. Either he would have given up or he would have gotten himself into a lot of trouble going to business ownership on his own. He came to Beau and I. We helped him negotiate a deal, put him in business. He is now a partner with Beau and capital expertise. He is running the day-to-day of the business. We changed his life. Beau and I actually were on a marketing call yesterday on how to change all our paper clicks and grow the business. I have a stack of applications on my desk to hire people. That's what we do. There's different ways to buy businesses. Many people think money is the obstacle and that prevents them and that's a justification. There are many, many ways to buy a business. So, with that said, Beau, I'm going to hand it off to you and we'll take it to the experts after you. Thank you.
>> Perfect. Well, that was awesome. Yeah, I think the the point of this is that I've been hosting events for probably 15 years now. I've had 28,000 people the last 6 years register for my events and through Eventbrite and I just have a passion for sharing information cuz that's how I get smarter every day. I get around smart people and I learn from smart people. It's not rocket science.
If you're willing to do that in in in the business acquisition space, I have a lot of people come to me who are not prepared to buy a business and I think people get get inspired to buy a business, but you really have to be prepared because even if you're able to buy the business, it doesn't mean you're going to be able to successfully run it.
So, every day is a learning process for you got to learn every day and you're going to you got to get around the right people. So, that was RJ and my idea about doing this event and then having a business buyers club is to really just provide value to people. If you have questions, you can put them in the chat.
Today we're not going to bring people on. When we do our regular meetings, you'll be able to get in there and ask questions and you'll be on camera, and that'll be a lot more personable. But, today's really about just look learning new things. And RJ, if you want to kick it off with Paul, I think that's where we should start.
>> Hey, great. Thank you, Bo. Paul, give us give us a little quick background. I I don't know if I did you a justice there.
So, tell us about you. Tell us what you have for our guests today.
>> Yeah, sure. Thanks, RJ. Bo, thank guys, thanks for having me here. Explain a little bit of my background so you guys understand where I'm coming from. As he said, graduated from Notre Dame with an accounting and finance degree, went straight into big six accounting, and stayed there for about 2 and 1/2, 3 years, and then did corporate finance in various roles for about another 10, and then ventured out and and bought my first business about 25 years ago. So, that's that's kind of a little bit of my background. I got five kids that keep me super busy. And as Bo said, as as I completely agree. I am super passionate about what I do and helping people in this space. And under no circumstance try to navigate this by yourself. Under no no circumstance. Do not. And I'll get into that uh why in a second. But, what I'm I got two quick topics to talk about here. Buying a business buying an established business versus starting one from scratch. And then, because I am a CPA, I'm going to talk a little bit about taxation and how important that is and how that's overlooked. But, probably one of the most important topics that we may talk about today. Any questions before I start, RJ RJ?
>> Nothing thus far. So, go ahead keep on rolling.
>> Okay, awesome. Very good. Um and by the way, everybody that's here, you've taken step one, so congratulations on being here because you definitely need to seek out expertise. So, you're already on the right path. So, very good. All right.
So, buying versus building. Man, buying is super sexy, right? Buying buying building all that sort of stuff.
Everybody loves building from scratch.
It's super sexy. It is not the way to go. So, what I tell people, so 95% failure rate for people that are starting a business from scratch. 95% failure rate.
>> Wow.
>> Those are not good numbers. Not good numbers. So, I've started some from scratch. So, I'm just going to run through some stats here. So, I bought 15 businesses, existing businesses. One failure. Do the math on that. Is that 94%? 95%? 95%? 95% success rate. I've started four from scratch. Three have failed. 75% failure rate for me. And I know what the hell I'm doing. So, I will tell people if you if you still have that wild hair and you want to start one from scratch, go buy one or two or three existing and start making a a crap load of money.
And then if you want to start one, go do it. Because you need to be able to feed that animal, right? Because that's the problem with starting one from scratch is you don't know when you're going to be profitable. All it is is going to be taking money out of your pocket on a daily basis. You got payroll, you got expenses, you got rent, you got utilities, customer acquisition. When's that going to happen? Is that 6 months?
12 months? 18 months? 24 months? When do you become profitable? When do you become break even? Nobody knows. So, how much money do I need for that startup?
Do I need 50 grand? 150? 250? 300,000 dollars? So, the number one reason why companies fail, both ones you start from scratch and ones you buy, is lack of cash. Understanding working capital requirements, i.e. money coming in versus money going out. Actually super hard to do for ones that you buy, right?
Understanding that, right? Getting getting that working capital requirements in that initial loan package with the SBA. That is probably the hardest thing to do. I still struggle with that, right? What are your payment terms with your customers? 30 days? 60 days? 90 days? What aha moments are you going to have post closing? You got a forklift that goes out, it's 50,000 dollars to replace the engine.
Did you budget it for that? Have you anticipated that, right? Did you understand that you're buying a a allotment of rolling stock, i.e. cars, trucks, and you're in a state that you got to transfer titles, so you got to get title registration, and most likely pay sales tax cuz you just bought those trucks, right? So, do you anticipate another $70,000 within 2 weeks because you got to transfer titles? This is why you seek out subject matter experts.
There's literally 500 things to do from I woke up this morning and I want to buy a business to closing, post-closing, and you know about 10 of them. You don't know about the other 490. That's why everybody's here on this panel is make sure you understand that process and do not under any circumstances, I mentioned earlier, do this by yourself. And I bring that up for a second time because man, I'm super smart. I went to Notre Dame. I think I'm smarter than everybody else. Besides the other Notre Dame guy in the call. Exactly. Exactly. And and I tried to do this by myself for 10 years because I thought that process I thought me gra graduating Notre Dame, I'm a CPA, I don't need anybody's help. Boy, was I wrong. And it took me about 10 years to pull my head out of my ass to realize that I needed subject matter experts in the areas where I was not a subject matter expert. It cost me millions of dollars that first 10 years. Millions of dollars. Right? I mean, think about it.
Until you until you understand your ego and what you're good at and what you're not good at, you will struggle. Look at yourself in the mirror, find out what you're good at. Are you good at operations? Are you good at marketing? Are you good at sales? Are you good at accounting? Do you unders Do you understand and operations? You know, what are you good at and what are you not good at? Say there's 10 hats that you got to wear when you're running a business, and you're good at three of them.
Who do you hire for the other seven?
Do we understand that? Super important.
It took me 10 years to figure that out.
>> Well, I'm I'm going to I'm going to interrupt you right there, and that's a great point because what I find in my in my daily interaction with people is exactly that. But usually, the financial aspect is what's missing. They might be the best auto mechanic in the world, great at customer service, even great at marketing. So, those levers and function of of business are strong, but they don't know how cash flow works. So, you could be People don't understand the concept of this. You could be profitable and go out of business and be like, "Well, how is that even possible?" Well, because cash flow is the breath of business. If you If you have terms and you're not receiving money in time and you got to pay today, well, you could be in solvent before before you able to collect those those dollars and that's what people get upside down. So, those points are excellent. So, you need to have a strategic person in each area to make sure those your blind spots are covered. So, I'm sorry to interrupt you, but I wanted to emphasize >> And I totally agree and the other thing I will say is like, you know, you're buying a two a $2 million company, why are you pinching pennies and not wanting to pay a consultant 10 grand? You're about ready to put your house on the line for a personal guarantee and you're being cheap and not spending $10,000 on a buy side consultant? I I don't understand that, right? So, there were there was somebody that I was consulting with. This was actually last week. We thought we had a smoking hot deal.
Smoking hot deal, distribution company in plumbing plumbing space and we're buying it at 3.5 X and we thought we had a great deal, right? It was about a $3 million purchase and then he sent me over the balance sheet. By the way, P&L sexy, balance sheet is where all the happens. Balance sheet, tax return.
If you don't understand the balance sheet and the tax return, you don't know what you're doing. The balance sheet is the history of what the P&L did for the last 10 years. I can look at the balance sheet and tell you everything about the company, okay? So, this guy overlooked cuz the first thing that came to my mind is like, look, there's there's accounts receivable to 1.8 million. So, there they What I What I found out is their their payment term is 90 days, but not only was it 90 days, their customers still weren't even paying them within 90 days. Their day sales outstanding, DSO, day sales outstanding. That's pretty much I I I bill somebody a dollar today and when do I get it? They were getting it 110 days later. So, what we thought we were buying something at a 3 and 1/2 X, which we we we thought was a great deal. He needed an additional 1.5 million dollars of working capital. So, now what what was a 3 and 1/2 cap or 3 and 1/2 multiple turned into a five multiple and we walked away from the deal because they didn't look at the balance sheet. All they cared about was owner's discretionary income, right? So, you got to understand you got to understand that, right? So, let let me I kind of diverted here for for a couple minutes. Let me get back to buying existing businesses. So, why I love buying >> Paul, sorry Paul, before you go there, let me let me just put an asterisks on that. So, those on here because I'm sure we have people that are more sophisticated and people that are novice and green to this. When when Paul's talking about a multiple three and a half multiple, we're going to go into that in later segments cuz I don't think the time now, but but that's the evaluation of the business. So, a lot most businesses are going to sell forget top-line revenue, bigger companies and depending on the category of business sell based off of top-line sales. Most of the time we're looking at what's called EBITDA, SDE, seller's discretionary earnings or cash flow.
That's really the what the owner benefit of the company's benefit after they pay all expenses. What's left in profit and then category category of business changes that in very different multiples and I'm going to cover that in another show, but that's what Paul Paul referred to. Three and a half times the seller's discretionary earnings is what the value of the business was. Go ahead Paul, I just wanted to add that.
>> Okay, so a couple more couple more comments on on why I love buying existing, right? So, I have a threshold of 10 years. So, if the company hasn't been around 10 years, I don't buy it under any circumstance, okay? So, and and I just bring that up as an example.
So, the flooring company that I bought my first my first pigeon purchase, it had been around 20 years and I'd owned it for 25, so 45 years. R.J., what's what's the likelihood it's going to be around another 45?
>> Higher than 95%.
>> Yeah. So, it's been through the Great Recession of '07, '08. It's been through a a worldwide pandemic. It's going to get through anything. So, while I like 10 years, it's most likely been through a recession, an economic downturn in those 10 years. And if it survived, it's most likely survive for another 10.
Okay? So, that is that is non-negotiable when I am buying a business. Been around 10 years. My other non-negotiable on buying a business is I don't want any family members involved in it. Okay? The seller is selling, but if they got a sister and a brother remaining, no. Walk away from it. Walk away from it. And and just make sure you understand what you're doing and and seek help. I'm going to If hopefully you guys are are listening to Acquiring Minds podcast, okay? That is I think the best podcast out there. And I'm going to bring up something that just dropped two or three weeks ago. Somebody he had on, it's a good listen. He tried to navigate the purchasing process by himself. And he bought a $2.1 million HVAC company, and it went bankrupt in 7 months. That's hard to do. I could If I tried to screw up a company in 7 months, I don't think I can make it happen. So, he tried to navigate it because he thought he was smarter than everybody else. Tried to navigate it by himself. And what he failed to do, there was two massive, super important employees that left 1 week after close because he didn't ask the questions during due diligence that he should have. Hey, is there anybody here that's remaining with the business that if they get hit by a bus, this company's going to suffer?
>> We call that key man risk. That's key man >> What Very preventable. Very preventable.
If he asked those questions, so he could have locked both of those people up with employment contract before the purchase, and maybe incentivize them with 1 or 2 or 3 or maybe even 5% equity, and those people would have stayed there for 2 or 3 or 4 or 5 years cuz you just locked them up. Highly preventable. But when you do this by yourself, it could be life-altering. I mean, that guy just lost his house. He may have lost his marriage if he's married. I mean, these these are the risk that you are taking if you don't seek out subject matter experts like the five people on this panel.
Does that make sense? So, it's just it's a very difficult process to do, but it is I will I'm trying to punch in the face to make sure you know yourself what you're getting into, but I truly believe this is the only way the only way a normal person can create generational wealth. I started it my first purchase with a $45,000 down payment. 45 grand.
I'm worth over $20 million now. So, I considered myself a normal person back then. I consider myself a normal person now, but this is this is the only opportunity for a normal person.
$45,000. 20 years later I'm worth 20 million. This is the only way that a normal person can create generational wealth, but you can't do it by yourself.
>> Yeah, that's great. Paul, thank you for that. And I don't want to go deep into the difference between business ownership and real estate because they're both great vehicles and and I think everyone on this panel has in some ways involved in real estate investments as well. But the truth is that real estate is a slower way. You're getting a much smaller return, but business ownership much higher returns, but it's a living breathing thing. It's like taking care of infant. It needs nourishing. It needs constant attention and you got to be on top of it. Employee brought some really great points and I come off a lot like you. We're we're businessmen who sound very cynical. I spend most of my time talking people out of buying businesses at this stage of their life. They need they need to get the right mindset. They need to be they need to be all in. They have to understand the risk involved. This is that's why I throw shade towards Cody Sanchez as much as I respect for him because they make it sound so easy. This is not always plug and play. There are difficulties. So, I thank you for you know, you know, putting the warning out there, but it it is it is attainable because you just need to you need to create the team. You need to rely on people and going back to your point about scarcity. I was raised in a a scarcity mindset as many people are around money. I'm not the only one and Paul's right. I buy businesses. I'm not afraid of the big investment, but then the part to pay the professional experts the extra 10,000 all sudden I don't need to do that and you and you you put that together and you say wait a second. Why apply that mindset to scarcity now? That is the insurance you need to raise. I'm always about raising as as Paul is and everyone on this panel, raising the highest probability for success. You want at that blackjack table, you want that that probability for success in your favor. You want to shift those odds and the way you do it is by a lot of things you're going to learn today and in future episodes. Paul, I thank you.
Is there anything else >> Yeah, let me throw and and Alex you may get into this a little bit more but I'll I'm just going to bring it up as a topic here is legal entity creation. And Alex, you can maybe go into a little bit more detail on this. People overlook it.
People do it by themselves. There's four boxes to pick, right? So you know, sole proprietor, partnership, LLC, LLC taxes a partnership, LLC taxes and S corp or C corp, okay? Not that hard. I'm going over this super fast. There's four or five boxes to pick. You better pick the right ones. And then when you go over to get your EIN, your your your federal ID number, there's three or four boxes to pick. You better pick the right one because if you pick the wrong ones, you you you've just you're paying way too much in taxes. There's four or five ways to become wealthy. One of them is not by is one of them is not by paying taxes, okay? I make over a million dollars a year. My average tax rate is seven That's because I I've I'm being a CPA, I don't do my own taxes. I seek out subject matter experts to make sure how do I minimize my taxes? How do I pay myself? How how's this legal entity needs need to be set up, right? Do I need holding companies? Anything like that. You've got to seek subject matter experts. Do not do this by yourself.
Right? So, for it I'll say one more thing and I'll let you go. So, most people would set up LLC and they do single member LLCs. So, it's just you.
It's it's me. I'm setting up Paul's the only owner, single member. In the eyes of the IRS, that is considered or can be considered a disregarded entity and you will be taxed as a sole proprietor paying the worst and highest tax rates of any of the entities because you didn't know what you're doing. So, I bring on one of my children as a quarter percent owner on all my LLCs. And now I'm now multi-member and now I have better tax benefits. Okay? So, we don't need to get into this super confusing topic, but I just wanted to throw that out there as another thing that you think is easy and not important, but super important and if you don't bring in the right people to help you consult on that, you're making bad decisions and it's going to be massive consequences.
Does that make sense?
>> That's fantastic. Thank thank you for that, Paul. And there are opportunities.
So, there's a liability purposes, but the the other aspect is the tax purpose and that's why you have to seek experts because I've done that and I've changed corporations as I grew as as the business grows I took on more employees, I was able to change the tax structure, but but that's a great point. So, so thank you, Paul. There's currently no questions, but but if we do have questions later in the chat, I will bring them back to you and we could answer them on another episode. So, thank you, Paul. Appreciate you joining us.
>> I'm just going to drop my video here and yeah, yell at me cuz I'm just going to drop in the other room. So, thanks for having me, guys.
>> Thank you. Appreciate it. Thanks, Paul.
All right. So, so Paul gave us a little background on himself and his businesses. We're going to have a Paul on as a regular guest cuz, you know, each each one of his entities on its own is a great story and there's a lot to be learned there as all the as the guests today. So, we'll we'll get back to Paul in another episode. Any Paul, anything you want to add? Otherwise, we'll go into Alex's story and and from him.
>> No, I just thinking about tax stuff right now. I'm thinking like cuz I'm a some of my and this is why you want to be around smart people. It's just but some of my stuff I was always that if it's not if it's a single member LLC, I like to do it cuz it passes through to your personal tax returns for like depreciation and things. So I'm just I have a lot of questions now. I think that's the point of this, right? You're going to always come up with questions cuz like you hear something then you're going to go, okay, well, for my circumstance stances cuz everybody has a different situation. If I want to take this depreciation and offset on my personal through my personal tax returns. So that's why you got to get the right professionals, right? Cuz like I'm going to make a list of questions. I want to keep learning because I want to be dangerous enough to ask the right questions to my CPA or my tax professional to really understand how it all works. So anyways, that was just my food for thought. Always learning something new and and asking the right questions because everybody has a different situation. So you understand your situation and you want to ask those questions uh pertains to you.
>> Yeah, that's why I'll go back to a little information is a dangerous thing.
But over the years working with my accountant, I have found that to start there was one structure made sense, but as the business evolved and took on more employees and more profitability and maybe less depreciation, that changed.
But but again, I don't play in that world. I just take the experts guidance.
So speaking of experts and speaking of taxation, Alex, welcome. Thank you for joining us today.
>> Yeah, thanks, guys. Thank you, RJ. Man, we got some good nuggets there from Paul. There's some good stuff. Really interesting points there that he brought up, but you know, all great, really valuable stuff. Really excited to be here with you guys today. Happy to go into some of that structure with S corp and LLC and all that, but let me go through I prepared a bit of a deck here I can kind of jump through, but you know, my focus today is to really help everybody here think about, you know, if you're looking to buy a business, what you know, in that due diligence process, right? You're going to be looking over financial statements. You're going to be looking over you know, P&L, balance sheet. You're going to be looking over the tax return.
So, really what there there are a lot of red flags that could jump out to a professional when they see it. But for somebody who's just doing it for the first time or or or maybe it's a new business or new industry that they're looking at, they may not be that obvious. But there's some really standard ones that kind of play across the board for any business, right? So, we'll dive into that today and talk a little bit about what are the red flags, what are the opportunities as you're buying a business so that you can create more value for yourself or for a potential exit. Or if you currently have a business and you're looking to sell, how do you maximize that value, right?
What is it that that buyers are looking for? How do you make the financing easy, which which will will bring more buyers to the table and all of that. Let me know if you guys can see my screen here.
Yeah, we see it. Okay, perfect. All right. So, what buyers miss. So, we're just looking for red flags, hidden opportunities, and cash flow. You know, RJ, you brought up cash flow earlier.
That's critical. Um so, we'll talk a little bit about that today. Uh all right, who am I? Why listen to this guy?
Alex Velasquez, CPA. I spent most of my career at KPMG based out of the Los Angeles office here. Did a 3-year international assignment in our São Paulo office in Brazil, kind of head up the SEC desk out there. And today, I own two businesses. One is Horizon Advisers.
We do technical accounting advisory services for middle market pre-IPO, recent IPO. So, average client size is about 300 to 500 million dollars in revenue. We help them in the IPO process. We help them with SOX implementation in their internal control environment. We help them with technical accounting when they're buying a business, making sure they draft the technical memo and that they get the right accounting treatment there so that that external auditors can get through it quickly and when they file the 10K, it's clean for all investors to see. We also help draft 10Ks, 10Qs and all that.
So, in servicing those large companies and in a career in auditing those large companies, we we've developed Beyond the Books, which is a second company here that we're running and what Beyond the Books focuses on is just bringing some of those best practices in these large robust accounting and finance departments down to growing small businesses. So, any small business that's 2 to 10 million in revenue, they've kind of outgrown a basic bookkeeper. They're now looking for more insights, strategic insights and so we offer fractional CFO services there. Get them on a monthly close cadence, get them on accrual basis accounting so we can do proper analytics on a monthly basis. I take over the bookkeeping, make sure the quality of the data is there and then cash flow projections and management, which is always, you know, a scary kind of thing for most small business owners. You know, always wondering if they're going to have enough cash for the next payroll or if they have to, you know, quickly inject cash into the business, understanding why and how to prepare and plan for that ahead of time. So, So, three questions every buyer should ask. When you're looking at the financials, any of this stuff actually real, right? Is the revenue real and is it sustainable? That's an important piece, too. Is the profit real? How much of that is actually going to stay with you? They're probably trying to inflate it, right? When we're doing audit, we always have what's called a professional skepticism, right? We trust but we verify. So, a seller is going to try to inflate the revenue as much as possible so that they get top dollar, right?
They're going to try to inflate their profits as much as possible. It's not that they're trying to be fraudulent or misleading, it's just it's just the nature of the beast, right? It it could be something that they're doing inadvertently or or good natured but they're accidentally, you know, it overstating or or exaggerating things. So, you really have to be diligent about looking at this stuff, right? Or hiring the right people to help you look through it.
>> Alex, if if I could just interject what I see on a regular basis and and what novices overlook is the history of people in the structure of the company.
Very simple way to raise the bottom line is you eliminate a regional manager, let's say, who is making $150,000 a year. So, that money goes right to the profitability of the company, but there's a vacancy there. They might be able to keep that company going without that position for a little limited time, but eventually that person needs to be replaced for the sustainability and the health of the company. But But But for the short period of time, you're going to pay what we talked about before, that multiple on that $150,000. So, you know, if you look at that, you know, as as a multiple, you're you're paying an exponential rate, and eventually that profit's gone. You have to reinvest it.
So, So, that's That shows up every day when I evaluate businesses. It's one to double down on. Thank you.
>> Yeah, and and you know, the the name of the game here is I mean, it's kind of cat and mouse, right? So, we talked a little bit about the inherent nature of a of a seller trying to inflate their profits, and a buyer is trying to squeeze it down, right? Because what's the game? The game is you're paying a multiple, so as RJ mentioned earlier.
So, for for those that that know, it's like a refresher, right? But for anybody that's kind of new to this, the way you kind of start negotiations is you look at the profit in a given year. And you multiply it by a standard average for that industry, right? So, if it's 3x or 5x EBITDA, you're essentially paying for that revenue for the next 5 years. And then And And so, what you have What you're doing as a buyer is you're verifying that this revenue is going to continue, and this profit is going to be sustainable for the next 5 years to justify the price that you're paying, right? And now, for you to be savvy and to to increase value in your in your purchase just like when you buy a home and you flip it, you make it look nicer and cleaner and then you sell it for a higher price. You're doing the same with the business, right? You're trying to maximize that profit after you acquire it, right? So, they because it's based on a multiple. If you buy 3x on a million dollars of profit, you're paying 3 million for the business. If in the next year you get that profit up to 2 million dollars and it still sells for 3x, you can now flip it and sell it for 6 million, right? So, you've created 3 million dollars in value by doing that, right? So, that's kind of the game, right? So, as a buyer when you're looking at the financials, you're trying to identify anything that is not going to be consistent year over year or any risk that, you know, some of this revenue might go away or some of these that the value in the business could go away, right? And then any opportunities that you can add to the business, right?
So, first thing is the revenue real?
Second thing, is profit real? Third thing, does the cash actually show up?
RJ mentioned this a little bit earlier and we'll dive a little bit deeper in this today, but I'll try to move quickly here so we don't spend too much time on this. So, ultimately you're trying to answer one of these three questions. All right, most expensive mistake. Most buyers focus on revenue and EBITDA or sellers discretionary earnings, but the experienced buyers are focused on the quality of those numbers, right? So, anybody can give you anything on a piece of paper, right? You need to verify that that information is correct. So, a few things you could do when you're looking at revenue, what do we do as auditors?
When you're at these big four firms, you go into these companies, all you're doing is you're signing a document, putting your life on the line saying that these financial statements are correct. So, how do you verify that they're correct? You got to look at every line item and then you got to drill into it and you got to do these tests to make sure that they're legitimate. And if you find a difference, you adjust the number, right? So, first one is revenue. What we always do, you take a sample of the revenue and and statistical averaging says that if you take 25, any more than that, you're not getting much more benefit, any less than that, you're kind of losing the benefit. So, that's kind of like a sweet spot where you're not doing more than necessary. Sample 25 invoices from the year and trace them down to payments. Make sure that you can see that that revenue actually came in and that a real person on the other side gave money for that revenue because if they're inflating revenue or they're trying to overstate it, they're going to do it by one of two ways. They're going to fake invoices. So, if nobody ever paid for that invoice, then you know it's fake, right? Because the if somebody's paying for it, then there's some legitimate uh business case there, right? And and and a legitimate buyer.
The other way is to do like a top side entry where they'll just book, you know, an entry to increase the revenue. So, you want to look for those. But, if you're sampling down and you're looking at actual cash received, you can trust that that revenue. And a sample of 25 can allow you to to get comfortable over the entire sample up to 250, 300 or more invoices in the year, a sample of 25, if there's an issue in that population, you're going to catch it in 25. So, if you find one or two that are odd, you can expand your sample and now test 50 and you can trust that a certain percentage of that is being manipulated.
Operating expenses, you want to reconcile, so you want to look at at at the bank statements or the credit card statements because again, that's the cash, right? That's what was actually paid for services that they took on. And so, if that actual payment didn't make it onto your P&L, then you want to catch that, right? So, your your bank statement and your credit card statements, you're going to want to pick some larger transactions there, some transactions that look a little odd and make sure that they're actually on your P&L. Are they actually reporting to you all the true expenses of the business?
Because what's going to happen is you're going to buy it and then you're going to realize that you've got a contract where you have to pay some somebody to do some service for you for the next year and it wasn't showing up in the P&L, but you've got this additional expense. So, take a look at the actual cash, identify some expenses there, make sure they're being reported. And then margin, margin is critical. So, margin, the way a P&L works, you have your revenue, you have your cost of sales, any direct inputs to to generating that revenue. And then you have your operating expenses. These are overhead expenses, so your your rent, you know, any kind of expense that doesn't directly go into servicing your customer or your the product, right? So, your margin is the revenue minus the direct cost of service that revenue, right? So, in my business, we we bill our client by the hour, and we pay our employees by the hour. So, if we're billing the client $250 an hour, we pay the employees, you know, 100 150 an hour, and then that difference is our margin. And that's everything that we have to pay the overhead, the rent, all the overhead expenses, software, and things like that that don't directly go into servicing that the client. So, margin is critical because you could have contracts there or clients there that that aren't even profitable. So, if you're buying a business that looks good on paper, but maybe they have two or three service lines, one of those service lines might be a negative margin. You might be losing money on that, and the other two are kind of financing it. Or you might have a customer that it it is very needy, and they're not actually making money for the business. So, you That could be an opportunity for you to kind of make policy changes within the business or to walk away from the deal if it's a critical large contributor to revenue.
So, these are a few things >> Yeah, Alex, I'm sorry to interrupt you there. Really fabulous stuff. And and this is why, you know, this master class is sequential, right? A follow-up, because otherwise, this would this would be a never-ending weekend. Because every point that Alex brought up, I see on a regular basis. The other things that popped out at me is that watching these numbers, you have to circle back. It's got to be tied together. There's something called concentration of clients, right? Concentration of customer. If you have traditionally stand talking, if 10% of your revenue or profitability or more come from any one single client, that's very dangerous because you lose that contract, you lose that client, maybe they leave with the the owner that relationship, now your business is in jeopardy. So, Alex is dead on with these numbers, but then you peel back that underlying that layer a little bit deeper and it really gets even more granular of where that money comes from because there could be a threat somewhere in there. Another point I want to make is Alex probably isn't seeing it because, you know, he he's working on really on bigger businesses, but me as a independent and a franchise broker, but in the independent world, Main Street businesses. Most Main Street businesses, let's call it what it is, okay? They're they're mitigating taxes and not in the legal sense, right?
They're not doing it in the accounting.
They're doing their own creative accounting. And what that means is they're taking cash and not reporting it, right? So, at the end of the day, when you're evaluating those businesses, that's a whole different dilemma to go into and I'm not going to waste time going over that now, but it is very important because I'm sure many people on this call might be looking at a local automotive, a local laundromat, as Cody Sanchez likes to say. A lot of cash businesses have a different layer of accounting and due diligence that's required. So, Alex, I think you have course I just you hit on some great nuggets there and I just wanted to just scratch the surface a little deeper. So, thank you. Go ahead.
>> Yeah, yeah, no problem. And and I'll go a little bit into that later. So, I'll touch on that, but that's a great point.
So, red flag number one, take a look at the tax returns and then compare them to your financials. So, if your financials say you're making 850 and that's what they're trying to sell the business, that's their basis for your multiple, but the tax return is showing 480, you see this a lot in laundromats and and uh and that's why SBA loans that they don't like to loan on on laundromats and certain cash businesses because the owners like trying to maximize their income, but they're trying to minimize their taxes. And so if there's a discrepancy between those two, some funny something funny's going on. It could be legitimate because taxes are on a cash basis and and and your business could be on a accrual basis, so there could be a timing difference there, but uh you know, you want to take a look at revenue on both the the the tax return and and the financials that they're trying to sell the business on and then also the income and and try to explain any difference that's there. It it could be normal and usual and that's fine. You look into it, you get comfortable with it, you're good. Um but they have to be able to explain that to you, right? The seller should be able to explain it to you. If they can't explain the difference, you know, put your your radar on, you know, there may be some issues there that that go deeper. So, reconcile revenue on the P&L to your tax return. Review 3 years of tax returns because they might be trying to sell the business on like one good year, but go look at the last few years and see how that how that how that shook out and if it and if it lines up cuz the history is the best indicator of the future, right?
So, and then check officer compensation and any K-1 distributions. Make sure that they they they match up what you're seeing on the financials, right? Okay.
It's not so much a difference that should worry you, it's more understanding it and whether management can can explain All right, going into cash flow. So, this is what we talked about earlier and RJ brought this up.
So, another red flag, profit is growing, but cash is not growing. What's going on? This is critical because your cash is the lifeblood of your business. You could the business could be doing great, but if the cash isn't coming in or it's misaligned with your expenses, you can quickly go out of business. Most businesses fail because they run out of cash, not because they run out of customers or because they're their their employees are too expensive expensive, it's because they're not managing their cash well. And so, what they'll do is they'll run and get a line of credit, or they'll try to do all these financing deals just to keep up with the working cap- capital mismanagement, when all they could do is identify the core problem, and then address it through policy changes. So, cash flow pays your debt, profit does not. So, are the receivables growing faster than the sales? Is inventory piling up? And are vendors actually financing the business, right? So, what you're going to be looking for is you're going to be looking at your AR balance.
That's, you know, everything that you bill out to your customers. Are they paying timely? Um, do you have a lot of this stuff that's over 60 days? If your aging is over 60 days, the business is essentially in the money lending business, because they're providing all these services, and they're paying all their employees, but they're not getting paid on it for two or three months, right? So, there's a lot of risk. The The longer it takes for you to collect that cash, the more likely it is you're not going to collect it, right? So, a good healthy business should be collecting on the the right terms. So, if you have 30-day terms, you should be collecting within 30 days. So, if you see receivables that have been sitting there for more than 60 days, there's a chance that you're not going to collect on those, and you might have to write that off, right? So, you want to look into the the quality of those, and then the payables timing, right? This is a a big issue, and I'll give you an example for my business. We pay our employees, uh, twice a month, but let's say we start doing work for a client on the first of the month. I pay my employees their payroll on the 15th, and then I invoice my clients on the 15th, because I have the hours that were incurred.
Now, I know what I need to invoice, and I know what I need to pay for payroll.
But, I have to I have to pay cash to my payroll on day 15. That invoice just got to the client on day 15, and they have 30 days to pay us. So, by the time we collect the cash, 45 days have gone by since day one. That means three payroll cycles have gone by. So, I've probably spent maybe $200,000 before I get my first dollar from the client. And that was eating us alive. In our in our in our leadership meeting, we identified the issue we were getting in a cash crunch, and we adjusted policy.
So, now what we do is on day one when we start with the client, once they sign that contract, we bill a 20% retainer up front, and we hold it until the last invoice. And what that does is it flattens out the curve because I'm essentially getting paid on day one for one to two payrolls up front. And so, now I have cash in the bank, and when I pay that payroll and send that invoice, I'm taking away from that retainer, and it's helping me. By the time I get paid, that retainer's gone down to zero, I get paid on that first dollar, and then we start kind of evening things out. So, that's something that could be either be risk or opportunity. If the business isn't doing that today, that's something that you might be able to implement once you take over to strengthen the business and make it more valuable. And you can negotiate with the with with the seller um a a lower price because they don't have that in place. You're taking on more risk, right?
>> Alex, let me jump in there. Let me just jump in That is so valuable. I think I have to double down so everyone understands that because the cash management is a learned skill set that most small business owners just don't have. And what you just identified and fixed in your own firm, and you're in a you're a CPA, imagine somebody who's fixing cars, and they don't have that that understanding. What I see on a regular basis is people think that they're going to borrow their way to profitability. If, for example, I like to use metaphors cuz they stick in everyone's mind, give a little story.
It's like if you had a leak in your house, you just keep going to Home Depot, get more buckets. Well, eventually, you you're going to get exhausted from getting all those buckets. You're not fixing the real problem. And that's what most people do.
As the saying is as silly as it sounds, they're they're going to get more buckets. They're tapping credit lines, they're going credit cards, they're borrowing from their parents, they're going to Home Depot for buckets rather than fixing the real problem, calling a plumber, and getting to the the real issue here. So, so thank you for that because that right there, what you just explained, I see it every day in businesses, and it's a simple remedy, but not always so simple, but it takes a professional to identify. So, thank you for that. Just wanted to double down.
>> Yeah, man, what a great analogy. I love that, RJ. The the buckets are it's so crystal clear. And that's This is one thing we do for our clients and on Beyond the Books. These are existing clients that are existing businesses that are having cash or issues that and they're growing and they need to manage their business a little bit better. So, what we do is a cash projection. And what that does is it takes your cash today and it factors in everything you expect to collect over the next 30 to 90 days, but also everything you expect to pay out over the next 30 to 90 days.
Payroll, credit card expenses, rent, everything. And it tells you week by week whether or not you're going to be short or you're going to have surplus.
We also build in reserves. You you need a reserve for your quarterly estimated tax payment and a reserve for just standard operations to to give yourself a little bit of comfort and sleep well at night, right? So, then you know on a weekly basis, 4 weeks ahead, you're going to be short on cash. That payroll is going to be tight. So, now you can start moving pieces around the chessboard, right? You can call your clients, try to collect early, call your vendors, maybe delay payment, maybe get some line of credit, or inject some cash in the business, but you're proactive.
You're not coming up on that day all of a sudden saying, "Why isn't there cash in the bank to cover payroll?" and you're freaking out, right? The other thing that it does, allows you to take cash out of the business, take your family on a trip to Europe, and not worry about impacting the operations of the business, not knowing if that's going to be a problem or not. Or maybe you don't go to Europe and you go, you know, you know, hour drive up the coast instead of a large trip like that because you know you don't have that much to pull out. Yeah, the the bank says you have 850,000, but once you do that cash projection, you know you you probably really only have 20 grand in there that you can take out. So, then you look at it a little bit differently. You can reinvest in the business for growth or you can take it out. So, >> Great point.
>> The other thing is the cash will get tied up in inventory. So, you want to look at the inventory. You want to see how long it's been sitting on the shelf.
Can you even sell it? Because it's been there for so long. A big thing is obsolete inventory. So, a lot of that stuff you might have to write off. And if the cash is going in inventory and piling up and not selling, the inventory is not moving, then you got cash tied up in inventory. So, that's another one you want to look at. And then owner's draw.
You're not going to see this on the P&L.
It's a balance sheet item. If the owner's taking money out of the business, it's not going to show up on your P&L. So, the P&L looks like it's profitable, but you might have cash liquidity problems because the owner keeps taking cash out of the business, right? So, these are things that that you want to think about and look at.
>> Well, you mentioned you mentioned inventory and that's what we call on the management side of things, the operations side, the velocity of the inventory. How quick are the turns? How What's the industry standard? And what what SKUs are lagging? And that's where you then have to get granular and figure out what why isn't it selling? Is it not priced correctly? Is it obsolete?
Whatever that is. And that's getting granular and we could talk about that another episode. But sometimes people can vic- have conviction to their product line, their inventory, but they're not analyzing why they're putting all that money on the shelf if it takes 30 days to sell it and you're in an industry that the turnover should be every 14 days, there's a problem internally there. And again, that's a skill set that needs to be learned. So, you great points, Alex. I I apologize for interrupting you, but but there's so many things I want to double down on that I I can't resist. So, thank you for bringing it up. Thank you.
>> No problem. And I'll try to move quickly here on the remaining slides. And we're you know, we're almost through most of it. But uh red flag number three, aggressive EBITDA add-backs. What are add-backs? These are expenses that you see in the P&L that are not recurring.
It's a one-time expense. So, they call this quality of earnings when you do like a diligence or transaction services. So, what you want to do is look through the P&L and take anything out that you think is not going to survive and stay with you. So, if there's personal expenses or personal travel or, you know, a non-operating owner expenses that the owner has been putting through the business, you can take those out because as soon as that person leaves and the business stays with you, those are no longer expenses.
You can bring those back in. The question is with if the seller is trying to keep things in there that and they're calling it, you know, a one-time expense, but it happens every year, right? It's recurring, maybe it's annual recurring, maybe it's some consulting that they have. They call it one time, but but you see it show up pretty often.
And so, you want to think about those add-backs, too. Um making sure that these are true things that are going to walk away when this seller walks away and they're not going to be stuck with you. Cuz you're paying on a multiple of EBITDA, right? So, you want to make sure that number's clean. All right, red flags four and five, customer concentration. RJ alluded this to this earlier and disorganized financial. So, the first one, customer concentration, if 40% of the revenue comes from one customer, that is an extremely risky buy. And so, what what you want to do here is you probably want to build an earn-out in the clause of the contract so that the seller is on the hook if that revenue or that customer leaves.
So, if you're buying the business for $2 million, the way an earn-out works is it's got it's a contingent consideration, right? You can say, "Hey, I'll buy it for $2 million, but because 40% of this comes from one customer, if that customer stays for the next 2 years, I'll pay you 1.2 mil or sorry, I'll pay you 800,000 of the 2 million in year two. But if they leave along the way, you're only going to get 1.2 million, right? So, I'll pay you the 1.2 million today. You finance it however you however you're going to pay them, but you have now this earnout clause where the seller is on the hook to keep that customer with you. And if that customer leaves for whatever reason, they're not going to get half of the the payment because a lot of the value of the business is on this one customer.
And so, if that's a client relationship with that seller and the seller leaves and they don't maintain that relationship and that customer goes to a to a competitor, then you bought something that no longer exists in year one or two. So, getting creative with that with that contract is important.
And this is very common in these larger acquisitions with these earnout clauses.
So, as a seller, you want to minimize that, right? You can ride off into the sunset if you get all your money on day one. But if there's an earnout, you're you're on the hook. A lot of times it's almost like an employment agreement where you're still stuck to the business, but it's no longer yours and you have to commit and and and and help the company grow with new sales or keeping customers there, right? So, as a seller, you want to kind of minimize that. Make sure the business can function without you. And as a buyer, you want to make sure you put that in there so you could share the risk with the seller, right? Disorganized financials. This is critical, too. I mean, a lot of these financial statements you're getting, if they're a mess, late reporting, missing reconciliations, you've got balances in there that you can't get support or details to, they just can't explain them or they're inconsistent, you you've got issues there cuz you don't really know what's happening with the business.
There's no way to really tell. So, weak financial reporting often signals a deeper operational risk. So, that's a way to increase the value of your business if you can get a nice clean financial process in place and good financial reporting, your business is going to sell for a higher multiple because more buyers buyers can rely on the true numbers and they're more likely to get a lender to to to close the deal because you've got reliable financials.
Now, we talked about risk, let's talk about opportunities. Poor books, they can hide a great business. So, some excellent operators have weak accounting infrastructure. So, if if you can implement a better financial reporting process and accounting and bookkeeping, you're going to increase the value of that business. Working capital improvements, we talked a lot about this. So, if you can get that cash sooner and make those payments a little bit later or at least flatten the curve there, you're going to add a lot of value to that business. So, a lot of businesses are kind of in this upside-down mode where they're paying first and then collecting later. But, if you can flip it where you're collecting first and then paying later, you're going to get a higher multiple. So, this is big. We call this deferred revenue.
SaaS companies are big on this. They get paid for the full year subscription up front and they've got a lot of cash on the books, so they get a higher multiple on revenue. It's almost like guaranteed revenue for the year, right? So, if you can manage that and flip it, you're going to add value to the business.
Financial infrastructure creates value.
So, this is the reporting. This is the financial statements. This is making sure that you can trust the numbers. So, what you want to do to add value to the business, you want to establish systems.
Okay, monthly close and reporting, you want to be closing consistently methodologic methodically each month.
Clean bank reconciliations monthly, not quarterly. ARAP, again, talking about this balance in cash in cash out, right?
Making sure that you're managing that and nothing sits for too long. Cuz then the longer it sits, the higher the risk you're not going to collect, right? And then expense category categorization should be consistent year over year. So, looking at your chart of accounts, making sure you're not adding and removing accounts all the time that you're you're allocating things appropriately, so your reporting is clean. And then you've got good tight KPIs. So, your revenue, your margins, day sales outstanding, cash, looking at these metrics periodically uh will let let keeps your finger on the pulse of of how the business is doing. Bookkeeping quality, we talked about that. Monthly P&Ls, consistent accounting structure, clear separation of owner and business expenses, that's a big one. It can get very murky if you mix the two. Uh and then regular reconciliations there, right? And what lenders want to see, so if you're buying a business, you're going to get it's going to be a lot easier to finance it if there's consistent financial statements, they're reliable, there's filed tax return, they're not delayed or or or sitting on extensions for too long or having lots of amendments. So, if you have three two to three years of of tax returns filed, but they like to see that. Monthly reporting, so a nice sophisticated process there, clean balance sheets, uh and reliable cash flow. The that the banks are going to be more likely to to to to loan on that. So, >> So, on that Sorry, Alex, again, so many so many great nuggets here. But, on that point, I I know we're talking to probably a mixed audience. Those in in the whole premises is acquisition, but even after acquisition, proper financial hygiene.
Now, a first few years, you you might not be perfect, but anyone looking to sell their business over time, the the proper financial hygiene, what you touched on before, gives so many more options and opens up to so many more buyers because everyone can understand it and they can get financing on it.
Otherwise, and I see it every day, when when I see messy financials, I say to people, "Listen, we can't go back in 3 years and fix all these. We're here now.
You need to sell now." But, these this is the dilemma. And that's when when I'm going to get deep into now, but that's when there's a combination of you the buyer needs a higher capital liquidity or to bring capitalization into the business. SBA requires the seller to hold a higher standby note. We're going to get We'll get into that at a later time. But, those things kill deals cuz sellers don't want to be on a standby note, meaning that you don't get your money, you got to wait 2 5 years before you get your money. It crushes deals, but it's all because exactly what Alex is talking about here. The The financials are really not properly audited or prepared. So, so that's really great. Alex, finish up. Good, my friend. Yep.
>> All right. Five key takeaways. So, things to remember here that we've talked about. Tax returns, they're your truth, right? Because this is the the legal binding, right? Keep them aligned to your internal reporting. Cash flow beats profits. You need to know the profits cuz that ultimately turns into cash and and how well you're doing that adds value to your business. But, the current cash flow is going to tell you whether or not you're going to be able to pay all all of your commitments. Challenge every add back, right? Make sure that those add backs are are are are legitimate and that they're really going to go away, that you're not going to be seeing some of those recurring that they call one-time are actually going to recur. Clean books equals a clean business. Systematize your monthly close. So, making sure that and again, if you're buying a business, here's the things that you can do to add value to the business. If you currently have a business, here are the things that you can do to kind of sleep at night and get things to maximize that value on a sale, right? You want clean books so that you can understand the numbers and and course correct timely and adjust policy timely to strengthen your business.
Systems matter, right? Buyers and lenders that they want to see real-time visibility. So, you should have systems all across when you're onboarding employees, when you're doing your operations, when you're you're doing your financial close, all of those should be documented and core processes and systematized so that so that it it's clean.
>> So, the goal of due diligence is not to kill deals. It's really to understand what you're buying. Find the true value of this thing, so you know what you're paying. You don't want to overpay for it, right? And if you're selling, you know, make sure that in the due diligence process, your buyer has what they need and they can trust the numbers you're giving them. So, maximize the value of your business so that on that day, it's nice and smooth, right? How much cash is the business truly generate? What risk am I taking on, right? What what am I going to have to deal with in year two or three that that I can currently catch today and won't be a surprise. And what opportunities am I acquiring? What can I do to raise the the value of this business on day one?
So, you can catch all that stuff and and start aligning it with your strengths like we heard Paul talk about earlier and say, here's what I can do with this business. I can increase the marketing.
I can, you know, tighten up their operations to reduce their cost. I can take all their back office and bring it on to my accounting team and you know, whatever it is that you can do to raise that EBITDA number so you can add value to the business right away. Those are the opportunities you're looking for.
And so, if anybody wants to kind of discuss further, I'm happy to talk about this in more detail. Feel free to reach out to me. Here's my contact information here. Beyond the Books, we help businesses that are existing to kind of get a little more sophisticated and have that fractional CFO more strategic insight into their business and strengthen that. So, if you're preparing for a sale, we can help you maximize that value. If you're looking into a deal, we don't do transaction services, but we can help you identify what you can put in place to to add value on day one once you buy that business. And then Horizon Advisors, of course, is for for the larger companies there, but happy to discuss with anybody even if it's not a good fit for us to work together. I'm always happy to kind of give my time and just give you my insights and and and thoughts based on my experience and what and what I've seen.
>> Great, Alex. Thank you. Very generous and really phenomenal points you had.
And to audience, these experts are going to be recurring on the program. What we'll do is we'll bring them on regularly to look at live deals, some of your deals as well, and get their perspective on it from from the accounting perspective or operations.
And so, really great stuff, Alex. Thank you for that and appreciate if if you looking to have a consultant consultation with Alex, do reach out.
Alex, thanks again and and we'll we'll bring you back very shortly. Thank you, sir.
>> All right. Great stuff, man. Really great nuggets there. Tom, we're going to round out the day with you and and your expertise. So, tell us, Tom, give us give us some insights. What are you going to discuss with us today?
>> Sure. Thanks, RJ. Thanks, Bo, you know, for having me. Thanks, Alex and Paul for for the nuggets. I'd say my goal here is I know we've been going for for a little over an hour. I think both these experts hit a lot of excellent points and so I'll try to be pretty pointed with my with my experience with what I say. I'm a rambler, but I got my bullets in front of me. So, we're going to try to make this as collaborative as possible. I think at this point in in the episode, please please please, if you're still with us, you know, I'm hoping there's some questions out there. So, if there's any questions for myself or Alex, I think I think Paul jumped, but if there's any, you know, questions out there, please just jump in as I kind of go through my background and some of my experiences and kind of what my firm does and and how we help support, you know, acquirers like yourselves throughout throughout. And last thing I'll say I'll give you my background.
Shout out to everybody on a Saturday showing up in in May when it's summer out and shout out to to RJ and Bo for working hard to put this together and Alex for taking his time and being generous with his counsel and advice.
And you know, shout out to all the How many participants we got right now? 34 of you that are still with us. That's a testament to running a business.
Consistency compounds, so keep keep at it. Keep working hard. RJ, maybe I'll give a quick background and then I'll get into some of the bullets here.
>> Do it. Let's go.
>> So, real quick background on myself. I always like to hit the personal mostly you kind of know the person behind behind the professional, but originally from Long Island, New York. Have known RJ for about a year and a half as he's based on Long Island as well. Went to high school, went to Notre Dame as as Paul kind of mentioned, made a joke there at the beginning. Studied finance, minored in Chinese, went to work in investment banking my junior summer at Evercore, their New York M&A group.
Evercore is a one of five or six, they call them boutique investment banks that competes against the Goldman Sachs, the Morgan Stanley, the JP Morgan, and the Bank of Ameri- Bank of America's of the world, but does it with about a third the staff. So, it's a really hands-on experience. Worked on a couple billion-dollar transactions there during my summer for about 10 weeks. It was It was an awesome formative experience in a very, you know, prestigious investment bank, I would say, and learned a lot about mergers and acquisitions. I took that experience, ended up going straight into private equity at a school at a firm called GreatPoint Partners up in Greenwich, Connecticut. We were investing 30 to 50 million-dollar equity checks out of a half a milli- half a billion-dollar fund into mostly founder-owned and operated businesses in that two to 10 million EBITDA, and I want to talk about that when we get to some of the buy-side advisory. What are your goals of of acquiring a business?
You don't need to take it to a bill. You don't need to take it to, you know, 10 million EBITDA. You get it to a few million of EBITDA, there's a lot of dry powder out there that'll pay a premium multiple, and we'll talk a little bit about multiple arbitrage and what that means and how to scale a business and how to think about that when going through the buy-side advisory process.
Was there for about two and a half years, and then in my intro, RJ mentioned it, I was recruited out to a family office and as a founding, you know, managing partner to help kind of institutionalize a self-made half-billionaire's investments. So, he had built a 100 million revenue, 40 million EBITDA a wealth management practice in about 32 years. Had acquired 70 wealth management practices along the way, lived completely below his means, was making million dollars a year, would collect coupons at Stop & Shop. He would tell you that himself. And that compounded his wealth kind of a Warren Buffett style, and uh learned a lot from him. So, I was his right-hand man as as RJ mentioned, we acquired a CPA firm, we acquired an insurance benefits firm, we acquired an AI bookkeeping firm.
Sometimes we were 30%, sometimes we were 70. So, it depended on a lot of deal dynamics, and I think that kind of sharpened my billion-dollar transaction experience at Evercore to, you know, 50 to 200 million-dollar enterprise value transaction experience in private equity to, you know, 5 to ten million dollar equity checks you're writing at the family office with one single check writer. And so, I kind of packaged up all this experience, said, "How do I do what I love to do?" While pursuing that professional career, I've started or owned five businesses. Started a lawn service in seventh grade, built a landscaping business in high school I sold before leaving for Notre Dame, started a edtech services business and Notre Dame. I sold a couple years ago.
We were working with libraries and schools across the across the country by the time I sold it, taking video games and creating educational content for for students. My third business, I bought a distressed tutoring business, which I still own today and have scaled rapidly since since purchasing almost four years ago. The fourth business, I restructured a failing two million EBIT support-a-potty business here on Long Island. So, I was the COO and CFO, operational, you know, hands-on experience implementing new software, cleaning up the books, sales tax that was paid on an accrual basis but should have been paid on a cash basis. We had a call at the We hadn't invoiced in six months. That's how bad this business how bad the shape was in at this business.
And if you go to JFK Terminal 1 or over the George Washington Bridge, you will see a Bravo State Services port-a-potty.
That's the business I started with two partners and then we acquired the failing business. So, we did the whole entity structuring thing. So, when I speak today, I I think I wear a lot of different hats on the call. I own my firm now, which is my fifth business, Fractional Financial Officers. We started about a year and a half ago.
We're up to about 13 people full-time.
At this point, I was the only employee up through June of last year. When Paul mentioned the Bivers Build thing, he's right, you know, I starting a business and bootstrapping it with nobody in my family does this stuff. I took I put no personal capital into the bank account, I took no loans. I just kind of, you know, gritted my way through it and I don't want to do that again. It's emotionally taxing, it's mentally taxing, it's physically taxing, and it puts a lot of strain, especially when you have an a different operating business. And then I bought her office building in December. So, I also little experienced in real estate some of the tax benefits of that. I share all that to say when we talk about buy-side advisory, which is my topic today, and bringing it back to to some pointed notes here, I speak from experience at a young age. I'm not shy to say that. I actually think it's what makes me maybe a little bit more unique is I'm probably one of the youngest, if not the youngest on the call, and I think my story is one of just trying a lot of different things and working hard, but I do think there's a lot I've learned about how to stay focused, what it actually, you know, buying a billion-dollar a billion-dollar transaction is very different than a couple million-dollar transaction.
Everything Paul said about that business that went bankrupt, and I think this is a popular topic in today's world in light of the W-2 and, you know, trying to create wealth. I do agree with Paul what he said. This is, you know, one one if not the only way is to generate true generational wealth and and build a lifestyle you want, but it doesn't start that way, and it's not that way for a very long time. So, it's not a get-rich-quick type of thing here. And RJ hit real estate. Yes, real estate has a longer runway, but it's a little bit more passive. You can hire an active property manager to manage that property for you, assuming your cash flow supports it. In a business, you are the property manager. So, you know, today we're going to talk about buy-side advisory. I'm going to pause to make sure that I'm not missing anything.
There's no questions the audience, and I'm going to shift gears to a little bit more tactical things, but wanted the audience to at least know a little bit about myself and uh you know, my personal background. We'll hit a little bit more about my firm, fractional financial officers is what we do throughout the next segment.
>> That's great. It adds a lot of color, and it does add in your young career a compressed amount of valuable experience in every aspect. So, from from the larger to you bootstrapping your own business, I mean, you could talk on all different levels. So, I I think that serves serves our members a a justice.
So, so yeah, why don't why don't you tell us cuz this is an area as well as Alex touched on in the slide like quality of earnings and Paul mentioned about hiring a consultant, buy side advisor type. This is where a lot of people cheap out and and this is where really people like yourself, Alex, and Paul are able to uncover and go, "You're not sure. Once I lift the hood, I'm not sure you really want to own this business." It looks good, you know, the pitch deck looks good, but when we peel it back and and that's in essence the true understanding of what it means to buy a business. So, guys, go right into the buy side advising. Tell us give us your tactical approach.
>> Yeah, absolutely. So, there's a couple topics. There's 12 in front of me here.
I'm going to try to speak to each for maybe 30 to 30 seconds to 2 minutes depending upon the topic. But, one is what it what buy side advisory means. I think this is a great topic. So, just as if you were going to sell your business and have an advisor, that if you're going to go buy a business, that's what buy side advisory is. And it takes a lot of different shapes and forms depending upon who you are as a buyer. Are you an existing business that's looking to acquire a smaller business? We acquired a bookkeeping firm in February. We have a bookkeeping practice. We acquired a smaller, right? So, that buy side advisory looks very different than if you're an independent sponsor. You're going to raise capital and run a GP LP model, meaning you're the the the general partner and you have limited partners who put capital in but aren't involved in the business and you take 20% carry or 20% of the profits you generate on that business and a management fee of say 2% of the capital that gets invested. So, that's the private equity model that's now being applied to people like myself who will go raise capital and buy a business and I quarterback the whole thing as my own private equity firm. Or are you a successful, you know, W-2 employee that's already to take your shot in this space and and to acquire businesses. So, the buy side advisory, what it means, it depends. It depends on who you are.
Depends on what makes you you. What are What are your resources? What makes you unique? Not only just capital, but what's your experience? So, I own a tutoring business. What's my experience as a you know, what makes me qualified to own a tutoring business? Truth be told, not a lot. Yes, I've gone through academia and yes, I just went through the process. You don't always have But I know I've hired the people, the operating partners we call them, where I have somebody 15 years older than me, who's my COO and my partner of 10% who runs the business for me. Why? Cuz he's going to be better at it than me. Cuz he knows tutoring better than me. He was an English teacher for 13 years. So, buy-side advisors you need that person in your camp who's done a lot of things, who can look at a situation and help advise you on who are the key employees you need to retain post close. All the things Alex spoke about about the X's and O's of the quality of earnings, which our firm does, right? The bookkeeping, the financial statements, all those things. That's it it's tying it all together, the legal advice. So, I think I was awesome that Paul and Alex started before me because what does buy-side advisory means? It depends on who you are and it depends on what your resources are. Is it money? Is it experience? Or you found a niche and something out there that doesn't exist today? And then there's the personal man of who you are, what makes you tick? Are you the type to work for 10 years and make 100,000 a year and in year 10 you sell for 10 million and you could keep going? Or do you like more instant gratification? So, my goal in buy-side advisors, it's a little psychological.
You got to understand who you are and what makes you you before you go buy that business and that's where when we model cash flow and we show that to grow a business doesn't mean you make a lot of money. If you want to scale aggressively, when that revenue comes in, you hire in advance. You reinvest back into marketing and lead flow. The only way to scale and grow is to spend money and put it back into the business.
A lot of people want to buy something and mailbox money, but they want it to grow too. No such thing. Doesn't work.
So, a lot of people our job as buy-side advisors is to tell you what's everything to look out for before you close the business, but also what to do once you have acquired it as well. And it depends on who you are and your situation. So, it's very cons- consultative and you know, I'll keep going through this. This isn't the end.
But with that said, I think it's important that, you know, reach out, right? My That's my role. That's my job at the firm today is to put the right people in places to be successful on our bench and on our staff with, you know, individual acquirers like yourselves.
The second thing bullet here I'll mention is building acquisition criteria. We just hit it, right? So, it's got to be, "Hey, I'm from Oklahoma and I have five kids and I don't want to leave Oklahoma." Okay, that's an acquisition criteria, right? It's It It takes into You have to take into account the personal and the professional.
Because if you have five kids, but I don't, I'm going to have Unless you're terrible parent, I'm going to have more time to outwork you than the parent with five kids. So, you have to be really honest and and up front with yourself.
And that's where the W model is an advantage cuz you can box more what you have to do and what you have to make and it's a little bit more predictable, right? So, you have to be really honest with yourself about some of those personal factors and what that looks like. You also have to be honest about how much capital can you deploy? SBA Bo will speak to this. He still needs at least 10%. As far as I know, Bo knows the Xs knows better than me. But when I purchased my building here, I bought it with the SBA. You still need to put 10% down. And the smaller businesses you own, the more operator you have to be because there's not enough cash flow to hire somebody to be that operator. I took the profitability of my tutoring business down and scaled it up from 22 to 24 and then I cut it into a third.
Unfortunately, to be able to do that, that I live below my means and have other cash flowing assets and investments and things of that nature and, you know, other firms are doing very well. But I did that on purpose cuz I said, "Okay, we've gotten it here. To double it requires a lot more operating leverage and investment." And you have to have that cash flow and you have to be able to sustain it. You're not going to buy a business and just take a double your salary from what you're from what you're making today. That's probably pretty unlikely. If not, then you're going to not Then you're not going to grow. You're going to hamstring growth.
So, the acquisition criteria ties into account the personal, it ties into account what you want for yourself and what time frame, and then we get into the X's and O's of the actual business and what experience you have. What How How are you going to run an HVAC company if you don't even know, you know, how to replace your own air conditioner at at at the building you own, right? Like, you have to have some sort of operational experience to do the diligence or hire somebody to help you do the diligence and then run the business for you. And that's a lot of what private equity does at a high level. I'll keep rolling through here.
I'll hit four more and then I'll pause real quick. But, deal sourcing strategies, there's a lot. There's BizBuySell, right? There's a lot of brokers out there. The best thing to do is build proprietary relationships. It's very hard and it takes a long time and it might take a few years, you know, to actually do a deal. When I started at my private equity firm, one of the many things I did was actually reach out to founders to sell their business to our portfolio companies. So, my private equity firm, we'd done 32 platform investments. At those platforms, we'd done 102 acquisitions by the time I left. So, those 32 companies had acquired 102 companies. Not all 32 had an acquisition story as part of their post-close growth plan, but a lot did.
And so, I was often reaching out for new platform investments, but also acquisitions for portfolio companies.
You got to build relationships. And at month 14, I closed my first acquisition that that I sourced. The next three closed within the next six months. So, that's a compounding effect, right? Of getting into this. So, it might take two, three years. It might take some time to actually just, you know, build a relationship with somebody where you can, you know, foster a proprietary relationship. When you have an investment banker and a broker, that also is can be very, very helpful for these smaller-sized businesses because a lot of the smaller-sized businesses don't know about all the things that Alex mentioned and they're not prepared for it and they're not going to see it coming and you're going to ask them questions with me on your side helping you diligence the the investment and they're not going to be able to answer it or get back to us in a certain amount of time. RJ referred us on a quality of earnings for a company. We wanted to have it done May 15th. We are still waiting on tax returns for 2025. It's just That's just the reality of the game, right? And a lot of a lot of sellers just aren't prepared. So, we help support sellers, we help support buyers, which uniquely positions us to understand the other side as well. But, a lot of time, they're just not prepared. So, when you're sourcing deals, I don't, you know, a broker might require you to pay a little bit higher price, but the Warren Buffett adage of I'd rather I'd rather I'd rather buy a great business at a good price than a a bad than a good business at a bad price, right? So, you want to buy a quality asset to what Paul said, 10 years of experience, no family dynamics. So, sometimes those investment banking those investment banker broker led businesses that RJ represents, it's really important to have somebody sophisticated like him to actually get the data you need in a timely fashion, make sure there's no skeletons in the closet. It shows investment from the seller that they're actually serious about selling, and it helps bridge that gap a lot. So, I'm really in favor of in a small medium-sized business, especially even if I'm on the buy side, having a sell side advisor that can actually push things forward and help manage the seller's expectations both emotionally, but also the tactical accounting tax legal diligence materials as well. Three more, due diligence preparation. So, when we do a buy side advisory engagement, buy side advisory is your quarterback, right? They call the plays, they tie together all the different aspects of the bookkeeping, the accounting, the quality of earnings, the legal, the financing. It's their job to help kind of We call it the non-equity thought partner at FFO. That's one of our taglines you'll see. So, sometimes you bring in a business partner, and they have equity, and they'll be in the deal with you. We provide all that same value and all that time and effort, but we don't ask for equity, right? You You pay us a retainer and a success fee depending upon how involved we are in the business that you actually did. We sourced it for you, did you source it, right? Some of those factors affect how how our economics are structured and how we compensate our team. So, the due diligence prep, that's the earlier I can meet you in your acquisition journey, the better. You don't I actually don't want to meet you when you have an acquisition that you're almost going to go under a little lie with cuz I I'm kind of joining something that I wasn't really a part of and I couldn't really help advise on. Negotiation and deal structure, I think Paul hit it and and Alex as well. Alex astutely noted a lot of different ways to structure earn out right, around revenue concentration and things of that nature. Cash up front, financing, seller notes, earn outs, they all have different tax impacts. One nice thing about an earn out is it's, you know, it's a write-off on the P&L. It's one of the, you know, a cash up front is not a seller note is is guaranteed comp, it's not. So, the seller will pay ordinary income tax on that, federal, state, wherever they live, city, municipality if they live in New York or another metro area potentially depending upon tax code. But, for you know, for you, it's helpful to understand that an earn out, they actually get taxed as ordinary income, which means it's a write-off on your P&L. So, most sellers hate earn outs because they just want to sell and get out. They don't want their compensation affected by your performance and what you do with it.
Think about that HVAC business that that guy bought that Paul talked about for $2.1 million.
If that seller had a big earn out, well, now they both lose cuz there's no money from the business to pay this guy and the assets were probably structured unless that, you know, seller is really sophisticated and went after, you know, the buyer's house or some of his personal assets, it's probably structured in that LLC and in that in that business and the assets of that business. So, if there's no more assets, they sell the trucks and they restructure and they shut it down and there's nothing left and he's out money and obviously this guy's out of everything that he just put up to buy the business. So, legal structuring and financing and both will speak to that, I'm sure, is really critical. And that's again, you want a buy side advisor that's worn a lot of different hats.
Master of Jack of all trades master and un kind of concept, right? Because it's their job to go help you find the masters. Hey, let's bring in this person to do the legal. Let's bring in this person to help us as an operating partner assess the opportunity, right?
As that's negotiation deal structure avoiding emotional acquisition decisions. You It's almost like the the day you buy your first business or sell your hundredth, it's kind of you kind of just want to act like you've been there done that. It's a normal day. Right?
You're really not that surprised when you sell the company for a ton of money or you buy a company and it goes through because you put in the work, right? So, I think if you put in the work and you invest in in the advisory and you invest in somebody in your camp, you're going to do all the work that you're not going to be surprised when you acquire and you're not going to be surprised when it goes well. So, removing emotion is critical and and there's no such thing as controlling your emotions, but understanding them is critical. You want to buy side advisor that you build a relationship with where if you're pushing something or you're getting eager or you're getting timid, they call you and say, "Hey, what's going on? Talk to me. How you feeling about this?"
That's really important buy side advisory. It's not just the accounting, it's not just the legal. I keep coming back to this theme. It's somebody who's been there done that and can support you through it. So, I'm going to take a quick pause and then keep going, but RJ, Beau, Alex, you know, definitely jump in there if there's any questions the audience let's definitely >> Sure, there's a question here. Probably what Alex was We can all chime in, but it was about the earnout clause and essentially the the question was basically what won't that kill all all deals and the I guess my take on it is is well, earnouts are typically not structured for SBA deals. Alex is doing a lot of bigger deals, probably not in the SBA realm, but earn earnouts and seller notes are very typical on on business acquisitions. So, that that was the wouldn't that his question basically was won't those earnouts, you know, if if they're not going to get, you know, paid for a couple years, kill the deal?
And what You guys see a lot of deals.
Most deals have some sort of seller financing or equity left in the deal as opposed to like real estate deals where you don't see that as as common. So, uh the answer is is that most of the deals I see on the lending perspective have uh for SBA loans, I would probably say 50 to 65% of those deals have some sort of seller note, seller standby, or some kind of performance note which is eligible for SBA as opposed to an earnout.
>> And I think I mean that's a fair point.
Uh you know, as a seller, you you definitely don't want an earnout, but as a buyer, you don't want to take on all that risk. So, I >> to jump not to jump in, Alex, you know, a seller doesn't want the earnout not only because, you know, it's affected upon the performance post close which they might not have any involvement in in in the state of New York, you're going to pay, you know, assuming you're you're at the top end of the federal tax bracket, you're going to pay 37% on that incremental plus, you know, 8.875% state, right? Or or wherever your state between 6 and 8% in the state of New York. So, you're going to pay 45% versus long-term cap gains federal of 20 plus the state. The state is the same whether ordinary or, you know, long-term, short-term. So, they're going to pay an extra, call it 15, 20% on that same income as part of their valuation. So, in smaller deals, most small business owners that I've seen hate earnouts.
They despise them, and they they won't even entertain it. And that's the job of them hopefully to have a sell-side advisor that says, "Well, you could sell for 8 million or 10, but at 10 you have an earnout at 8 you know, it's on them to kind of structure through it and negotiate."
>> Yeah, and I think that so that's a key thing actually that I was going to touch on is just like anything in the deal, I mean, it's negotiable, right?
>> It's one of 10, 15, 20 things, right?
Yeah.
>> Yeah, and you want you want to get to a reasonable place for both parties, right? So, if the seller really wants to sell, they might take an earnout, but not at 40% or whatever it is, right? So, they're willing to negotiate the number, and the buyer really likes the deal, they might want to make it work. So, they're going to give up a little bit more risk and and or take on a little bit more risk and and lower the earnout.
So, it's just one of many things that you negotiate through to get to a point where where everybody's happy and the deal makes sense. And and look, if it doesn't work, just like the price or anything else, the the deal just didn't work out. And you just move on to the next buyer or or you go back to work and try to strengthen up the business a little bit in different ways, maybe put in you know, some systems in place so it doesn't depend so much on you to retain that customer or some other piece so that the earn-out is not not an issue next next go around.
>> Yeah, what what happens in that case and I see a lot as a broker is that initially a seller rejects those offers.
But if let's say the SBA or any lending institution and usually it's based on the add-backs that are disqualified, you know, the owner the seller looks at like, well, it's still cash flow to the business, but banks just won't lend on that and that's a whole deep conversation. But at first they'll reject those offers with with a standby note or earn-out. But but then if the market speaks to that repeatedly over time they realize, okay, I don't really have a couple of choices. Either I would keep the business and I start to fix it going forward or I have to structure a deal with an earn-out or a standby note.
And it takes a little while. They don't like to hear it and I'm usually the one delivering that message, but that's the reality and that's the fault of not keeping what Alex identified so astutely in his presentation, you know, maintain clean books throughout. You got to do that consistently. If you do that, you you have less problems when you're going to sell. And as a buy side, it's it's a lot easier to get funding. So, all these things, you know, it's a lot of information there. Like I said, it's a file of information, but they all have meaning and they all synergistically come together in the deal. They're they're they're not mutually exclusive usually. Usually they compound and and string themselves together. That's why knowledge is power and with knowledge you can take action or inaction. And sometimes the best deals you do are the ones you don't do. So, you don't do. So, Tom, anything? I want to be respectful of everyone's time, but I also want to be respectful of you, just cuz you're going last. I don't want to cut your shot. What else do you have as points to discuss, my friend?
>> Yeah, I just want to add one more thing.
There's There's a bunch of bullets here that kind of center around a a central theme. So, I'm going to I'm going to go to that theme. You know, creating a long-term acquisition strategy, right?
Professional buyer mindset and discipline, risk opportunity comparing multiple opportunities. So, what I want to get at is when you have a buy-side, you know, transaction advisor who's helping you throughout this process, you put together your thesis, your growth thesis. This is what private equity is really good at is they say, "Hey, we see this market moving. We see in dental, you know, doc there's a gap. There's a shortage in veterinary clinics where, you know, of the necessary 60,000 needed a year, there's 25,000 coming out of all the schools in the country." We bought that clinics at my private equity firm.
Like that That was a real stat three years ago. And I was staffed on that platform. So, if you can acquire, it's it's, you know, economies of scale, but if you can acquire and retain the vets and you have a strategy to do that through creative structuring, rollover equity, earn-outs, high compensation plans that don't kill cash flow or EBITDA, right? And we had a lot of creative structuring that we did at my private equity firm to buy vet clinics.
You can, you know, you can de-risk. And that's how you go first, what's my thesis, my personal, and what's my experience, and then you go find a business. And so, I just want to touch on three things really quick, three types of acquisition.
>> Tom, let me I'm sorry, let me just double down on that because that's an important point. I want to also give people another analogy here is that in the in the fast food service world, right? everybody follows McDonald's.
Where's a McDonald's? There's usually a Wendy's or a Burger King or something.
They system is going to talk about demographics, traffic patterns, and so forth. They follow them. It's very similar in private equity. Private equity let's use a rule of thumb and not exactly because the industry gotten so competitive, some some smaller firms have lowered, but they're looking for a million dollars in EBITDA for the most part and higher, right? But if they're going there, they're the McDonald's. You could be you could be the parasite that follows. They won't touch something with a lower EBITDA or SDE because it just doesn't fit their buying criteria. But you could go to that category and that industry of business and act like that private equity and just scoop up what they just too small for them and they don't want to do it. So that's a great identifier.
That Tom, thanks for bringing that up and and because I watch that very closely. If they're going into it, that means that the metrics and the economies of scales is there, but uh there's opportunity. So you can look for that opportunity. Thank you, Tom. Go ahead.
>> Yeah, absolutely, RJ. I'm going to give and and off that point, I'm going to give three tangible examples of transactions I've personally been involved in and and what they looked like cuz they're all very different and I'm going to speak to them quickly. So Bravo Site Services was the name of the porta potty business, you know, I started with two partners and then we acquired uh another the failing business. It was called Rent-A-Throne.
Uh hilarious name, I know. So we tried to professionalize the name Bravo Site Services. Why? Cuz we knew private equity probably doesn't want to buy a company called Rent-A-Throne, no matter how good the fin it right? So we we were building it to to and and fixing it to eventually be acquired. It was acquired within 6 months and I started FFO and that was my next move and this is my firm and my mainstay for the next 20 30 years. But I say that to say that acquisition story was a full seller note from the old owner because he was 3 months from shutting down, right? So that acquisition looked totally different than say number two I wanted to hit which was the bookkeeping acquisition. We bought it making good money, an owner with a key staff member leveraging offshore talent, leveraging systems, processes, technology, nice expansive book, a lot of upsell opportunities in the controllership and CFO and transaction advisory and M&A which are all things we do at FFO, but she just wanted to do something different. She wanted to focus nichely on the ABA autism therapy space. She She like She liked working with those companies. She had a mission. She had a family connection and a story and was very passionate about it. Said, "I don't want to work with You know, 25 different construction or plumbing or, you know, nonprofits anymore, right?" FFO does.
So, that's how we facilitated that transaction. And then, there's my former, you know, my last boss, my former boss, who, you know, took a wealth management firm and scaled it and did 70 acquisitions over a 30-year life cycle. But, he started it when he was in his late 20s and now he's, you know, 53, 54. And so, all three are very different and no acquisition's the same. So, I think today you've gotten all the tools.
Like, I really don't think we missed anything. You've gotten all the tools to to use, but now you need to put it into action. And and just And talking about it, listening to podcasts is awesome, but that needs to be backed up with the action and trying. think if anything about my story is just I tried a lot of things. I started knocking on doors when I was in seventh grade, right? You have to go out there and try, but you don't want to lose your house. You don't want to buy a business and go bankrupt. It's high stakes, high reward. And there's a timing component. Where are you in your life cycle, right? Do you have 30 years to invest into something or do you have five? It's a very different story for everybody. I think that's what we stress on the transaction advisory side at FFO and guiding people through it is, you know, And And the last point Paul mentioned and RJ is going to hit FFO really quick and then I'm done is it's an investment. So, be prepared to make an investment. Don't be shocked. You know, if we reach out and we talk and I say there's a monthly retainer and a success fee associated. Yeah, because if you want somebody good, you got to And And to do this well and do it right, it's going to cost dollars. So, you know, we've we I do a lot of these things and so, about half the people who reach out are expecting it, excited, and we get them great results and have plenty of case studies and people I've connected with if you want a testimonial about what our firm's done. But, a lot, you know, don't, you know, kind of lead on for a couple months and come back and go forth and they're not really committed. If you're not committed to this, then this, you know, I think you are if you're listening right now cuz it's Saturday at 1:44 and I've been rambling for like 25 minutes. We're almost 2 hours in. So, you got to be committed to it and and that requires bringing on the right advisor who's experienced and uh it requires an investment. Last thing I'll say really quick, so our firm, Fractional Financial Officers, I've hit on again, I'm fortunate to have a team of 13 with me and uh you know, on my side and and not behind me, they're with me in the field every day. I have two clients that I work with, that's it. So, I'm the CEO of the firm, so we probably won't work together, but I have a a uniquely experienced staff of former VP of Finance at Party City on my staff. I have a 57-year-old CFO who sold a company to private equity 3 years ago and actually watched private equity not structure the deal right. Private equity firm in Canada not structure the deal right, take on too much debt, it's going bankrupt next month. That happens.
That's a real story. So, that's our staff, that's our team. We have an accounting division which does bookkeeping and fractional controller for companies that are operating, but for most of our acquirers here, what's more applicable is our advisory team, our fractional CFOs, our transaction advisory, and our buy-side advisory, which is what we talked about today, and our M&A investment banking services. So, we do a lot of things because I think there is a lot required to be successful in this space and to be a business owner. So, if anybody's out there who wants to talk and reach out and consult, again, you've had three great people here between Paul, Alex, and myself. I'd say my domain of expertise on this call is more on that buy-side advisory, a little bit of the emotional kind of tying together and quarterbacking all the vendors and the X's and O's of the game, and happy to speak to you and spend as much time as helpful with you regardless of where it goes and if we work together, you know, in the weeds and then sign an engagement or not. It's just It's what I love to do, it's why I'm here, uh it's why I jumped on this when RJ asked me to and I replied to the email 3 hours said, "Yes, I'm happy to do that on my Saturday. So, I know you guys are here as well and happy to help anybody however I can.
>> Thanks Tom, appreciate it. And and part of what it we're going to close this up.
Bo and I put this together because we want to give great information, great experts on here and this can be a recurring theme. These experts and knowledge will will come on on a rotating basis and evaluate deals and offer their expertise on our site on a regular basis. But again, any expert on today and in future episodes, you can reach out to them. They'll give you free consultation, they'll help you, they'll guide you. This is this is really we all come on with contribution. We want to lead with contribution and give you as much information as possible and if there is a connection that you want to build with later on and build a team around some of the experts you meet here or find your own own experts. The the the really the catalyst, hence the name, is for you to get going and take action and build a team because business ownership is a team sport. It requires you to team. We're going to provide great experts that you can free consult with and see if they're the right mix or go find one that you're comfortable with, but it's it's proven fact that when you put together a great team, the higher probability of success is is going to win out every time. So, Bo, I'm going to kick it back to you. You want to close this out?
>> Sure, great. Thanks everybody for joining. That was really good. I I think kind of my takeaways for people that are watching. There's a lot of people watching it on the live stream, too, and we can't get their questions, but that's okay. You can reach out to me if you have questions and we'll connect you with everybody. But I also put in the chat if you guys want to come to one of our personal like intimate events where we get on Zoom and where you guys are going to ask your questions live and it's more collaborative, go ahead and put your information in and we'll make sure you get emailed for our next next event for that event. I would just say there's a lot of things we didn't cover that we wanted to cuz we had such great speakers today. Like how to structure a deal with financing, SBA financing, all the things that go along with it. I'd also say too, you know, Tom and Alex are pretty sophisticated guys, right? Some of you guys might be like your heads might be spinning right now. And that's why RJ and I like franchising sometimes for for people that are getting started because systems and processes and it's a good starting out. So, some of you might be already owning businesses, sophisticated, maybe you're your upper senior management uh type of thing. Some of you might be like, I'm a blue-collar guy and I'm just doing my first thing.
And so, there's you know, there's differences. The good thing is most of you stayed a long time to watch this because I think what you'll what the truth of the matter is is that there's a lot to owning a business and that's why RJ and I started this because we know cuz we own businesses, we're buying more businesses, and RJ's been doing this for a lot longer than I am. He's a little bit older than I am. So, and he's still learning, right? We're all learning and that's the point. So, you got to get smart people around you so you can continue to learn and do the right things and and not be the person that buys their first business and in 4 months they're filing a B BK and the SBA's foreclosing on that on their business. So, I think that's the point of this group and uh and my background was real estate investing. So, when I was telling RJ, "Hey, let's do a group that's really like a real estate investor group up for business ownership." Um where it's collaborative, you bring in really smart people. And that's that was kind of the the start of the conversation where we're at today.
Um but we have a lot of tools in our tool belts to help people and we have a lot of smart friends. So, RJ, any last thoughts?
>> Yeah, yeah. So, so future episodes, I'll tell the Nesses story, how Bo and I partnered with him and changed his life, and we're we're continuing to do that with others. We're evaluating businesses every day and evaluating partners, and showing people in the structure of of financing and so forth. To really touch on as Bo said this, these gentlemen are very sophisticated talking about higher businesses, but I'm a business broker, I sell middle market, so I sell manufacturing companies in the in the millions, but I also sell local laundromats and auto repair shops and pizzerias and delis. So, we're not isolating anybody. We we have small business, mom-and-pop business to higher-end businesses. We're going to touch on all of it. It'll be interactive, and we're going to have experts come in and evaluate. You can bring deals to the table. We'll evaluate, pick them apart, take a look at them. And and really you'll get great experts on there. So, so thank you to our experts for showing up today. We appreciate you. We'll be We'll make sure that you'll be able to get their contact information to do a free consultation.
This will also go out in a recording to you so you could replay it and take better notes. And And that's all I got.
So, thank you very much for joining us today. Appreciate it.
>> Thank you.
>> Thank you, everyone.
>> That was great. Thanks, guys.
>> Bye-bye.
>> Thank you.
>> Thank you.
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