In an earlier podcast, I spoke on the topic of Preparing Your Business for Sale through a Quality of Earnings. In this article, I wanted to expand on this topic through telling some stories of Quality of Earnings (QoE) to marketing service offering that I’ve provided to my clients as well as the lessons learned from each.
Don’t forget tax consulting and due diligence
I had a 74-year-old client who owned a container distribution business. While all his children were very successful, none of them took an interest in the company. Having performed a sell-side QoE for our client, we took his company to market and ended up having a handful of strongly interested parties. Ultimately, our client signed the LOI for a purchase price nearing a two-digit multiple and was going to be very happy once the deal closed at that transaction value.
During the buy-side due diligence process, the buyer negotiated heavily to discount the purchase price by $2 million due to a subjective item in the EBITDA calculation. Our client was not happy and contemplated walking out of the deal. Because our process included a tax consulting component, we were able to advise both parties on a structure that was highly beneficial to our seller client, prompting him to come back to the negotiating table. At the end of the day, because our tax consulting process involves providing an after-tax estimate of purchase price as well as considering various structuring options, the deal got closed and our client was able to retire happily, knowing that he had turned over every stone.
Personal goals matter
One of my earliest deals was with a seller of an environmental consulting company. He came to me asking for a QoE after he received a term sheet and wanted my opinion of the proposed deal. After I completed the QoE for him, he asked me to run a process for him to determine if there were any other strategic buyers interested in acquiring his company. Ultimately, we reviewed two offers.
I understood my client had two main goals: 1. To be able to move away from the sweltering Houston heat, where he performs most of his work, to cool and dry Montana and 2. To respect and enjoy the relationship with the buyer because he would continue to be employed by the new buyer.
It turned out the original offer my client received before he contacted me to perform the QoE and start the sell-side process was the higher of the two offers. Yet, he still decided to accept the second offer which was quite a bit lower. This was because the second offer achieved his two personal goals, and he was happy with it.
One of the common questions I ask business owners when preparing to exit is: what would you do with more time, energy and capital? I am delighted and curious to hear the answers because that helps me understand where the business owner is at with their personal goals and visions, and then I can better understand how I can help them meet these goals. Under this example, I was very glad I asked my client these questions!
The Quality of Earnings report may lead you to continue running your business
A couple of years ago, I had a business owner come to me with a very, very unique business. They are the only people who do what they can do and because of their specialized skillset, they are in high demand. The owner came to me asking for a QoE because he and his wife were in the process of deciding whether they wanted to sell the business or keep running it.
After completing the QoE report for him and running some cash flow modeling, the business owner could see, based on his backlog and projects, how much he would be cash flowing versus if he were to cash out today. It turned out that he was very happy with his cash flow projection and, depending on the result of the QoE, he would make a sell or hold decision.
He ended up holding and is still enjoying the results of that decision today. So, I would say not every QoE I’ve done resulted in a deal for the seller. I believe in empowering the business owner to do what makes most sense for them and using the QoE as a tool to make that decision.
Engage in a QoE advisor to accurately calculate EBITDA
Recently, I performed a buy-side QoE on a business that, according to the seller, had $2 million of non-qualified “addbacks” that were actually transactions on the balance sheet. Balance sheet “addbacks” are not acceptable, because an addback to EBITDA applies only to discretionary and non-recurring expenses. Unfortunately, this seller did not have a QoE done on his side before the buyer requested me to perform the buy-side QoE. I have seen business owners who, due to this error, have been very disappointed in their resulting valuations because they thought the EBITDA was much higher than the reality.
Show meaningful metrics and charts
I was lucky enough to be on the team listed as a finalist for the third annual Association for Corporate Growth (ACG) Houston Deal of the Year awards in the consumer products and services category for our work on the Jurassic Quest® deal. Jurassic Quest was such a fun deal to work on, because it is North America’s largest and most realistic Dinosaur event! Jurassic Quest is the only interactive dinosaur event that has over 100 true to life-size animatronic dinosaurs in each of its indoor touring shows from the very small to the gigantic.
Our report showed many meaningful metrics and charts, such as the ticket sales per show throughout the course of the year and in different locations around the country. Because the Quality of Earnings tells the story of the business through the numbers, it was important for us to also show visuals, such as charts and photos, as well. After producing our QoE report, the deal closed within approximately 45 days, which was lightning fast.
Don’t lose sight of running the business while we’re marketing the sale
This last point isn’t a story per se, but it’s important advice we give every one of our clients. “Don’t lose sight of running the business while we’re marketing the sale” because your valuation is ultimately determined by your business’s EBITDA. A good financial advisor will do the legwork on the QoE and marketing, giving you the ability to stay focused on the business.
About the Author
Anneka Sciola runs the Transaction Advisory Services practice at Calvetti Ferguson. Her passion is helping business owners grow and eventually sell. She is an Advisory Director and has extensive experience in public accounting, consulting, and industry. She is a 2021 recipient of ACG’s Middle Market Growth Young Professional Award. Her practice specialties include valuations, quality of earnings, M&A sell-side representation, bankruptcy and restructuring, technical accounting, and litigation consulting.