E: 25 Top M&A Entrepreneurs - Elliott Holland from PE firm to 3 Acquisitions to Due Diligence

Welcome to the top M&A Entrepreneurs podcast. I have a guest is Elliot Holland today. How are you doing, Elliot? Doing well. How are you? I'm good. So, I wanna just jump in. You and I have been exchanging, uh, some, uh, text messages on Search Funder, and somebody recommended you say you'd be a great audience to talk to, because you're just in the thick of this. So, let me start off. You were in private equity, right? A long time ago. What, what, uh, what firm was that? With two different ones. So Lynx Partners, which is a sort of mid-market, uh, industrial-based firm, and then the Watermill Group, which is a family office slash private equity firm in Boston that's done $4 billion in transactions. So I work for both of them. Now, what did you do for them? So I was analyzing deals, putting together investment thesis, um, sourcing deals, sort of the whole litany of private equity skills. So I mean, if you think about most folks on here will be searchers. As a searcher, you're kind of a single person uncapitalized private equity fund. So everything a searcher would do, I was doing as part of a, you know, 1020 person team. And getting paid for that, right? A monthly. Yeah, yeah. Yes, that was a very big difference than my self-funded day, so yes. Yeah, did you like uh working for a private equity firm? There are pluses and minuses. I mean, I learned a tremendous amount of information. There's just no substitute for working for somebody who's been doing deals for 30 years, and when you work with, you know, 4 or 5 people. That have been doing deals for 30 years, it's just stuff you can pick up on that you can't pick up from someone who's been doing it for 3 years, right? Oh my God, this, uh, you know, Warren Buffett says, hey, it depends on who your bad boy for. Yeah, it, it matters a lot. And then also, most of the things that happen in the world of like self-funded or search funder deals are microcosms of what happened in private equity. And so oftentimes we simplify things to, to make them palatable for the, the average person's sort of capacity cause some of the stuff can get so complex and sometimes so simple as well. But when you don't kind of understand the fundamentals, you can kinda get thrown off a lot, like There's a lot of what I call like open air negotiations and search funder deals, and if you don't sort of recognize the like boundaries, you can get screwed up. Is that something open ear? Open air like air. So what what do you refer to is like, uh, are you referring to evaluations and due diligence, which is kind of the where you're going with that, yeah. Yeah, and the thing is, so I do due diligence, but I actually help people with kind of getting deals done, so I sort of provide like private equity services for searchers. But it can be a valuation which is both a headline number, a seller note, a how long is the seller gonna work for me after, a timing of the due diligence process, how deep the due diligence is gonna be, how many of the sellers' employees am I gonna keep. So evaluation, you, you dumb it down to just a number, but it's, you know, the letter of intent is 3 to 5 pages, right? And so how do you get an offer in front of a seller in a competitive process such that they have a high likelihood of accepting your offer? But then also, um, what are the terms on the seller note? Um, the searcher wants to close by the SBA deadline to get some benefit. The seller could care less. Um, the buyer wants to get the customer list day one. The seller doesn't wanna give it at all. So all these things where I call it an open-air negotiation because I feel like in corporate settings, you have HR that is a referee, you have precedent that is a referee, and I didn't see too many negotiations in corporate that ever like Ever had a volatility of more than like 10 or 20%. The negotiations we do in sort of the deal world can be 100% volatility. And so, there's no guardrails and the volatility is higher, and so they become more complex. How big were those deals on the private equity, the two companies you work for? You said how big were they? Yeah, how big are you? What size? Yeah, so they went from $12 million on the low side to Gosh, 500 million on the high side. Yeah, so that's not really in the search, you know, search funder, search, you know, self-funded, yeah, that's not even in the same area, ballpark. Although I'd say 20% of the people that come to me are working on deals. That are over $12 million. Yeah. So I did a $28 million deal this year, a $15 million deal this year, a $10 million deal this year. Um, so we think of self-funded searchers as SBA $5 million and below only. I, I've dealt with some wealthy self-funded searches that are doing bigger deals, so I challenge that. Yeah. Now you, after the private equity firm, you became a search or searcher, right? You start and you acquired how many businesses? 3 businesses, an automotive parts business, a tow truck company, and a clinical trials business. Yeah, how big were those? Those were 1517, and around $22 million. Yeah. And were you funded at that time, or you a self-funder? Self-funded. I was more of an independent sponsor than a searcher. The only difference being, I consider independent sponsors being people that come out of an investment banking or a private equity world and do deals for their own versus I think of a searcher as a person that doesn't have that experience generally and is going to do deals. And so, for instance, I would have access to my friends who were at debt funds and private equity funds that were putting money specifically into deals like mine, and those are guys I went to business school with, whereas as a self-funded searcher without that experience, those folks, it's gonna be hard to get a phone call with them. But the reality is, John, it's the same work, man. It's kind of a $10 million deals the same as a $12 million deal, same as a $120 million deal in terms of which, the jobs you have to get done are the same. Yeah, how long did you keep those companies? Did you grow them, flip them? What did you do with it? Those are permanent equity companies, so we put money in those companies, we paid off the debt, um. And my former business partner who was the majority owner still owns all three of them to the best of my knowledge. Yeah, interesting. Did you like being part of a company or do you say I don't wanna be, you know, I don't want to run a company or I don't want to be in the org chart or Well, I think it's more of a competitive, like comparative thing. I mean, I think for all of us, we're trying to figure out where do the things that we wanna do match with our skill set, match with our highest and best use. So I think for me, being a CFO of a single company wasn't nearly as lucrative as being an owner of several. Being an owner of several working for somebody else wasn't nearly as lucrative as my friends who were owner of several and work for themselves. And so it was always sort of um Where could I sort of get a bigger bang for my buck, if that makes sense. Yeah. Based upon what you like to do and the time you want to spend in it. So how did you move to just due diligence, opening your own firm guardian? I think two major things drove it. One was I thought that the solutions for financial due diligence for deals under 5 million bucks were terrible, honestly. Um, they're slightly better ones in the market now, but really, I was just talking to a guy right now who owns a business in South Carolina, and he was like, I wouldn't trust my CPA to do a squat. And I hear that a lot in terms of very risk averse people. Well, as a searcher, you're trying to figure out a private business. Whether it's worth 5 million bucks, right? Yeah, CPA can tell you what the trillion 12 month EBI is, John. Is that sufficient to make a $5 million bet? Uh, I need to know more. Yeah, they don't give you more. Yeah, I, I'd have to ask for uh bank statements. I mean, I just kind of dig into it. I wouldn't rely on just one. I mean, I need 3 years, 5 years at most, to like cash flow, bank statements, uh, income statements, and then, uh, bank statements, yeah. And that's just on the financial side. So a business is a function of all the operations that it, uh, as it perpetuates, right? So, tow truck business is pretty easy. You get broken down on the road, you park in a bad parking lot. You, uh, get in a high-speed chase with the cops, whatever the case may be, right? If somebody has to go pull your car from the road or your AAA, right? And so to run a 50 truck business is not just the fact that it does a million dollars of cash flow. It's because you're going into rough and tumble areas, you need to hire people that are OK going into bad parts of town to pull cars. Because you're pulling people's possessions on a truck that they don't know, you need the kind of person that can deal with that complexity. because you're pulling cars off the expressway, you can't have a, a, a, a, a very easily scared person pulling a car at 3 a.m. on a major expressway. But you also can't have a driver that won't do that work because they're, because of how tight you have to run your routes. It doesn't work. And so to me, the trailing 12 month EEDA is just one tool. How do you know the cash flow is gonna continue? How do you know that you can do all the functions the current ownership group does? How do you know that all the sales relationships and supply relationships that person built over 30 years are gonna accrue to you? Diligence is way more than just financials, bank statements, and taxes. It's is the business gonna create the cash flow? That it did under the old owner under you. Part of that's financial, part of it is operational, part of it is commercial. And I think that's also why You know, you talked a lot about deal size and I pushed you because The stuff that a private equity person does, so a long-term professional business buyer or they were groomed in business buying. They don't just stop at a quality of learning, they do a commercial due diligence. What is the industry like? They do an operational due diligence, so what is the business like? What are the things you have to do well for that business to continue? And so part of the service that we bring to the searcher market is we wrap the operational and commercial diligence into the financial. And so what we're helping people understand. Is is this business worth what you're paying for it, where 20% of that is trailing 12 month EEA. A big portion of that is How do you keep the sales relationships? The top 3 employees, how are you gonna keep them? The working capital will be negative in this business for 3 months post close. How do you handle that? All these other things that come up that are The searchers have to deal with, but I think A quality of earnings by itself in its traditional form don't do a great job of answering. Yeah, I got, we're we're looking at a business right now that's doing 5 million a year consistently enduringly, uh, but it's only bringing in about 5% uh either. It's got $3 million in cash in the bank. But it's an industry where they sell software to state government. So, uh, it's not a business where You know, they, they wait for the RFP. It's not, it's not a business where it's gonna come in and go, oh, we're gonna grow at 50% per month. That's just not gonna happen. Yeah, and at 5%, even our margins, if you looked at the cash flow model on that, which you may have already, the slightest swing in payment terms will make that business and solve it. That's why he has $3 million of cash on the balance sheet. Yeah, but he's not gonna sell you the $3 million of cash for free. Yeah, if I went down 20%, it, it can't afford a million dollars loan from the SBA. No. But the trailer, but, but, but the quality of earnings would say it did $250,000 of IEA or sorry, you said 5%, yeah, $2500 in IEDA last year. And then, so what are you gonna do with that, John? Not much, yeah. The biggest issue you're gonna have is how much flexibility you need around working capital to make you think that you can pay off any debt, let alone an SBA loan. Then the fact that the SBA, you won't have enough juice in there. When you pay taxes and interest to, to pay principal. And so it's not gonna work in that way. So now you have to structure the deal in a way that allows you to put enough seller financing in the deal, so that for the capital structure that you can get, the deal will work. All that stuff is outside of a traditional quality of earnings. All that stuff is what guardian helps people get through. Yeah, beautiful. How do you guys work? I mean, how do you, I know you're very active on Search front or, how do you find your deals? And I also know that you talked to a buddy of mine, uh Walker Deeble, so you're very active with uh Quiet Light brokerage, right? Yeah, so Walker sends me business from his acquisition lab, Roland sends me business from um his class. Um, there's a couple of other groups that I'm the primary diligence provider for. I get a lot of deals from Search Funder, a lot from LinkedIn. And a lot from other marketing stuff that I do, whether it be podcasts like this or email marketing campaigns that I'm running, um, speaking about, you know, diligence all the time or people just knowing that I'm a deal guy that's been in the space for 10+ years, which Ryan Condi, who runs another podcast, I didn't say this, he did, he called me an OG. So if I'm an OG in small and medium business acquisition, then people will sometimes seek me out. Yeah, uh, so how long have you been working with Roland? I mean, that's the core, one of the courses I went through. I've been through a couple of the courses, so, yeah. Yeah, I've been working with clients out of Roland's class for almost a year now. Oh, beautiful. Yeah, it's awesome. I mean, I, I, why wouldn't you? Where do you get try to get involved and say, hey, I need to go to Elliott, or I need to be Vinced to go to Elliot, say I need to look at this cause I just don't trust myself, or I just don't trust the guy, the seller, or the broker, whatever it is. In this game, you shouldn't trust anybody, including yourself. As a searcher, you're gonna see a million dollar opportunity and most of my clients are making 6 figures currently, so they're thinking about 10Xing their economic situation. You should not trust your prudence when you're facing those odds, right? You're gonna fall in love with almost anything that can 10X your capacity. Um, the brokers and lawyers and sellers, if you just think about their pure incentive. I'm not saying they're good or bad people. I'm saying who they work for. They don't work for you, so you have a hard time trusting them. Where people should bring me in is typically right before the letter of intent. So when a deal gets serious, it's the best time to bring me in. We have a special offer. You can go to offer from Elliott, 2 L's, two T's on Elliott, and you can get a free letter of intent and company evaluation review at any time. And so people can go there and, and, and sort of get that help. And then once you're in that zone, It's a great place to work with us because we can sort of foster you through the letter of intent process to make sure the offer you're putting on the business kind of fits the constraints that you may know, but some you may not know. Like, for instance, you knew that that deal wouldn't work in the SBA. A lot of my clients wouldn't know that. And so they put together an SBA letter of intent with a very small seller note and then not be able to close it. So we helped them with that. And then once the letter of intent is signed, we walked in through the full Sort of financial due diligence process. We add our deal advisory services which help with the operational diligence, which is really, is the company set up for you to be able to run it. The commercial diligence, which is, is the industry, one that you want to be in, and what do you have to do to win in this industry. And then recently we've started doing even post-closing operating plans for our clients. So once you close, what are the things you do in the 30, 60, 90 after you close to maximize. The IEA, which is gonna maximize your return on investment. Let me, let me ask you about the uh er not the operational but the commercial, the industry that you want to be in. You were in two car sort of auto industries, and automotive repair, and then, you know, uh, uh, you know, that the other one, which clinical trials, well, clinical trial, completely too different. I mean, did you figure out they're like, hey man, these are different businesses. I don't like being in that industry or Um, You know, man, I'm a generalist. I like all the industries that pay me. And over 10+ years of looking at 300 deals plus a year, I told somebody I pay them 1000 bucks, but they sent me an industry I didn't have at least 3 confidential information memorandums on my computer in that industry. So I've looked at everything. There's nobody that you haven't, I mean, from cannabis to a pharmaceutical. Yeah. The artificial intelligence, to tow truck companies, to uh portable toilet rental, to roll off containers, to anything, right? And so I think Look, there's probably 4 or 5 industries that I've spent more than 3 or 4 years on, that I'm really good in, but I've spent a lot of time thinking through industries that work and here's the other thing. So, I think every industry has sort of an average profitability. And then businesses that are doing higher than the average profitability in any industry become interesting. And then businesses that are doing below the average profitability in any industry are also interesting because you should be able to get them for a cheap price. And so the other piece about this industry thing is it's only one lens to consider the quality of the deal. If I get the deal for $5 I like that software business doing 5% margins of $5 right? Even terrible businesses are worth the low price. Yeah. Uh, I'm happy to take that price if he would, uh, uh, offer it at the right, yeah. I think I'd find the money for it very easily. So where do you come in as far as uh right around the LOI, but then what do you do when you say, hey, look, I'm doing the due diligence for you. Do you interact with them directly or do you tell the buyer to say, hey, this is what I need you to ask for? Sure. For most processes, we come in, we work with the, the buyer to understand what their needs are. Some want to be involved, some don't, whatever they want, we can manage. We typically are interacting directly with not just the seller, but the seller's accountant and the seller's bookkeeper to get financial data. So week one or day one we'll say, hey, here's our due diligence request list. Here's everything that we need. And then hopefully in the next week or so, we get the lion's share of that data. We start our process, we'll analyze the data set, and then come back to the, the buyer within a week with our executive summary review. So we call, when we start in our minds is when we get the data. So there's kind of like pre-week one, which is asking for the data and then collecting it. We start week one when we get the data. At the end of week one, we're presenting an executive summary review to our clients. But here's the main issues. Here's what we're seeing. Did we miss anything? Do you know of something that we could not have possibly known that we need to understand these numbers? Week 2 and 3 are going through the buyer's big issues. It's typically week 2. Um, getting very detailed with the seller happens in week 3, answering some of the buyer's tougher questions. And then week 4 is typically recognized that the quality of earnings does many things. It helps the buyer feel comfortable doing the deal. It helps the lender get comfortable with the financials to loan on the, the money. It gives other equity investors and stakeholders a reliable financial view of the business to invest their equity. And so then we'll refine the report to speak to all those audiences, and so our process is 4 weeks. Is it, is it, if somebody, if the buyer already says, hey, I'll give you X amount for the business, is it kind of too late for you to come in and because he'd come back and forth and go, well, look, I just did due diligence and now it's only worth, you know, half x. Yeah. Um, I don't think it's ever too late. You know, if the, if you've already negotiated a price, that's fine. A lot of our clients start with us after the letter of the tenants signed. And then we have some clients that go to somebody else, they can't get the deal done. Um, the people can't finish diligence, primarily oftentimes because the data doesn't come over in nice neat Excel sheets and they need somebody to go digging. And so they'll come back to us halfway through their diligence process to clean up somebody else's work. So. The ideal time is right before the letter of intent, but we can come in and help at any point in the process. Yeah. What do you mean some data came over and not Excel spreadsheets? People put it on a napkin? Well, a lot of firms can't handle stuff that's not in QuickBooks Excel. Right. Or bank statement Excel. If you have some Um, what's a good example? So we had a situation last week where for the first time I saw a new financial system that was a bunch of Microsoft Access databases strung together. OK. With very few checks and balances on how correct the system was from a gap accounting perspective. And so for a CPA firm that's gonna manage their risk and not wanna take on the risk that the IT system is bogus, they're not gonna touch that. They're not gonna touch that. For us, we're deal people who manage CPAs and so again, you know, we're gonna caveat things that we can't necessarily guarantee that the financial system is accurate, but we check each number 3 or 4 different times between bank statements, financials, taxes, and other data that we get. We're pretty comfortable triangulating on most data points that are important. And so we kept going where I don't think another firm could have. And there's a bunch of different situations that show up like that in terms of equipment list and, you know, written on somebody's, you know, notepad, you know, 38 pages long, and, and sometimes they'll have somebody to convert that, but that person may cost you $200 an hour. So we just, we do really good work for the smaller deals in a cost-effective way. Uh, I used to work for Intuit, so we I'm familiar with QuickBooks and enterprise solutions, and one of the uh negatives about that was that you can get in and then change an entry, and there wouldn't be history to it. I mean, where do you see like moving up the Great Plains or something like that where it's, if somebody does try to move an entry, it you can track it and say, hey, this guy, it's this is fraudulent. Sure. Well, That's that, so, so. I think that's the first question of diligence. Is someone maliciously trying to defraud you? Because before I can answer, is the business worth what you're paying for, which I think is the most important question. The first question I have to answer is, is the person maliciously trying to defraud you? So, I'd love to have people who are more on Great Plains or more robust financial systems, but the reality is, for most of the deals, I'm lucky if I get QuickBooks. And and even if I get QuickBooks. I often get quick books that's manipulated by a seller's wife or a seller's husband that graduated high school, and wouldn't and fundamentally has run the business on it for 20 years, so they're good. But in terms of how, like, I would interpret financials from an accountant who use QuickBooks, they'll be completely different. So what we have to do is we can't alter the data quality on the front end. The way we check for fraud is, you can move entries, John, but you can't walk into the chase with 100 bucks, but have him tell Elliott that it's 500 bucks. Yeah. And so we're gonna compare the financials to the bank statements, where the bank statements won't lie. We're gonna know that, you know, deposits are plus or minus revenue and um withdrawals are plus or minus um expenses. Now, you have to do a lot of adjustments for checks and for transfers and for inventory purchases. There's a lot more to it, but essentially, that's what it is. Additionally, taxes give you certain details on asset prices where people can't make adjustments either. And then here's where the deal person lens comes in. After looking at business for as long as I have, if I see IT spend on a software company as 1% of revenue, I know that's BS. Yeah, I know that's if I see sales on a sales-focused company under 15%, I know that's bogus. And so although I might not be able to go back to the entry, like I had a conversation with the client the other week. You mean to tell me you're buying a content website? And the whole technology spend on everything, including online advertising, is less than $5000 a month. Do you believe that? Um, no, I don't believe that. No, no, cause even if you're doing content marketing, which is cheaper than paid advertising, to get those people to, to, to do that work is, is gonna cost on an almost $2 million revenue business. marketing company, that's your biggest, uh, line item is sales and marketing, yeah. So we, we check things that way, and, and again, If I said I could only accept like the most robust protected financial systems to start, I'd be out of business. I, I actually am the best at messy situations. Yeah. So you're looking at the income statement, you could say, uh, you know, and say this is the industry and you're, you've done this long enough to say, you know, it's below the threshold, something's wrong there. Above this something wrong there. Can you do that with the balance sheet? Can you tell a lot with looking at a balance sheet by industry and say, Uh, why are they doing this? I mean, I, I looked at a company with a deferred revenue of 1.6 million. It's not a bad thing. It's a software company, they still owe it, but how do you value it? That's something we had to negotiate or working on. And then what's the timing on it? That's the other thing. And then again, You know, John, as a, as a nerd, I could go into the nth degree of detail, but I would, I would, I would tell your listeners. You know, um, You gotta realize, are you the, are you the smart guy or the dumb guy and the thing that matters on your transaction? So if it's how to run trucks, are you the smarter guy than the seller or the dumber guy? If you're the dumber guy, get some help. If it's financials that you need to understand to get your deal done correctly, are you the smarter guy than the seller and his accountant in all the years he could have maliciously, you know, fraudulently manipulated you, or are you the smarter guy? If you're the dumber guy, get some help. I'm your help. On your particular deal, it's like 10 to 20 things that you don't know that you need to know to feel comfortable that The deal's good. And, and look, the SBA will probably catch half of those. There's a graveyard full of people who have gotten a deal through SBA and still had to give up their house, their car, and all their assets because they missed something in diligence. If you feel that you're not an expert in the thing that you wanna make your million dollar bet around, go get some help. Because it's deferred revenue. If you don't know what deferred revenue is and you're listening to this, and you gotta go look it up on Google, go get some help. Yeah, I, I, I love the way you say that because uh I'm out there, I do podcasts, people reach out to me on LinkedIn, and they, and they said, hey, I'd like to buy the business, and I said, well, do you have any experience in that industry? And and it's no, and I go, well, Uh, you know, you might want to have experience in it cause every industry has KPIs and they have these metrics, right? And what whatever makes the bell ring, and you should know what makes the bell ring because you're not gonna be able to answer that, ask that question. Nobody's gonna tell you that. Hey, tell me the 5 KPIs that run your business, Mr. These guys are dudes that graduated high school, started selling something, were good enough to put a business around it for the most part, Gals too. And you start asking these questions and people wanna call them unsophisticated sellers. I'm like, you idiots, if this dude's pulling a million dollars out of their business consistently has employees, they're not unsophisticated. They're more sophisticated than you. They just don't speak in your language. So you're trying to hustle somebody who's been doing the exact thing you're trying to get into. They've been doing it for 30 years, 10 years, 5 years, yeah. Get some experience. That's the thing where earlier in the podcast, it was, we hadn't gotten here, but the quality of earnings just gives you cash flow. It doesn't give you the fact that there's not a single KPI that's non-financial or accounting-based in the quality of earnings, right? Any operational metrics, maintenance cost per truck you get. Potentially in the quality of earnings, but you're not gonna get like quality of, of, of salesperson. You're not gonna get like should you be flying Ford trucks, GM trucks or something like there's a bunch of things you're not gonna get that could completely drive efficiency, right? And so GM truck gets, you know, 2% better margin or 2 something better than a Ford truck, and that's why we focus on GM trucks, right? Exactly it, yeah, exactly. Or something simple like my brother works at the Ford dealership, so we use Ford trucks because we get a discount, right? It can be anything or like oftentimes I get. What I call academic business buyers. Somebody who read a book or took a class and they're kind of starting off and I love it cause that's how everybody starts. But they'll look at the business from an efficiency standpoint and start thinking about all the costs they can cut cause they don't need it. And sometimes you don't recognize that the employee costs that you may wanna cut out isn't necessarily the most industrious person. You saw them taking long lunches or something, or the smartest person, they didn't get your math problems as quickly as you want. But they hold one of the mission-critical relationships that allows the business to function, and you fire them and you could lose 30% of your revenue. Yeah. I, um, what did you see during COVID? I mean, COVID, some companies took a, you know, kind of a, a dip in their earnings. Some people tapped into savings, borrowed money or something. What did you see during COVID? Because we have a lot of people go like, oh, these are the COVID numbers and uh you know, that's the answer they gave me, and I said, well, you need to look into that a little bit more. Yeah, I mean, What's interesting now is I think people are still writing the book on what numbers they need to look at as the most representative set, right? So if you're buying a business, August 30th of 2021. So at best you have maybe July 31st financials. And if there's a broker involved, their book is probably through June at best. So do you look at the 1st 6 months of 2021? But if it's seasonal, you'll miss 6 months, right? So if they have a heavier back end or a lighter front end, you gonna miss it. Do you look at trailing 12 months, which is typically what we do. Well, if trailing 12 months have 6 months of 2020, that's terrible, that might not be represented. Well, what about 2019? We'll just take it back there. Well, the world's moved two years since then. And so what I've seen is a lot of people trying to nitpick the The period that they want people to look at and to forgive all of the, all of the operational blunders as the responsibility of COVID and nothing to do with the owner of the industry and all the benefits are solely because the seller is the smartest person in the world. They've tried to use PPP loans. Now, I'll give it to you, it's other income, so it did happen, but it's not repeatable, so people should not be paying a multiple on it. No. And some of the industries that were impacted by COVID were impacted because they're not as viable as they were in 2018. Technology has pushed them out a bit. Um, other things are happening, and, and that, that, that doesn't mean all of them or majority of them, but some of them. And so where I see people getting Taking to the cleaners is sort of believing everybody else's perspective on what you should think is a representative set of numbers for this business. In my opinion, you should be looking at all of them. 2019 is a great indication, maybe that's 30% or 3 a third of what you look at. I think 12 and 12 months gives you seasonality and I think the last 6 months or the 1st 6 months in 2021 also helps you. And I would have traditionally said trailing 12 months was the best metric, and that was like 80% of the ball game up until COVID. Well, not every single year, but for most years. Now, I would say you really do need to almost take an average. Yeah, well, are you able to say to look at something and, well, like a balance sheet or the seller's performance uh during COVID and say, well, it's, it's not really what the broker or just my opinion, it's not the value what the broker thinks it's worth, because of this, it was kind of a stress test, he didn't do well, and the industries out of favor. I would offer him, you know, 1 less. Sure. Part of our, you know, offer from Elliott.com is people will show us valuation models that say, hey, because of this and that and this, it does make sense to pay 5 times for this business. And I'll tell them I wouldn't pay a lick over 3 times. And here's why. And, and that could be because of the balance sheet, because I see accounts receivable ballooning, which means their clients aren't paying them, which means they're probably in due for a huge awakening soon that they've been doing work for free, and that's gonna hit the buyer disproportionate to the seller. Or the balance sheet will show um They can't get any more financing. So like, say you have a uh a trucking company, right? And let's say your financing dries up. Well, that's one of the lifebloods of your business, so that's gonna be a problem. And then I said this a couple of times. What the broker sends you is marketing material, by definition, even if it's accurate. What you need is something that says QuickBooks at the top, or has the QuickBooks header, or it says Great Plains at the top, or has the, the Great Plains header. When you look at data that's not original data, you're asking to be misled. Right, right. What would you say in the business that, um, and this is a conversation I had with somebody, uh, he sent me the balance sheet and I said, well, I, I'd look into this, but the they had about $500,000 in working capital last year, and they, or a year before, and then they had, they're down to $77,000 in working capital this year, but they produced as many sales, like, figure out why they did that. I mean, I That to me is strange. Either they're borrowed some money to produce those sales, or they got another investment from somebody else to produce those sales, and that's not recorded on there. Yeah, or their clients are paying them quicker if they produce more sales with their AR or internal capital is highly driven by accounts receivable. I mean, that's the stuff that is in between the lines of a traditional quality of earnings and goes into is the business worth what you're paying for it, right? Because now you're sort of in the land of the Ibera looks solid. I, you know, you say, uh, they even look solid. I'm gonna give them, you know, in the industry it's 4.2%. I'll give them or 4. I'll give them 4. And you get hoes because you didn't realize that, yeah, they were borrowing money to produce sales that people weren't paying them for or they were giving away stuff for free. Or their gross margin went down 10%. So now, their, their profit margin is, is, is, is, is super low and they cut a third of their staff. They told you they did a restructuring. They really like cut down to the bone, and there's no operation left. I mean, The, the, the first thing I tell anybody who endeavors to buy a business is the seller has the highest reason to lie or probably any time in their life. Wow. Even the most honorable person in the context of selling is gonna be tempted. Here's why. The seller doesn't get $1 for dollar, they lie. They get 3 to 6 times their lie. Every profit dollar they convince you is there, that's not. They don't get a dollar for that. They get your multiple of that dollar. So a person who might not lie for 1 time their lie, at 6 times their lie. Highly likely. And so as the buyer, you have to go find your truth. That's I, I love the way you said that Elliot. I mean, and then you added an intermediary like a broker dealer and they'll just tack on another couple lies to make it even look better. And that's the other thing, you have to recognize who's in the deal for the fee. And who's in the deal for the long term. So, for instance, The broker should represent the business if there's one in the deal, but the seller is the one that's gonna be signing the purchase agreement with all the reps and warranties, promising you this and that. If the broker tells you something and the seller hasn't seen it, and then you get to the purchase agreement negotiation, the seller is like, I never said that. You can't call the broker back and be like, Well, well, you misrepresented this. It's too late. So you, you also need to be filtering your ears for people who are gonna be long term in the deal. Um, And then also buyers should make sure they recognize this reality. The seller's, accountant, and lawyer have a hidden incentive to blow up your deal. Wait, say that again. The seller's the seller's lawyer and accountant have a hidden reason to blow up the buyer's deal. Yeah, cause they just get more bookable hours if they do it again, right. That, but here's the other one. If John buys my business, John's gonna use Jon's lawyer going forward, not my lawyer. Yeah. So my lawyer loses his job if he makes a deal easy. If John buys my business, John's gonna use John's account next year, not my account. So my accountant loses their job if they facilitate a smooth deal. Oh goodness. And so buyers have to not only recognize it's a billable hours thing, but a last kiss thing. And so when you get in situations where the seller's lawyer and accountants are You know, Unreasonably pushing Minutia as sort of mission critical, you sort of have to remind the seller that These people are not the ones getting the million dollar check. And in fact, to do you the best service, they have to let go of their check. Do you trust them to be that good of a steward of your best interest seller? Yeah, that's interesting cause it's kind of uh timely. I mean, back to that business I was talking about with $3 million in cash, you know, we're, we're not gonna really be able to grow at 15%. It's because it's in a mature industry. The other way to do is buy another business, you know, set along the side and, you know, combine some of the admin structures of it, which means, you know, that account is gone. Yeah, yeah. And so sometimes, so what I love doing in these deals and I help my clients do it is there's so many parties at the table, right? So like as a buyer, you're bringing your diligence person, your lawyer, your insurance person, um, your bank, and your equity folks. So 5 people plus you, that's 6. The seller has another 6 right on his side. And so when things start going wonky, you sort of need to draw all the people up on like a board and think about what their selfish incentives are. Because sometimes what you miss because either you're too much in your head and you blocked out other people's, I just need to buy the business. I just need to buy the business, yeah. Or you expect that because an accountant is supposed to work for the seller that their interests are 100% aligned. No. That you, you missed that maybe the reason somebody is being a a a royal pain in the behind is because their self-interest is in the way of the deal. And until you address that directly, you won't be able to push past it. How, how do you address that? I just say, hey, seller accountant, I need to say this to him, her. Similarly, the reason why I like drawing everybody on a whiteboard and kind of going through it is because you also can then say, OK, so here's the issue. Now, who do I need to address it with? Yeah, I need to address it with the person getting the big check. Then you can't address it straight on, or at least I don't think it's most prudent. I think you have to recognize that a business owner is an entrepreneur is a person that bets and takes risks daily, and they understand it. And so when you tell him something like, hey, Look, I'm not saying anything about the scruples of the integrity of your accountant, but do they work at this business next year when I send you that big check? That I wanna send you. Cause if they don't work there anymore, are they incentive to help with this deal? So then you're paying the guy real money now, is he working? Well, let me just stop, you know, you know what I'm saying, right? You don't give it to a person, cause I think that's too presumptive, but I think you introduce doubt in Could you reasonably believe this person has the deal's best interest at heart? And what they call it in business generally is conflict of interest, but again, I try my best not to use any fancy words when I'm dealing with um Folks in this small and medium sized business arena because you just never want to be speaking over somebody's head. Yeah, so you want the seller some kind of preemptive conversation to make sure that they everybody that surrounds him and their team is on the team. Yeah, or like what's the impact of this? So the accountant's been giving me a real pain in the butt. I wanna take my Brinks trucks to, to South Dakota cause you guys are upsetting me. But what's the impact to you if your accountant blows up your deal? Yeah, it's just like it's. Like, you lose a million bucks, they keep the gravy train going. But if you empower that person to blow up your million dollar check seller, I get it. But their incentive is to blow it up and your incentive is to get a million dollars dollar check. Cause I need the seller to tell his accountant to, to, to calm down, to back off. Did you learn this in the private equity world or just over years of experience? As an independent sponsor, I think everything you learn it quicker as an entrepreneur. Yeah, it's, it's a trial by fire, yeah. And you're betting your own money. You made a great uh delineation earlier. Well, Elliott, not only is it the same thing, but you get paid when you're working in private equity. You're cutting checks when you're a searcher, right, a self-funded searcher. It's it's a lot easier to spend somebody else's money, and when you make mistakes on somebody else's money, you say oops. Right, and your car payment gets paid, you know, your mortgage payment gets paid. You still go on vacation. When I made mistakes as an independent sponsor or searcher. Um, I had to go drive for Lyft, you know, for a couple of months, cause I, I put all my money on the, on the table one time. I had to not go on that vacation because I couldn't afford it. And so, you know, when you're sitting looking at the same wall you sleep in 365 days a year cause you can't go to Florida and sit on the beach, you learn quickly. And then you have to provide solutions to your own problems because people, they don't tell you answers to that stuff for free. Elliott, that is so important right there because it's like when you said, hey, do you want to be in this industry? Well, if you bought this business and there was a issue with cash flow, and they needed a driver, are you willing, able to get in that truck and go pick up a car in a neighborhood undesirable neighborhood? Yes or no? If it's your business, you don't have a, if your alternative is not paying the bank and then staking your business, even if you're scared to death, you're gonna go do it. Yeah. And in fact, I talked about this on Walker's podcast, I think it was, but in every business I've owned, I've gone and done the work in a very visible way so everybody can see it. Because the other thing you'll find out. And we talked about sort of misaligned incentives. Your general manager, your employees, hate to say it, right, but their incentive is to work the minimal amount per unit dollar you pay them. Send them a paycheck, yeah, yeah. And so when that guy says, oh man, I can't change the oil on that truck cause the clearance is only 2 inches and the jack that we have only raised $10 and my body is more than 10 inches. And so I can't get under that thing and change the oil, and so I gotta go take it to the service provider who charges $50 an oil change and I sure would like to do it, Elliott, cause I'm a control guy, but I just, I can't do it because of the clearance. Until you get your behind under that truck and call BS. He's gonna tell you that forever and that comes at a cost to you and a benefit to him. And so you sort of have to. Also, if the, if the general manager knows you won't come down in a snowstorm to go pull a truck off the expressway and icy roads. They're not going with the same vigor. Yeah. God dang, Elliot, and we're out of time, man. I gotta tell you, uh, how Elliot, some really gold nuggets in here. How does, how does the audience get in touch with you? Sure, so the first place is guardianduediligence.com. All of my contact information is there. And then I hope a lot of you are sending letters of intent and are close to getting a deal closed and you should go to offer from Elliott, E L L I OTT.com. We typically charge $2000 for our sort of letter of intent and company evaluation review, but we're, we're, we're, we're temporarily doing it for free to kind of help people get going. So, go there and you can sign up for um a temporarily free uh review and that'll kinda get you going to get into the A better LOI and a better deal structure so you can get a good deal done. Yeah, I, I got one more question about the letter. You send letter, you recommend sending a letter of intents to kind of lock somebody in for not dealing with somebody else, or what's your thoughts on that? Yeah, I mean, I think you don't want to be known as a person that sends letters of intent for no reason. But I also think The broker can't tell you that the seller's willing to sell for a million bucks. You'll only know when you send them a letter of intent and they sign it. And so when you take a lot of the window dressing away from this business. Like I just had a call before this one, John, and this guy is telling me all these stories about he wants to buy his biggest supplier cause the guy's having health issues and, oh, but he hasn't spoken to me in 3 weeks. I wanna fly up there and I'm like, This guy's not ready to sell. He's not motivated. Yeah. And there's nothing you can do to motivate him except asking him. So I encourage you. If you're serious about a business, send a letter of intent because it cuts through a lot of the BS. Cause if, if the answer is no or I don't know, or I need to go on a Mecca to the Middle East or wherever, the Pope and go talk to him for 3 months, you should know that because the most precious resource a searcher has is their time. Don't waste it. Send an offer, see if it's acceptable. Beautiful. And I'll put uh how somebody gets in contact with you offer to Elliot, get on it right now. um I'll put these in the YouTube and the audio stuff. So, Elliott, thank you so much for spending time with me today. Thanks for having me. I appreciate it. All right, take care, man. Take care.