Anneka Sciola - Quality of Earnings: A Financial Due Diligence Tool (#78)

Back to regularly scheduled programming! Host Tom Bronson chats with Anneka Sciola about Quality of Earnings, or QofE, in this week’s episode of the Maximize Business Value Podcast. They emphasize that this Financial Due Diligence tool is imperative for buyers and sellers to understand the value of a business. An important takeaway for all business owners: the vast majority of businesses trade on a multiple of earnings, NOT revenue, so this tool will help prepare for the future. Anneka addresses the differences between audits and QofE’s and describes the three components of all QofE reports. Listen now to learn about a QofE today!

Anneka Sciola runs the Transaction Advisory Services practice at Calvetti Ferguson. Her passion is helping business owners grow and eventually sell. She is a Director in Advisory Services and has extensive experience in public accounting, consulting and industry. Her practice specialties include Valuations, Quality of Earnings, M&A Sell-Side Representation, Bankruptcy and Restructuring, Technical Accounting and Litigation Consulting. Her industry specialties include oil & gas exploration, oilfield services, electric and utilities, manufacturing and distribution, industrial services, retail, professional services, construction and real estate development, healthcare and technology.

Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you?  Reach out at tom@masterypartners.com or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).

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Tom Bronson is a serial entrepreneur and business owner. He is currently the founder and President of Mastery Partners, Mastery Mergers & Acquisitions, and the Business Transition Summit. All three companies empower business owners to maximize business value and serve business owners in different capacities to help them achieve their dream exit. As a business owner, Tom has been in your situation a hundred times and knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Tom has two books to help business owners on their journey to a dream exit: "Maximize Business Value Playbook," (2023), and "Maximize Business Value, Begin with the EXIT in Mind," (2020). Both are available on Amazon.
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Transcript

Announcer (5s):

The maximize business value podcast. This podcast is brought to you by mastery partners, where our mission is to equip business owners, to maximize business value so they can transition their business on their terms. Our mission was born from the lessons we've learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom. So you can succeed. Now, here's your host, the CEO of mastery partners, Tom Bronson.

Tom Bronson (35s):

Hi, this is Tom Bronson and welcome to maximize business value. A podcast for business owners who are passionate about building long-term sustainable value in their business. In this episode, I'd like to welcome our guest Anneka Sciola she's the director of advisory services at Calvetti Ferguson, one of the largest accounting and advisory firms based here in Texas. I was introduced to Anneka by my other friends at Calvetti Ferguson. She's responsible for the firm's quality of earnings reports that they create for their clients. Now quality of earnings or Q a Q of E reports are becoming increasingly used in many business transactions, especially if the buyer is a strategic or a financial buyer, many business owners don't really understand what a Q a V report is.

Tom Bronson (1m 26s):

So today we're going to go right to the source and give you a clearer understanding of what it is and how you can use it to your advantage. So welcome to maximize business value Anneka.

Anneka Sciola (1m 40s):

Thank you, Tom. So glad to be here with you.

Tom Bronson (1m 43s):

Tell us a little bit about Calvetti Ferguson.

Anneka Sciola (1m 48s):

Sure. We are a middle-market CPA firm. We're the second largest independent firm in the state of Texas covering audit tax accounting, technology risk and advisory services. So what I do is I run the quality of earnings and valuation practice at Calvetti Ferguson. We are based in Houston, Dallas, Fort worth, and San Antonio, and we serve clients all over the country and all over the major Metro markets in the great state of Texas.

Tom Bronson (2m 19s):

Awesome. Those are, those are some good locations, kind of the triangle there. So what is your background and how is it that you became specialized in this line of work?

Anneka Sciola (2m 31s):

You know, Tom has a great question. When I was growing up, I really enjoyed making decisions with numbers and I was looking for a career where I could do that yet add value to whoever was going to employ me. So I know they're listening to those. So I first have to give a lot of things to my parents who encouraged me to dream big. My favorite class in high school was accounting. And when I got to college, I remember I asked my advisor whether he recommended me to take accounting or finance. And he said, you know, if you're my daughter, I tell you to take accounting because you can always do more with finance, more finance with an accounting background, but it's hard to do your accounting with a finance background.

Anneka Sciola (3m 14s):

Well, that was pretty good, great advice for me. And that's what I did because I ended up taking a lot of finance classes along the way. Anyway, as I was going through college and grad school courses in business, one thing I kept thinking of was how can I gain the experience and get folks at bodies and help them save money, make money, or manage risk. So then after I graduated, that was during the great recession. I started at one of the big four accounting and consulting firms advising one of the big oil majors and getting a chance to work with folks from all across the world. You know, one of the things I learned is when you're on a conference call with folks in Europe, the UK Asia, and you're the only one from the United States, Tom, you get the short end of the stick and get stuck with a 4:00 AM call.

Anneka Sciola (4m 7s):

That was

Tom Bronson (4m 10s):

I've had those calls before.

Anneka Sciola (4m 13s):

That's right. I digress, but it was one of those things. So after that, I spent spending time at one of the big oil majors. I got to work at one of the largest power utility companies in the country, but it was consulting in a way I never thought I'd get involved in. So what I worked on there was on a company in bankruptcy. And during that experience, I learned what about what companies shouldn't do to get themselves into that situation. So during my stint at that big four firm, I also got to work on quality of earnings reports, also known as financial due diligence. So after several years of working with major companies, I wanted to try something different.

Anneka Sciola (4m 60s):

And that was to get into the middle market space, which is, I think a lot of the business owners that you talk to where I could really roll up my sleeves to work with business owners and their controllers and CFOs. So at that time, I came over to Calvetti Ferguson in downtown Houston, which then eight years ago, we were maybe a fifth of the size of what it is now. I started off taking a role to audit the financial statements of companies rather than doing consulting. And then a couple years down the road incomes, one of my former colleagues from a previous firm who just joined us at Calvetti Ferguson. And he asked me if I would have an interest starting in advisory practice with him.

Anneka Sciola (5m 43s):

And I said, sure, why not? So here we are fast forward, six years later, we built a practice where we are a one-stop shop for almost all things. I think a middle market business owner would want to come to your CPA for. So what we can do is we can help you sell your company value, your company, perform a QV, which is a subject of what we're going to talk about today, as well as provide you a general services to help you grow your business to the next level. And on top of that, we also do financial expert witness work, but that is a discussion for a later time. So just to wrap this up, I would say overall, I have been consulting in the merger and acquisition space for over a decade.

Anneka Sciola (6m 25s):

I've represented clients on deals to the finish line and have also worked in a separate practice area of litigation support with attorneys on deals that haven't gone well. So I guess I've seen just about it all.

Tom Bronson (6m 40s):

I'll bet you have I'll bet you have. Now that was some great advice from your teacher. In fact, I think back when, when I was in high school and I did really well on the math sat, not so well on the English and, and my piano teacher of all things, it was really more of a mentor to me. He said, Bronson, you should major in accounting. And I said, well, why is that? His name was Ziggy, Ziggy Hurwitz long since passed away. But Ziggy said, look in good economic times in bad economic times, you still got to count the money. You got to count the beads. So, I mean, and I looked at him and I said, does anybody really want to major in accounting?

Tom Bronson (7m 24s):

And so now I've met someone I even know CPAs that didn't want to major in accounting. Right. But, but that's awesome. What a great backstory and, and I know you've got great experience. So let's, let's dive into the deep end. What is a quality of earnings report and why should a business owner want to know about it?

Anneka Sciola (7m 43s):

Sure, Tom. So I would say a QB, first of all, yes, stands for quality of earnings. So basically think of it as you wouldn't want to go out there and buy a car or a home without inspecting it. First, a quality of earnings report helps a buyer and in many cases, a seller. So the folks that we're talking to potential business owners we're talking to today helps those buyers and sellers decipher some of the major financial components of a deal. So to me, the most important components are not just three items. I'll boil it down to the most three important items. One, number one, what we call the historical EBITDA.

Anneka Sciola (8m 24s):

And that's what I'll call the income statement, approach. Number two, the historical operating balance sheet, and that's well called a balance sheet approach. And number three, calculating networking capital for a true-up mechanisms. I'll talk about each in a little bit more detail. That is that okay with?

Tom Bronson (8m 43s):

Yeah, absolutely. I want to know. In fact, you brought up a great point, the networking capital issue, it's something that a lot of sellers overlook, right. And buyers are typically very savvy about that and they do that. So if you want to, if you want to break these down and talk about each one of them, then, then have at it.

Anneka Sciola (9m 4s):

Great. So the first one is the adjusted EBITDA that we'll want to look at for the past few years. So we'll want to get a view of what is first earnings before interest taxes, depreciation, and amortization for business. Because as you know, Tom, most businesses besides maybe software is valued on a multiple of EBITDA. From there, we calculate what we call normalizing adjustments to EBITDA. So those are things like your sellers, compensation, discretionary expenses, non-recurring expenses, as well as any other one-off events. These are all positive things for a seller to want to adjust for because there are called add backs and would increase your value on the flip side too, though, we would also want to decrease things of this nature on the revenue or income side.

Anneka Sciola (9m 55s):

So again, looking for discretionary and non recurring income, ultimately this is a final number we're looking for college adjusted EBITDA. What that's supposed to represent is what a buyer would expect to be their EBITDA when they take over the business. And that is why they're going to pay you a multiple based on this EBITDA number. So that's item number one, item number two is so the first thing we focus on as adjusted EBITDA, which is what we calculate on the income statement. Then the second item we focus on is documenting the operating assets and liabilities that would go into a transaction, which has, which I see is typically a sale of assets on a cash free debt-free basis.

Anneka Sciola (10m 39s):

So this will be taking the balance sheet to figure out what assets are tied to operations and what liabilities would come with operations versus those that would get paid off. So you'd be surprised in some of the assets I have encountered. In some instances, you know, besides your typical owner, personal vehicles, I've encountered assets such as cattle and various other animals. And Tom let's just say the nature of the business has nothing to do with husband at all. So going back to this exercise, which is figuring out assets and liabilities, getting this documented is also important because they will be included in the purchase agreement schedules.

Anneka Sciola (11m 21s):

All right, last thing, this balance sheet item segues well into my next, which we were just talking about earlier, which is working capital. So that's item number two. The third thing we focus on is working capital analysis. You know, sometimes I do see, I should say that business owners keep their eyes so much on the purchase price that they forget that the purchase price they get in the offer is just part of the total purchase consideration. At the end of the day, the business owner gets their cash in the bank back, but it's usually subject to a networking capital trip mechanism, which determines how much networking capital is needed to fund the business so that ultimately after the settlement, the seller will either get a check back for a networking capital excess, or they have to cut a check back to the buyer for networking capital deficit, which is not what we want.

Anneka Sciola (12m 18s):

You know, the seller never want to have to get payback to the buyer you get. And so I think it's always good to have the, what we call the normalized networking capital. Some people call this the peg defined and agreed upon upfront before the deal closes. And this that's what this exercise of the QMB is intended to do. So there you have it. The QV report is really there to tell the story of the business through its numbers and provide buyers and sellers illumination of a company. Finances. Of course, there are a lot of other things we would typically do as part of the QB, but those three I mentioned are the most important that comes to mind.

Anneka Sciola (13m 2s):

There are other things Acuvue report can cover and there include doing a lot more of the kick, the tires and telling the story of the business based on the financials. So we have Calvetti Ferguson have what I call an all apart approach to how we can scope out a QB. And that is completely tailored to the needs of the buyer of our services.

Tom Bronson (13m 24s):

So, so to all QVS contain at least those three components or, or does some of them just have the EBITDA or the, or the balance sheet or the networking capital, I mean, or D D cause I really want to educate our business owners about QV. So do they all have those components? And then there are other things you can add.

Anneka Sciola (13m 44s):

Yeah, sure. So almost always they would contain those components of what I always see is the income statement approach to get to adjusted EBITDA. I would say that probably comes, you know, 99% of key reviews have that. And then 95% of cuvees I do have the adjusted EBITDA and the networking capital on the balance sheet, I would say 50 50, whether the buyer of the services want that.

Tom Bronson (14m 13s):

Okay. All right. Well that, and that may now, how is this D do you also do audits or are you just QV?

Anneka Sciola (14m 21s):

Yes, we are a full stop shop. And so we do audit compilations reviews as well, as well as <inaudible>.

Tom Bronson (14m 29s):

All right. So I, I had on a, a, another guest some months ago, some weeks ago, talking about audit. So this will sound to the uneducated ear. Very similar to what we talked about in audits. How has the QV different from an audit?

Anneka Sciola (14m 49s):

Yeah, sure. So in audit at the bottom number you get to here is a, what we call us gap. Number certain in the United States, we have general generally accepted accounting principles that an audit ensures you get to that number, which is net income. And that's a great first number. I would say, businesses that have audits done will tend to have a much easier QB. So audit can be the first step into a QB, but what the audit cannot define, because it is not a us gap number is that adjusted even to us. So the audit is not going to eliminate for a buyer, all those add backs.

Anneka Sciola (15m 29s):

We talk about, it's not going to get to the net working capital adjustment, or necessarily define the closing balance sheet. And so I think of be great to have an audit on the front end of the process, but it certainly does not get you there to the finish line.

Tom Bronson (15m 46s):

Great. That that is a great distinction between the two and, and I just want to caution business owners. It is so very important to understand that adjusted EBITDA number. That's one of the first things we do when we start working with our clients. And you'd be a surprise. You know, I, I hear you say you've had some unusual things on their balance sheet. I've talked with business owners that have run their businesses, a lifestyle business that, that when I talked to them about their discretionary spending, you know, their, their personal vehicles or cell phones, things like that, I've heard things from all of those to the pool guy at home, the lawn service, you know, the, the maid service at home, you know, all of these things.

Tom Bronson (16m 29s):

And, and it's so important for business owners to understand that that buyers many times will get adjustment fatigue when they start seeing things like that and seeing how the business had been run that way. So, so my advice always is to try and clean those things up two or three years in advance, pay the taxes on it. Now it will pay back in spades later, but you also mentioned that the, and this is something that is so very important. There's lots of ways to value a business out there, but for most businesses, and I'm talking about businesses, you know, the, the highest number of businesses are, are less than 10 million in revenue.

Tom Bronson (17m 9s):

But if you're in that lower middle market group, which is kinda a hundred million and less, I'd say 95 to 98% of all transactions are based on a multiple of earnings. I hear people all the time thinking that it's based on a multiple of revenue or that, that, you know, that they can get a multiple of recurring revenue. Those things are important, but most transactions are valued on a basis of, of the earnings. And so, so it's so very important to do that and to really understand how businesses are valued in your space. That's something that, that we can help business owners with.

Tom Bronson (17m 52s):

And so I just, I, every chance I get, I want to try to dispel that myth, that, that businesses transact on revenue. Certainly some do certainly some do based on a transaction of technology, but the vast majority trade on earnings. Would you agree with that?

Anneka Sciola (18m 13s):

Absolutely. Absolutely. I think I probably can count on, on my, on my hands, maybe a couple of transactions. I have a year that trays on multiple revenue and, you know, always they're just technology. They are SAS based companies. The rest of those that I see is trading off of EBITDA.

Tom Bronson (18m 35s):

Yeah, that's it. So, so it's really important for, I, for me to keep drilling that at business owner. So thanks for doing that. And I took a great risk of saying that without getting your approval first. So, so, so QV, well, let's get back to the QV, those three components. Would you say that QV reports pertain mostly to buyers or to sellers or to both

Anneka Sciola (18m 59s):

Good question? I would say T Tom, both they're both buy-side and sell-side IQ he's most of the time a buyer for sure would want to engage a professional to perform a QV similar to the inspection analogy I gave earlier, because they would want to get it done to inspect the business's finances and then put a value on the business based on what they're seeing as a good and solid EBITDA of the company. I will also say we also get a lot of sellers coming to us, wanting to get a QB done as well. That's because the seller wants to know what kind of value they will likely get in the market, given where they're at. So they'll come to us and get a QB. Donna calculate their EBITDA, as well.

Anneka Sciola (19m 41s):

As many times, they come to us to run some modeling and researching comparable transactions to come up with a range of values for their expectation purposes. So I'll share with you a story. A couple of years ago, I had an owner come to me with this very, very unique business. They're the only people who do what they can do, and because of their specialized skillset, they're in high demand. Anyway, the owner came to me asking for QV to be done because he and his wife were in the process of deciding whether they wanted to sell the business or keep running it. So we did a QV report for him, ran some modeling. And from there he could see based on his backlog and project, how much he would be cashflowing versus if he were to cash out today, it turned out he was very happy with this cashflow projection.

Anneka Sciola (20m 28s):

And based on the result of a QB, he made a sell or whole decision. He ended up holding and is still enjoying that today. So I would say not every QB I've done resulted in, resulted in a deal with the seller. What I believe in Tom is empowering the business owner to do what makes most sense for them and use a QB as a tool to make that decision. So, as part of my practice, we have business owners. I represent that not only ask us to perform the QB for them, but they also ask us to represent them on the entire sell side process as well. So that's everything from putting together the QV report to marketing the transaction, to representing the owner from selection of an offer all the way to closing.

Anneka Sciola (21m 14s):

So that's what I'll call our holistic sell side M and a consulting services. And Tom, I'll tell you the great thing about the business owner, getting a QB that once you have it, the buyer now has a roadmap to quickly perform their QB or just review the sales IQ. Ruby. I've seen many times that a buyer just tells us, Hey, can you update the QAV we do for the business owner once they're under contract. So I'll give you an example. Let's say you engage with us to represent you, to sell your business. We perform the sales IQ would be for you when we then talk to the potential buyers and they hear it sells our QV report has already been done.

Anneka Sciola (21m 56s):

They usually quickly take the numbers from the report to come up with an offer. Then if you sign up with their offer during the formal due diligence process, buyer would tell me, Hey, arnica, can you update the QV report as of the latest date of the company's financials? Sure. Of course the buyer would do additional due diligence of their own. As you can envision, this process goes by much smoother because we have a QV report as a starting point.

Tom Bronson (22m 25s):

It can be a painful thing if you've never gone through an audit or a QV. And I wanted to give my own example. I have a great friend David hammer, who sat on the board of a, of a business that sold, gosh, I want to say probably 2016. He, they knew that they were going to go sell the business. And he strongly encouraged the, the investor group to get a queue of E it was not inexpensive, right? I mean, there were fairly sizable business. And David specifically said, he's one of my most trusted M and a attorneys in a solo practice here. But he said that he firmly believes in conduct cement, that they increase the value of that business by $30 million, $30 million, by having that data in advance.

Tom Bronson (23m 15s):

And, and then they knew had clues of things that they needed to do. So, so I'm a big proponent of, of doing a sell side QV before you start working on the transaction. And, and I'm just hats off to Calvetti Ferguson because it's very rare to find a, an accounting firm that has these advisory services that are also offered in the firm. So, so hats off to Calvin on that. So we've talked a little bit about, you know, kind of the, you know, the use of it, what it entails, but are there some pitfalls that you've seen in QB work?

Anneka Sciola (23m 50s):

Yeah, I'll share a couple that I typically see. I I've seen one earlier this year, how to seller that had EBITDA adjustments based on the balance sheet. So this one seller had almost half of their EBITDA adjustments, which was about $2 million or some change in just balance sheet entries and balance sheet entries by their nature don't impact EBITDA, and therefore they don't qualify. And what I described earlier as an add back. So in that case, they didn't really know what adjusted EBITDA was. And unfortunately their service provider didn't really explain it to them. So when we encounter that, it was a big surprise to that seller, and unfortunately it impacted what they expect it to be the EBITDA and dust the valuation.

Anneka Sciola (24m 39s):

So that that's one example. It's always sad to see when a business owner thinks they have this much. I'm thinking that they're hearing things like non-recurring personal. So they think everything that is recorded can be an add back. And it's not the case. I've also seen some sellers take very strong positions on the business, expensing of personal expenses of going back to a little bit of what you talked about earlier, Tom, you know, I personally don't have a problem with this approach, but I have seen buyers yes. Sometimes Bach or get fatigued at those, especially when they see that a significant proportion of EBITDA comes from those discretionary expense add backs that we were talking about earlier.

Anneka Sciola (25m 24s):

So it's just something to think about. And I would especially advise sellers, engage a qualified Q of E advisor to help them level set expectations and get a preliminary EBITDA adjustment and spend, you know, some time just thinking through their plan of attack, whether really it makes sense for them to incur all these discretionary and book, obese, discretionary expenses in their, in their income statement. I always think it's better to know now than later. And that's why getting a preliminary EBITDA assessment always seems to make sense to me. The last pitfall I've seen quite often is the old ad adage time kills all deals.

Tom Bronson (26m 7s):

Yes. Tell us about that.

Anneka Sciola (26m 12s):

Yeah. So going back to that as a seller, having a QB in your pocket can not only help you understand the value of your business and give you strategies in which to negotiate with a potential buyer, it will also help you save a lot of time confusion and headache in the process of talking to interested buyers in or during the actual due diligence process. I mean, I've seen deals that so explaining, you know, why QV kind of help mitigate that time kills all deals. Now, in my personal experience, I have dealt with deals that have dragged year or two because books are not clean. And I know we talk, certainly talk about some, some of the things I would advise to, to sellers about how to get about having books that are clean, but that's really what I have seen, you know, deals that can close in 45 60 days and have that timeframe in, in the LOI to be contemplated seems to go a lot better than deals are open-ended or deals that just drag months and months.

Anneka Sciola (27m 20s):

And then so buyer and seller both get fatigued.

Tom Bronson (27m 24s):

I, I agree. I, I, I hear that frequently time kills deals. As I tell business owners, the faster you can go during due diligence, the more prepared you are, meaning the more prepared you are in advance, that, that the, the more likely the deal will actually close. I think as they drag on, I've seen them go on for a year. I've never seen anything go on for two years, but I've seen them go on for a year. And at that point, the seller is almost, or the buyer has almost forgotten why he wants to buy the place in the first time, in the first place. So, so, so make sure that it goes quickly in a way to do that would be being prepared long in advance. We tell business owners that, that they should be thinking about these things at least three to five years before they want to, to exit their business.

Tom Bronson (28m 9s):

So what am I one last quick question, before we take a break, how do you think a Q and a report would add value to a business owner looking to sell?

Anneka Sciola (28m 19s):

Sure. Going back to your previous point real quick, nobody wants a five-year engagement. So same thing between buyer and seller, as far as how Ikea could add value to business owner, looking to sell. I think most of our deals that involves a business owner getting a QV. Once we see that a lot of times, once we get that done, we still have a much shorter marketing time horizon, as well as an expedited due diligence period. So it goes back to time kills all deals. I've seen marketing take a few short weeks and a due diligence period of, of as low as 45 days after you get the sell side.

Tom Bronson (28m 57s):

Wow. That's a, that's amazing. That's that's rare now. I don't, this, this podcast is coming out in early October. I don't want business owners to think that they can start thinking about it now and sell before the tax law changes at the end of the year. So it's important to plan for these things in advance. So yeah, while yes, it's possible that that that could happen. The odds are stacked against you, so awesome. Hey, we're talking with arnica Shola and we're going to take a quick break. We'll be back in 30 seconds,

Announcer (29m 32s):

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Announcer (30m 13s):

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Tom Bronson (30m 25s):

We're back with Aanuka Shola and we're talking about an exciting topic. It should be an exciting topic for business owners, quality of earnings. So, so let's jump back into the topic. What does a business owner need to do to have a successful QSV engagement?

Anneka Sciola (30m 45s):

Sure. Yeah, I would say first of all, Kenny, on crash course on what EBITDA is and what a QV is, which is exactly what we're accomplishing today. So you're already halfway there to the T to that goal. I think besides that the cleaner, the books, the better, I also see business owners that have good accounting methods, especially being on a cruel basis of accounting have easier with QB and a sell side process. I'm not saying everybody go run out there and get an audit done or abandon your cash basis, method of accounting. But generally speaking, having cleaner books and following us gap method of accounting tends to help business owners be more successful.

Tom Bronson (31m 27s):

You know, I, that's a great point. I see a lot of business owners who really manage using cash basis to cash basis financials. And I just, it's my personal opinion that to manage the business day to day, you need to be looking at a cruel basis, right? And thinking about, you know, where things really belong as opposed to cash basis. Look, you can do your taxes on a cash basis, which I would encourage for small businesses, but you really should be managing the business on an accrual basis. Would you agree with that?

Anneka Sciola (32m 4s):

I do, especially as you're getting close to selling, I don't personally have a problem with managing the business from a checkbook perspective, but when you're looking to sell to more sophisticated buyers, a lot of times they're in, you know, institutional investors, private equity, strategic buyers, they're going to have a hard time swallowing and incorporating the cash basis numbers into their modeling, which is on an accrual basis. And so oftentimes, you know what we'll tend to slow down the process is then we get involved and we hope them help the sellers of business owners come up with the cash to your cruel basis.

Anneka Sciola (32m 46s):

Justments and so that is something we can do, but I think it's always good to be to your point, Tom, being more prepared.

Tom Bronson (32m 54s):

Yes. I can't say that enough always be prepared to use the boy scout motto or what, I don't know how many fingers it is. The boy scout always be prepared. So now speaking of being prepared, I'll bet you've seen almost everything over your years of doing this work. Could you give us a real success story for someone who did a QMB?

Anneka Sciola (33m 19s):

Yeah. Yeah. I had one that was, excuse me, a 74 year old client who owned a container distribution business. And so one thing I'll bring up, we haven't talked about tax due diligence and consulting yet, but we were able to find our client the 70 year old business owner, $3 million in value because of our tax consulting work. So what we did was we performed the QAV for him as a business owner, marketed his business, which took about a month or two year to find a really great strategic buyer, gave him tax consulting and saw him to the finish line somewhere in between that process.

Anneka Sciola (33m 60s):

The buyer asked for a $3 million reduction in purchase practices. Well, you know, because of our work and the tax structuring, and we are a full service CPA firm that we also bring in a tax consulting side of it as well. We were able to net the seller about the same amount of cash consideration to offset the reduction in purchase price, where at the end of the day, he, the seller being walked away on a post tax basis with roughly the same amount of money as he originally expected all because of the tax structuring that we were able to come up with. So he was happy, the buyer was happy. And I think he ended up taking his proceeds, retiring, started a goat farm because that was his hobby.

Anneka Sciola (34m 47s):

So that's one success story I could share with you. I could share with you another, if you would like to hear

Tom Bronson (34m 51s):

That as well. Sure. Bring it on.

Anneka Sciola (34m 53s):

Okay. I've got another client of a smaller business and he got tired of, you know, as you, as you know, being in the south here of the Houston summer heat, he had a business where he spends his time primarily outdoors, but he would prefer to live in Montana and spent his summers there instead. So ultimately through the QV and sell side marketing process, we landed him. Several offers, turned out, he picked a lower offer, but with a buyer he was more comfortable with and that accomplishes more of his intangible goals rather than just a monetary goal. So I would say what makes us unique is that we don't bind our sellers to us with a timetable, nor do we try to sway them one way or the other with the options we just like to give our clients objective advice, being that trusted advisor and sounding board and encouraging our business owners to go after the option that they are most comfortable with and meet the most of their criteria as possible.

Anneka Sciola (35m 51s):

So I mentioned that he went with a lower offer to be happier.

Tom Bronson (35m 56s):

Yeah. I love that. I actually, in one of my exits, I went with a lower offer because I thought it was the right thing to do for our people, for our customers, you know, for the long-term success of the business. And sometimes that's a, that is a smart play. But if you don't even understand your options right, then, then it's hard to make those decisions. And we do the same kind of thing. We, we don't care what the age we, you, we help business owners design and execute their ideal exit strategy, but we don't care is we're not a, an investment banker. We're not a, a, a sell side representative. All we do is the work, the pre-work to get a business ready. So if they want to do an Aesop or a, or a sale to, you know, leverage buyout for management or sell to their children or sell to a third party, we don't care.

Tom Bronson (36m 41s):

We're totally agnostic to that. We just want to help business owners achieve their goals. It sounds like we have great alignment with our, with our values between mastery partners in Calvetti Ferguson. So is there any, is there any other advice that you, that you would like to give to business owners that are looking to sell?

Anneka Sciola (37m 2s):

One of the common questions we ask business owners when preparing to exit is what would you like to do with more time, energy and capital? We are always delighted and curious to hear the answers, because that helps us understand where the business owner is with their personal goals and visions. And then we can better understand how we can help them meet these goals. So to answer your question, I would say to the business owners, spend time thinking through these types of questions, also surround yourself with good advisors. I would tell every exiting business owner I encounter that you need, what you need is a good attorney. Who's skilled in transactions, not something different like real estate or divorce or something I've been with the same attorney who's drafted my my will or whatnot for, for, for a decade.

Anneka Sciola (37m 52s):

I would say, get someone who's skilled in doing reps and reps of transactions in a good business financial advisor, whether that be a CPA or not interview your advisors and make sure that they have good references and also understand your vision and where you're trying to go.

Tom Bronson (38m 11s):

I'm really disappointed that you didn't say that they should engage with mastery partners, but, you know, I'll get over that really quickly. Anneka. So Calvetti Ferguson. Exactly. So, so that is some great advice for business owners. They should be thinking about what that future is because you know, the stats are that, that of the only 17% of attempted transactions reach the finish line. And that's all businesses less than a hundred million in revenue. And the smaller you are, the more challenging it gets, the number actually goes down. So 17% success rate out of that 17%, only 60% or a full 60% are unhappy a year later with the outcome.

Tom Bronson (38m 55s):

Right? And it's because they don't spend time thinking about what am I going to do next? You've poured your life and your soul into, into this business. And so you should be intentional about what's next. We call that the third act here at mastery partners. And so I like that when you're, when you're talking with business owners about, you know, what dream about what you're going to do, you know, you have access to capital, you're going to, you know, and how are you going to spend your time? I think that is a such overlooked component of exit strategy. So I'm really glad that you brought that up. That is great advice. Now we've already talked a lot about kind of how Calvetti Ferguson is differentiated from other CPAs.

Tom Bronson (39m 36s):

And by the way, you mentioned that attorneys are not all cut from the same cloth, right? They specialize, you always need to get an attorney that specializes in these types of transactions so that they can help you. That goes for CPAs as well. You know, just the person who who's been doing your taxes or, or being a bookkeeper for you, they may not be qualified to represent you in a transaction. They may be, but they may not be. And so you need to do that investigation to make sure it's okay to have them keep doing the things that they're doing, but you might need to get some specialized help. So, so I think that that is an important component as well for business owners. But back to Cavetti Ferguson, what sets you guys apart from other accounting and advisory firms, other than all the things we've already talked about?

Anneka Sciola (40m 22s):

Great question. We have members in the firm who have been in the company shoes, and they have served us CFOs and controllers, our very own founders of the company, Mr. Jim <inaudible> and Jason Ferguson were that CFO and controller who are today entrepreneurs and can help guide companies because I've been in your shoes. Also, I give credit to the gentleman. I mentioned earlier, who earlier in my career, asked me to help him build this practice to new, who was also a CFO who took a company public and grew it from $6 million in EBITDA to $60 million in EBITDA for years, He says, growing companies, it's hard and the PTSD is real and you're not prepared for it.

Anneka Sciola (41m 9s):

So give him credit for that saying, I have a great team of analysts who I know if they're listening, I want them to know that I think they're world-class and have the ability to run their own practices and book of business one day. So as a wise, man, once told me, I am just paving the runway. You're the one taking off. And so that's what I would tell them to finally say what sets our practice apart from the other firms is that we bring a holistic service offering to business owners. In most shops, you have to go to one provider for the QV, another for the valuation, another to get your business marketed and another to get taxed.

Anneka Sciola (41m 50s):

We do all of that within one umbrella with one team. So I've been there in that big firm where everyone worked in their different silos. And let me tell you, it was hard sometimes to get to know my colleague across at cube.

Tom Bronson (42m 5s):

I, I totally agree. Those are great services that, that really set company Ferguson apart. I'm glad you mentioned chin. I had an opportunity to have lunch with them a few months back and introduced by another great friend over at Calvetti Ferguson. I have yet to meet somebody that I don't like at Calvetti Ferguson and that's important. So I think you'll really enjoy spending time with all of these folks. Look, one last business question. This podcast is all about maximizing business value. So Anneka what's the one most important thing you would recommend business owners do to build long-term value in their business. Okay.

Anneka Sciola (42m 44s):

I would say focus not only on building sustainable EBITDA, and that starts with having a gray, repeatable and scalable business model and all the great things Tom is teaching you, but also making sure that you're training your next generation of leadership to take over. Because if a buyer sees that the value of the business is just with you, then the value of the business will be very limited to just,

Tom Bronson (43m 9s):

I love that. I love that. That is some definite great advice. Business owner dependency is probably the great deal killer. As I say for, for like, if you've got a business that's 50 million in revenue and it's got some owner dependency issues, you're going to take a haircut on the evaluation. That's just pure and simple the way it is. But if you have a business that is $10 million or less, that is owner dependent, it's almost worth nothing because the, where is all that knowledge where, you know, it's not a transferrable business. That's the thing that we harp on all the time with our clients. We are trying to build a business that is scalable and transferable over time.

Tom Bronson (43m 51s):

And you can't do that if you just retain all of that knowledge in your head. So I love that as great advice to get. We don't hear that very frequently. So thanks for asking, but I'm not going to let you off the hook here, even though you're thanks for answering that way. I'm not going to let you off the hook, even though you gave a great answer there. We always ask my favorite question at the end of our podcasts and our listeners stay tuned. Just to hear the answer to this question. So here, are you ready for this arnica? What personality trait has gotten you into the most trouble through the years?

Anneka Sciola (44m 24s):

Oh goodness. That is an interesting question.

Tom Bronson (44m 28s):

Don't say math. No, that's not personality related. Right? Well, I would say I'm a pretty direct straight shooter. And over the years, as I was developing my skills as a manager, not only of team members, but also of my client relationships, I've learned that tailoring my message to my audience and seeking to understand them first has helped me get out of situations that would have gotten me in trouble. If I came across as too candid upfront, even though I'm thinking those thoughts internally, it's, you know, the, what is it? The seven habits of effective people might.

Tom Bronson (45m 9s):

My favorite one is seek to understand then be understood. Yes. I love that. That's one of my favorite Steve Covey's book, seven habits of highly successful people seek first to understand then to be understood. So, so that has been a challenge for you in years past,

Anneka Sciola (45m 29s):

I would say, I would say so I'm just thinking more about, you know, into that message.

Tom Bronson (45m 35s):

You know, you see, you mentioned earlier that your parents might listen to this podcast. I'd be interested to know what their answer might be to that question,

Anneka Sciola (45m 42s):

To ask them and get back to you.

Tom Bronson (45m 45s):

I'd never asked that to my wife. We've been together for 30 and a half years cause she'll give a shit. She won't even know which one to choose the about the things that get me in the most trouble. Look, this has been so much fun. How can our viewers and listeners get in touch with you and the folks at Calvetti Ferguson?

Anneka Sciola (46m 2s):

I will say first, I don't think I'm going to ask my husband Peter Sciola, but I will tell you he has been my rock and being able to, to, you know, operate the practice this way first and foremost, I really want to thank you for your time. It has been a pleasure getting to know you, Tom, and following your podcast with all the great information that you provide. Thank you very much for the service, a servant leadership you do for all the listeners out there today to get in touch with me. You've got my LinkedIn profile as well as my bio page on calvettiferguson.com.

Tom Bronson (46m 37s):

Awesome. That is perfect. And you can, you can see all the great people at that website. Thank you Anika for sharing your knowledge with our, with our audience and our listeners today.

Anneka Sciola (46m 48s):

Thank you, Tom.

Tom Bronson (46m 50s):

You can find Annika Shola at Calvetti Ferguson, C a L V E T T I Ferguson. Everybody knows how to spell ferguson.com or on LinkedIn. And of course you can always reach out to me and I will be happy to make a warm introduction to my friend. Anneka Sciola. This is the maximize business value podcast, where we give practical advice to business owners on how to build that long-term sustainable value in their business. So be sure to tune in each week and follow us wherever you found this podcast. And if you'd like to get weekly updates from us, just go to our website, masterypartners.com and you can sign up for our weekly newsletter. There is jam packed with all kinds of great information about maximizing business value.

Tom Bronson (47m 35s):

So until next time I'm Tom Bronson reminding you that it just might pay to be proactive and get a quality of earnings report before you start your exit process. So think about doing that while you maximize business value.

Announcer (47m 56s):

Thank you for tuning into the maximize business value podcast with Tom Bronson. This podcast is brought to you by mastery partners, where our mission is to equip business owners to maximize business value so they can transition on their terms on how to build long-term sustainable business value and get free value building tools by visiting our website, www.masterypartners.com that's master with a Y masterypartners.com. Check it out.

Tom Bronson (48m 41s):

That was perfect. I wouldn't make any changes.