Comparing records on both a cash and accrual basis lets me do more than just find these random gaps. It lets me evaluate how healthy a business actually is.

Quick 101 on Cash vs. Accrual

I’m proud to say that my mom reads these newsletters. For her sake (and probably a lot of other readers), I’m going to give a quick breakdown on the difference between cash and accrual accounting. Cash basis accounting records income and expenses when the money actually hits the bank or leaves it. On the other hand, accrual basis accounting will record income when it’s earned and expenses when they’re incurred. It does not depend on when the cash actually moves around.

So, let’s say you earn revenue in December and send an invoice to your customer in December and they pay you in January. On a cash basis, that would be considered January revenue because that’s when it is your bank. On an accrual basis, it’d be December revenue because of when you earned the money. Despite it being the same customer and same sale, the books will look very different. When you compound these differences over time, it can start to matter a lot.

Love ya, Mom.

Example Scenario

Let’s say I’m looking at a small business’s last three years of tax returns, which is filed on a cash basis as most SMBs are. Most people see cash basis as the more conservative way to do accounting. Income comes in at $500K, $500K, and then $1 million in 2025, the year that’s conveniently right before the owner decides to sell.

Seeing that jump doesn’t automatically translate to it being a great year in my eyes. Instead, it makes me question how real the growth actually is and whether they are using a cash or accrual basis.

To uncover what’s going on, you have to look at the balance sheet. (Fair warning, a lot of SMBs do not show the necessary numbers on the balance sheet to do this analysis properly.) This approach is generally regarded as more efficient than burning down the banana stand. Callback, baby.

Here are some numbers to reference before I walk you through what I’m looking for.

You need to look at three accounts on the balance sheet: accounts receivable, inventory, and accounts payable. If a company’s tax return or balance sheet isn’t tracking these, that’s your cue to go find out why. Each account can be thought of as a lever that shifts cash-basis income away from or to what the business actually earned.

Accounts receivable

If AR decreased by $400K over the year, that means old invoices got collected. Even though plenty of cash showed up, it’s not revenue in that period. It’s just revenue that was already earned in a prior period finally hitting the bank. Cash basis would count for this change as the present year’s income anyway. All that to say, $400K is an overstatement.

Inventory

If ending inventory decreased by $200K, it means the business used more inventory than it replaced. On an accrual basis, that shows up as COGS going up by $200K. Unfortunately, it doesn’t account for no new cash having left the building to buy it.

Accounts payable

If the company is delaying payments to vendors, real expenses have been incurred but haven’t hit cash yet. If that gap is $100K, then, on an accrual basis, operating expenses would be $100K higher than the cash-basis numbers suggest.

The Bottom Line

Once you stack those three adjustments on the business generating $1 million income, the cash-basis year and the accrual picture begin to look very different. Back out the $400K in AR, add the $200K in COGS, add the $100K in OPEX, and EBITDA drops from $1 million to $300K. Just to drive this home: this is a $2.8 million dollar swing on a 4x multiple just by asking what actually changed on the balance sheet. Understanding changes like this one is key to understanding when to kill a deal before it’s too late.

Of course, this effect can run the other way too. It’s not always the cash basis that’s inflated; sometimes accrual makes a business look better than the tax return suggests. In either case, the different bases can tell two different stories. If you’re a lender or a buyer trying to figure out whether this business will actually cash flow how you expect it to, only one of those stories tells you what you’re really buying. Tax returns are built for the IRS, not for you.

A good rule of thumb is that profit margins and EBITDA margins should be relatively consistent unless there is a reasonable change in the business to explain it.

If you’re looking at a deal and want to know which story you’re actually being told, that’s exactly what a quality of earnings report is for. Grab some time with me, and let’s walk through what you could expect your business you are acquiring to actually earn.

What I’m Seeing Among Buyers

First thing to know: Multiples are climbing. This is true even for smaller businesses. A large part of this change is that private equity has come down market to compete for deals that used to be too small for them to bother with. But now, there’s enough dry powder in PE to film the next Dune movie.

PE entering the space has created a strange dynamic. On the one hand, winning the LOI is harder because there’s more competition at higher prices. On the other hand, it’s also harder to get that LOI funded. Lenders don’t want to move their debt service coverage ratios just because the purchase price went up. The difference between what a deal costs and what a lender will fund needs to get filled. There are typically two ways to do so: the buyers come up with more of their own capital, or they give up equity.

I’m also seeing buyers who are willing to buy almost any company in almost any industry, rather than looking for a business they’re uniquely suited to run. I have a much stronger preference for the sniper vs. the shotgun approach. Buyers should be selective about what they target rather than taking a “spray and pray” shot at things.

As a CPA, I know I’d be reasonably good at running most accounting firms. I also know for a fact that I would not be good at running a tech company or a marketing agency. If I was looking to buy, I would lean into this smaller buy box as a point of differentiation from all the other buyers, self-funded or not. By knowing what you want and why you want it, you’re elevating your pitch far above any buyer who’s only looking for certain financials to line up. I just covered the story of Adam Markley, someone who has walked the walk of buying a business, and buyer-business compatibility was a central point of his.

What Buyers Aren’t Worried Enough About

Debt.

That’s it. It’s debt. I could really move onto the next section, but the SEO gods have told me to keep my word count up so I’ll break it down a bit more.

I don’t think buyers fully grasp what is on the line when they acquire a business and how delicate an M&A transaction can be. When you buy a company, you’re buying something that was profitable and cash flow positive under an owner at a certain point in time. Even adjusting for all the ways the owner was personally responsible for the business’s success and setting aside the dreaded J-curve, you still need to account for room to cover the debt load you’re about to take on. You are now responsible for paying down principal and paying interest, every month, without fail, as well as all the other expenses that go into this business. Few people can appreciate what that obligation does to a business, or to the person running it, until they’re living it.

If I can climb onto my soapbox for just a minute. Another thing people need to watch out for is relying on AI-generated quality of earnings reports. I’ve consistently seen AI QoEs miss massive adjustments that materially matter. AI will give you an answer, but more often than not, it will give you an answer you want to hear. I asked it if my “dry powder / Dune” joke was funny, and it said it was. I told it that it wasn’t actually that funny, and it agreed. If it can’t make up its mind about a very mediocre joke, then you shouldn’t trust it to advise you in making the biggest purchase of your life.

The point is, you can easily prompt an AI to produce a seller-friendly QoE or a buyer-friendly QoE, and you’ll get two very different answers to the same question. It will tell you what you want to hear. I, on the other hand, will not. Like I said at the beginning of the article, I’m here to bring down the hype and show the risks, opportunities and adjusted EBITDA in deals.

What to work on as you search

One of the biggest make-or-break factors for a new owner is if they can make sales. The moment you buy a business, your pipeline is likely to shrink. It’s common for small businesses to have many of the previous owner’s sales come from close relationships and personal referrals. You’ll likely lose some of those. On top of that, your closing rate is probably going to dip too, simply because it takes time to learn how to sell the way the previous owner did. Getting better at selling is one of the most important things a new owner can do. If you have a buy box that suits you well, you can already start familiarizing yourself with the sector and with local networks in order to hit the ground running when you find the right business.

Wherever you are in the search process, feel free to reach out to me and set up some time to talk. It’s a difficult market, and we’re here to help.

Adam says the market he’s operating in today is not the market he started in nearly ten years ago. PE money is flowing downstream into deals that used to be searcher territory, pushing multiples up. As interest rates are pushed up, the banks are getting choosier about who they lend to and why. So I asked Adam the question a lot of you are probably asking yourselves: what does it actually take to stay relevant as a buyer and get the broker to pick you?

Scars and Stripes

Before we get into his advice, it’s worth understanding why Adam’s answer carries weight. He has an extensive history of acquiring companies in both the US and UK. Four of them were done with an actual SBA personal guarantee attached, meaning his personal capital and reputation were on the line. He’s also done different types of deals, including non-bank, on-market, and off-market deals, which he now manages through a holding company.

His fund, Prox Search Capital, has allowed him to venture into large self-funded search deals and independent sponsor deals. He’s also got Veracity CFO as a fractional CFO and financial operations firm, which he assured me explicitly of not competing with QoE providers. And then DealBuff is his buy-side sourcing firm, built around the idea that searchers need to run their acquisition search on-market and off-market simultaneously.

Just as a cherry on top, Adam is very invested in the ETA community, hosting or attending meetups in Denver, Baltimore, Philly, and teaching acquisitions to MBA students at the University of Colorado.

None of that is the point of this article. Hopefully, though, it was enough to show how much work he has put into what he now teaches.

The Scar Tissue

It should not come as a shocker to hear that acquiring a business is not an easy endeavor. Actually, buying the business can be the easiest part in some ways. It’s what you do afterwards that gets tricky. Adam’s earned his stripes and has the scars to prove it. One of his UK companies had an operator empty the bank accounts. One of his SBA-backed deals had so many supply chain issues and labor shortages that he had to personally cover the loan payments out of pocket for close to two years. Admittedly, he pointed to his own poor decisions compounding some of the problems. And in another case, he had to sue a seller for fraud after the business did not turn out to be anywhere near what was represented at purchase.

Adam keeps the physical paperwork of his personal guarantee from one of his SBA loans on his desk. It serves as a reminder of one of his guiding principles as an investor. He told me, “If it’s not good enough for me to sign a personal guarantee, I can’t ask you to sign one so I can invest.”

Three Things Searchers Need To Do To Stay Competitive

With PE pushing multiples up and banks getting more selective, independent searchers can feel like they have their backs up against the ropes. Adam gave three pieces of advice to help searchers stay competitive in this market.

First, your investment thesis has to actually be you. Searchers have the advantage of not being cookie-cutter PE firms with cookie-cutter buy boxes. By being an individual with a story, you can stand out from the crowd.

Adam said that “you can’t be competitive if you’ve done concrete work your whole life and you’re trying to buy a CPA firm.” In other words, look to ground your thesis in your experience and network. Not only does this make things more attractive for the broker, you’re also relationship-building in way that should produce future clients, vendors, or peers. People who scattershot across unrelated industries hoping something sticks tend to miss all of that.

Second, capitalize the deal to grow it, not just to close it. Many buyers view the purchase price as a fixed number. Once they can clear it, they think they’ll own the business and then the money will start rolling in. In Adam’s experience, most buyers way underfund what happens after close. We’ve written about the dreaded J-curve in the past, which should be expected in nearly every M&A transaction. On top of that, however, are the costs and time associated with implementing all of your strategies.

Adam suggests buyers should pre-fund their first 12 months of anticipated CapEx as well as 12–18 months of growth initiatives. Then, they should stack three or four months of extra debt payments on top of that so they can operate debt-free to start out. This will likely sound much more conservative than the latest TikTok video telling you to buy a laundromat for 0$ down. In reality, the working capital calculation you get out of a QoE is a snapshot of what the business needed before debt and before you took over. It does not forecast how you’ll actually run it, especially with all your newfangled growth strategies. Growth is expensive, and you will make mistakes. If you recognize that, you’ll bake it into the agreement before you close.

Third, actually operate the business. Time and again, new owners I’ve talked to tell me about how much of an adjustment it actually was owning a business. It’s a very different type of work than searching. I think you can safely say searching is to dating as owning/operating is to marriage. You’ve moved beyond the starry-eyed daydreaming of what could be, and you’re now being tasked with putting in the work to create that reality.

Once you buy the business, Adam says you will have to get in the field, selling the product or service yourself. If you can’t sell what you’re buying, he’d argue you shouldn’t buy it in the first place. Beyond the practical value, rolling up your sleeves in this way builds trust and buy-in with the team you’ve inherited, which makes every change you actually want to make afterward land better.

Why This Matters Right Now

Ultimately, this advice is to tell you to lean into your “disadvantages” In a market where multiples are getting pushed up by well-capitalized PE money. If you’re an independent, individual searcher, then your edge comes from being just that. Make sure that your thesis is actually yours and keep on keeping on.

If you’d like to learn more about what a quality of earnings report can do for you and your search, check out our website or book some time with me.

With all the money flying around during M&A transactions, people are rushing to get a slice of the pie. That realization brought a wave of people into this space who had no CPA license and no specific background in the work. A lot of times, they were just offering financial due diligence as a way to get their foot in the door so they could then sell bookkeeping and fractional CFO services on the back end.

In my humble opinion, that creates a conflict of interest. If the deal goes through, the provider would be more likely to get follow-up work as a bookkeeper or fractional CFO. You can imagine how that might influence the add-back process. In short, non-CPAs who were never qualified to review financials for acquisition purposes started doing exactly that, often as a loss leader for what they were really trying to sell.

My Background

I cut my teeth at Baker Tilly, which is a competitive enough firm to begin with. But, to even be in the right room for M&A deals, you had to be a CPA with five years of audit experience just to qualify. Even then, only one out of three people who tried actually made it. It’s so competitive because the deals are so large. There was not much margin for error, so you needed technical skills, communication standards, and time management. I’ve carried all these lessons into QOE Prep, especially that last one. Excuse the advertising break, but we consistently get our projects done in two to three weeks.

Unlike the Baker Tilly team, the ETA space has no rules about background. On the one hand, leveling the playing field is great for getting more people to participate. On the other hand, we never want to sacrifice standards to do so. As it stands, the AICPA doesn’t set standards for what a quality of earnings report should look like. ETA work deals with private companies, and it’s not an audit. In other words, Uncle Sam doesn’t care enough to set defined procedures. A quality of earnings engagement sits under consulting or analytical services. It is not an audit, and it is not an attestation service. Anyone can call themselves a provider.

What’s changing?

Based on my observations, in 2025, a lot of smaller businesses started showing less profitability than they had in prior years. Lenders are also getting more cautious and caring more about the year to date trend. When a business is trending up, everybody wins. The lenders get paid back, and SBA loans perform the way they’re supposed to. The BDOs aren’t getting calls about defaulted loans. Last but not least, the buyers are happy because the business they bought is doing what they expected.

2025 was a genuinely hard year to sell a small business. Ask any broker or ask any buyer who tried to get financing. It was rough out there. While there are always many factors involved, a meaningful part of the 2025 SMB struggles comes back to unqualified people performing quality of earnings work. The standards of this level of diligence are not high enough to properly sniff out what’s wrong with a deal before things close.

I understand the appeal on the buyer’s side. Buying a business is already a huge investment. Nobody wants to add more costs upfront, especially when there’s a chance that everything falls through. Getting a cheaper QoE might feel like you’re cutting down on your expenses and risk exposure. But as Ben Franklin put it when asked about QoE reports: A penny saved is a bad business earned. When you don’t invest enough in the diligence process for what is likely the biggest investment of your life, you can end up owning a business that becomes more of a liability than an asset. It’s the worst of both worlds because you pay for both the QoE and its fallout.

Conclusion

Whenever it comes to a service provider in the M&A world, you want someone with real deal experience behind them. I’ve written about finding good brokers and avoiding the charlatans. The same thinking applies to getting a CPA with experience to prepare your quality of earnings report. If you don’t know where to start, I know this one guy out in Lancaster PA who does a great job.

If you’re in the midst of making one of the biggest investments of your life, be sure you surround yourself with the right people. Reach out to me, and let’s talk about your deal.

With the 4th of July approaching, I thought I’d be a bit patriotic in this edition of the newsletter. There’s a long and storied tradition in this country of hating taxes. That very hatred is likely why we are celebrating 250 years. Ben Franklin said there’s nothing certain in this world except death and taxes. He also said our national bird should be the turkey. So, you can take some of what he said with a grain of salt. While I won’t argue about the certainty of death and taxes, I don’t think they necessarily need to be shoved into the same box labeled “Things I Dread But Will Deal With Later.” Instead, I want to offer a different perspective on taxes that I’ve discovered while working on all these M&A deals.

Taxes as Investment

Long story short, I have started to think about taxes as an investment into one of the greatest economies this world has ever seen. In this country, it doesn’t matter where you started, what you look like, or how old you are. You get a real shot at building something of your own, whether that’s a business from scratch or doing the ol’ Buy Then Build approach.

Here’s the thing about that opportunity: it’s not free. Property taxes, payroll taxes, income taxes, estate taxes, excise taxes, tariffs, the list goes on long enough that I could fill the rest of this newsletter with it. But every one of those is doing something. They fund the roads that get your product to market, the courts that enforce the contract you just signed on your acquisition, and the basic security and stability that let you run a business without worrying whether the rules will change on you tomorrow. It also goes without saying that these very taxes support our troops around the world and at home.

I’m not here to tell you we’re overtaxed or undertaxed. That’s an argument for someone else’s newsletter. I’m certainly not going to say that our taxes are being spent efficiently. What I am telling you is that none of the opportunity we just talked about, the ability to buy a business, build it, and sell it, exists without the infrastructure paid for by these taxes.

Taxes as a Measure of Success

Thanks to all the deals I’ve done, I’ve started looking at taxes a little more critically. When a business unethically lowers its tax bill, I’m not the only one who’s stuck with a headache.

In reality, there are two sides to this coin, and both of them are ugly. First, the business is built on the benefits of operating in this country, the courts, the highways, public schools, etc. It wouldn’t be able to enjoy so much success without this infrastructure. The other side of the coin is that those businesses don’t invest back into the system. By paying more in taxes, they’re bolstering the goods and services needed for economic success. Your tax bill is, in reality, a rough measure of how much you’ve actually gotten out of the deal and how much you’re giving back.

Ideally, people keep track of this balance between what you put in and what you get out, while reporting their income in order to pay into this system the appropriate amount. If they don’t, it ends up being worse for ethical taxpayers. At the end of the day, the government will raise tax rates high enough to pay for what the government needs. If every person and their business were accurately reporting income, tax rates for the USA as whole would be lower.

To be clear, I’m not talking about tax avoidance here. It’s tax fraud that gets my knickers in a twist (is that too British to say when celebrating America’s big 250?). It’s well-established in American law and ethos that everyone should “arrange his affairs that his taxes shall be as low as possible.”

Every acquisition we help with includes a book-to-tax analysis, comparing a target company’s financial statement income to what it reported on its tax return. When there’s a gap that can’t be explained by standard M-1 adjustments or the usual differences in tax treatment, that’s worth investigating. More often than not, it means the business has been underpaying its taxes. Additionally, if you are a business owner looking to sell your company and have avoided paying taxes, an SBA lender is going to make it a lot harder for the buyer to get a loan. The SBA loan process evaluates businesses from tax returns instead of financial statements. In other words, no matter how nice your financial models look in Excel, a boring old tax form is going to determine what happens with your loan.

Conclusion

So this 4th of July, as the fireworks go off, I’d encourage you to think about taxes a little differently, too. Not as money taken from you, but as money invested in the country that made it possible for you to build, buy, and sell businesses in the first place. And, if you’ve got a bit of a competitive streak like me, you can think of taxes as a measure of success, too.

And if you’re in the middle of evaluating one of those deals right now, that’s exactly where a proper QoE report earns its keep. It’s how you find out whether the business you’re buying has actually been investing what it should or cutting corners you’ll inherit the moment you close. If you want a second set of eyes on a target company’s numbers before you sign anything, that’s what we’re here for.

Happy 4th of July.

One of the interesting things about the ultrarunning community is that nobody cares about their times or paces. Every mile is so different from the last, and even the same race can feel completely different from one year to the next. If you were to ask me what I thought about the race at mile 18, I would not have nice things to say. But, if you asked me at mile 24 where we were running slightly downhill through a quiet meadow, I’d say I loved it. Ask about mile 29, and I’d get PTSD flashbacks.

When look at a business’s financials, you might be tempted to take the current snapshot as a true reflection of what’s going on. The real story, though, is likely one of ups and downs. These nuances have to be rooted out by seeing how they change over time. We call this a “variance analysis.”

What is a variance analysis?

The concept behind a variance analysis is fairly straightforward. We simply track how each line item on the P&L changes month over month, quarter over quarter, and year over year. We’ll do this both in dollar terms and as a percentage of revenue, which is what people in the industry refer to as common sizing.

The goal is to identify outliers, because in a healthy, stable business, most line items should behave predictably. Fixed costs like rent will hold steady until a lease changes. Variable costs like COGS should maintain consistent margins unless something fundamental has changed in the business. So whenever something breaks that pattern, it’s worth asking why.

Marketing expenses

One of the most common patterns we see is a sudden drop in marketing expenses in the quarter or two before a business is listed for sale. Believe it or not, this isn’t a strange coincidence. Many sellers are often coached to cut discretionary spending and do whatever they can to improve profit margins before going to market, and marketing is one of the first line items to go. On paper, the numbers will actually look great. You’ll have adjusted EBITDA margins climb, and the business appears more profitable than it has been in years.

But marketing exists for a reason (unless you’re selling Teslas). It generates leads, which drive sales, which produce revenue, which ultimately flows to the bottom line. Because marketing takes time to produce results, a buyer purchasing a business that has cut its marketing budget will likely face the dreaded J-curve that they never saw coming (unless they are subscribed to this newsletter). That inflated adjusted EBITDA needs to be normalized, and the cost of rebuilding that pipeline needs to be factored into the deal.

Staffing changes

We have also seen meaningful shifts in staffing costs as a percentage of revenue in the year leading up to a sale. When a business owner explains that labor efficiency improved due to process changes or the removal of a bad hire, that may be entirely true. But it warrants scrutiny. Lower staffing costs can also mean employees are being underpaid relative to market, or that the existing team is being pushed beyond a sustainable workload, or delayed bonuses. A buyer stepping into that environment may find themselves facing turnover, morale issues, or the need to hire additional staff shortly after closing. None of these costs or issues would be visible on a normalized P&L without a closer look.

Rent and related-party arrangements

The last example that we’ve come across has to do with rent arrangements. When a business owner also owns the building, rent becomes one of the most important adjustments in the entire analysis. We have seen cases where rent is set well below market rate. Owning the building effectively subsidizes the business’s profitability. We’ve also seen cases where it is set above market, functioning more like a personal income stream for the owner.

In either case, a buyer needs to know what the business would actually look like if they were paying fair market rent from day one. Adjusting rent to market rate is a standard part of our normalization process, and it often has a more significant impact on true EBITDA than buyers expect.

Closing

Variance analysis is just one of the many reliable tools we use to produce a Quality of Earnings report. Like all the other tools, we use variance analysis to discover the real story of a business that a cursory glance at the numbers wouldn’t provide. If you’re considering an acquisition and want to understand what the numbers are actually saying, book a call with me.

Nobody was at fault. The previous owner wasn’t hiding anything. It just happened, the way things tend to happen whenever there’s a lot on the line. To be honest, it might have had something to do with my toddlers flushing wipes down the drain… we’ll never know.

Buying a business seems to work the same way. No matter how thorough your due diligence or how clean the financials look during the process, there is almost always a period right after the acquisition where things start to look ugly or just straight-up break. This is what we call the J-curve. While it’s certainly no fun, it isn’t necessarily a sign that you made a bad deal. It’s really just a natural side effect of a massive transition for the business. Understanding why the J-curve happens is the first step toward surviving it and, more importantly, shortening it. I’ll talk about four areas where I see the J-curve playing out.

Sales

As anybody in the ETA world can tell you, things don’t always go as planned. When you acquire a business, you inherit the seller’s sales pipeline on paper, but you likely won’t inherit all of it. A meaningful percentage of those leads are probably planning on calling the previous owner’s personal cell phone directly. It wasn’t your business card being handed out. Unless you specifically negotiated for call forwarding or a structured handoff period in your LOI, those calls won’t automatically reroute to you.

So from the very beginning, your opportunity volume is lower than what the historical numbers might have suggested. Beyond that, you’ll likely have a worse closing rate than the previous owner because you’ll still be learning the lingo. When you think about it as a formula (total sales = opportunities * close rate * price), it becomes clear how quickly revenue can fall when two of the variables are dropping.

Processes

Every business runs on a set of processes that the previous owner developed and refined over time. Typically, those processes worked because they were built around that person’s strengths, preferences, and habits. If you can think back to whenever you had a substitute teacher take over a class, I’m sure you’ll get the picture. Rather than working on your multiplication tables, you’re pledging allegiance to the band of Mr. Schneebly.

When you step in, you’re not going to run the business the same way, nor should you. But it takes time to figure out what to change and how to change it. As you start tweaking workflows and changing SOPs, things will slow down before they speed back up. That slowdown has a real cost that shows up in the numbers.

Team

Most employees have thought about what their next opportunity might look like. Whenever there is a significant change, this question will only get asked more often. After an acquisition, the employee no longer knows the owner. Even if the last owner wasn’t great, the “better the devil you know” rule would still apply.

Some employees will give you the benefit of the doubt and grow into some of your most valuable people. But as some employees choose to leave, you’ll be at risk of losing someone with a store of institutional knowledge. Rebuilding that gap in continuity takes time and money to close.

Clients

In small businesses especially, clients aren’t always loyal to the company. A lot of times, they’re loyal to the specific person who built it and ran it. These clients will hire the business because they trusted the owner, and they will stay because of a years-long, working relationship. When ownership changes, some of those clients will understandably want to move on. Depending on how the cookie crumbles, it could be a few of your top accounts that shrink or disappear soon after the acquisition. There’s not much you can do to prevent this, unfortunately. But there are some things you can do to shorten the J-curve.

Shortening the J-Curve

The J-curve is a transition cost that, like most costs, can be managed and reduced with the right preparation. The buyers who navigate it most efficiently are the ones who enter ownership with this understanding (and don’t listen to Brad Evilbroker). They know they need to address the changes in the four areas I just talked about (plus one):

• learning how to sell in this specific business,

• leading this particular team,

• improving these existing processes,

• communicating their value clearly to clients who didn’t choose them

• Having enough cash in the bank to prepare your business for this transition phase.

That kind of preparation takes place far in advance of the actual ownership of the business. Being prepared is exactly what our firm, QOE Prep, is designed for. If you’re in the process of acquiring a business and you’re not feeling prepared for things like the J-curve, reach out and let’s talk.

There’s a moment in all emerging movements when the insiders know something the world doesn’t yet. The main idea will have enough critical mass to feel inevitable from the inside, but it’ll still look eccentric from the outside. Pickleball in 2018, CrossFit in 2008, sourdough in 2020. Whether or not the trends stick around depends on the continued adoption of these ideas and adaptation to the changing world (thankfully, we’re no longer trapped inside and forced to bake bread to stay sane).

Entrepreneurship through acquisition (ETA) is transitioning from that eccentric to established phase.

For decades, this path to ownership has existed in the background of American business. The small, mostly institutional community was largely unknown to the ambitious people who might have benefited most from it. Then, over the last decade, something changed. Right around 2018, the idea started to spread. Is pickleball a correlation or causation? We may never know. But what we do know is that a once-niche strategy is becoming (almost) mainstream.

This is a deep dive into how that happened: where ETA started, where it stands today, and where the people building it think it’s going.

Part One: Where it started (1980 to 2018)

To understand ETA, you have to go back to the ‘80s, in a classroom at Stanford Business School.

Professor Irv Grousbeck is credited with originating the search fund in 1984. It would allow people without much capital to raise a modest fund from a group of investors. They could then use that money to cover a salary and deal expenses for a year or two while looking for a business to buy. When they found one, the same investor group had the right of first refusal to fund the acquisition.

It was, in essence, a way to democratize leveraged buyouts. The institutional private equity firms of the era were buying companies, installing operators, and generating strong returns. Grousbeck’s insight was that a talented individual could do a version of the same thing with the right structure and backing.

Grousbeck got to prove himself right, which is why we’re talking about him here. He backed a deal in the 1990s called Assurant, which went on to become a multibillion-dollar company. His son, Wick Grousbeck, parlayed generational wealth from that world into ownership of the Boston Celtics.

Despite this, the model stayed small. Stanford University became the intellectual home of traditional search funds, pumping out a handful of practitioners each year. Harvard Business School built its own branch of the movement, centered around two professors, Rick Ruback and Royce Yudkoff, who wrote what became the closest thing to a Bible the ETA community had: The HBS Guide to Buying a Business. Year after year, the two schools produced more searchers and refined the playbook. They had some small conferences, and that was mostly it for a long time.

The Wharton ETA Microcosm

“I don’t think the space had really grown that much from the ‘80s to the mid-2010s,” says Gary Chalik, who would later become one of the people responsible for bringing ETA to a new generation. “When I learned about it in 2017, there just wasn’t a ton of resources.”

Gary came from investment banking. He’d spent years covering private equity firms and understood leverage buyouts at an institutional level. What he hadn’t known was that individuals could do something similar on their own. You could just leave banking, go to business school, and come out the other side as an owner-operator of a real business, without having to first accumulate a fortune.

So Gary did what you do after an aha moment. He went deep. He applied to business schools with an eye toward building a network in the ETA space. Before business school, he worked inside a traditional search fund, doing cold calls with potential sellers.

It was a formative, if sometimes frustrating, experience. The traditional search model had its perks: a built-in investor network and structure, as well as a salary while you were searching. At the same time, it had constraints, such as only looking at larger deals that weren’t necessarily local.

Gary eventually chose Wharton and, with it, a different kind of opportunity. While Harvard and Stanford had built real ETA ecosystems, Wharton had Paolo.

Paolo was a second-year student who’d organized a small vertical within the school’s private equity and venture capital club dedicated to ETA. It had a few small events and investor relations. Gary partnered with Paolo with the goal of making the ETA community at Wharton its own thing. They launched the Wharton ETA Club as an independent organization. They got the approval from the administration, built out a leadership team, started pulling together alumni who’d gone down this path and hadn’t been formally connected to each other.

Today, the club now has over 300 members and hosts the annual Wharton ETA Conference, which now has a waitlist to get in. On top of all that, two of the people they connected, Jim Vesterman and Charbel Zreik, eventually became adjunct professors, teaching what is now one of the most popular classes at Wharton based on their experiences as searchers. Much of the growth of the ETA movement can be likened to Wharton ETA’s own growth.

Part Two: Where it is now (2018 to today)

In 2018, a man named Walker Deibel published a book called Buy Then Build.

Its release is the moment most people in ETA point to when they try to explain how things changed. Although the groundwork of the book had been laid four decades before, Buy Then Build translated Grousbeck’s work into language anyone could understand. The work essentially lit the fuse that kicked off the ETA movement.

“I’d say 2018 was probably the infancy of it,” says Tim Ericson, who runs an ETA-focused investment fund. “And it’s been sort of snowballing and accelerating from there.”

Tim came to ETA from the opposite direction of most people in the space. He’d spent fifteen years running a venture capital-backed startup, raised $40 million, scaled the business, and sold it. When he considered going back to the VC-backed startup world, he quickly remembered how hard it was.

“The 0 to 1 is just as hard the second time around,” he says. “You learn a little bit, but it’s still just as hard finding product-market fit.”

A friend, who had left venture and bought a few van rental businesses, told him to read Buy Then Build. He spent an entire summer consuming everything he could find on ETA: the book, podcasts, blog posts, community forums. Will Smith’s Acquiring Minds podcast became a touchstone. By the fall of 2022, he’d enrolled in the Acquisition Lab.

Within two months, Tim was under LOI on a business within two months of starting the program. He closed the deal in May 2023, ran it for a year and a half, and then started doing what came naturally: investing in other people doing the same thing.

Tim’s story is one of the defining patterns of the current moment. It starts with a founder discovering ETA, buying a business, and then becoming a resource for other people buying businesses. The community, by all accounts, is something special. “One of the things that has stood out to me is how tight-knit the ETA community is,” says one observer of the space. “It seems like everybody knows everybody and cares about each other.”

The infrastructure around this community has started to look, in some ways, like what you’d expect from a maturing industry. There are now at least 12 investment funds (that we know of) focused on the sub-$2 million EBITDA small business acquisition space. More and more universities are launching ETA curricula. The Acquisition Lab, born out of the self-funded search world, has grown to run cohorts of 15 to 25 entrepreneurs a month.

A Tale of Two Models

Two search models have taken form over this period. The traditional search fund or the Grousbeck model still exists and still works well for a certain kind of searcher. It lets someone who’s early in their career and not tied down to location go out and chase down larger deals. Meanwhile, the second model, the self-funded search, has grown enormously and in many ways now defines the popular conception of ETA. Self-funded searchers use their own capital (often combined with SBA loans) to buy smaller businesses.

The tradeoffs are real. A traditional searcher gets a salary, a network, and a structure. A self-funded searcher gets flexibility and ownership. As Gary puts it, it depends on who you are and what you’re optimizing for. “If I was not married and didn’t have kids and I went down this path straight out of business school, I would probably do a traditional search,” he says. “Just because of the structure it provides.”

The self-funded search allows people to take a more granular approach to vetting potential businesses. Grant Hensel at Entrepreneurial Capital identified one trend that might be overlooked by anyone focused solely on the bottom line. He said that “searchers don’t fully appreciate how valuable it is to put cash on the balance sheet at close to serve as working capital and as a buffer against the unexpected.” Even though it might not look as pretty in Excel, the risk profile of a small business acquisition that starts with $100,000 vs. $500,000 cash in the bank is dramatically different.

While a traditional search fund is capable of identifying the same risk, the self-funded searcher can get more creative with the terms and ultimately hold more control over what exactly they’re looking for.

Jordan Fliegel, CEO of Acquisition Lab talks about “a third intermediate approach between traditional search and self-funded search named ‘Investor-Backed Search’ where a searcher is still buying a business with an SBA loan and owning the majority, but they also have 6 or 7 figures of outside capital from minority investors.” In other words, it’s not purely binary. This nuance between traditional and self-funded search is what Acquistion Lab Capital and Entrepeneurial Capital lean into.

The combination of both models, plus the community infrastructure around them, has created something that a decade ago simply didn’t exist: a clear, accessible, well-documented path for ambitious people to become business owners without starting from scratch.

Part Three: Where This Is Going

If we flesh out the comparison of ETA to VC about 20 years ago, we might be able to get a glimpse of how things will turn out in the coming decade or so. The VC world had been around for a while, it went through this massive phase with Techstars and Y Combinator. This grew into a handful of funds in the U.S. and eventually an entire ecosystem. Much of this is due to the dotcom bubble and Silicon Valley startups creating a gold-rush effect.

ETA has some similar tailwinds. Two in particular stand out.

The first is what the ETA community has taken to calling the “Silver Tsunami”. The baby boomer generation built an enormous number of small businesses: HVAC companies, plumbing outfits, specialty manufacturers, local services of every kind. Now they’re retiring, and their kids, by and large, don’t want to take over. For decades, this meant businesses simply closed.

ETA offers an alternative for the higher echelon of these companies. “You’re really providing an exit opportunity to retiring owners,” Gary says. “Whether it be retirement or other reasons for sale, they’re able to realize some kind of perpetual value for their life’s work. And you’re taking the business and putting it in the hands of somebody who’s hungry.”

However, ETA is best for a company that is already financially healthy. Lenders are increasingly wary of lending on any but the least-risky-looking deals. Nella Bloom, an M&A attorney, says “only the most-organized and most-profitable companies are able to sell their assets these days. Solvent companies with good quality of earnings and salable assets, which don’t depend on the owner’s involvement, are salable these days. There’s a lot of ETA inventory, but not a lot of good ETA inventory. And owners are seeing the difference when they receive offers.”

The second tailwind is AI, and it cuts in a more counterintuitive direction.

The AI wave is, paradoxically, good for ETA. Not because AI is going to power a new wave of SaaS-style startups, but because it’s going to make the startup world much harder to win. There’s so much capital being poured into this space that it’s extremely difficult to be successful, given the competition. If you’re a talented person trying to figure out where to build a career and potentially get wealthy, the expected value calculation of starting an AI company is worse than it’s ever been because of how many jobs are up for grabs.

At the same time, no prompt is going to fix your leaky faucet or patch your driveway. The essential services that ETA buyers typically acquire are not going to be automated away (or the robo-plumbers are at least further out than the social media manager agents). They require human beings, locally, doing physical things. Which means demand is structural and ROI is much more tangible. As a result, more and more big players like private equity firms are jockeying for a spot at the table.

The competition from private equity is real, but it isn’t a death sentence for the individual searcher. As Oliver Bogner at the Advisory Investment Bank points out, “PE aggregators love the lower middle market.” They’re buying platforms at 5–10x and bolting on smaller businesses at 3–6x, which means searchers in high-activity sectors like HVAC, pest control, and fire and life safety are increasingly going head-to-head with institutional money.

Big fish in a big pond

As the ETA ecosystem matures and capital becomes easier to access, many industry participants believe the market is beginning to move up-market. Searchers who once focused almost exclusively on smaller owner-operated businesses are pursuing larger, more operationally mature companies. “As investor capital becomes more accessible in ETA, searchers naturally start hunting for bigger deals,” says Joe Spina, an M&A lawyer active in the ETA space. “Those businesses are usually more sophisticated and professionalized, with less dependence on a single owner. That’s where I think the market continues to move over time.”

The differentiator is the operator angle. A PE-backed platform acquiring a subscale business from a truly retiring owner is going to want a management team in place, and they’re not sending one of their own people to run a two-truck plumbing outfit. A searcher who can say “I’ll be there day one, short transition, no earnout” is offering something institutional capital structurally cannot match.

This opportunity isn’t lost on the talent pool. “People coming out of top MBA programs at Harvard aren’t looking to go into investment banking anymore,” Tim Ericson says. “They’re looking to buy a plumbing business in their hometown. The shift, just in the last five years, has been amazing.”

One M&A lender we spoke to, Shem Doupe, predicted that there will be “a wave of wealthy parents guaranteeing business acquisition loans with their children in place of paying for their college education.” Doing so would push them directly into business ownership after getting some real-world experience. As the return on investment of a college degree drops, many of these parents will see an AI-proof businesses as a better opportunity for their kids.

Tim’s own fund runs an Entrepreneur in Residence program that is also banking on this trend: they make contractual capital commitments to top-tier searchers before even seeing the deal, allowing people who might be leaving significant salaries at Amazon or Google to step confidently into acquisition mode.

A word to the wise

There is, of course, a cautionary note embedded in all of this.

Venture capital’s expansion was driven by more participants, more capital, more competition for deals, which, in turn, produced some bad outcomes. There was plenty of consolidation between firms and concentration in the allocation of resources, leaving funds chasing after marginal deals.

There are early signs of a similar trend forming in ETA. Already, roll-ups account for the vast majority of acquisitions. Ask anybody who’s been searching, and they’re practically guaranteed to either be years into the process or not very happy with their purchase. Unfortunately, there are more unfavorable deals being done. Tim has spotted a pattern with the newer wave of searchers: people who have been looking too long and who want badly to buy something will start rationalizing away red flags because the seller said something reassuring.

The antidote, in his view, is professionalization. His fund, along with M&A lawyer, Joe Spina, launched PACT, a set of standardized deal documents for small business acquisitions, in conjunction with six or seven other investment firms in the space. The explicit model was Y Combinator’s SAFE note, which standardized early-stage startup investing terms and made it dramatically easier for founders and investors to move quickly without reinventing the wheel every time.

That said, in terms of professionalization, the ETA world isn’t there yet. There are still too many founders who discover the idea in isolation and plenty of deals done without proper support. The industry could benefit from more structure, and it’s trending that way. The people inside it have a good sense of where things are going.

I’m from the SBA and I’m here to help

We spoke with Lisa Forrest at Northwest Bank about the trend. She said, “Many buyers today are taking a harder look at maximizing the amounts of leverage that the SBA might allow. We’re starting to see more discernment and patience with our clients that are pushing for more appropriate structures.” So, while there is plenty of opportunity, there is also the risk that things spin out of control. Lisa applauds the caution searchers are demonstrating. By avoiding max leverage, Lisa says that you should be more likely to maintain enough DSC room to allow for the J-curve and to afford growth.

While SBA can be a godsend for many searchers, it is not one-size-fits-all. Angel Rosario, an SBA relationship manager, says that the structure of search funders and SBA loans may not always be a great fit. It’s an involved and ever-changing program. “We will always need full personal guarantees, may have to place a lien on primary residences, need life insurance on borrowers, and if a search fund group has any foreign ownership it makes the loan ineligible.” Just recently, the SBA changed its policy so that only US citizens can utilize the program. While some banks may be able to navigate these structures and associated risk, Angel points out that it isn’t easy, especially when millions of dollars are at play.

On the credit decisioning side, Goran Pavlovski of AWG Capital Advisory sees a similar shift through a different lens. He said, “The largest SBA lenders have pulled back from specific industries where 2021 to 2023 vintage paper underperformed, and newer lenders with credit leadership poached from those same legacy shops are picking up the well-structured deals the incumbents won’t touch.”

In other words, there’s a surface narrative that SBA credit got harder. Goran says that what’s really happening is a redistribution of appetite across the lender landscape. He also notes that lenders have tightened their fit criteria for searchers, after seeing weak portfolio performance where buyer background didn’t match target operational demands (for example, a recent Harvard economics grad trying to buy the nearest HVAC shop). That’s why his firm presses on searcher-to-target fit early in the process. Some deals going unfunded deserve to. The rest are good deals at the wrong lender, and a clean quality of earnings paired with a well-run debt process is usually what separates a business that gets funded from one that does not.

Conclusion

The ETA movement started in a Stanford classroom four decades ago. Since then, it’s grown slowly, gaining momentum until exploding onto the scene in 2018. The window, as best anyone can tell, is still open. It remains to be seen how far along the growth curve we are.

While ETA is becoming more popular, buyers have to still vet each deal and make sure they are worth it. 2025 was a particularly hard year to buy a company due to many small businesses being less profitable than they were in 2024. A downward trend in earnings causes, lenders, investors, and buyers to be more cautious when buying companies.

For now, our work at QOE Prep is to support buyers and sellers making one of the biggest decisions of their lives by providing timely, thorough quality of earnings reports. If you want to learn more, go to our website or set up a call with our founder.

I also wanted to say thank you for making it this far in the article and an even bigger thank you to everyone who contributed. If you’re not already connected with them, you should be.

Consider this your game plan before your next M&A transaction. So, zip up your Patagonia vest and let’s dive in.

The Opening Drive

Assuming you’ve already finished your 1,000 stomach crunches and morning skincare routine, you can get started with any of the following three plays. In fact, the first three plays actually happen before the seller even realizes the game has started.

The QoE Chop Block

Pay top dollar for a “high-quality” Quality of Earnings firm. You’re not using them to find the truth but to manufacture doubt in the opponent. The right QoE firm will hunt down any adjustments, question add-backs, and scrutinize revenue. By the time they’re done, the seller’s trailing twelve months looks like a business falling apart. The beauty of this play is that you didn’t say it, they did. You come in as the hero trying to save the deal even though the business looks worse than reported. You consult the business owner that the broker was trying to lure them in thinking they could sell for a higher price, just so they could win the seller’s trust, business, and money

The False Consensus Audible

Your aim here is to get the seller looking one way while you make changes they don’t even know about. When you deliver the adjusted numbers, deliver them without blinking. Tell the seller something along the lines of “This is just how every serious buyer is going to look at it.” Don’t enter the room ready to negotiate but rather to report on your CPA’s QOE findings. All of a sudden, the seller will start wondering if maybe they were wrong about their own business. That self-doubt is worth more than any single line-item adjustment.

The Time Machine Sweep

Inflate future costs and projections. It’s a sandbox for you to play in since the future can be anything you want it to be. Plan some new hires at a high price just to right the ship, set up a new ERP system, demand a higher paying CFO because their books were a mess! If they’re smart, they’ll know that what you’re really saying is: I’m going to pay you less for what you already built. It sounds reasonable. It is not.

The Midfield Grind

This is where you can turn your patience into a weapon. If things get too slow, you can always redesign your business card. Subtle coloring, tasteful thickness, and watermarks are all the rage nowadays.

The Clock Drain Draw

Time is the seller’s enemy the moment they’re under LOI. Most sellers will get excited enough to share the news with their spouse, maybe some employees, and for sure their own mind. They’re likely already looking up condos in Florida. Once you know that, you should know that every week you can create some delay will tighten that psychological vice. Get creative here by messing with timelines, requesting more data, scheduling “check-in” calls, etc.

The Thousand Cuts Option

Nobody retrades by $2 million upfront. You do it in $200,000 increments, each tied to a specific diligence finding. A lease that wasn’t flagged. A customer contract with a change-of-control clause. A receivable from a client that went out of business. While none of these move the needle alone, all of them together absolutely do. By the time the seller realizes what happened, they’ve already conceded the framing on each individual issue. Death by a thousand cuts.

The Concentration Zero Blitz

Every business has real risks. Your job is to take those risks and make them feel existential. Customer concentration at 30%? “That’s a cliff.” One key supplier? “Single point of failure.” Revenue dipped one quarter? “We’re seeing early indicators of structural churn.” Employee who does it all with no known procedures? “We have to factor in getting hit by a bus.” Even though you may be looking a small deals under $50 million, you should treat it like it’s a billion dollar unicorn. Any hairiness to the deal means the seller needs to take a haircut.

The Red Zone

If you’ve made it this far, great work. Take a break and listen to some Huey and the News. Their undisputed masterpiece is ‘Hip to Be Square,’ a song so catchy most people probably don’t listen to the lyrics. Anyways, you’re close to the goal line now, and this is where the real money gets made or lost. So don’t get conservative.

The Earnout End Around

Keep the headline number intact. Just move the value out of upfront cash and into earnouts, holdbacks, and indemnity escrows. Some trusting sellers tend to only think about price, so if you keep it the same, they’ll be happy. If you run this play, though, they’d actually be getting is a fraction of it at close. The rest would be contingent on hitting targets they no longer control. Did someone say Net Present Value? Guess who controls the keys to hitting those targets.

The Working Capital Sneak

Define a “normalized” working capital target that’s higher than historical reality. Guaranteed it won’t come up until closing. By then, the seller will be exhausted with the whole process and just want things to be done. That delta comes straight out of proceeds. It’s one of the cleanest, most invisible reductions in the entire playbook. Great for essential services.

The One-Time Fleaflicker

Assuming the business is trending up, you can’t ignore it. You can, however, try to neutralize it. Accept that there’s growth, but call it a one-time deal. Or say it’s far too late in the deal to look at more months and roll forward would slow up closing. You have a mandate and timeline to hit. Anything that keeps the multiple anchored to a trough rather than a trend.

The Final Whistle

If you’ve been around the block, you’ll know these plays aren’t anything new. This is the first time they’ve been written down for your benefit, though.

None of these plays work in isolation. The QoE Chop Block sets up the False Consensus Audible. The Clock Drain Draw makes the Thousand Cuts Option land harder. The Fog Machine Blitz makes the Earnout End Around feel like a relief.

Unfortunately, it goes both ways. If your opponent signs up for a reputable QOE provider like QOE Prep, they can interrupt the process and send things spiraling. Before you know it, you’ll have a fair, respectable transaction on your hands. Even worse, they’ve got a service offering called the QoE Challenge that your seller will hopefully avoid. So, be sure that your opponent never stumbles across this website and sets up a call with the founder. Rumor has it that they are now offering $1,500 for an introduction that leads to a QoE.

I’m glad you asked how to sell a company for more than it is worth.

Too many brokers get distracted by ideas like “fairness” or “transparency.” That’s amateur thinking. I prefer to think of our job as having two simple goals. All you need to do is maximize the price and close the deal. Everything else is just noise.

Since you’re early in your career, I wanted to share some of the lessons I learned along the way.

Rule One: Build urgency.

People make bad decisions when they’re rushed. As brokers, we don’t care if it’s a bad or a good decision. We just want a decision. Regardless of whether the buyer is ready or not, you should always push for a short exclusivity window. The more time you put into the equation, the more you run into obstacles like “thorough due diligence.”

To spice things up even more, you should always be sure to introduce competition to the deal. It doesn’t matter if the competition is real. If someone’s about to buy a bridge in Brooklyn, they probably won’t care to look up the other bidder. It’s good to make every buyer feel like they’re one step behind. Tell them there are stronger offers out there, but that the seller prefers them anyway. I’ve used this plenty of times to get the buyer to bump their price before we have our sellers sign the LOI.

Rule Two: Due diligence is overdone.

You don’t want the buyer getting too comfortable with the business. There are simple tricks to keeping the seller just out of reach during key moments. Say they went on a vacation and have come down with a case of “limited availability.”

Whatever you do, don’t give anyone direct access to financial systems (including those pesky QoE providers). Everything should flow through summaries and curated views. Better yet, have an intern make a PowerPoint with some 3D pie charts and call it a day. If the buyer’s accountant has to work overtime to rebuild the financials from 50 different spreadsheets, they probably won’t have time to question them. Excel is the worst. It’s much preferred to convert everything to PDF so that it’s harder for the buyer to know what’s going on. Also, if you want to take it to the next level, you can scan the documents and then send them over.

Rule Three: Up the price as much as possible.

Now, Chad, this is where most junior brokers make their first real mistake.

They like to treat price and terms as equals.

They are not.

You need to anchor everything on headline price. That’s the number people remember, the number they tell their partners, the number that makes them feel like they’re winning. The price should front-and-center, while the actual structure of the deal should be living in the shadows. Keep it there. Also do not forget we get paid according to the highest price, so make sure you want the price to favor the seller and the terms to favor the buyer.

Rule Four: Add-backs

Use add-backs aggressively, of course. Marketing spend that didn’t “directly” produce revenue is an easy one. Never mind that the buyer will need to spend it again. Your job is to present earnings as potential. Add-back distributions, because you know that its money going to the owner. Add-back cash payments received by the owner that never hit the books, banks or tax returns. Add-back all personal expense run through the business that were only there as a “tax strategy.” No matter what, always say the owner only works 10 hours, 15 if you have to.

Along the same lines, if the business is trending up, be sure to emphasize the most recent months, base the value off of TTM. If the business is trending downward, you’d want to base the price of the company off of the three-year average and to encourage the client to “look at the bigger picture.” Whatever the case, be sure to avoid nuance and context at all costs.

Rule Five: Only emphasize what will close the deal

Highlight upside everywhere you can. Talk ad nauseam about new markets, pricing opportunities, operational improvements. Did you know that AI will help to cut staffing costs and result in guaranteed massive returns for the buyer, with zero liability or risk of fallout? While you want to feed all of this to the buyer and then some, you don’t want to spoon-feed them. Remember to let the buyer imagine themselves as the one who unlocks it. That way, they’ll feel smart, smart enough to trust their own judgment and close the deal.

Risk should be treated as a four-letter word. You should avoid it at all costs in professional settings, and if you must use it, be sure to dress it up with couched statements. Never end on a bad note and instead dangle the pretty potential ROI in front of the buyer.

Closing words of encouragement

As you do these things, keep your cards close to your chest. The more the buyer knows, the more they’ll start asking questions. Keep them comfortable with what little they know, as they’ll find out soon enough what’s going on once the business is their problem.

If you do this correctly, the process itself does most of the work. You’ll have an optimistic, short-sighted buyer making rushed decisions with little data. Practically a recipe for success. If you follow these steps for the majority of your career, you’ll end up with the reputation of being “experienced” and a “closer” which will only net you more jobs.

One last thing. Make sure the buyers steer clear of using QOE Prep because of how thorough their financial due diligence is. Don’t let your buyers find their website or book a call with their founder who makes sure that their buyers don’t overpay for a business. Before you know it, every buyer will have the upper hand in deal negotiations.

Remember if the new owner is able to easily pay off their SBA Loans after buying the company, you did not sell it for enough.

May your ROI always be high,
Brad Evilbroker

“Just wanted to follow up to close the loop. As expected, we formally terminated the LOI and walked away from the deal. In addition to disagreements about the APA terms, an even bigger issue was the continued steady decline of the business. Exactly as you had intuited, this deal was simply too risky, and we had to walk away.”

There was nothing dramatic about the message, and no attempt to frame the outcome as a win or a loss, just a straightforward update that the process had come to an end.

From the outside, this outcome might appear disappointing, especially after the time, energy, and attention that went into getting a deal to that stage. Most people implicitly define success in acquisitions as a completed deal with something of a positive outcome. Conversely, they’d view a terminated process as a failure or a missed opportunity.

In my experience, however, saying no was a huge success story.

Deal or No Deal

The business had naturally been presented as a strong opportunity by the owner and the brokers. While it met many criteria that a buyer might look for in the initial review, we started to see as different picture as we spent more time with the underlying financials. There wasn’t a single data point that was alarming, but a consistent direction of the numbers that clued me into a potential issue.

Revenue had been gradually declining over time, while profitability was compressing alongside it. The dynamic created a pattern that was difficult to ignore. None of these changes, taken in isolation, would necessarily stop a deal, but together they said things were moving in the wrong direction.

Buyers tend to want to justify continuing in a situation like this, given the sunk cost. It is easy to focus on the chance that performance will stabilize or improve with the new leadership. While this is possible, it’s still a huge risk. Say the deal closed and the buyer takes on a personally guaranteed loan. If the business were to continue along the same trajectory, it would have to deal with the previous pressure of poor financials combined with the stress of new ownership and all that goes into that transition. It’s not exactly a recipe for success.

Instead, the decision was made to walk away.

The EV of an M&A Deal

By this point in the process, the costs that have already been incurred are real and immediate. Meanwhile, the risks that are being avoided are hypothetical and less tangible. Regardless, the most relevant comparison is not between closing and walking away as isolated events; it is between walking away now and owning a business that may not be able to support its debt over time.

I like to explain this concept through expected value (EV), a term you might be familiar with if you majored in math or you play too much Texas Hold’em. In poker, serious players don’t judge a decision based on whether they won the hand, but on whether the play had positive EV. You can make the right call and still lose if the odds were against you in that draw. Over time, however, consistently making high EV decisions where the probability and payoff are in your favor will result in you coming out on top.

Here’s an example with our scenario. I’m somewhat arbitrarily giving it a 10% success rate based on what I saw in the trends.

Viewed through that lens, the decision becomes a simple math problem. In a situation where the underlying trajectory of the business raises legitimate concerns, it’s less about abandoning a deal’s upside and more about protecting the downside.

Leave the Math to Us

Unfortunately, these walk-away outcomes do not show up anywhere in a visible way, so they’re not typically counted when people talk about M&As. However, they often represent some of the more important decisions in the process. Now that we’ve done over 500 deals, we’ve been able to spot some patterns about the trajectory of a deal and its business.

A good QoE will tell you about the upside and downside of a business based on its numbers. Knowing both sides of the equation might help you find a level of risk that may not be acceptable, particularly when leverage and personal guarantees are involved.

If this resonates with the way you think, email me to discuss our deal at caleb@qoeprep.com.

In my line of work, one of the biggest sources of delay tends to be a lack of direct access to the seller’s data. For whatever reason (usually not a great reason, if I’m being honest), the seller thinks that it’s enough for me to trust that what they’ve sent is enough for me to do all my verifying work.

Rather than giving me access to their QuickBooks, I’m forced to rely on unformatted PDFs, incorrect exports, or curated reports to do my work. As all this rolls downhill, the buyer is left with making a decision that relies on this potentially incomplete data.

I have a very simple proposal for this problem.

No buy-side QoE without direct access to the accounting system.

There are roughly 20 or so QoE providers who work on sub-$5M revenue deals. We’ve run into the same inefficiencies over and over again, and we know the pattern. I think it’s time for us to come around a single rule to set an industry standard.

What would change with the new rule

With the way things go now, there’s usually a circus show of emails and requests flying back and forth that ends up with incomplete data. I’ve spent weeks chasing down information that could have been downloaded from QBO in a few minutes. Rather than a clean, efficient QoE process, we’re stuck in a frustrating slog, which doesn’t bode well for closing deals. The ABCs are to always be closing, not always be CC’ing more people for access.

And yet, we keep accepting it as QoE providers. I think if the ~20 of us who consistently work these deals aligned on this issue, the problem would disappear overnight. By not providing buy-side QoE’s without direct access to the accounting system, we would avoid dealing with PDFs, reconstructed financials, and unnecessary delays.

Also, if buyers, brokers, and sellers knew this was the standard across providers, their behavior would change immediately. By setting clear expectations from the beginning and holding everyone to a standard, we’d be creating a more efficient and effective operating procedure in an industry that is fairly new and unregulated.

The Rule Part Two: Electric Boogaloo

If we’re not willing or able to hold that line, then we should at least price in the inefficiency. There should be a premium added when sellers choose the “no access, just trust us” route. Due to the additional friction, both the buyer and seller should be willing to front the fees that reflect the manual workload. The delays and inefficiencies have serious opportunity costs, let alone all the headaches they bring.

This should not be a controversial idea, especially because of its reach.

Lawyers would be supportive because better access to data reduces delays and helps deals close faster. Brokers would benefit from the shorter LOI timelines and smoother processes. Last but not least, buyers get higher confidence and fewer surprises.

A Call to Action

For buyers and advisors, implementing this change starts with one simple step:

Require direct access to the accounting system in the LOI.

Make it clear that summaries, PDFs, and hand-selected reports are not enough. Direct access is the only acceptable way to do a deal. Once you set the expectation early, the rest of the process becomes significantly more efficient. If this is something you’re interested in learning more about, feel free to set up a call with me or check out our website for more about how we do things at QoE Prep.

The Early Foundation

I started my career at a local accounting firm where I did a little bit of everything, as one does at a small firm. I did tax and audit work, bookkeeping, and CFO advisory. I even took it upon myself to clean the bathroom toilets from time to time. Needless to say, I remember thinking this distribution of work felt scattered and almost pointless. It really made me question why I was there, but looking back, it was the perfect foundation.

Working with small and mid-sized businesses gave me a deep understanding of how companies actually operate. I learned how owners think, how financials break down, and where the everyday problems hide. That experience gave me the operating knowledge I would later rely on in transaction work.

My Time at a Top Ten Firm

After that, I moved to a top ten firm with a focused goal of becoming an audit partner. In my mind, that was what the top CPAs did.

But once I got into audit full-time, I realized something was missing for me. For those lucky enough to not have experience in audit, it’s a slow process. The deliverable simply confirms that the numbers are correct. Don’t get me wrong: it’s important work. Personally, though, I didn’t find it energizing, and I felt like the pace was set by the clients.

Then in the summer of 2021, I pivoted into quality of earnings work almost by accident.

My firm had a surge of QoE engagements and needed someone who could do the work and communicate it with clients. Most CPAs aren’t famous for their people skills and will typically choose to keep all their work in Excel if they can. I was comfortable with the tough conversations, so they threw me into the deep end.

In my first month, I completed four deals. Shortly after, they asked me to leave the audit team and join the QoE team full-time. I loved it. The work was fast-paced, analytical, and full of high-stakes transactions. It felt like I was firing on all cylinders. Pretty soon, I started to work on some of the inefficiencies I saw in the system.

I rebuilt our internal templates and improved the work processes. One of my favorite moments was training interns to complete the entire prep work in about 40 hours, instead of the 160 hours it previously took.

As you might be able to tell, I was proud of my work, so I figured the company would feel the same way. When I asked for a raise, I was told I had only been in this new position for six months and needed to do my time.

One of my biggest strengths and weaknesses is patience. So I left. I hated having my pay dictated by how many times the earth had revolved around the sun.

The First Version of QOE Prep

My first attempt at what is now QOE Prep was a fairly different model. Instead of selling directly to private equity firms and ETA buyers, I partnered with transaction advisory firms. My team and I would perform the quality of earnings work that they sold under their umbrella.

It fit my personality well. True to the three letters after my name, I do not love selling, and I love doing the Excel work. I also love building systems and teaching teams how to operate efficiently.

We ended up working with seven firms under this white label structure. For two of them, I essentially rebuilt their entire QoE system, and they went on to become top recommended firms in the space.

Then, I got the best compliment you can get: Recurring clients, especially those executing roll-up strategies, were sending deals specifically to me.

Going Independent

Once I saw the clients liked what I produced and how fast I worked, I realized I could build recurring clients on my own. Last year, I officially launched QOE Prep as an independent firm.

I’ll be honest that at first it was not easy. It took four and a half months to close my first deal. During that time, there was no shortage of thoughts about all the opportunity cost of my new endeavor. Then, seemingly out of nowhere, I closed seven deals in one month. Since April, we have averaged about six deals per month. We currently have nine active deals we’re working on.

Two years ago, under the white label model, we completed 57 QoEs. This year, our goal is 100.

Moving Up Market

Along the way, I’ve learned to not rest on my laurels. At each stage in my journey, I had to make the conscious choice of leaving behind something that I built. With each new opportunity that came my way, I had to let go of the last one. I was able to move on because I recognized both what was frustrating and what was exciting. When I saw inefficiencies, it pushed me to look for better alternatives.

Right now for example, I’m looking to move up market, because I’ve learned that smaller deals are often harder than mid market deals. Transactions under 5 million can be challenging because you rarely work with a real finance team. Larger companies tend to have a smoother process, thanks to their more robust systems.

Because of that, I am intentionally moving back up market, while still supporting the smaller deals that make sense.

Why I Built QOE Prep

Looking back, I built QOE Prep because I believed QoE work could be faster and better. I was simultaneously driven by opportunity and frustration along the way.

This year, we are aiming for 100 quality of earnings engagements.

And we are just getting started.

In reality, if the deal falls apart during the underwriting process, it really should have ended much earlier. There are plenty of fees and countless hours that could have been saved by a good conversation with an experienced lender. Good lenders have seen enough to know when a deal is drifting toward trouble.

We spoke with Sarab Singh, a senior SBA officer at Huntington Bank, about the process he uses to save ETA borrowers from losing their personal guarantees in a bad deal. The SBA process can be a fairly involved endeavor, with dramatic implications regardless if things go well or fall apart. Before signing up for one of the biggest commitments of your life, it makes sense to have someone like Sarab in your corner.

Where an SBA Deal Actually Begins and Ends

An SBA loan has a defined lifecycle, but the most important decisions are all clustered at the front end.

Sarab typically gets involved shortly after an LOI is signed and sometimes even before. During that window, Sarab and his team can review the buyer’s personal financials, liquidity, experience, and motivation and match them up with the seller’s historical performance. Of course, it matters to find desirable cash flow, trends, and leverage, but it’s also important to understand what sort of person is stepping into the business.

If that initial screening holds, the lender issues a term sheet. Once that’s signed, there’s a compounding avalanche of time, money, and expectations. Sarab described it as being “at the mercy of multiple parties that are involved… buyer’s attorney, seller’s attorney, legal counsel, brokers, you name it.”

In other words, underwriting and closing should be considered confirmation stages once everything else has been sorted out. By then, most deals should already be a yes or a no.

Why Some Deals Should Never Make It Past the First Calls

Deals fall through for a variety of reasons. Sarab identified a few of the most common issues he’s come across.

1. Buyer-business mismatch: Pretty spreadsheets aside, some companies need a specific buyer for things to go well. Operationally heavy businesses, for example, will quickly expose any skill gaps. A loan officer will look at both the borrower and the business that is selling to determine if it’s lendable.

2. Geography and culture: Moving into a new market without local knowledge will invariably add some friction. In the same way, stepping into a workforce or customer base that the buyer does not fully understand will prove difficult. Buyers need to be adaptable and understanding if they’re going to make things work.

3. Financial trends: Hockey sticks should always be met with skepticism. A flat performance followed by a sudden spike may be real, but it demands explanation. Sarab likes to determine if it is truly sustainable by looking deeper into the business revenue, net profit, adjusted EBITDA figures for the future, etc.

4. Rising valuation pressure: Increasing demand has pushed multiples higher, sometimes beyond what the cash flow can comfortably support. Layer in seller notes and personal guarantees, and the margin for error narrows quickly.

5. Low liquidity: SBA rules may allow a low-liquidity transactions to work on paper, but this approach leaves no room for surprises. While money doesn’t buy happiness, it does buy you time to fix problems you’ll inevitably run into as a new owner.

Walking Away Is an Outcome

SBA lenders work to protect both bank capital and buyers’ personal guarantees. The rise of ETA has brought more first-time buyers than ever into the market. While the growth is exciting, the inexperienced buyers tend to bring about more deals worth a pause.

Sometimes, the most useful conversations are the ones that end without a transaction being made. Whether the buyer realizes the commitment level is too much or the lender decides a deal isn’t a good idea, the result of walking away is far less damage than if they had pushed forward. Instead of thinking about the missed ROI from buying a business, buyers should think about how they avoided a potential catastrophe to their portfolio.

Wherever you are in the process of acquiring a business, we do our best to consider what’s best for you. When you commission a quality of earnings report from us, you can rest assured that it will be packed with insights to help you navigate the transaction process. If that sounds good to you, please check out our website or set up a call with me to discuss more.

If you were to perform this stunt, I’m willing to bet you wouldn’t want to wing it. Instead, you’d want to plan as far ahead as you could about everything you could imagine. How fast should we be going? What road should we be on? Does it really make sense to do all this while dragging an entire bank vault through the streets of Rio de Janeiro?

Point is, you’ll need to be prepared.

This concept came through again and again in a conversation with Alexandria Seydel, an M&A attorney turned business exit strategist. After meeting countless owners at the LOI stage, she realized how much value sellers were leaving on the table by not planning ahead. That realization led her to build Ripples Edge Advisors, a firm focused entirely on helping owners prepare for an eventual exit. In our talk, Alex shared some of what she does to help owners capture the most value for their businesses when they sell.

Look at me, I’m the captain now

In many small businesses, the owner holds a surprising amount of knowledge in their head. It can be anything from sales relationships to operational decisions. The level of owner dependence is a huge factor in determining how well a business will transition.

Alex likes to test this with a simple question. If the owner booked a three-week trip to Europe, “what parts would break” and “what parts would need you to log in in the middle of the night.”

From there, she and her partner begin to dive into these bottlenecks. Sometimes that means observing sales calls to see what goes on. “We’ll ask to be a fly on the wall,” she said, because owners often underestimate how central they still are to daily operations. If they found that a sales lead was not strong enough, her partner would coach them into the role or help the owner hire someone who can grow into it.

There are plenty of quick fixes like this, but without understanding the role of the owner, it’s easy for them to fly under the radar.

Slow and steady wins the race

The changes that move valuation happen slowly. Alex’s ideal planning window is two to five years. Within that time frame, an owner can address issues like client concentration, build up a leadership bench, formalize and document processes, and more to ultimately create something a buyer can step into. For example, if 70% of the revenue is coming from three clients, Alex might redirect some energy toward mid-sized customers to smooth out risk in a way buyers care about.

In terms of operations, Alex and her team will map what really happens when a customer signs. Who touches what. What tools are used. Where undocumented shortcuts hide. Every owner believes they have a good way of doing things that works. What they really have is experience. And experience does not transfer when the deal closes. Setting up all your operations to be transferable is a manual process that is going to take time.

By contrast, a short timeline limits almost everything. Alex believes there are very few tweaks an owner can make in a few months that will have a true impact on valuation.

You know what happens when you assume?

Much of Alex’s work has to do with challenging assumptions. Owners often assume they can exit quickly. So by the time they seek help, they’re burned out, which usually means the numbers have softened. On the other hand, a lot of buyers expect sellers to stick around for about a year after the transaction. (If you want to learn more about keeping sellers in the game, read this article on our QoE Challenge service).

These mismatched expectations are why Alex says her job “is just to ask questions and to poke holes in your assumptions and help see around the corners you don’t even know you’re not looking around.” This mindset of hers extends to understanding the seller’s and buyer’s motivations.

A sale works best when the owner’s values line up with the buyer’s motivations. Some owners care about legacy and their team. Some just want top dollar and a clean break. Matching these goals with the right buyer depends on priorities.

• Are you focused on just the economics of the deal? Private equity might be the answer.

• Do you want your product and team to stay the same? Find a strategic buyer.

• Do you want the new owner to have personal stewardship? Try talking to ETA buyers.

• In some cases, you can even hand over your company to the employees through an ESOP.

Working backward from what the owner wants life to look like after the sale helps determine which buyer to prepare for.

Putting the “prep” in QOE Prep

Like I said in the beginning, when you sell your company, you’re handing over a living, breathing asset. The owners who get the best outcomes are the ones who start early. They figure out how to set up reliable processes so that someone else can pick it up and keep going.

An essential part of this prepping process is getting due diligence you can trust. When you commission a quality of earnings report from us, you can rest assured that it will be completed on time and will be packed with insights to help you navigate the transaction process. If you’re interested in learning more, check out our website to set up a call with me.

Right now, there are over 2.9 million businesses with aging owners getting ready to retire. As it turns out, very few of these (under 15%) are likely to be kept within the family. Roughly 2.5 million will sell to individual buyers, private equity firms, and strategic acquirers. This shift is what you’ve probably heard referred to as the “Silver Tsunami.” It is huge and already reshaping the market.

There is a tremendous opportunity here, with these businesses bringing in an estimated 6.5 trillion dollars in revenue per year. However, as with everything else in life, supply and demand are still at play.

The best companies have historically been bought up by those with the most resources: PE firms, large corporations, etc. The leftovers are still highly sought after and now PE is playing in the lower-middle market as well, driving up their multiples to unsustainable levels. Buyers are left finding a balance between acquiring the right business and maintaining a reasonable risk level. Here are some things I’ve observed that have resulted in more successful M&A transactions.

You’re not special (unless you’re a seller)

Given that demand is outpacing supply, the result is a sorting mechanism.

Strong businesses with great financials, durable cash flow, and low owner dependency tend to move quickly. They are often absorbed by private equity or larger operators at higher multiples.

If you’re an independent buyer looking for one of these businesses, you’re in for a rough time. An old coach of mine loved to tell his athletes that “you’re not special,” and when it comes to search, you’re not. Everybody wants to find the business to buy that has repeatable profit that can become more profitable with technology or offshoring talent. If this is all you’re open to, you’ll either be searching for years without success or end up settling for something you don’t want.

If instead you look at what’s left on the open market, you’ll see options that require more work but aren’t necessarily bad. Typically, these businesses will fall into one of two categories:

• They require operational expertise. The nature of the business (say, an essential service or business dependent on deep sales relationships) could demand an involved owner-operator. The manual lift implied here could be enough to scare away the “big fish” and keep you in the game.

• Their reputation in the community matters. If an owner’s last name will continue to be attached to their business, the owner may feel compelled to prioritize the right buyer over the highest price. In this case, they could reject cookie-cutter roll-ups in favor of a new owner with a lot of integrity.

Three questions to ask as a buyer

With this in mind, buyers should ask these three questions as they’re staring down the Silver Tsunami.

1. Can you actually replace the owner?
   You’ve filtered for businesses that only work because of the owner’s expertise. Now, you need to be honest with yourself to see if you can bridge that gap. Are you ready to roll up your sleeves and learn how to squeegee windows the right way?
   

2. How well do the numbers hold up under scrutiny?
   Given how hot the market is, you’re likely to be at risk of overpaying. Dropping $3 million for a business that supports $2 million of value creates an immediate hole. Your net worth will drop by $1 million, and you’ll have to work day and night to get back to where you started. Before getting carried away by the story told by the multiples, you’ll want to do the financial due diligence to know what’s really going on with the business.
   

3. Do you want to run this business?
   You may have answered the first question because you’re confident you can clean a window. I’m asking this again to emphasize that you have to want to clean that window. If you don’t love what you do, it’s going to be difficult to find success. Buyers who enjoy the work and the industry tend to handle the friction of new ownership better.

Surf’s up for sellers

Let’s look at the other end of these deals. If you’re an owner looking to sell, you’re likely feeling pretty good about your prospects. Before you start looking for condos in Florida, I want to share a statistic with you.

Roughly 50% of owner exits are not voluntary. Half of business owners have to end things due to one of the 5 D’s: Death, Disability, Divorce, Distress, or Disagreement. Nobody wants to consider these options when things are going well, and I can guarantee you it doesn’t get easier when one of the 5 D’s actually take place.

Getting ready to sell is a process that should start years in advance. Just because there is a Silver Tsunami taking place, it doesn’t mean your own individual business is ready to capitalize on the phenomenon.

You should start preparing by setting up good processes, reconciling your finances, and building teams that can operate without you in the room. Go on vacation (for the good of the business, of course) and see how well things go when you’re out of the picture.

The easier it is for the business to run under new ownership, the easier it is for buyers to part ways with their capital.

Staying prepared for the wave

We all know the Silver Tsunami is coming. Whether you’re on the buy-side or sell-side of the wave, you should be prepared to capitalize on the multi-trillion-dollar trend. It will bring on some massive opportunities, but only for buyers who understand what they are stepping into and for owners who prepare before the moment arrives.

We want you to be prepared when the time comes. By commissioning one of our quality of earnings reports, you’ll be equipped with insights that reveal where there is value (or lack thereof). If you want to learn more, check out our website to set up a call with me.

Whenever an M&A transaction is underway, the deal must go through several layers of diligence. Sometimes a broker suggests just getting a proof of cash. Other times, a lender will ask for a QoE. Most of the time, a buyer hears about a QoE and just assumes it’s a more expensive version of the same thing.

While they’re related, they’re not exactly interchangeable. If you’re wondering which one to get, I’ll break it down for you so you can be sure to get the most bang for your buck.

What a Proof of Cash Does

The main job of a proof of cash is to confirm that what shows up in the financial statements is grounded in reality.

In CPA talk, we say “reconciliation.” We’ll compare the bank statements to the reported income to make sure deposits line up with revenue. We will also compare the disbursements with the expenses in the P&L.

At this point, you’d have a complete proof of cash, but whenever we offer this service, we go a step further with what’s called “financial verification.” At this stage, we’ll first tie payroll records to payroll expense on the P&L. Then, we’ll make sure the book income is reconciled to tax returns, ensuring nothing has drifted too far from what was actually reported to the IRS.

When we say a proof of cash tells you whether the numbers are “real,” this is what we mean. It confirms that revenue wasn’t overstated, payroll wasn’t understated, and cash was not overstated by adjusting journal entries.

If your goal is simply to reduce the risk of things not lining up, a proof of cash will get the job done.

What a Quality of Earnings Does

Functionally, a QoE starts in the same place, but it definitely doesn’t end in the same place.

Like a proof of cash, it does the reconciliation work to check whether the numbers tie out. Once that foundation is in place, it goes on to ask another question:

Given how this business actually operates, are these earnings worth paying for? How repeatable are the profits for a new owner?

Instead of only confirming totals, a QoE looks for patterns that provide insight into the value of the company. We examine profit and loss trends over time so we can see whether margins are staying stable, improving, or eroding. We’ll take a look at the balance sheet to understand how the business is funding itself and whether working capital behaves the way a buyer would expect after close.

Then, we’ll test the seller adjustments and do some recalculations. Do the add-backs hold up under scrutiny? Would they truly disappear under new ownership? From there, we’ll provide an adjusted EBITDA as a way to understand the valuation of the deal.

QoE reports also expose concentration risks. A business bringing in a million each year might not be as desirable once you learn there are only two customers. On the flip side, how do you value a company once you realize a single salesperson owns most of the relationships? These are real risks that need to be accounted for as you are negotiating a deal. Without a QoE analysis, they could easily fly under the radar and cause you to lose millions

How to Choose Between Them

To sum it up, choosing between a proof of cash and a quality of earnings boils down to what your goals are.

If you want to confirm that the seller’s numbers actually exist and reconcile, then the right tool for you would be a proof of cash.

If you want to know how those numbers translate into value, then you’ll want a quality of earnings report.

To be clear, we always recommend a getting a full QoE. We believe it’s better to be safe than sorry when you’re making one of the biggest decisions of your life. Ultimately, though, it depends on the level of risk you’re okay with, and we’ll be happy to work with you if you decide a proof of cash fits your situation better.

Whatever the case, if you’re trying to decide which approach fits your deal, I’m happy to talk it through. You can reach out directly or book a call to continue the conversation with me directly or with other searchers during our office hours.

Let’s imagine a scenario that is fairly common in the M&A world. The owners of a mom-and-pop business decide they’ve had enough headaches and want to sell their business. Over the last 30 years, they’ve built up a 5 million dollar business that won the attention of several PE firms.

As it often goes, mom and pop don’t want to spend the time or money commissioning a sell-side QoE. However, the potential buyer does commission a QoE and uses the suggested adjustments to bring the offer down to 3 million. It’s too late now for the sells-side QoE, which could have helped them renegotiate and meet somewhere in the middle. Mom and pop are left without options and are forced to cut their losses so they can move on.

How sellers lose control of the narrative

Whenever a seller goes to market, they try to move quickly because they are typically optimistic they can sell for a great price. They’ve been building their business for years, making sure it’s performing well and that they have a coherent game plan. So long as the seller is telling the story, there’s no discrepancy about how valuable the company is.

Then, while the ink is still drying on the LOI, the diligence process begins. After the buyer commissions a buy-side QoE, the story can change quite a bit. A buy-side QoE will become the new reference point used to define everything from EBITDA to the quality of the customer base.

When a seller skips the sell-side QoE, buyers will usually either come back with a lower asking price or just flat out walk away from the deal. Based on our experience last year, 48% of buy-side clients chose to do the latter. However, let’s say the buyer is still interested in the company, given the lowered price suggested by their buy-side QoE. What options does the seller have to push back on the new price?

If a seller believes the buyer’s QoE provider was unreasonable, we recommend that they challenge the buyer’s QoE. We believe that sellers should always seek to have the last word in a negotiation.

Without a challenge, the seller is left working with a document prepared by and for someone else. It’ll adjust for items they understand differently and use assumptions that are detached from how the business actually operates. Without this nuance that only the owner and their team can provide, the power of narrative resides solely in the buyer’s hands.

When should you commission a QoE Challenge?

Here are three scenarios that call for a QoE Challenge.

1. Adjusted EBITDA is at least 20% lower than the numbers used to set the initial asking price

2. The EBITDA multiple drops by more than 10% (e.g., from 4.0x to 3.6x)

3. The new offer is at least 20% lower than the original offer in the LOI

When you commission a QoE Challenge, our team will review the buyer’s QoE directly. We’ll undergo a thorough analysis as to how the buy-side conclusions were reached. With these insights, you’ll be equipped to defend the value of the business you’ve worked so hard to build.

Here’s what we review:

• Adjustments driven primarily by an outsider’s judgment

• Add-backs that were rejected or recalculated

• We’ll look for our own add-backs to drive up EBITDA

• Normalizations that are too conservative

• The recasted PL margins and trends

For sellers, this creates a way to negotiate against aggressive (and sometimes unreasonable) buy-side adjustments. It also lets sellers provide their perspective on the nature of small businesses that PE buyers might overlook.

For brokers, it offers a tool to stay engaged throughout the entire negotiation, without holding up the process or breaking the bank. If you are representing a seller and a buy-side QoE is shaping the discussion, QoE Challenge gives you a way to respond.

Worst comes to worst, if the negotiations don’t work out, you’ll still end up with a sell-side QoE to attract more buyers. Throw on a short-sleeve hoodie, and you’re gold.

To learn more, email me at caleb@qoeprep.com.

That “one person doing everything” model can work for a long time. Think Steve Jobs and Apple. Most entrepreneurs can relate to this approach, because they’ve typically worked as investment bankers, consultants, PE associates, M&A lawyers. So they know their deals and models, and they have grown accustomed to being the smart person in the room.

But then they go and buy a business and inherit someone else’s employees and customers. So they take on all the operational procedures, or lack thereof, that got the business to where it is. If the original owner also followed in Mr. Jobs’ footsteps, then there will likely be some challenges in the transition to the new ownership.

Insight from an Operator’s Operator

We spoke with Meredith Grace about this challenge of finding a company with good operations. She started off in operations, not deals, and has personally operated around a dozen companies.

She now works in two main lanes:

1. Helping ETA buyers with operational diligence and post-close execution.

2. Helping burnt-out owners stabilize, turn around, and position their companies for a future sale.
   

Her work ranges from “keeping the company from dying” to “getting it ready to sell for a lot more than it is worth today.” When she talks about operational misses, Meredith can pull from a growing list of mistakes made by real companies that she has worked with to correct.

The Yin and Yang of Operations and Search

Operating a company is almost the opposite of how most searchers are wired. When you’re searching, you tend to ask high level questions such as:

• What are we really buying and what type of person is selling it?

• Why does this company exist and what is the core purpose?

• What are the few goals that actually matter for the next couple of years?
  

A searcher will use those answers to drive everything else in a deal: offer, pricing, priorities, hiring, what to stop doing, etc.

But when you employ an operator’s mindset, you’ll ask much more practical questions. So practical that most searchers would prefer to call them “boring” questions. But Meredith knows from experience that there is a ton of value behind these questions. Here’s a few examples she shared with me:

• Are the chart of accounts and expenses in the right buckets?

• Is QuickBooks using the classes correctly so you can slice performance in a useful way?

• How often does the team meet, and what’s on the agenda?

• What is the company’s north star?

None of these questions sound exciting in a deal memo. However, the answers give you exactly the kind of structure you need if you want the financials to actually mean what you think they mean. Apologies if you had to read that sentence twice.

Meredith’s guiding standard is pretty simple. By the time a business is ready to sell, she wants the original owner to be able to hand a laptop to the new owner and say, “Everything you need to understand and run this company is in here.”

Unfortunately, very few companies are actually at that point.

Signs of Operational Fragility That Searchers Miss

Financials alone will not reveal how sturdy or fragile things are in a company. In fact, profit is often a lagging indicator of a lot of behavior you do not see in the CIM. Meredith identified a few patterns she keeps seeing with different clients.

Key person dependency

You can have one excellent employee carrying five who are coasting. But you wouldn’t know this just by looking at the payroll. In other words, the P&L will look fine until that one person quits.

Operationally, you want to know: Who does everyone go to when there is a problem. Who knows how the big customers actually work. Who holds all the context in their head.

Weak financial controls

It pains me to say, but financial quality is not purely a QoE problem. For example, if AR collections swing between 30 days and 90 days depending on the month, that could reveal evidence of a broken process. Maybe someone isn’t invoicing consistently, not following up, or keeping customers happy.

Additionally, if you notice AP steadily creeping up, it may be a seller quietly deferring expenses that will land on your watch.

So making sure the books tie out isn’t enough for you to rely upon. You need to get into the nitty-gritty of what gets invoiced, who truly owns collections, how is cash reviewed, and so on.

Lack of documented processes and tech backbone

Meredith jokes that you can learn a lot from the receptionist’s desk. If there are sticky notes everywhere, it could be a sign that the systems are not doing their job. You also don’t want a company that runs on “oral tradition” where each SOP is passed down from person to person. That system works when the seller has been there for 20 years. It does not work when you step in with debt service to cover.

In an ideal world, a buyer should be able to fully understand the business by looking at systems, dashboards, and documented processes.

No real growth strategy

Most searchers arrive with big plans. They want to double or triple the business. Believe it or not, this isn’t really a novel idea to grow profits and shrink losses. It’s basically gospel in C-suite meetings. Unfortunately, the idea isn’t always communicated to the rest of the people in the business.

Meredith likes to look for whether the company has any shared “north star.” Do the employees and owners share a single company goal? If the answer is no, you need to understand there will be a cultural shock when you show up with seemingly new plans.

People and culture issues

Turnover is the most obvious red flag here. High churn in key roles is usually a symptom of problems like low pay, weak leadership, or a culture of constant fire drills and blame.

Again, the P&L will not tell you this. You have to ask: How many people did you hire last year? How many are still here? Why did the last few people leave?

Overall, none of these red flags should necessarily stop you from buying a business. Instead, they should prompt you to dive deeper into what you’re looking at so that you know what you’re getting into and have a plan to manage it.

The First 90 Days After Close

I’m a very action-based person. I like to get stuff done, so I was pretty surprised by Meredith’s next piece of advice. She says that in the first 90-day stretch after you buy a company, you should do almost nothing.

Her advice is basically: sit down, be quiet, and learn.

She has seen too many new owners show up, guns blazing. They arrive on day one ready to prove they are the smartest person in the building. And the result of all the new changes is predictable. Employees shut down or leave the company, and customer retention likely takes a hit.

Instead, her version of the first 30 to 90 days looks something like this:

• Spend your time observing. Watch how work really gets done by shadowing people or sitting in on customer calls.

• Build real relationships with your employees by understanding their values. They don’t actually care about your long-term strategy so much as whether their paycheck is safe.

• As you do these first two things, you can be sketching a new operating plan. You can build your list of changes to make once everyone understands who you are and why you’re doing this. But you don’t lead with that.

Reach out to Meredith for a discovery call on your latest acquisition.

Where QoE and Operations Connect

On the QoE side, we are looking for places where the numbers do not line up with what the sellers are saying. Typically, we can spot this by looking at patterns over time. Proof of cash, payroll reports versus P&L accounts, AR and AP trends, odd drops in repair and maintenance that conveniently improve EBITDA right before a sale.

A good QoE report can give you a map of where to dig to answer some of these operational questions. For ETA buyers, that is the real edge. Not just getting the “right” adjusted EBITDA, but seeing where the business might crack when you are the one on the hook.

While we pride ourselves in a quick turnaround with our projects, we want to be the partner who slows you down, shows you the real picture, and sometimes helps you walk away, rather than the firm that tells you what you want to hear. In the long run, the deals that work are the ones where the numbers, the operations, and the people are all telling the same story.

If these values resonate with what you’re looking for in a QoE provider, feel free to book a call with me to discuss how we can work together in the future.

Alyssa has spent the last few years at infoFluency, a family-owned company that works at the intersection of data and investments. Lately, they’ve been developing Luminous, a tool for pre-LOI diligence and evaluation to help specifically in the M&A world. According to Alyssa, data plays a huge role in every M&A transaction from the moment a buyer looks at a deal all the way through exit.

The first warning signs of bad data

The earliest warning signs of bad data often show up during the diligence phase in an M&A transaction. Alyssa likes to ask how this process has gone to get a good idea of what a company’s data might look like. If it’s been like pulling teeth to get any kind of metric, it’s a clear indicator that there are some bigger infrastructure issues. Sometimes the seller cannot find the data points at all.

She pointed out a few patterns that show up over and over:

• Information lives in an inbox. When information is in your email, it means it is owned by individuals instead of the company. Besides the inefficiency of tracking down the information, this is a systemic risk if the employee leaves the firm.

• Parts of the business run on old on-premise tools. These systems are usually isolated. They do not speak to anyone (or anything) else, which makes cross-department work almost impossible.

• The same metric has different names in different systems. One team calls it revenue. Another calls it bookings. Another calls it orders. When no one uses the same terms, everything downstream becomes harder.

Alyssa shared an example of a large property-management company that wanted to grow through acquisition but felt blocked by their own internal systems. Everything was manual and siloed. Her team built an application that unified their accounting, investor reporting, maintenance tracking, and day-to-day operations. For good measure, they even threw some AI into the mix to get an overview of tenant requests.

If you’re looking to sell your business, you should check to see if any of these data habits apply. Taking some time on the front-end to clean up your data could pay off in the long-run once potential buyers start taking a closer look.

Rinse, lather, repeat, repeat, repeat

Once the data is gathered and it’s formatted correctly, the next question is how it moves. In many companies, the answer is by hand. Someone exports a CSV. Someone else copies it into a spreadsheet. Then, three people check the numbers. And finally, a fourth person combines them into a deck for management to flip through.

Alyssa shared an example from a client that was doing several hundred million in revenue. The private-equity owner needed quarterly board reporting. To get this done, the client had three people working on it for three weeks every quarter. In other words, 25% of three full-time employees’ workload was being used to produce something that could be automatically populated.

Here’s a good rule of thumb: If something is repetitive, it can (and should!) be automated.

Unfortunately, old habits die hard, and it can be a while before things get automated. Once your employee has done the same boring task 20 times, you shouldn’t be shocked if they do it 21 times. To break these habits, you’ll need to intentionally audit your systems for manual processes. If you’re looking for help, Alyssa and her team would be a great place to start.

The notorious “single source of truth”

Stop me when you know what I’m talking about: trolley, buggy, trundler, carriage, shopping cart. Unless you’re part of the 2% of my audience that lives in Australia, you probably were lost until I said “shopping cart.” Contrary to what your English teacher might have said, the English language does not have a single source of truth. Different words can have the same meaning, and one word can have different meetings.

In the same way, a company’s data needs to speak the same language. It needs to follow the same rules and use the same format. Having a single source of truth means every system in the company will also feed into one place.

Setting this up is harder than most people assume. Alyssa shared with me that these systems often need custom connections. You need to coordinate the right permissions and set good expectations with management so they can make good decisions. Alyssa and her team typically focus more on the output, operating with a “done-for-you” model. Once it’s setup, they’ll typically either teach the company how to use it or stay on as a fractional data team.

In practice, infoFluency will partner with a portfolio company or investment firm and follow a six-step data intelligence process. It begins with understanding strategic goals and working through data discovery, architecture design, integration, validation, and finally, delivery of actionable insights. After all this, they’ll build a KPI scorecard that looks something like the one shown below. The scorecard gives leadership a single view of performance across the areas they care about and updates it automatically. This lets the leadership team (or you, the new owner) make decisions based on real data instead of gut feel or outdated reports.

Give me your tired, your broken, your messy data

While a QoE report can be thought of as an accounting exercise, it is also a systemic overview of the story being told by the data. The work reveals gaps, inconsistencies, and unexplained variances that can be buried under bad accounting data. A deal can only move as fast as the data allows it to. Whether you’re on the buy or sell side of things, getting a QoE can help you see what’s really going on in the business. If you’re interested in learning more about what it can do for you, check out our website or set up a call with me directly.