M&A Murders & Accusations: The Good the Bad and The Ugly of Selling Your Business

Why smart sellers run a sell-side Quality of Earnings report before buyers ever ask

• Rick J. Krebs, M&A Advisor, CPA and CEPA

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Deals rarely collapse because the idea is bad—they fall apart when the numbers can’t carry the story. We sat down with Patrick McMillan, a seasoned quality of earnings specialist with Ampleo, to show how sellers can turn diligence from a gauntlet into an advantage. From decoding what “quality” actually means in earnings to explaining why EBITDA is only a proxy for cash flow, we break down the practical steps that preserve price and speed to close.

We get specific about where value leaks: customer concentration, deferred revenue, under/over-billings in project work, and the accruals most teams skip—PTO and year-end bonuses. Patrick explains how a sell-side Quality of Earnings reframes the process: you uncover issues while you still control the fix, present a clean, defensible narrative, and walk buyers through a reconciled data room instead of apologizing under pressure. The result is fewer retrades, tighter timelines, and a higher “experience grade” from buyers who want to know they can work with your team after the ink dries.

If you’re preparing to sell, this conversation is your playbook for converting cash-basis chaos into accrual clarity, setting a realistic working capital peg, and translating adjustments into a story investment committees can approve. Whether you run SaaS, construction, or services, you’ll learn how to make your earnings more predictable, your cash flows more believable, and your valuation more durable.

If this was useful, follow the show, share it with a founder who’s thinking about an exit, and leave a quick review telling us the one diligence hurdle you want to master next.

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SPEAKER_00:

Hello and welcome to MA Murders and Accusations. The good, the bad, and the ugly of selling your business. We dig into what you need to know and how not to kill the cell of your business. Now here's our host, Rick J. Krebs, Mergers and Acquisitions Advisor.

SPEAKER_01:

Hello, everyone, and welcome. This is Rick, the MA Cowboy, coming to you from Heber City, Utah. And have we got a great show today? Um I'm excited about our guest, Patrick and I. Um, this is Patrick McMillan. Hey, Patrick. Hey, Rick. Thanks for having me on. You're sure welcome, and thank you for doing this. I was trying to think how long Patrick and I have been working together. Um, I want to say a couple years.

SPEAKER_02:

At least two or three. Just looking at my notes. Looks like around end of 22. So yeah, yeah, a few years, about this time, a few years ago.

SPEAKER_01:

Going on three years. So we met we met through the uh exit planning chapter.

SPEAKER_02:

Yeah.

SPEAKER_01:

And uh you just started coming to the meetings, we got to know each other. And then Patrick, I'm gonna let you give your background. So tell us a little bit about yourself professionally, what you do, and then tell us personally about yourself, and then something that's kind of cool that most people may not know, and how you got into doing what you're doing, and then and then we'll go ahead and get started.

SPEAKER_02:

Love it. Perfect. Well, first and foremost, again, Rick, I love chatting with you anytime. We've had some amazing discussions. The meetings are always a lot of fun. Our our Utah EPI chapter. So uh give you my background then. So, yes, I live here in Utah, but I am a southern boy. I grew up in Northeast Tennessee in the Appalachian Mountains. And so grew up hiking and biking outdoors. I'll get into that, you know, when I get into kind of some of my personal stuff. As far as a career, what do I do? I'll start with the end in mind. I am the Q of E guy, the quality of earnings guy. I work on financial due diligence. How did I get into that? This is uh very crazy and interesting. So I've always loved numbers, especially when they have dollar signs attached to them. And why, yes, it's fun, it's a game. You know, for me, literally, I like changing stuff to see what happens. Um, but more importantly, there are families behind those dollar signs, and there's people. And I've learned, Rick, just throughout my life that people are intriguing and interesting in their stories, you know, and why they do certain things. We're all different and similar, you know, in different ways and similar ways and things. And so how did I get into all this? So grew up in Tennessee, did my undergrad while I was doing it. I got into accounts receivable, really enjoyed it, you know. So I got my start into accounting while I was doing my undergrad, which is not in accounting. My last verse is actually in Spanish and business. I wanted to do international business, but I got into accounting and I loved it. And so I stuck with that for a while. Uh, moved out here to Utah uh a few years later after I graduated. And this was in pre-2008. So, Rick, like a lot of people during that time, especially here in Utah, I got caught up in real estate, bought some properties, sold properties, flips, uh, held, rented, you know, did some lease to options to buy, you know, things like that. And it was fun. And while I was doing that, I actually bought and sold a very small kind of took myself through a couple small transactions. I bought my business partner out of our real estate holdings company. And around the same time frame, I also sold my mortgage loan processing company to one of my clients. And so you could say I kind of got my start in MA that way, but I had no idea what I was doing. I I learned quite a bit, but it was just very, you know, touch, very light touch. I had some great advisors around me, you know, that helped me through those transactions. So 2008 hit, like everybody else, lost everything and got a job. And what was that job? I was a corporate controller. There was a conglomerate of companies. We had, I won't even go, there were several different industries, several different types of companies, and and a few different owners and several investors. And so I was their corporate controller and then later became their acting CFO and took them through a lot of different transactions as well. And it was a blast. I really enjoyed it. It was crazy. I drove myself nuts. I still had no idea what I was doing, but I was learning really fast. Again, having great advisors around me, doing a lot of research, you know, and learning on the go and making a lot of mistakes. Rick, I almost lost my job a few times. Well, there's that's a whole other story for another day. But I tell you what, I learned quite a bit and it was great. So after a few years with them, I uh I resigned. We hired a real CFO to replace me. We hired a real controller to replace me. So two different individuals. And then I became an independent fractional CFO, picked up seven clients. Most of them were our investors, you know, from my previous tent. You know, helped them with some of their other companies, and that was great. Um, and then I joined the firm that I'm with now. When I joined, it was called Advanced CFO. Since then, we've rebranded, so we're Amplio. AMP is grow Leo, like the line, courageous, so grow courageously.

SPEAKER_01:

Love that. I wondered where Amplio came from. I love that. That's it. Right there. Yeah.

SPEAKER_02:

Uh, and it's a lot of fun. So when I joined uh almost six years ago, we had 40 consultants at the time. Um, now we have over 300 professionals. We have six divisions: finance, marketing, HR, turnaround, valuation, and sales tax. So I'm in the finance division and I lead what's called our transaction advisory. So now enter what I do today, quality of earnings. So that part of our transaction advisory is specifically in financial due diligence. We say we can help before, during, and after a deal. I or my team will specifically jump in and do that, you know, quality of earnings prep, or actually do a buy side or a sell side QFE. Gotcha. So you do both sides.

SPEAKER_01:

You're buyers and sellers.

SPEAKER_02:

Okay. Exactly. I like that because we can learn how to defend both sides. And that's important. You have to be able to present a defensible uh product and to be able to help buyers and sellers understand what they're dealing with and how they're transacting. So that's professional. Uh, I'll take a quick minute, talk about personal, and then a fun thing about me that some but not a lot of people know. So professionally, I mentioned I grew up in Tennessee. I love the outdoors, Rick. Uh, we've we've talked about snow build snowmobiling a little bit. Uh my wife and I have a cabin out in uh in Fairview, Utah. We are excited for winter to go snowmobiling out there. We do a lot of off-roading. Um, mountain biking is my absolute love. I love hiking, um, backpacking. I've done that quite a bit. I did King's Peak here in Utah a few weeks back. I also did a bunch of running. And so I just finished a I did a marathon in 22. Uh, had a bad experience, but I want to do another one. So I did a half marathon a couple of weeks ago, and I'll be doing St. George full marathon next year. So here's the fun story. So, with all this crazy activity, Rick, my entire life, I've never broken a bone in my body until two years ago, I was mountain biking here in Utah, very local trail, Corner Canyon, for the for you Utah's who know the name here. Been there at the very, very end. So you know why I'm light. At the very very end, where there's just that last little stint that lasts probably 30 seconds, and you can go left or go right. I went left thinking there was a jump. It's not a jump. I broke four ribs, drove myself and my buddy to the hospital because he actually, unbeknownst to me, at the start of the trail, hit a uh a slick spot and slammed into a tree and knocked himself unconscious for a bit. And some people had to knock him down. And this is a short story. So there's I I'm crazy enough to do some. I'll say I'm not stupid, but I've done some really dumb things, but I am crazy. So and that transfers that translates very well into my career because I'm just scrappy enough to figure stuff out. How's that for an intro?

SPEAKER_01:

Hey, that's a great intro, Patrick. I love it. I learned some things that I didn't know about you, so thank you. So let's get into the topic. Uh, the topic today is quality of earnings, Q of E. And uh, and it's one that you you work with all the time. I work with it all the time. You know, I want to say not until the last three or four years has it become more prevalent, more popular. Um, accountants would do due diligence, but I I think it's much more utilized in the industry, both on the buy side and the and the sell side. So tell me what is quality of earnings?

SPEAKER_02:

Yeah, and and I love this. I'm I'm I'm flipping through a book here I'm gonna show. So this was copyright 1987. Look at that. And you're you nailed it, and so I'm holding up a book called Quality of Earnings by Thornton O'Glove. So this was published in 1987, but you've nailed it, it hasn't been prevalent until the last few years. So Thornton O'Glove, he was he was uh an analyst, he was a buy-side analyst, and then he started publishing a lot of things about public companies that people didn't like because he was exposing rather than you know recommending to buy, he was saying, no, you should not buy this company. Here's why he called that the quality of writing. So that's really how it started. But here recently, with just the whole uptick in transactions and things going on, a lot of people have said, Oh my gosh, we could actually do this with private companies. And it's been going on for a long time. I mean, there's even Daddy, you know, the guy that's really started uh, you know, as well, made it big. That was 10, 15 years ago. But the reason why it's become so prevalent today is because businesses predominantly transact on a multiple of earnings. Multiple of EBITDA. There's a my shirt there for uh anybody that can see a warning, may start talking about EBITDA. So you really have to understand what the quality of those earnings are. So let's break that down. Quality, high, medium, or low. And I'm gonna use a very simple example customer concentration. People talk about this a lot, right? If you have a$10 million company that comes from, and I'm gonna be very facetious here, one customer, and that's an extremely low quality. Because if you lose that one company or that one customer, your company's done. Yep. But on the flip side, if it comes from hundreds of customers, then you have very low concentration, which means it's high quality. Those earnings are high quality because there's a lot of different customers, there's probably different contracts, you know, and and we can get into you know things such as, you know, um recurry revenue and all that, but let's just let's just stick to the to the top here. So that's what quality comes from. Okay. And it's not just customer concentration, it's things such as, okay, well, even vendor concentration, employee contracts, no, yeah, product product concentration or service concentration.

SPEAKER_01:

Yeah.

SPEAKER_02:

Exactly. Okay. Exactly. So there's a lot of different things you can derive at to say, well, determine what type of quality it is, a high, medium, or low. And then earnings, yes, companies trade most of the time on a multiple of EBITDA. EBITDA is a proxy proximate for cash flow. There's a whole other subject we can get into is EBITDA versus cash flow versus net income and all that. But that's so really what a quality of earnings is, is it helps to determine what the quality of those earnings are. When you buy a company, you're acquiring an asset, you're acquiring it for its cash flow, right? So you want to understand what how predictable is that cash flow in the future? And that's why you want to get a quality of earnings report, is to really understand the historical things that went on to be able to predict the future of the company.

SPEAKER_01:

So, um, how does it differ from an audit?

SPEAKER_02:

Oh, I love this question. I get asked this a lot. So an audit will tell you what a company is doing that's in compliance with GAAP, generally accepted accounting principles. A quality of earnings will tell you how they're doing that and why they're doing it that way. So, for example, revenue recognition. Okay, let's talk about a SaaS company, for example.

SPEAKER_01:

Okay. Love SaaS companies, work with them all the time. Yeah.

SPEAKER_02:

Yeah. Well, so if they're recording their revenue based on cash, cash basis. And so when they record a deposit, whether that deposits for one month or 12 months or 36 months, if they're recording that, that's cash basis. That's not in compliance with revenue recognition. And so an audit will say, well, they're not in compliance with gap. Here's why. Or sorry, here's what, here's, you know, the gap procedure and everything. But a quality of earnings will dive deeper into and say, well, correct. They're not in, and so it will actually start making looking at what those adjustments would look like and then the types of customers, the actual contract, you know, things like that. And then, well, how predictable is that customer for sticking around the stickiness of it, right? After a transaction. So the predictability. Predictability, exactly. I love that. So all in all it does, it just says, well, are they in compliance with GAAP or not? But a quality of earnings will really dive deep into it and say, let's actually discuss the customer.

SPEAKER_01:

Love it. And and quality of earnings is more uh income statement or PL centric than balance sheet, right? It's more about the earnings.

SPEAKER_02:

More, yes. But let's not forget the important balance sheet. Let's also not forget the almost and sometimes even more important statement of cash flows. And that's where a lot of people think that a Q of V will only talk about EBATA and income. Not the case, at least not a good Q of E. A good Q of V will also discuss balance sheet because you got to look at networking capital, which is very, very dependent upon, you know, the balance sheet, current assets and current liabilities, right? But it'll also talk about accruals. Every accrual has to reverse. And that's where we talk about there again, SAS, deferred revenues. That's an accrued liability. You've received revenue or sorry, you've received cash for something that you still have to deliver on. So that's a lot of money.

SPEAKER_01:

I see that a lot. If you have a cash basis, it's lumpy, right? They pay 100% of their subscription up front in one month. So the revenue and your eBiddle looks really good for that month, but you have expenses for 11 months to follow. So bad. So you mentioned bad Q of E. So what's the difference between a good one and a bad one for the listeners?

SPEAKER_02:

So, and there's a lot of QV providers out there, and and I'm not going to talk about any specific one, but just in general sense. So a good QV, again, will look at income statement, balance sheet, statement of cash flows, networking capital, revenue vendor, all the different concentrations, um, cash to uh uh cash to revenue proof, you know, things like that. Now, a good QV provider will be able to take all those things and explain it to you, whoever you are, whether you're buyer, seller, investor, you know, the consumer of the of the analysis, will be able to explain and walk through what those things are and be able to help you understand how this will affect your part of that transaction. A bad one, as you mentioned, and I'm gonna use an example here. I actually uh had earlier this year, I had a potential client reach out, talked about the deal, gave him a price on the QV, uh, and he kindly said, you know, hey, thank you. But he actually went with someone else who was cheaper. He messaged me back several weeks later and said, Patrick, can you help me, my QV provider, the target that I'm acquiring, and the broker involved, none of us can figure out the networking capital. I actually spent an hour or two, you know, kind of diving in and digging in. And it was interesting to me because I'm like, oh my gosh, this was it, it wasn't simple, but it wasn't complex either. So a good QV provider can really dig in and ask not just the right primary questions, but the right secondary questions to be able to translate information, you know, can take rigor, can simplify it, and then give it to you that's clear clarity.

SPEAKER_01:

Gotcha. And so the deliverable is a report, right? Is there a report?

SPEAKER_02:

Yes, what's so there's two different types of deliverables. Every QV should at least deliver an Excel data book. Okay, that way you can go in there and you can see the numbers and where they derive. And then a lot of times, and we will do this as well, you can actually say, Hey, I want I want the actual report itself, not just the data book, but the report, which is a PDF or a PowerPoint or something that has all the nice long verbits behind it. Hey, here's what we did, here's the process, and here's the explanation about it. Not everybody needs your report, Rick. Most people um are okay with just the Excel data book, but the individuals who usually want the report itself are like our uh independent sponsors or private equity because they're very used to having these very nice, and yeah, I'll use the word fluffy, very nice, fluffy, very detailed. Hey, here's the procedures we went through, here's exactly what this means. Here's a translation. So those reports, yeah, we upcharge a little bit to those reports because they take about a week to put together. And those reports are 30 to 60 pages long, you know, with a lot of good, solid explanations, defendable explanations. And so the idea behind a report is you can actually send that to a third party, they can read that and not need the Q of E person to explain things.

SPEAKER_01:

Gotcha.

SPEAKER_02:

Otherwise, an Excel data book, you know, and a one to two hour phone call can walk through things.

SPEAKER_01:

Yeah, yeah, that makes sense. So I wanted to dive into something, a concept here, and that is we're seeing them they're more prevalent. Buyers are doing private equity is asking for them. I mean, I've got I've got uh two right now under LOI were doing the buyers are doing Q of E's on them. Nice, good, and so and so here's here's what I've been thinking about. If you're a seller, and I I represent seller, sell side, if you're a seller and the buyers are gonna do it anyway, why not get ahead of the buyers and why not do a quality of earnings from a sell side first?

SPEAKER_02:

100%, Rick. And here's why. And and I love doing sell side QVs for a few reasons. So why would a seller want to do it? Yes, it's an added cost, especially if a buyer's gonna end up doing it anyway. But here's what I'm gonna say.

SPEAKER_01:

Hold one second. You use the word cost, yeah. I'm gonna say it's an investment.

SPEAKER_02:

I I love it. You are correct. And here's why. So when a seller does a sell side QV, it does a few things. Number one, it prepares the seller in a lot of different ways. Number one, it helps them to see what a buyer's gonna go through. Buyers go through some very deep diligence. So this helps prepare the seller to it's it's a practice run. Yeah, but that's just surface level. Let's dig a bit deeper. So, what it does is Rick, I don't care if you're a private company or a public company, your books are not perfect. No one's books are ever perfect. Okay. So, what a silci QV does, what helps get your books a lot cleaner and closer, and I won't say perfection, but closer to inducing confidence in a buyer. So think about two scenarios. If a buyer comes in, if you're looking to acquire a company and you sign the LOI and you start doing your diligence, and the books are a mess, and the QV uncovers the mess, the QV can still get done, but it's messy. There's a lot of adjustments. What are you thinking in filling as a buyer? Your confidence level starts waning, right? You're you're probably going to reduce that multiple a bit. On the flip side, if you've done a sell site QV and you're prepared and you've cleaned up a lot of that stuff, then that does a couple of things. Number one, you can say, hey, buyer, you may or may not do a QV, but here's one that we've done. So number one, that immediately says, We're serious about this. We prepared. We've we've made some investments to prepare our company for sale. Number two, you already know what most, if not all, the questions the buyer's gonna ask anyway and say, Yeah, we've already addressed that. Here we go, here's what we've got this in that data room, here's the backup to it, you know, here's the adjustments. But you're you've already had that practice run. But at the same time, now you've got those things cleaned up. And so a buyer's gonna be like, Wow, it shortens the time frame, where an eight-week QV probably took three, two, four weeks because you've done a lot of the prep work. So that's really gonna induce a whole lot of confidence in a buyer as well. So that's something, and you're exact that's why, and I love how you said it, it's an investment, you know, to spend 20, 30, 40 grand to do a sale side QV, then that way your multiple is gonna be strengthened with that.

SPEAKER_01:

Yeah. So what I'm thinking about is I'm thinking about deals that blow up, things that have happened. We had a company recently that I was selling, and um, they got into the books, and it was a construction-related company. Construction are what you talk about, they're like SaaS companies where they get a big deposit up front, yeah, and then they have to do the work, right? Usually it's time to billings and under billings, yep, over and under, and they have scenario. That's the billings next, yeah. Yeah, so buyer gets into it, private equity gets into it, and they're like, These books are a mess, we need a Q of E. Right. And so they had to do the Q of E. They ended up splitting the cost and uh fixing the books. Yep. And um that process was one where had the seller done their own Q of E, they would be talking to the accountant who they hired to do it, or the firm that they hired. And it's more of a friendly conversation when it's your client relationship with that vendor, right? Yeah, and so that's a much different, they're not defending the numbers, they're just working on getting them right.

SPEAKER_02:

It's gaining understanding.

SPEAKER_01:

Yep, gaining an understanding, getting the numbers right, getting the business cleaned up and ready for sale. Now, when we have a buy-side Q of E firm, the um the sellers are in a defense mode. Yeah, right. And I like to lead these transactions on my toes, not on my heels. And if you let the buyers do the Q of E, you're on your heels. You're always on the defense. Yeah. If the sellers are saying defensible, yeah, it's defensible, right? And and and um, it's just it's a different way to approach the transaction and due diligence. Do you want to lead on your toes? Do you want to get ahead of it? Do you want to have the questions answered already and be able to give them a nice clean report and an Excel spreadsheet with the tabs and it's all tied out and it's from a third-party CPA? I mean, as a buyer, when they go into these transactions, I don't know what the fallout is, I'd be interested. But as they go in, there's a lot of them that do fall out in due diligence because the financials are not what was represented. Either falls out or it's retraded in price and goes down. So buyers have some trepidation going into due diligence. They're like, okay, now I believe what you say, now it's time to prove it. But if it's already proven, I think the buyers like that. In fact, I don't think the buyers I I know, yeah. Yeah, and and it becomes more valuable of an asset and they're willing to pay more, I would say.

SPEAKER_02:

And you've nailed it, and I love how you frame that waiting on your toes rather than your heels. Rick, there are so many times, and private equity buyers especially love, they'll ask me this question often. And when I'm delivering the final QV to them and I'm walking them through everything, you know, and the adjustments and all that. Their final question very often is, okay, Patrick, now we see the numbers, now we know and understand the story. Our final question is going to be tell me about your experience. I want you to grade. And often they'll even ask me, and this is interesting, I don't know who started this, but often they'll say, grade the sellers, grade the team you worked with. Are they an A or are they an F? They want to know the experience because a lot of times, most of the time, that team's gonna have to continue staying on board for at least a couple of years. And so want to know who they're gonna work with. And so you know that when you're doing a sell side Q of V, then you're working a whole lot more together, you're leading on your toes, you're understanding the story. And so then you typically have a better experience. And so even if the buy-side does their own buy-side Q of V, then you're prepared, and that experience between those interactions are still going to be smoother. And so then, yeah, the QV provider can say, Oh my gosh, let me tell you, here's a horror story, not a horror story, but just an experience. This is as of what is today, Wednesday. This is as of last week. Yes, one of my clients is acquiring, they're doing uh an accounting firm roll-up. I've done 15 or 20 Q of E's for them in the last couple of years. Uh, my recent one last week, and I'm talking, I want to emphasize this, Rick. This is a CPA firm. That's the target, that's the seller. Okay. With wait a minute, with bad books? Well, not the books, but the adjustments. So typically a seller is gonna say, Oh, there's some adjustments in there. Let me tell you, let me send you a spreadsheet of what those adjustments are. So I got this spreadsheet, right? And it shows the trilling 12 month adjustments, and they're all hard-coded numbers. I'm like, awesome. I should, I got the QuickBooks file. I should be able to go in, he's got it separated, you know, in categories. I should be able to go in and find these. Rick, after two hours, I couldn't find them. So I called the seller. I'm like, hey, you have X, Y, and Z, one, two, and three. Help me to know where these are. He fumbled. He had to go through and try to remember where he got those numbers from. Now, we long story short, Rick, at the end of the day, we found all the numbers, but it took a really long time and it was disorganized. This is a CPA firm. About a four million dollar CPA firm at that. Wow. That's not a small one, not a huge one, but not a small one either.

SPEAKER_01:

Yeah, like bricklayer whose house is made out of wood and it's fallen down.

SPEAKER_02:

Exactly. So I communicated to the buyer, to my client, and I said, Hey, listen, his earnings were spot on. You guys, you know, you you said X, he said X, here we go. So, but let me tell you about the experience, let me tell you about the organization skills. You need some work. Now, luckily, that's teachable. Yeah. But that's something that didn't change the multiple, but it definitely is a different experience. You would think someone would be extremely so that's something that you know you see it really. If you do a sell site QV, it helps you, if nothing else, to organize the data in a presentable format. And that alone will induce confidence to a buyer.

SPEAKER_01:

And I'd never I didn't know that. That's really interesting. They ask, what's your experience like? What is the team like? How are you answered often?

SPEAKER_02:

I love that question because I will tell you exactly what I went through.

SPEAKER_01:

Yeah, yeah, exactly. But from a buyer standpoint, that's what I want to know. Yeah. Give me the juice, give me the dirty, give me the inside story here, whatever it is. You know, what am I dealing with? What am I buying? Yep. Who are the players? How who am I playing with?

SPEAKER_02:

Who am I gonna be married to for the next couple of years in this deal? That's right. Because even if the numbers pencil, if the team doesn't fit and the experience is raunchy, you don't want to do business with them. You don't want to acquire them. And yeah.

SPEAKER_01:

No, no. Wow, I had never thought about that before. So there's one other thing I wanted to bring up. I've got a few questions here. Hey, but um, one of the things, and you had alluded to this, that the sellers oftentimes just do cash basis financials. And when you go to market, the buyers in all likelihood want accrual-based financials.

SPEAKER_02:

Yes.

SPEAKER_01:

And so that requires some accounting work. And I'm an accountant, I don't do it for my clients because it's a conflict of interest, but there's some accounting work to get them presentable to the buyer so the buyers can get them presented to their investment committee and so forth.

SPEAKER_02:

Exactly.

SPEAKER_01:

Some of the things I see them miss, deferred deferred revenue is a huge one.

SPEAKER_02:

Oh, yeah.

SPEAKER_01:

Um, the other one are accruals. I was uh just on the phone yesterday with the CFO, and he's like, Rick, I so wish I'd have tied my numbers out monthly instead of annually, because these Q of E guys are beating me up and they're driving me crazy, you know, Heinz 2020. But they and and you're they're busy, they're running a business, right? And they don't necessarily need everything tied out, need all the accruals, but I see vacation, PTO, um, revenue in excess of cost costs us an excess of revenue, or they're overbuilding or underbilling. But these are things, if missed, can potentially swing the deal hundreds of thousands and sometimes millions of dollars because they impact working capital.

SPEAKER_02:

Yes.

SPEAKER_01:

And uh, and if you have a target and you're you haven't calculated these numbers, well, that's a negative to your working capital on the cruel side. So then you have a deficiency which reduces your purchase price.

SPEAKER_02:

Dollar yes. That's how everything translates.

SPEAKER_01:

Yes, over and over. So there's just so many different reasons to do this, to make this investment, to get a quality of earnings report from a capable person, I want to say, someone who provides the good value. And and this is what you do day in and day out.

SPEAKER_02:

Yes. Um, can I emphasize one of those points, Rick, especially with the time of year that we're at? So at the day of recording, this today is September 24th. So we're coming up on holiday season, right? Thanksgiving, Christmas, and everything. Something that I see a lot of companies miss on that specific note of accrual. So let's even go down to one very specific accrual that most companies don't even think about pay in payroll. Okay. Some companies will accrue payroll, okay. But three things that they're most of the time not accruing commissions, which aren't super commission structure is crazy. We all know that, okay. But commissions are typically paid out pretty frequently. But let's talk about the PTO. Let's talk about bonuses. Okay. The PTO will depend on, I don't care what your handbook says, your handbook can say anything it wants. But let's talk about the state that your company is based in and the state that your employee is living in. Okay. The PTO accrue and payout varies dependent upon state. This is where our HR consultants can jump in and help. Regardless of what your handbook says, most of the time you're gonna have some type of PTO accrued per employee just by default. But most companies are not putting that on the balance sheet as a liability. And what's gonna happen is come November, December, what's you're gonna have people taking 10, 20, 30, 40 hours of paid time off and getting paid for it, but not producing. A buyer has to know that. Because let's say the deal closes on October 31st, and you have a million, and the buyer has half a million dollars in networking capital to buy inventory and to make payroll. But guess what? Johnny, Susie, and George are going on vacation and they're taking, you know, 20 hours each, or 60 hours of unproductivity that you as a buyer have to pay, but the employees are not producing, and so therefore, you're not invoicing for that. So you need to make sure that your pay time off is accrued on a monthly basis, okay? To your point, exactly, on the balance sheet and bonuses, year-end bonuses. 50 grand, 500 grand, I don't care how much they are, accrue them because it's the exact same thing. We're coming up on year-end stuff. You're gonna December 31st, hey, we had a wonderful year, we're gonna pay out 200 grand in bonuses. But guess what? Your income statement didn't reflect any of that.

SPEAKER_01:

My favorite is they pay them in January, so it goes on to the next year. Exactly.

SPEAKER_02:

This looked really good because they have to wait till they had the cash to pay it. Those things need to be accrued for on the income statement and balance sheet so that buyer and seller can have those conversations about networking capital on who's gonna pay who win and how much and who's gonna fit that bill.

SPEAKER_01:

Love it. That's it.

SPEAKER_02:

It's just a discussion, doesn't mean buyer has to or seller has to just have the discussion. Come to the agreement.

SPEAKER_01:

And sometimes, sometimes I've got the buyers to accept it and they embrace that and and assume that liability. Yeah, right. But it's the discussion needs to be made. Discussion needs to be made. Yep. So tell me and tell our listeners how do they get in touch with you? You got an email, a website. How do they get in touch with you? They have additional questions.

SPEAKER_02:

The easiest way is LinkedIn. Patrick McMillan, M C-M-I-L-L-A-N. I'm constantly on LinkedIn. I will respond unless you're trying to sell me something. I will likely ghost you. But if you're saying, hey, Patrick, want to learn more about this, I'm looking at acquiring company. Hey, I want to sell my company help. You know, I would love to jump on a phone call. I'll send you my calendar link. So reach out to me on LinkedIn.

SPEAKER_01:

Great. Um, one other thing that I think though, what's the cost? Just a range on the QV.

SPEAKER_02:

Yeah. QVs, our range is between 20 and 45,000. Okay. If it's a very, you know, I'll say small, two to five million dollar company, no inventory, one entity, uh, then yeah, it's easy. It'll be 20 grand. Gotcha. If it's a and the more hair on it, it's so really the cost will depend upon size, scope, and complexity.

unknown:

Okay.

SPEAKER_02:

The bigger it is, or the more scope it is, or the more inventory, the more entities, and yeah, that'll up in cost.

SPEAKER_01:

Gotcha. So 20 to 40,000. I'm not calling a cost, I'm calling it an investment.

SPEAKER_02:

Investment. Yes, I'm gonna face my language on that. I like that. Thank you.

SPEAKER_01:

It truly what it is. And well, and when we're selling companies for millions of dollars, it it just so much better for the buyer. So I uh we've geeked out a little bit here as accountants today, but uh hopefully the information has been valuable to you. And I'm gonna be sharing this episode with all of my sellers. We're talking about preparing the business for sale. But thank you so much for your time today. I appreciate that, Patrick. And uh great to learn some interesting things about you. Four broken ribs on the trail. I mean, I'm gonna have to hear the rest of that story.

SPEAKER_02:

All hold up.

SPEAKER_01:

Good, that's good. But uh, we appreciate it, and we appreciate the listeners today. Until next time, this is Rick with MA Murders and Accusations. The good, the bad, and the ugly of selling your business. Thank you.

SPEAKER_00:

Thanks, Rick. Thank you for attending our podcast. We invite you to join us for future episodes of MA Murders and Accusations the Good, the Bad, and the Ugly of Selling Your Business. You can also visit us at www.bsalesgroup.com or email Rick directly at Rick at BSalesgroup.com.

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Rick J. Krebs

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