In this high-impact episode of the M&A Launchpad Podcast, hosts Feras Moussa and Casey Minshew are joined by Elliot Holland, founder of Guardian Due Diligence and the Business Buyer Masterclass. With decades of experience conducting quality of earnings (Q of E) reviews and advising buyers in small business acquisitions, Elliot brings invaluable insight into the due diligence process that every buyer needs to hear.
Whether you’re a first-time buyer or a seasoned dealmaker, this episode dives deep into critical financial diligence topics, including working capital, seller discretionary earnings (SDE), recourse strategies, and how to leverage brokers during tough negotiations. Elliot also shares real stories of deals gone wrong and how to avoid the most common buyer mistakes. Don’t miss this one—it might save you millions.
In this podcast episode, we discuss:
- What a Quality of Earnings (Q of E) report really uncovers
- How financial diligence helps avoid catastrophic deal mistakes
- Why EBITDA is often misunderstood (and sometimes misused)
- When SDE becomes a red flag instead of a metric
- How to approach working capital negotiations confidently
- Leveraging brokers the right way
- The importance of seller notes and recourse
- Building your deal team and protecting your downside
- Real-life cautionary tales from Elliot’s deal history
- Elliot’s take on when to walk away—and how to spot deception
Contact Elliot Holland:
Website: https://www.guardianduediligence.com
YouTube: https://www.youtube.com/@GuardianDueDiligence
LinkedIn: https://www.linkedin.com/in/elliotholland/
Additional Resources:
- Sponsored by O’Connell Advisory Group – Work with a trusted Quality of Earnings and Financial Diligence partner who focuses solely on business acquisitions.
Visit: https://www.oconnelladvisorygroup.com
- Attend the M&A Launchpad Conference – Upcoming in October 2025. Date and Location TBD.
Premier event for entrepreneurs, investors, and dealmakers in the lower-middle market.
https://www.malaunchpad.com
- M&A Launchpad Hosts Contact – Casey Minshew & Feras Moussa: info@equitylaunchpad.com
- Looking to buy or sell a business? Connect with the team at Equity Launchpad for expert guidance and hands-on support throughout your transaction.
M&A Launchpad Hosts Contact – info@equitylaunchpad.com
Explore more at: https://www.equity-launchpad.com
🎧 Podcast on Spotify: https://open.spotify.com/episode/4j5R3V7cETWefYdTTYIS2X?si=ME5mp8leRki_f_eriwqvIA
🎧 Podcast on Apple: https://podcasts.apple.com/us/podcast/avoiding-buyer-landmines-quality-of-earnings-sde/id1740382586?i=1000706907197
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Transcript
00:00 On today’s episode, we interviewed
00:02 Elliot Holland where we talked a lot
00:04 about QOV buyer mistakes and ultimately
00:07 as a buyer, right? How to really step up
00:09 during a transaction and make sure
00:11 you’re getting a proper deal, right? How
00:13 do you leverage the broker in the
00:14 transaction to help you do a deal? How
00:16 do you avoid a lot of the landmines and
00:18 pitfalls that people hit? And then
00:20 ultimately, how do you get confident
00:21 upfront so you can set the right
00:22 expectation for the rest of the
00:24 transaction? So, Casey, what were some
00:25 of your takeaways? You know, this is one
00:27 of the things I’m very passionate in
00:28 because I’ I’ve made the mistakes and
00:30 I’m the one that has asked is living
00:32 with them, right? And and so having that
00:34 due diligence is is critical, but more
00:36 importantly is having the right person
00:38 that you can talk to and understand the
00:39 deals because at the end of the day,
00:42 costs are going up. We all want to help
00:44 transition baby boomer businesses, but
00:47 they also have certain responsibilities
00:48 that they’ve got to do, which is stay
00:50 on, support us, leave cash, help us
00:52 grow. And so if we don’t have these
00:54 conversations up front and you don’t
00:55 have the due diligence that you know,
00:56 then all of a sudden you’re going to
00:58 find yourself in a very tough position.
00:59 And I’m telling you, I’ve been in that
01:00 position for the last 5 years. It’s been
01:02 very challenging. We’re going to get
01:04 through it, but man, I would have much
01:05 rather done a deal that the right deal.
01:08 The right deal.
01:10 Yeah. And so, so if you’re a first-time
01:12 buyer, I mean, this is a great episode
01:14 to really listen in on and kind of give
01:16 some thoughts to how are you going to
01:17 conduct that transaction? How are you
01:18 going to help ensure that you’re buying
01:20 the deal that you think you’re buying?
01:25 Welcome to the M&A Launchpad podcast
01:27 with your hosts Casey and Ferris with
01:28 Equity Launchpad. On this podcast, you
01:30 will gain insights on acquiring,
01:31 investing in, and selling profitable
01:33 businesses in the lower to middle
01:34 market. Whether you’re a business owner,
01:36 investor, or spying entrepreneur, at
01:38 Equity Launchpad, we will provide you
01:39 with the knowledge, guidance, and
01:40 capital to navigate the world of mergers
01:42 and
01:43 acquisitions. All right, guys, just take
01:45 one second here real quick. When you’re
01:47 buying a business, ensuring the
01:48 financial health of the company is
01:49 critical. And that’s where a quality of
01:51 earnings partner comes in. Quality of
01:53 earnings gives you confidence in the
01:54 financials of the company that you’re
01:55 purchasing. It aims to protect your
01:57 investment and ensure that you’re
01:59 stepping into a profitable business on
02:00 day one. Patrick of Okonnell Advisory
02:03 Group is your dynamic quality of
02:04 earnings partner. He’s here to help you
02:06 buy the right business on your timeline.
02:07 Patrick’s entire practice is focused on
02:09 business acquisitions. Your niche is his
02:11 niche. And over the past decade,
02:13 Patrick’s helped more than 200 buyers
02:15 like yourself successfully purchase and
02:17 operate enduring, profitable businesses.
02:19 In fact, Patrick’s helped some listeners
02:21 of this show. So, if you’re buying,
02:23 looking for help with the quality of
02:24 earnings, financial due diligence,
02:26 network capital, and more, head to
02:28 okconelladvisor.com, or just click the
02:30 link in the show notes. Hey Elliot,
02:32 welcome to the show. Good to be here.
02:34 Thanks for having me. Glad to have you
02:36 on. So, for the audience, you want you
02:38 want to share who you are and what you
02:39 do? Elliot Holland. I run Guardian Due
02:42 Diligence and the business buying master
02:44 class. With Guardian Due Diligence, I do
02:47 financial diligence, a mini audit
02:49 product called a quality of earnings
02:50 specifically for people who are buying
02:52 small businesses to make sure the
02:54 numbers are what they’re actually
02:55 supposed to be so you can pay those high
02:57 prices. And then on the mastermind side,
02:60 I am helping first-time buyers get off
03:02 the sidelines and into the game of
03:03 closing a deal. All right. And then, you
03:06 know, this is the this is the horsepower
03:07 you want to bring, right, whenever
03:09 you’re doing a deal. So for those
03:10 listeners out there, I mean this is
03:12 actually I think an important topic and
03:13 it’s about how do you avoid the
03:15 landmines, right? I think a lot of
03:17 people are scared to buy business
03:18 because sometimes they they get a set of
03:20 financials. They’re like I don’t even
03:22 know what I’m looking at or where do I
03:23 you know how do I understand this? And
03:25 to be honest, if you’re buying a
03:26 business first, you do need to go get a
03:27 little bit of financial literacy because
03:30 you need to understand at least the
03:31 basics, right? But I think you know
03:33 where due diligence is is kind of where
03:35 rubber meets the road of like how do you
03:37 validate what you’ve been given right at
03:39 a more detailed intimate level. And so I
03:41 think there’s going to be a lot of just
03:42 nuggets for people to think about is as
03:44 you’re buying a business what are some
03:45 of the things to look for and so and
03:47 then we’re going to make it simple and
03:49 fun. So here’s the thing about it for me
03:51 if you have a working knowledge of a P&L
03:53 statement you’re actually armed enough
03:55 to do a deal with a provider like me to
03:57 help you understand the financials. So
03:59 the thing is one of the big things that
04:01 I do is take complex accounting language
04:03 and even working capital all that kind
04:06 of stuff and just help people put it
04:07 into a package where they can make a
04:09 deal decision. And so I don’t want
04:11 anybody to be just scared of what we’re
04:12 talking about today. It’s just if if
04:14 they say it’s a million dollars of Ebida
04:16 and you should pay four times, is it a
04:18 million dollars of Ebida and should you
04:19 pay four times? Yeah. And I think Ellie,
04:22 you know, you’re a private equity guy,
04:24 so you know how to distill it down and
04:25 dumb it down, so to speak, right, to the
04:27 language of what your, you know, clients
04:29 are actually wanting to ask. That’s it.
04:32 That’s it. So, frankly, like even Ibida
04:34 is just profit. So, you know, a lot of
04:37 these terms are sort of a bit more
04:39 complicated than need to be. Uh, so we
04:41 try to have fun with that and also just
04:43 invite people to recognize it’s just
04:45 revenue minus cost is profit. That’s
04:47 basically it. In saying that, you know,
04:49 I’m I’m not so early in my days. So, in
04:53 2019 when I stepped into this this side
04:55 of the business, learning all the good
04:56 stuff. Um, ITA, oh, that was how I
04:59 looked at everything. I I honestly, man,
05:01 am not a big fan of IBITA. I I think
05:03 that, you know, like for instance, we
05:06 bought a manufacturing company. Why am I
05:08 adding back depreciation? Like it is a
05:10 real cost, you know, now that I now that
05:12 I look at it, but we we looked at EVA,
05:14 you know, and it’s like it’s real, you
05:15 know, it’s not something I get to it’s
05:17 not phantom income that they keep
05:18 talking about. No, my capex requirement
05:21 is se severe and I should have not I
05:24 should have bought on uh what is it?
05:26 EBIT, not EBITDA, you know. Yes. Yeah.
05:29 So, it’s like but I didn’t know that,
05:30 right? So, I get in the game. So, if I
05:32 have a guy like you on my team, right?
05:34 Those are the kind of conversations I’m
05:36 having because that’s what you’re going
05:37 to be saying to me. you’re going to be
05:38 like, “Hey, Casey, depreciation isn’t
05:40 something that you just get like, you
05:42 know, it’s real cost.”
05:45 Great point. So, one of the things that
05:47 happens in this more frothy market,
05:49 right, where a lot of people are coming
05:50 in thinking it’s easy. And I love that
05:52 it’s open to anyone, but you still got
05:54 to get good deals done. You’re right.
05:56 And asset heavy businesses,
05:57 manufacturing, trucking is even worse.
05:60 that depreciation, you almost have to
06:02 get it out of there because you’re gonna
06:04 have to spend capex to get the assets
06:06 and keep them going. And so there’s
06:08 certain businesses that Evodai is
06:10 absolutely terrible for. Manufacturing
06:13 is one of them. And you might not know.
06:16 I didn’t and Ferris didn’t either. So it
06:18 was but but but you know, you live, you
06:20 learn, and you you you take your bumps
06:22 on the on the on the pieces. But the
06:24 businesses that we’re doing now, I mean,
06:25 it is like and Ben’s actually running
06:28 our podcast right now. Buddha and but he
06:30 he the other day he’s like man you were
06:31 just like this you’re you’re changing
06:33 your whole idea on cash and I’m like man
06:35 because after you’ve bought a couple of
06:37 these companies you’re going to be out
06:39 of cash in the first year to 18 months
06:42 it’s insane. So it’s like let’s put a 13
06:45 weeks in. Let’s get the cash management
06:47 right off the bat. And uh so these are
06:49 the things that I think like a great
06:50 adviser like you would do is say hey
06:52 guys this is cash. It’s going to be it’s
06:54 going to get sucked out. You’ve got debt
06:56 service. you’ve got everything going to
06:57 hit you.
06:60 So, IBIDA is just used as an assumption
07:04 of cash flow. When you make an
07:06 investment, real estate, business,
07:07 whatever, you make an investment of X to
07:09 get the cash flow. You put the cash flow
07:11 in the bank, you cannot spend IBIDA at
07:14 Walmart. So, the first thing is the
07:16 reason we use Ebida is because it’s a
07:18 proxy for what Casey’s saying, which is
07:19 cash flow. The other thing is you run
07:22 out of cash in 12 to 18 months if you
07:24 don’t buy a terrible business at a
07:26 terrible price. You run out of cash in
07:29 30 days if you overpay by 50%. Which is
07:32 happening a lot of times in the
07:33 marketplace currently because let’s face
07:35 it with a lot more buyers than great
07:37 businesses to
07:39 sell. Brokers and sellers are putting
07:41 anything out there, any crazy story, any
07:44 crazy multiple. And because there’s a
07:46 lot of first-time buyers out here, I
07:47 wouldn’t expect them to know. But you
07:50 can still go bankrupt making bad deals
07:52 if you don’t know. That’s why doing
07:54 financial due diligence, making sure at
07:56 least you read up and understand what
07:57 kind of assets you’re buying. Mission
07:59 critical. Yeah. And and maybe for
08:01 listeners too, people are asking what
08:02 what’s the point of IBIDA, right? But I
08:04 guess Elliot, I thought you were going
08:05 to say something that you did and maybe
08:07 I’ll say the way I look at it is it’s a
08:09 way to normalize different businesses,
08:12 right? How do you compare the
08:13 manufacturing business to the software
08:15 company to, you know, the label maker,
08:17 right? They’re all very different, but
08:19 it’s a way to get some sort of
08:20 normalization between them. And and I
08:22 think for those that still don’t
08:24 understand that, it’s actually a lot
08:25 like real estate, right? Real estate,
08:27 you have cap rates. And so what is a cap
08:29 rate? It’s really kind of the same thing
08:31 as an IBIDA, right? Where you’ve removed
08:33 a lot of the noise. So you can compare
08:35 what is the Walgreens piece of real
08:37 estate? How does that compare to an
08:38 apartment that compares to a
08:40 manufacturing industrial facility,
08:42 right? Very different types of assets
08:43 and a way to get consistency. So as a
08:45 buyer or an investor, you can compare
08:47 them. And so that’s the point of IBA.
08:49 But again, that’s that’s very high up in
08:52 the financial stack, right? There’s
08:53 still a lot of stuff below the line that
08:54 you need to be very very conscious of
08:57 and what impact it has on the business.
08:59 It also allows more everyday folks to
09:02 play the game because can be calculated
09:05 on a single financial statement, the
09:07 income statement, which most people
09:08 understand the best. So it normalizes
09:11 different companies from a profit
09:12 perspective. but also allows you to look
09:14 at the income statement, go to EBIT, add
09:16 DNA, and be at the number that you’re
09:18 multiplying the multiple on to get the
09:21 valuation. So, it’s that, too. Yeah. You
09:23 know, and I imagine, Elliot, you’re
09:25 seeing in the, you know, more of the
09:27 small business side when you look at
09:28 those deals, you probably got a ton of
09:31 seller discretionary earning, right?
09:32 You’ve got a you’ve got sellers taking
09:35 tons of money out of the business for
09:36 different things. And we literally just
09:39 had a podcast earlier than this and the
09:40 guy was talking about his first
09:41 business. They were like, “We will not
09:43 buy something that has a bunch of
09:44 adbacks from seller.” Seller
09:48 was hair transplants in the business.
09:50 He’s like, “We’re just,” he goes, “We’re
09:52 not even looking at them. We’re like
09:53 literally it has a bunch of adbacks.
09:55 We’re considering that the seller is not
09:56 a good financial steward of the
09:58 business.” So, what are your thoughts
09:59 when you see these things? So, I hate
10:03 SDE, but it’s market based, so you you
10:06 can’t hate it worse than you want to get
10:07 a deal done. So sellers discretionary
10:09 earnings is not only adding back
10:11 depreciation, advertisation, and these
10:14 adbacks, which are just personal
10:15 expenses that sellers run through their
10:17 business, but now you’re adding back one
10:19 owner’s
10:21 salary. And the assumption is it’s for a
10:23 smaller business where a buyer is going
10:25 to take over the CEO role. So they’re
10:27 basically pushing the seller out and
10:29 taking that role. But it essentially
10:31 applies the same multiples as before
10:33 that were applied towards a lower
10:34 number, Evida. Now you add a $100,000
10:37 salary and you’re using the same 4x
10:39 multiple on SDE. And frankly, where
10:42 people are really getting out of hand,
10:43 Casey, is now there’s three owners in
10:45 the business. Let’s say it’s us three.
10:47 So now we’re not adding back one salary.
10:49 We’re adding back three and we’re seeing
10:51 if the buyer’s smart enough to catch it.
10:53 Yeah. And that’s why you bring in an
10:54 Elliot, right? To help you kind of
10:55 understand what those are. And so I mean
10:58 Elliot, maybe for for the listeners,
10:60 right? When is the right time to bring
11:01 you in? And maybe give some people just
11:03 some examples of landmines that you had
11:06 customers kind of encounter and you know
11:08 you had to kind of help them navigate
11:09 them or you know solve them or back out
11:11 of a deal maybe. Yep. I should be your
11:14 first call after you get a signed letter
11:16 of intent. For 99% of people as soon as
11:19 you get your signed letter of intent,
11:21 you typically have 30 to 45 days both in
11:24 your letter of intent but also in your
11:26 fundraising timeline to do a quality of
11:28 earnings. And if you wait too long,
11:30 you’re going to push your deal process
11:33 back, upset your seller, get kicked out
11:35 of transactions. So, as soon as you get
11:37 a LOI, call me and I’m really easy to
11:39 connect with on my website. But now,
11:41 let’s get into some war stories. That’s
11:43 what everybody and for the record, my
11:45 hope is if you know, Casey gets an LI,
11:47 I’m his first call and then you can be
11:48 the second caller, right? You know, we
11:50 got to we got to get excited about
11:51 getting an LOI first. No, but you know
11:53 what is important though, just to kind
11:54 of bring it to the to the listeners, is
11:56 you’ve got to have a team. Um, this is
11:58 not this is there are no rewards for
12:00 doing this by yourself. In fact, no, you
12:02 you you may be a great deal generator.
12:04 You may be able to go find a deal, but
12:06 trust me, you probably you’re 100% going
12:08 to miss something in the financials,
12:10 right? And then you do not want to
12:12 quarterback your own purchase and sale
12:13 agreement. You like all of this stuff.
12:16 You want to you want to get a great team
12:17 around. You know, I think about this
12:19 Casey. So, people always like use Warren
12:21 Buffett as like the the most brilliant
12:23 investor out there. He gets QoE’s. So,
12:27 you’re trying to go do something, do it
12:29 yourself, that some of the greatest
12:30 investors go get help on. Just think
12:32 about that. You smarter than Warren
12:34 Buffett? No way. Get help. Absolutely.
12:38 So, I’ll talk about some stories. So,
12:40 here’s the thing that you have to
12:41 understand because it’s the cap rate,
12:44 similar thing, a multiple. So, now what
12:47 I’m saying is if I tell somebody that I
12:49 have a million dollars of profit as a
12:50 seller, Casey to buy my business is
12:53 going to multiply that times about four.
12:55 What that means is each fake dollar of
12:58 EBA that I can get into there, I don’t
12:60 get $1 back for it, I get four. So, this
13:03 creates an environment where even
13:04 normally
13:06 reasonable, integrityfilled people will
13:09 tell a story cuz they’re getting 4x
13:10 their story back in return. Let me give
13:13 you a couple of examples. I was doing
13:16 Equality Marines for a customer who was
13:18 buying a security company, like man
13:20 security outside of stadiums, basketball
13:22 games, whatever. and the the broker
13:26 claimed to be a special finance guy and
13:29 so it felt comfortable but the the buyer
13:31 responded to get a quality of earnings.
13:33 So there was about a million dollars of
13:35 cash flow in this business when they
13:37 presented it. So as we’re doing our
13:39 quality of earnings, one of the things
13:41 that we do is say hey we need to test
13:42 some of the invoices to make sure that
13:44 there’s invoices to match all of this
13:47 revenue. All of these huh he oh it’s in
13:51 paper all these boxes I can’t send it.
13:54 you want 78 boxes in the mail, blah blah
13:57 blah. Excuses, right? So, finally, we’re
13:59 saying, “Hey, just pick five um invoices
14:02 out of there, and we’ll test those.”
14:04 When they wouldn’t do that, I told my
14:06 client, I’m like, “Your seller went into
14:08 the bank, deposited a million dollars,
14:10 and is hoping that you didn’t check so
14:13 they can call that revenue, 100% of that
14:15 revenue drops to the bottom line in
14:17 Ebida, and you would have bought a break
14:18 even business for $4 million.” Talk
14:21 about going to the poor house. Oh my
14:23 god, that’s incredibly uh I’m glad you
14:26 found that. But I bet that’s happening
14:28 more more than we know. A lot more than
14:31 you know. It’s getting scary. And people
14:34 always say I’m a I’m a fear-mongerer and
14:36 I’m just making everybody think it’s
14:38 scary. I’m seeing these deals. I do 40
14:40 to 50 deals a year. And right now,
14:42 brokers and sellers know that it’s very
14:45 likely they’re going to find a
14:47 sucker. Somebody’s not going to do
14:49 diligence. Somebody’s going to do it
14:50 yourself. Somebody’s going to try to
14:51 call two or three full-time accounting
14:53 friends like, “Hey, on the weekends, can
14:55 you kick through these financials for
14:56 me?” And so, the amount of stuff that’s
14:59 going on is crazy. I’ll give you another
15:01 one at the intersection of due diligence
15:04 and like accounting QOE. So, I was
15:07 working with somebody who was buying a
15:08 fabrication business, right? So, they
15:11 fabricated metal and gave it to sort of
15:13 OEM manufacturers, washing machines,
15:16 dryers, that kind of thing. Well, the
15:18 seller was selling the fabrication
15:21 business, but they actually were also
15:23 supplying the business. They had another
15:26 business that had very similar SKUs to
15:28 the one business that they were selling
15:30 to oh, different enduse customers. And
15:33 then they also had uh a business that
15:35 was one of the customers of the
15:37 business. So you guys might not have
15:39 followed me, but everything around this
15:41 business was still owned by the seller,
15:44 which means that you have
15:46 complete situation where the seller can
15:49 increase the input price, decrease the
15:51 price he’s willing to pay, compete with
15:53 you without you even being able to write
15:55 a non-compete that would restrict him.
15:57 And so before we even got into the
15:59 numbers, I told my client, you know, you
16:01 can’t buy this business because there’s
16:03 no profit in it. The seller will suck it
16:04 out the day that you buy this thing. But
16:07 those are diligence things that people
16:09 don’t catch. Yeah. And those aren’t even
16:12 Q of things, right? No, that’s not those
16:14 are just, hey, like bouncing ideas off
16:16 of somebody that’s not affiliated with
16:18 the transaction and be like, bro, like
16:20 slow down, right? Like, you know, step
16:22 back and look at the bigger picture
16:24 here, right? And again, that’s going
16:25 back to Casey’s point. That’s the value
16:26 of partners. I mean, heck, even prior to
16:28 this podcast, Casey and I were just
16:29 talking through, you know, uh just kind
16:32 of like one of the deals that we have
16:33 going on and just talking it through out
16:36 loud, right? We both know the mechanics
16:37 of the deal, but having the back and
16:39 forth banter helps you identify areas
16:42 that that weren’t as apparent up front,
16:44 right? So that’s the value of around you
16:47 to talk through things, right? And
16:48 sometimes you get really excited about a
16:50 deal. You want to do the deal. So you
16:51 find, you know, you look for every
16:53 reason to say yes versus like what are
16:54 the reasons to say no. So Elliot, I I am
16:56 I am a casualty of not doing a QV. the
16:59 first company I bought. Um, if I would
17:02 have called you and said, “Hey, just
17:05 take a look.” You would have probably
17:06 done a couple Google searches. You would
17:08 have looked. You would have said, “Hey,
17:09 did you know that they’re second largest
17:11 customer just went bankrupt a month
17:13 before you closed?” And you would have
17:15 known that, right? You would have been
17:17 like, “Casey, like, did you you know,
17:19 I’m just And but I was so busy with the
17:22 financing. I was working with the
17:23 attorneys. I I didn’t go back and do I
17:26 had already done all this due diligence
17:27 four months before. like I didn’t keep
17:30 checking and looking. And so I was right
17:33 there, right? We we closed in October
17:35 2019. Oil prices crashed in half. I
17:38 would have seen that if I would have had
17:39 an adviser. The point of the matter is
17:42 is I’m one of those those that I’m like
17:44 I kicked myself. I’m like, god dang. So
17:46 for any of those listeners that that
17:47 haven’t thought of, you know, spending
17:49 that money, it’s the best money you’re
17:51 going to spend. Even if he tells you,
17:53 hey, it’s not going to be worth it.
17:55 Guess what? It’s It’s best money you
17:57 spent. Oh gosh. It’s more valuable for
17:60 my clients that walk away from
18:01 bankruptcy than even the folks that
18:03 actually get 20% or 40% returns on their
18:06 money in a good deal. Think about that.
18:08 Avoiding 10 years of just disdain. I
18:11 mean, you got to be smart. And then
18:13 here’s the other thing. You got to
18:16 realize the smartest buyers, not just
18:18 Warren Buffett, but the smartest buyers
18:20 in the small deal market under $10
18:22 million. So my friends off of Wall
18:23 Street doing private equity, a mutual
18:26 friend that’s speaking at your
18:27 conference, these are brilliant deal
18:29 people that still get quality of
18:30 earnings and still have partners on
18:32 their deal. So the concept that you can
18:33 do it by yourself is just crazy. Yeah,
18:36 absolutely. And so maybe let me ask you
18:38 this, Elliot. What are some of the
18:39 outside of just not getting QV? What are
18:41 some of the biggest mistakes you’ve seen
18:42 your clients make that did end up
18:44 transacting? And what was it? Giving up
18:46 too much leverage upfront. It’s
18:48 unfortunate that for first-time buyers,
18:51 you’re asked to do a very advanced
18:53 negotiation typically with people who
18:55 are older than you, more experienced
18:57 than you at the letter of intent phase
18:59 and in the first couple of weeks after
19:01 the letter of intent. And a lot of
19:03 people don’t understand that because
19:04 they don’t have good partners, guys,
19:06 saying that this is way out of market or
19:08 this isn’t something you have to do.
19:09 You’re being told to do this, but it’s
19:10 not really normal. you give up so much
19:13 leverage pre-OI and immediately post
19:16 that when it comes time to negotiate the
19:18 purchase agreement that 50 to 90 page
19:20 humdinger at the end, you’re getting
19:23 railroaded. So, I think that’s one huge
19:26 mistake. I’m going to I’m going to throw
19:28 some of my Ivy League NBA friends under
19:30 the bus. I’m I’m one of them. So, it’s
19:32 it’s us. We get the letter of intent
19:35 signed. A lot of people are part-time
19:37 searching, so they got a full-time job
19:38 taking up 60 hours a week, and they’re
19:40 like, “I’m gonna kick the tires myself.”
19:44 So, one week passes, 2 weeks, 4 weeks, 6
19:47 weeks. Then I get a call like, “Hey,
19:48 Elliot, can you do a quality burn in two
19:50 weeks?” Cuz my seller doesn’t think I
19:51 have any money and I’m behind. I didn’t
19:53 get all the quality burning stuff that I
19:54 wanted done on myself. So, can you do
19:55 this in 2 weeks? And we can’t. And so
19:58 now the six weeks that you kind of
20:00 kicked the tires yourself and probably
20:02 didn’t do anything of significance, you
20:05 delayed everything in your deal and now
20:06 your seller is like, “Hold on, man. 6
20:08 weeks and now you’re asking for
20:10 QuickBooks and that kind of thing.
20:11 They’re going to kick you out of the
20:13 process.” The other thing people mess up
20:15 on, and this is a bit nuanced, but I
20:18 think this will be fun to talk
20:19 about. They dislike the business broker
20:22 so much that they don’t use the business
20:24 broker some of the best things that they
20:26 can use that person for.
20:28 Let me give you an example. Yeah.
20:31 So, the business broker is a very
20:33 important person in the transaction
20:35 because they are the buffer in between
20:36 you and the seller. Halfway through the
20:39 deal, crazy enough, the broker is trying
20:41 to close the deal. That’s what he was
20:44 signed on to do by the seller. So, at
20:47 times he has to translate something that
20:49 the buyer needs to tell the seller into
20:51 language the seller will understand
20:53 because the buyer can’t say it directly.
20:56 For instance, a lot of my clients get in
20:58 situations where like bank statements
20:60 are just late and you’re like a month
21:01 from closing, you’re still missing two
21:03 bank statements. You got to call the
21:05 broker and say, “Hey, man, get that gosh
21:07 darn seller on the phone. Get those
21:09 freaking bank statements cuz no deal is
21:11 closing without it. I’m tired of
21:12 waiting. If they’re not in my hands by
21:14 tomorrow at 5:00 p.m., I’m walking from
21:16 the deal and you’re losing your money.
21:17 Go do your job. Earn your commission.”
21:20 Now, a lot of people are like, “Whoa,
21:22 that’s that’s forceful, Elliot. Why are
21:24 you so direct? When we’re talking about
21:26 million-dollar deals, guys, the broker
21:28 may be a little perturbed at you in a
21:31 second, but when he gets that check on
21:32 commission, he’ll be very happy you push
21:34 that button. So, you got to use these
21:36 these folks for the actual benefit that
21:39 you get out of them. Did that make
21:40 sense, guy? It makes huge sense because
21:42 those guys are getting they’re not
21:43 getting realtor commissions. They’re not
21:45 getting 3%. They’re getting in in the
21:47 small market, they’re getting up to 10%.
21:50 That’s a big check on a million dollar
21:51 deal. they better work their ass off,
21:53 right? And you said something really
21:54 important I want to hone in on for
21:55 people. It’s, you know, the seller is
21:57 the person that is hiring the broker,
21:59 right? So, the broker represents the
22:01 seller. So, at the beginning of the
22:02 process, the broker is trying to find a
22:04 buyer, but as the process is halfway
22:06 through, really the broker, yeah, he
22:08 represents a seller, but he’s there to
22:10 help you get the deal done, right?
22:12 Because the last thing the broker wants
22:14 is for this deal to start all back over
22:16 because, you know, that’s going to be
22:17 another nine months, right? These things
22:18 don’t move fast. There’s a lot of, you
22:19 know, if it’s a qualified buyer, you’re
22:21 doing your part and, you know, they’re
22:23 there to almost represent you
22:25 indirectly, right? And even a better
22:27 example, I think Elliot than the one
22:28 that you said, it’s the broker can
22:30 convey the hard or complicated message,
22:33 right? Getting statements is easy, but
22:35 you know, something along the lines of
22:36 like, hey, we have to retrade this deal
22:38 because this, this, and this, we went
22:39 and validated this, earned back, I need
22:41 a reduction in the price half a
22:42 thousand, you know, a half a million
22:44 dollars. Hard pill to swallow or this
22:46 other one. I’ll give you one. Um, hey,
22:49 the seller’s wife is the
22:51 CFO and she’s getting all of our data a
22:55 week or two late. You need to tell the
22:57 seller to get his wife in order. Yeah.
22:59 Right. Good luck on that. So, you don’t
23:01 want a seller, you know, you don’t want,
23:03 as a buyer, you don’t want to say that
23:05 to the seller directly, but guess what?
23:06 That’s what the broker’s there for. And
23:08 so, that’s what the deal needs, right?
23:10 like, hey, that general manager, we know
23:13 he has a habit, so we have to retrade
23:15 the deal because we we’re okay with the
23:18 risk, but it’s going to be a bigger
23:20 seller note. There’s a bunch of nuance
23:22 kind of grimy things that you got to
23:24 sometimes deal with in deals that
23:26 leverage that broker, right? Also,
23:28 here’s another one. So, first is
23:31 leverage the broker. Also, a lot of my
23:34 firsttime buyers assume that when they
23:36 tell the broker something that that
23:38 exact message without any edits made it
23:40 directly to the seller. So, they’ll say,
23:43 “Oh, I told the seller whoopde whoop
23:44 whoop whoop.” And I’m like, “There’s no
23:46 way you told the seller that. You told
23:48 the bro, hey, I told the broker to go
23:49 tell the seller.” I’m like, “That’s a
23:51 totally different thing.” So, you got to
23:53 be careful, too. You talk about
23:56 mistakes. Just like in any other
23:58 communication, there’s that telephone
23:59 game. you tell the broker one thing,
24:01 they’re going to translate it and
24:03 sometimes translate it very well,
24:04 sometimes translated very poorly. You
24:07 have to know that once you have that
24:08 buffer, it can benefit you, but it can
24:10 also be to your detriment. Yeah. So, one
24:12 of the things that I read the other day
24:13 on LinkedIn and I and I totally
24:15 disagreed from it, right? There it was a
24:17 broker or was somebody I I didn’t know
24:19 who exactly it was, but someone I follow
24:20 on LinkedIn and um they were talking
24:22 about networking capital and and what
24:24 their point was is they said that in the
24:26 small in the smaller deals, you don’t
24:29 even want to talk to the seller about
24:30 networking capital because you you know,
24:33 you just it should be a cashree,
24:35 debtfree deal. And I’m like, who the
24:37 what? I’m like, that should be like your
24:39 first conversation because who buys the
24:42 business without networking capital and
24:44 and Elliot, you know that this is like
24:46 the number one thing that kills deals.
24:47 I’m I’m sure it is because owners think
24:50 it’s their money. And uh so how do you
24:53 how do you convey that or convey that to
24:54 your your new newbies that are buying
24:56 how to have that conversation?
24:59 So I’m going to start with a statement
25:00 and then answer your question. We have
25:03 to recognize that for instance, I’ve
25:04 been in small deals for 15 years. Some
25:07 people have been in this for 20. Some
25:08 people have been in it for four months.
25:11 So, a lot of people who are saying these
25:12 things on LinkedIn and Twitter have been
25:14 in it two years. And they’re just
25:16 representing this very narrow part of
25:18 the market where a lot of BS is
25:20 happening because there’s a lot more
25:21 buyers than great deals. You can’t
25:23 listen to them around 10year advice. And
25:25 if you’re going to buy a business,
25:26 you’re going to be in it 10 years. So,
25:28 some of these people are just talking
25:29 way outside of their understanding. Now,
25:32 let me answer your question. on a
25:34 working capital basis. When you value a
25:36 business at a multiple of IBIDA, that
25:38 includes working capital, debtree, cash
25:41 free is something totally different and
25:43 we can get into that in a second if you
25:44 want to. But if you don’t have enough
25:47 working capital in the business, the
25:49 only way you go bankrupt is you run out
25:52 of cash. So you can have a bad month, a
25:55 bad year, but if you have enough working
25:56 capital in the business, you can weather
25:57 the storm. Now, what’s happening is a
25:60 lot of sellers are signing letters of
26:01 intent to say, “Hey, I will leave normal
26:04 working capital in the business.” But
26:05 here’s what’s happening. They’re getting
26:07 to the end and like, “Oh, wait. Working
26:08 capital is stuff I sold that I didn’t
26:10 get paid on yet. Oh, no, no, no. I’m
26:12 keeping that.” And they’re reigging. And
26:14 so, the the thing that I tell people,
26:17 and this is my deal lens, not my
26:19 accounting lens, is that be prepared for
26:22 sellers to retrade on working capital,
26:25 but do not allow it to go to zero. Do
26:28 not allow a broker to tell you that 100%
26:30 of the working capital should come from
26:32 some working capital additional debt
26:34 that you’re going to get from the bank.
26:35 No, no, no. That seller should be
26:37 leaving some working capital in that
26:38 business. So, Elliot, this is this is
26:40 when I’m meeting with a seller like I’m
26:42 having two conversations upfront, right?
26:45 We are going to ask for a seller carry.
26:47 So, if you’re not interested in carrying
26:49 paper and I’m going to ask for at least
26:50 50%. I’ll start there. No, you’re not. I
26:52 I need you to because because look, SBA
26:55 rates there’s there’s there’s a couple
26:56 things that are actually happening. Cost
26:58 of is going up. Yeah. So, if the
27:02 seller sells it to me today and
27:03 electricity cost doubles tomorrow and
27:05 electricity is my fourth largest bill, I
27:07 have not yet bought a company where my
27:09 insurance rates did not go up 20%. So,
27:13 I’m telling them right up front, hey,
27:15 unless you have a different kind of
27:16 business, costs are going through the
27:17 roof. And if I got to carry cost at 10%
27:19 with SBA or any other lender, it it’s
27:22 just not going to make sense how, you
27:24 know, and I always start there. Now, if
27:25 we negotiate back and forth, I want to
27:27 have that conversation at the beginning.
27:28 The other one I have is is I explain
27:30 what networking capital is right there.
27:33 I’m like, it is fuel to run the
27:35 business. So, you know, whatever
27:36 whatever if you because so we were
27:38 talking to a guy in a recycling company
27:39 and they do recycling. So, when they buy
27:42 goods, they’re paying cash, right? Yep.
27:44 So, he was churning a million dollars.
27:46 Then, you remember this one? He was
27:47 turning a million dollars uh a a month
27:50 in buying raw goods and flipping it.
27:52 Guys bring them stuff, they pay cash. So
27:55 I was sitting in the meeting, first
27:56 meeting with the broker. We drove up to
27:57 Dallas and right about midway through I
28:00 told him, I said, “Hey, you know that
28:02 the cash that you’re utilizing to buy
28:04 goods stays with the business, right?”
28:07 And man, you should have seen his face.
28:09 He was like, “Absolutely not.” And I
28:11 said, I’m telling you, that is a tool
28:14 that you’re using to buy goods and
28:16 services. That is that is that is not
28:18 your cash. That is the company’s cash
28:21 and that allows you to fuel your
28:22 business. So, I’m sorry. And man, you
28:24 should I mean, even the broker was just
28:26 like that. Well, let’s have this
28:28 conversation later. I was like, no,
28:29 let’s get let’s get to the hard stuff
28:30 first, right? You if you can’t get over
28:33 your fact that your million dollars is
28:34 your vehicle for I go, so you know that
28:37 but but that’s what I do. and and I and
28:39 I may walk out with nothing, but at
28:40 least I’m not dealing with that at a
28:42 term sheet or LOI. Casey’s great on
28:44 first dates. Trust me, I I can I can
28:47 tell he’s he’s stellar. So, I’ve done
28:49 this so many times. It’s like you get to
28:51 the you get to the LOI. You’ve invested
28:52 45 days and then all of a sudden you
28:54 write in there, we should get, you know,
28:57 an appropriate amount of networking
28:58 capital. And and the same thing you just
29:00 said, the guy has no clue what that
29:03 means. No clue. No clue. And and
29:07 unfortunately in that the broker will
29:08 know but claim that they don’t. So what
29:11 I’ll say because I speak to first-time
29:13 buyers and more experienced the more
29:15 experienced buyers are going to actually
29:16 go into deals just like
29:18 Casey. The first time buyers it’s going
29:20 to be harder for you to come that
29:21 strong. You don’t you don’t have it in
29:23 you yet. Now try to you should have the
29:25 same conversation the same way. But get
29:28 as much as you can. You should
29:29 understand that this is like an
29:30 aspirational place where you should get
29:32 to when you’ve done a bunch of deals and
29:34 lost some money and should have done
29:35 something different. Don’t be a complete
29:38 softy. That’s what I’m seeing is
29:40 probably the biggest risk is like you’re
29:42 letting working capital go, you’re
29:44 letting the seller know go and now you
29:47 have no recourse. That’s what we should
29:48 talk about, guys. We’ll talk about that
29:50 next. That’s the theme of this, right?
29:52 Is you know you in these transactions,
29:54 you know, you can’t be a softy of
29:56 certain things, right? Like the broker
29:58 is not a person you want to be timid
29:59 with, right? They’re there to get the
30:01 deal done. You be frank with them. Let
30:03 them go do the messages. You know, yes,
30:05 you may have a very strong willed seller
30:07 and you have to kind of manage that. But
30:09 again, you’re basically I mean, you
30:11 know, there’s a phrase that I heard that
30:12 I really liked a couple weeks ago, which
30:13 is the problems you’re dealing with
30:14 today are based on decisions you made 3
30:16 to 5 years ago. So, you know, don’t set
30:19 yourself up for five years of headache
30:20 by not getting the deal done correctly.
30:22 Like this is Yeah, actually I’m doing it
30:25 right now. It’s painful. It’s important,
30:27 but that’s what I want people to listen
30:28 to. This guy’s still doing deals, but he
30:31 screwed up on the first one. He’s trying
30:32 to tell you, don’t screw up the same way
30:33 he did. The reason you listen to podcast
30:35 or any kind of education is so you can
30:37 actually learn from other people’s
30:38 mistakes, so you can at least make
30:40 different ones. So, I channel, you’re
30:42 going to laugh, it’s totally cheesy, but
30:43 I channel Harvey Spectre uh when I when
30:46 I go into do deals. And I’m not I’m not
30:48 the one, but I’m talking about
30:49 that ability to just articulate and
30:51 communicate exactly what you want
30:53 upfront because if we can’t get through
30:55 that at the beginning, there’s no need
30:56 for us to spend the next six three
30:59 months together.
31:01 Absolutely right. And it’s okay if the
31:03 seller’s too rigid for you to be a
31:06 buyer. You’re going to let that pass and
31:08 and let some of these folks who are a
31:10 little bit softer take that pill, right?
31:13 You’re doing good deals. people should
31:15 describe to do good deals. And the good
31:17 deal requires tough conversations. Let
31:19 me give you another mental concept
31:21 there. So when you’re when you’re
31:23 telling a seller, hey, I need a half
31:25 million of working capital. I need a 20%
31:28 seller note, call it a half million, and
31:30 I’m going to come deliver $3 million in
31:32 a Brinks truck in three in three months.
31:36 The person who can do that, the person
31:38 who’s strong enough to do that, do you
31:39 think they’re not strong enough to have
31:41 a tough discussion at the beginning? So,
31:43 by being soft at the beginning, what
31:45 you’re actually communicating
31:47 psychologically is, I’m unlikely to be
31:49 the person to deliver the Brinks truck
31:51 in 3 months. I’m unlikely to deliver
31:53 your seller note. And so, this isn’t
31:56 about like, this is about respect. It’s
31:59 about being formidable as a buyer. And
32:01 that’s why I talked about 20 minutes
32:03 ago, a lot of people give way too much
32:04 leverage at the LOI phase. Yeah. So,
32:06 last thing before we jump to our
32:08 questions, so talk to us about that,
32:09 what you meant by leverage with the
32:11 seller. You to you said we need to talk
32:12 about that. That is a big I knew you
32:14 were going recourse. Sorry. Recourse.
32:16 Yep.
32:17 So, you buy a used car, drive it off the
32:20 lot, you can’t take it back. So, all
32:21 your diligence has to happen before you
32:24 buy the business. But recourse is the
32:26 fact that you have this legal document.
32:28 People, oh, we’ll send a legal document
32:30 so I’m protected. No. So, anything in
32:33 the legal document to get recourse out
32:36 of it, you have to go litigate it, pay a
32:38 cost, spend time. If that seller is
32:40 still integral in you learning the
32:42 business, piss your seller off. You
32:44 should be doing sales and marketing.
32:46 You’re doing legal doc reading. And very
32:48 few people recover anything through that
32:50 process. So when recourse is discussed,
32:53 it’s sort of that seller note is your
32:55 recourse. You should be able to set off
32:57 that seller note for breaches and reps
32:59 and warranties, but you should know that
33:01 seller note and your ability to reduce
33:04 it is probably your only real recourse
33:06 in this transaction. So when people
33:08 like, “Oh, this seller won’t accept a
33:10 seller note.” What what what they’re
33:12 saying is this seller wants no recourse
33:14 on the selling of their business. So you
33:16 got to understand that. I I would tell
33:18 you to walk. Uh me personally, if if I
33:21 am doing a deal and the seller is not
33:23 willing to carry paper, I’m walking.
33:25 Period. And you should walk. 100% of
33:27 people should walk. They’re telling me
33:29 something. They’re telling me something
33:31 that they’re done or or hey, I’ll stay
33:33 on for a year. You’re not
33:35 staying on for a year. you’re going to
33:37 sell it, 90 days later you’re going to
33:38 be an and you’re going to walk
33:40 with your top sales guy, you know, and
33:42 whatever it is, it happens. Yeah, you
33:44 can. And like all that stuff that people
33:45 put into the document, very little of it
33:47 can you actually hold somebody
33:48 accountable if the day after the close
33:50 they run away. And so your way to hold
33:52 them accountable is to hold the paper
33:54 and and and that may be the only kind of
33:58 formable reason to do it, but it’s
33:60 mission critical. If you listen to some
34:01 of these stories of people who failed in
34:03 their transactions, so many of them went
34:05 soft on the seller note. Wow.
34:08 Absolutely. Good stuff, man. I think we
34:10 beat up some good stuff. I hope our
34:12 listeners listened to got some some some
34:13 good things. And we wish Elliot you were
34:15 coming to our conference here in May
34:16 coming up, but we’re going to get you at
34:18 the next one in Chicago. That’s right.
34:20 All right. So, let’s jump into our
34:21 rocket round. This is when we ask our
34:23 guests three important questions. All
34:25 right. Elliot, what do you like to do in
34:26 your free time? I love music, man. So
34:29 going to a good concert is something I
34:30 love to do. Nice. All right. Good. Got
34:33 you. Next up, uh most memorable moment
34:35 in your business journey. Yeah. So when
34:38 I started realizing how how well I could
34:42 market on digital marketing in a way
34:44 where most people had done like steak
34:46 dinners and golf outings, when I really
34:48 start dialing in the digital marketing
34:51 opportunity is one of the most
34:53 incredible moments in my business
34:54 because it allows me to speak to my
34:56 audience kind of very specifically
34:58 without having to do a bunch of physical
34:60 inerson stuff that really is
35:01 inefficient. I don’t know, man. I only
35:03 only talk well in front of a stake so
35:05 that just me personally.
35:07 All right. And what is your favorite
35:08 tool or resource?
35:10 My CRM, HubSpot, how I keep track of all
35:14 my clients, resources, vendors, and all
35:16 the rest. Just having like almost like a
35:18 second brain. That resource is mission
35:19 critical for me. That’s awesome. That’s
35:21 why you’re growing a great business,
35:22 man. And then lastly, before before I
35:24 jump off, I had a question for you. So,
35:26 one of the times when I when I back in
35:28 the early days when I was ID reached out
35:30 to you, you sent me like a due diligence
35:31 list that you have and it was a pretty
35:33 thorough thick spreadsheet, right? and
35:35 it was intimidating. So, I want you to
35:38 just share the listeners because I want
35:39 them to know that like when you get your
35:40 due diligence list, right, from anybody
35:42 doing a QV, it’s it’s a lot of
35:45 information, right? So, what is it’s and
35:47 it’s that feeling that if I go back to
35:49 my seller and ask for all of this,
35:51 they’re going to walk, right? So, how do
35:53 I overcome that objection? What’s what’s
35:55 that last that last little tidbit there?
35:58 You have to remind the seller that
35:59 although they’ve made $10,000
36:01 investments for 20 years daytoday,
36:04 they’ve never made a $3 million single
36:06 day investment with 90% leverage. So if
36:10 seller, if you were going to do this or
36:12 you were going to suggest your kid were
36:13 going to do this acquisition, you would
36:15 want them to have this data. This is the
36:16 same data I need from you. Yeah.
36:19 Incredible way to wrap up, man. Perfect.
36:21 Hey, thank you for joining us. Yeah. And
36:22 how can people get a hold of you? Thanks
36:24 for having me. So go to
36:26 guardiandue.com or go to YouTube and
36:28 just type in guardian due diligence. My
36:30 YouTube is probably my number one social
36:32 channel and go check me out there.
36:33 Perfect. And we’ll put in the show
36:34 notes, Elliot. Thank you very much.
36:36 Thank you so much. Thanks for having me.
36:38 Thank you for listening to the M&A
36:39 Launchpad podcast. If you’ve enjoyed
36:41 today’s podcast and would like to
36:42 support us, please leave us a rating and
36:44 a review after you listen. If you’re
36:45 looking for guidance on your next
36:47 business acquisition or sale, capital to
36:49 support your next business transaction,
36:51 or to invest in a private equity
36:53 opportunity, visit equity launchpad.com
36:55 to learn more and to connect with our
36:57 team. If you know of an individual who
36:59 would be a great guest for the show,
37:00 head over to
37:03 equityaunchpad.com/nominate where you’ll
37:04 have the chance to refer yourself or
37:06 someone else to be a guest on our show.
37:08 I’m Casey Mchu and I look forward to
37:09 talking with you next week.
