The 5 M&A Deal Crime Scenes Where Founders Lose Millions

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How do I identify 'value leaks' during an M&A audit?

This episode of Making Billions with Ryan Miller outlines a professional framework for conducting a Quality of Earnings (QofE) assessment, focusing on the transition from cash-basis to accrual accounting and the elimination of "invisible" value erosion during the due diligence phase. 

For fund managers and private equity leads, the primary challenge is not the bid price, but the normalization of EBITDA and the stabilization of working capital.

[THE HOST]: Ryan Miller is a fund manager, capital strategist, and former CFO turned angel investor in technology and energy. He is the founder of Fund Raise Capital and Aequor Capital Partners, and has mentored over 1,000 fund managers across private equity, private credit, venture capital, real estate, and alternative assets globally.

[THE GUEST]: Holli Moeini is a seasoned M&A strategist, financial expert, and the author of "The Missing Millions." 

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Transcript

Ryan Miller   

You're not losing deals to better bidders, you're losing them at 5 invisible crime scenes where millions quietly move from your LPs pockets to the other side of the table. So if you're a fund manager, a buyer or a deal lead, then this conversation shows you exactly where value leaks in M&A, financial story, working capital, due diligence, earnouts and integration. And how disciplined buyers use them to either walk away or claw back price without emotion. You'll hear how a single accounting decision recovered millions of dollars the night before closing. And why 70 to 80% of businesses never sell, and the specific thresholds and structures and top operators use to protect their capital and avoid overpaying. So if you live in the world of LOIs Q of E and post close integration risk, this will change how you read financials and how you negotiate every deal that you touch, all this and more coming right now. Here we go.

Holli Moeini 

Holly, welcome to the show. Thank you for having me, Ryan. It is a beautiful thing to be here today, and today we are going to focus, and I'm excited about talking about the finding the missing millions in M&A.

Ryan Miller

Awe, me too. This is that's a direct line from your book, and I can't wait to get into that. So let's dive in Holli. So walk me through the exact steps you use to take a founder from not ready to sell to a successful eight figure exit in 12 months. So, what do you do, first, second, third?

Holli Moeini 

The first thing to do, if you're thinking about selling is get your financial story right. And so what do I mean by that your financial statements have to be correct? If they're not clear, they're not clean, you're not going to have a great exit. So it really starts there. And in one case, last year, I did take somebody to a successful exit, and what we found was that when we uncovered and looked three years back to the whole story, we had questions, the story broke down. So we talked to the controller, the controller couldn't answer the questions. Then we found fraud, and so then we had to go back and clean it up. So as founders, if you're looking to sell, that is always the first spot to start for a successful exit. Number two. So the second thing is, it is to hand over the control of your company is one of the most emotional things you'll ever do, right? And so you have to know and stay disciplined on what you're willing to live with and what you're not, because the deal fluctuates the whole entire time. And so in this case of last year, we actually had to walk away. And you're talking at 11-12, o'clock at night to the founder, figuring out, like, what are we prepared to do? So you have to know your boundaries and stay disciplined and going back and with those emotions, keep them in check. And then the third thing that we that is really important is that not all of the leadership eggs are in your basket, so get your team prepared to show up for meetings and showcase their abilities. So we did those three things, Ryan and that's that's what we did. 

Ryan Miller  

So that's a great start. So financial story, just make sure it's clean numbers, because you might uncover fraud, not that you want to, but you might and so don't just take people at their face value. I too, I'm a recovering CFO, so I know the feeling and getting the CEO prepared, and sometimes the ELT, the executive leadership, those might actually go together. Now, how important is it, in your opinion, to work on, say, all the systems and for all that boring stuff when you're getting ready to sell? How does, how does that fold into some of the early work?

Holli Moeini   

Some of the most boring things are the best things like accounting and systems and processes. This is like music to my ears, because, yes, this will help you even be more successful is getting your systems processes and having your leadership team actually show showcase that they are actually doing it and it's repeatable. This gives the buyer trust that they can count on you at closing that you're going to withstand the scrutiny of being with private equity or whoever's buying you. So that gives you trust your multiple goes up this, this is the story. Eliminate the risk, and your multiple goes up. 

Ryan Miller  

Brilliant. So, the riches are in the boring things. You know, just to provide a fund framework, because we're mixing it up on this. When I was, I was brought in for an insurance company to be CFO there, and they were selling. And so I follow something that I always call SOS, it's stabilized, optimize, standardize. And so through that framework, first step is, where are we not stable, because we were getting ready to sell. And so what is like, what feels duct tape, because the thing is most, most of the time, depending on the age of the business, and they weren't new, like they've been around for a little bit. And when we look at processes, or what internal employees would call a process, is just a combination of solving small issues over time, and then we call it a process, but it's not a great process, so it's stable, but maybe not optimal, or it's not even stable. And so we want to make sure it's like, where are we not stable? And so we did a whole process mapping thing, super exciting, I know it was to me. And we figured out, and through doing all of those process maps, we were able to figure out where we, like people were copying and pasting and using different stuff, and our tech stack was out of control, and licensing costs were wide wild, all the stuff that keeps CFOs up at night. And so when we did it this, this standardized a lot of the key operating processes, right? Like order to cash for cure to pay, if you remember all those from early days.

Holli Moeini  

Oh yeah.

Ryan Miller  

Yeah. So standardizing a lot of that but then it, what it does is it creates profitability. What it does is it allows all those boring things that allows premium prices and I know you know this so and I'm excited to get into it so. So with that said, I'd love to know what your diagnostic process is for reading a set of financial statements to immediately identify where millions in enterprise value are being either hidden or maybe even destroyed. 

Holli Moeini  

Yeah, I love that question, because it's not what you suspect it to be, right? The Missing Millions are not just in the financial story. So the way I look at the whole entire process, and my diagnostic process is part of that, is that when you look at a deal from start to finish, there are like, five moments in time where millions go missing, or they change hands risk and millions. And I call these the five emanate deal crime scenes. That's what I call them, crime scenes. So there's five moments crime scenes, and these scenes happen for both on the buy side and the sell side. Everybody has a moment in these scenes. So let me talk through the scenes, and then that is my five diagnostic process. So the first one we talked about it briefly, is the financial story. Your financials have to be clean, you need to and we may talk about this later, but you need to optimize everything at your disposal to tell the right story. And if you're a buyer, you need to make sure you're reading the story correctly. So that's the first one. Working capital, when it comes to middle market deals is a fog and is a price issue. So everybody struggles with working capital, except for very, very sophisticated buyers. And so working capital is number two. Diligence, most deals die here because we have not gotten through deal. It's Crime Scene one, right? And so for buyers, red flags get pushed off, and deal fatigue is real, like it took me so long to find a deal, you know, I'm just gonna, I'm just gonna plow through this. And this is where sellers get heartbroken, or they get, you know, retraded. So this is a real big crime scene. Then we have the earnouts. And earnouts, typically, everybody will probably agree that that is a crime scene, I don't even need to explain that. And then, then we have integration, which is really an important thing, where the humans are really going to cure you and create more value for you, but we seem to think about that as a side note. So those are my five crime scenes. So my diagnostic process is really the full map of M&A, and financial statements are clearly a part of that, but it's only one part.

Ryan Miller  

Okay, so financial story, which is like the model, but also not just the model, but every the context that feeds into the model, the assumptions and everything we want to make sure that that sound, that the numbers check out, working capital cleanup, that was a big part of what I was able to do. That was huge. So let me just give you, I'm not using this just a general thing. If you're a business owner, or if you're going to buy a business owner, and they have to dip into the line of credit every month to make payroll, not saying I saw that, not saying I haven't seen it, all I'm saying is that could be a red flag. Yeah. So, you know, I remember when I started, I had the finance manager, lovely person, love her, and she was like, Ryan, I've got it covered. When an invoice comes in, I get that thing paid in at least a week or sooner. And I was like, I think I just threw up in my mouth. I didn't say

Holli Moeini 

Literally, no. 

Ryan Miller   

But I thought it so anyway, so working capital was a big issue, and I could see why it was like, it was actually a training issue. It was a wonderful person, but it was a training issue and so we were able to manage and work on our processes and working capital. And then diligence is another one, of course, huge legal, financial due diligence earnouts. I'm sure you've got battle stories, but we're not here to call anyone out. And then integration, I think that's lovely. So, so the five crime scenes where you scan for evidence and you look for potential areas that maybe you're paying for that you shouldn't, or maybe you, on the good side, maybe you'll find things that you should pay for that you're not. So either way, whatever we decide to do, whatever someone decides to do, I think what you're saying is these are the five areas you can start to look just really start going and whatever you decide, just do it with your eyes wide open. Would you say that's a fair summary? 

Holli Moeini

I think that's fair. And I think that if you're going to sell, you better actually spend some time looking at all those crime scenes. So you know, before you set your price, you need to put working capital in your price. Before you actually get to an LOI, get to a structure, you need to understand all the crime scenes. And so even even integration, you think, okay, nobody's thinking about integration, but, but before the LOI, maybe you want to make sure that your key employees are taken care of. And oftentimes it's so hurried and so emotional up to the LOI stage, you're not really thinking about other people. Okay, you know, you're looking at lots of zeros and something that'll change your life and so, so those are things that like, I think you should understand the terrain before you even start. 

Ryan Miller   

Brilliant. So let's, let's go even deeper than when you look at an EBITDA number, so we're looking at the financial story among many others. But when you look at an even number in a deal, what specific adjustments do most sellers miss that quietly cost them millions at the closing table?

Holli Moeini   

Well, I'd start by saying they miss even getting to the closing table. So 70-80% of the businesses actually don't sell, and so we got to start there that they don't even get there. So there's some normal adjustments that we have to look at, the repeatable ones. So the first one I'd say is, owner salary. Your salary is not at market. You don't think you need to normalize that you do rent, if you own the building, it's on a market. And then there's cleanup, one time items that even consulting professional fees. I always dig into all those things and see if there are add backs that are not going to continue on post close. And then, like, one of the biggest ones of all, Ryan, is a lot of sellers just give their financials and their cash basis financials, and that's like the worst thing to do. And if, if you are a seller and you're a growing seller, I guess if you're flat and stable, you might not be that attractive anyway. Okay, so if you're a growing business, and you give cash financials, you know Ryan as a CFO, you that's actually the lowest EBITDA, that's the lowest value you're going to get. Your buyer is not going to tell you that you just lost millions of dollars, but you just lost millions of dollars. And so using this is where accounting gets exciting, again, right? Using proper accounting, which is the accrual method, you know, before you actually get out in the marketplace, is, is one of those big swings, but everything counts. So that's the other thing is all these normalized adjustments, everything counts and you document it. And I've never had a private equity say they don't agree with my adjustments. So I think that there's discipline around it. You identify it, document it, and move forward.

Ryan Miller 

All right, so we'll throw in salaries, rents, one time, agreements. Your normalization is you're making adjustments. And just horrible practice. I remember flipping from cash to accrual, and I probably gave everyone a heart attack so they didn't know what was going on. That's not how we do things. No, I get it, but this is how it's done. So this is the fun of corporate leadership. So you got to be that person every once in a while. 

Holli Moeini  

You do and I think, as a business owner, I think you should always be ready to sell. I mean, that's one of the things so, so accrual basis accounting is actually going to show your P&L in a better light, and it's not up and down from cash. I mean, how do you make decisions as a business owner? I think that. I think that business owners have the accounting really follows tax basis books and so you're on cash and the big companies know this, smaller companies do not big companies. And oil and gas had it too. You have two sets of books. You have your gap books, and you have your tax books. They are completely separate, and they're both valid. There's nothing squirrely about this, this is a normal occurrence. Most businesses don't know, business owners do not know that they need to leverage that.

Ryan Miller 

Okay, so that's a big one too, and especially if you're going in, if this is your first deal, especially going in, Would you say it's wise to get both to say, show me your tax and show me your managerial month ends and how would you pose that?

Holli Moeini   

I mean, if I'm a buyer, I want everything. You know, if you'll give it to me, I'm taking it. And so oftentimes you get limited to how much you have to give. But I don't like as a seller, I manage the package that goes to the broker and or the buyers that I manage that package, and that is something so they don't get access to everything before the LOI. I think that that's like when you're dating, you don't get access, 100% access, you know, you are just completely with a certain set of data that has been curated for you, and then once. But that data has to match your books in the background, because you're gonna, you're gonna head to diligence, okay, so, so I think you curate that I don't use. There's no open book. We know we don't need to be like full disclosure. And then, yeah, so that and then the buyers, you know, they have to, they have to be careful there, too. So I love that.

Ryan Miller  

You know, I see you like a grand chess master, and I know you think like this, because you talk about seeing multiple moves ahead, so like a grand chess master would, it's just seeing those five moves ahead. But what's the actual move sequence you follow when you enter into a new deal to buy?

Holli Moeini  

Okay, so I think that strong buyers actually the best buyers, the strongest buyers, are the disciplined buyers okay, and what do I mean by that? And so they don't follow steps, they follow discipline. So they ignore the marketing material, and they cook up and look at their own financial story. So they get the materials, they dissect it, they figure it out if profit isn't so oftentimes right here, profit doesn't hurtle 10% and buyers still want to keep going. You know, we stop actually, if it's not 10% profit at the end of the day, you don't have, you have a turnaround business. And I don't, I think, unless you're in the business of understanding how to turn a company around, stop right there. Okay, you're not gonna, it's not gonna be good for you. So 10% is the threshold. 

Holli Moeini 

The other thing that is discipline about buyers is that they don't, I say you don't rush into LOI, you know, you take the time to learn as much information as you can before you get to LOI. Now, sometimes you don't have that luxury. Everybody's in a competition or a bidding war, you don't have but if you do have that luxury, take time to get to know the seller. Get all the information you can if you're giving me documents I'm accepting, and because sometimes at that point, you can reconstruct things and say, okay, they don't meet that they don't meet the threshold, or their key person walked out. I had a company where we had gone straight to diligence, and I was helping them with diligence, and you know, their EBITDA fell apart 40% different, over 40% difference. And you know you really have to, but we would have known that earlier, had this, the buyer spent time with the seller. So, discipline, discipline to look at the financial information, and then you listen to the seller. What is the seller saying and not saying, and what are their pressure points they're gonna expose what that is. And that's where you see where real risk and dependency is in the business. So you're, you're starting to plan for things at that point. You're starting to plan for, can I run this company post close like this should be the questions you're asking yourself at this point in time. And then the third thing is, you can't be afraid to walk away. I mean, I think that's the power move Ryan, like, if it doesn't work, be okay. There's so many. There's 35 million, million businesses out there. Like, you can walk away. There's another one. And I've heard that story from buyers that got fatigued and wanted to rush into something and they found the deal. It's like, when you finally find your wife or husband, like, oh my god, I finally found them, right? And they're so happy, right? So, yeah, so be disciplined. That's what I say with that one.

Ryan Miller 

Okay, perfect. So making sure you know the numbers don't rush to an LOI, being okay to walk away, which means you didn't say it this way, but reading between the lines and understanding what they're not telling. So some red flags. What are some red flags that you've seen in deals, or that you can even conceptualize. What, what would you tell people to look for?

Holli Moeini   

I, okay, so I've seen all kinds of things. But the thing is, is that if the seller is hesitant to give you financial information at diligence, that is a red flag. And I had one situation where we had, I was brought in at diligence, I didn't have any prior knowledge of the seller. Was brought in, and he his tax returns. Nothing matched. And so when I started talking to him, and he wouldn't give a balance sheet, and when I started talking to him, he actually got angry, and he was agitated, and the broker was trying to cool things off, and I'm just asking questions. And when we got the balance sheet, we noticed that he was running a bunch of businesses through, there was no EBITDA story there that you could actually extrapolate. And he was an accountant too at the end of the day. So it was an accounting firm. And so you got to look at, I think numbers come alive. And I know that we're kind of geeking out on the CFO thing, but like, but numbers sort of come alive, and then how the seller talks about the numbers are really important. 

Holli Moeini   

So many times, when I was a buyer that this the CEO, the seller, would come to me and have the story about, you know what, we're breaking bread and getting to know each other about their how great they're growing, and then I get their financials, and it's completely not true. And the CEO could be right, and nothing nefarious is going on here, but the CEO could be right and the books are wrong, or or vice versa, I don't know, but like that, story has to be synced up, and when it's not you erode trust. Risk goes up, it's just not good for you. So those are kind of so I do watch the behavior and how sellers act what they're interested in, and that informs you, that informs you as a seller, so the more time you can spend with them prior to signing the LOI, which is non binding, we know that, but it establishes, you know, a pattern that, or a trust that you're making at that time. So, and people think, always retraining and trusty roads after that and it's a precarious time of building trust, right?

Ryan Miller   

Brilliant, yeah. And those, as I like to say, trust comes before the transaction. So in finance, it's more about trust than it is the transaction. So some red flags are messy books, different stories from different executives. And like you said, that doesn't mean anyone's lying. It just they have different vantage points. But either way, if there's a difference, you should, you should smoke that out and try to figure out what's going on, and then their tax returns don't match. I love that. Those are, those are wonderful red flags. 

Ryan Miller   

So you know, with that, I'd love for you and you know, when we, when we first met, we talked about how you turning your finance department into an actual profit center, to use big corporate talk, I think it's possible, and maybe I'm stretching the term, but you can say it is a driver of profit. So I'd love for you to give me this specific example of an accounting decision, whether it's legal or ethical, that materially suppressed or unlocked enterprise value on a deal you worked on.

Holli Moeini   

Okay, yes, accounting can be exciting, we're just, we're getting people excited about it right now. So we are, we are, well, we. I had a situation where we had a transaction that was the night before closing, and my seller had a bunch of unbuilt work, and I was like, Well, how do they want to handle this because we really earn the revenue, but we haven't booked it yet so, and it was like four o'clock on the Thursday and we're actually closing Friday morning. The wires are teed up, right? It's exciting and so we met with them, and they said, you actually don't get credit for that. And told my seller, and I was there, and I said, well, why is that, we earned it? So for everybody out there, like, this is a big this is a million dollars. It was a part of working capital, and I wanted on the closing balance sheet. And they said, You can't, you can't bill it tonight, or you'll be against your reps and warranty. And I said, well, I think we bill it all night. Or, you know, we delayed closing, nobody wants to hear that, right? And but, but I sounded tough, but I went back and asked the attorney, just to make sure, I don't want anybody going to jail, right? And so we ended up being right, and we ended up billing it. And they came back and they said, yes, they agreed to put in working capital. That was a million dollars, and the seller said to me, he goes, I wouldn't have known they were ripping me off. He he wouldn't have known. And so this is where it's really helpful to have somebody on your side that can understand the business side of things. Like he's not thinking about closing balance sheet and working capital. He's not, but he needs somebody to do that on behalf of him. And so that was a move, and it was legal, and it was kind of ethical, because we did have a fight in that meeting. And it was, you know, it was we were all sweating a little bit and, and I was sure I was right, though, at the end of the day, I was like, that is our revenue. We are taking it.

Ryan Miller 

Hey, thanks for listening to Making Billions. If you liked this episode, could you do me a huge favor and go leave a review? This helps us to get the podcast to more ears, to help people raise capital, learn fund management strategies and serve our mission, to help fund managers and deal syndicators to gain greater hope and focus as they build their input. All right, let's get back to the show. 

Ryan Miller  

That's amazing. So when in the deal timeline then. So we're talking about when people exit, when they sell, when we're doing an M&A deal or an acquisition, where in the timeline do most sellers unknowingly give back the most value, and when is the specific action they should take.

Holli Moeini 

The danger zone here is that it's actually before the deal even starts. Okay, so sellers have financial statements. I hate to be a broken record here, but they have financial statements that don't hold up. So you have to ready your financial state. That is a danger zone, because most, most businesses don't even get to the closing table. So Danger Zone is right there, you have not spent time maximizing your value. That's one. And the other danger zone. We're talking about quite a bit here is working capital. Nobody understands it. And sellers, you must put that in your price. So sophisticated buyers will come in and expect you to have that as a part of your price. And I have many sellers that insist that I created that AR, it's mine. I take it with my cash and I leave. So then when the buyer wants to have you deliver working capital, they think they're getting a haircut in the price. This is happening over and over again, and so you got to think about, what is the price with delivering some level of working capital. So these are the zones, and that can be a lot of money, and it's valuable. So those two zones getting your financial statements right, so you're presenting the right picture. We talked about that, and then working capital.

Ryan Miller   

Hmm, okay, perfect. So, you mentioned earlier about earnouts. I'd love for you to break down how earnouts and working capital adjustments are used to quietly shift risk from the buyer to the seller, and how a seller can fight back.

Holli Moeini 

Oh yeah. Okay, so this is, this is great. I think earnouts are misunderstood. How's that okay? So I know sellers hate earnouts. I love earnouts because they can bridge the gap between what a seller wants and what a buyer is willing to pay. So I love it. But though you're right, Ryan, the risk is, it's very risky. And so, so we have to be careful. And I have my 3Cs that I go by, which is Clarity, Control and Cadence. And let me go through this. These 3Cs are important to get a good earnout that you're going to be able to achieve. And so clarity is you really have to have the details of the language in your APA or your EPA, properly stated. So what the heck does that mean? It means there's no accounting jargon, you understand what the agreement says. So I had a situation where a client of mine was going to be measured on net revenue. Well, everybody's like, well, that's easy. Net revenues net of bad debts. I'm like, well, what's bad debts? And then when you drew a little further it's gap and our international financial IFRS standards. And I'm like, okay, that's as gray as a gray zone, okay and that could be anything. And so I, so I painstakingly drew out this long definition of I mean, I don't want to say it, but it's baby language, like everybody can understand it, like if we're still trying to get the bad debt, we, like, you can't count it as bad debt. 

Holli Moeini  

And then four months after closing, my seller comes to me and says, the accountants have all changed the bad debt policy, and now it's hundreds of 1000s written off. And I said, well, you don't care. Actually, the accountants are doing their job. You don't care because it's not tied to any weird thing. So get your language right. That's first, Control, you need to be able to control that revenue. If you are, are, you know, responsible for that earnout? So when you close, oftentimes a new GM comes in and they're running the shot, and you're still having your earnout, and it becomes a very uncomfortable thing. So you try to draw that I try to draw everything out in the legal language with my lawyer, have a good M&A attorney, and then, you know, there's a cadence to it. So you don't wait till the end of the year to 12 months to say, did I make it okay? No, no, no. We look, we have occasional check ins with it. And even with this situation I was telling you about, we went in and said, hey, we recognize you're changing your accounting policy. We don't think that applies to our earnout. Are we right? And they said, yes, you're right. So we got it all in writing, and we're carrying on. Nobody's, everybody's happy. So I feel like, like and working capital. So what do you do about it? You get a good M&A attorney. You get somebody that can you just need to understand the language. I don't actually think you need a business person for it, because if there's business language in there, get out, get it, get out of it and put something else there. And attorneys will help you work through that. Make sure those three things are in there, and then working capital. Get some help on figuring out what that is, or that's a problem for you, because that working capital peg that you are going to be stuck with delivering is an important number. So most people need help on that.

Ryan Miller  

Brilliant so earnouts are an interesting part of the deal. We'll say anyone can decide how we're on the spectrum interesting lies, some are it's a little too exciting than they prefer, and some it's fine. And then you also mentioned a good M&A attorney. You had that. So I just wanted to underscore how important they are. I always, and I know you're a CPA, but I always say, you know, a good lawyer and a good CPA are a better Caboose than they are in engine. So you and what I mean by that is you never want them to lead the deal, but you'd never lead the station without one. You never do a deal without them. But don't put it on them to lead the deal, this is your deal, you got to lead it. But they are attached to the train. In fact, they're the ones that say at the end, when it's all done, just like the caboose, to say it's all there, it's all good. So a good M&A attorney, and then on the other so that's legal. And then on the other one is a great qualified CFO, CPA, just someone who really understands the space from a deep technical standpoint because this can be what we're talking about are the deep technical stuff. That's what we do on our show. So we really go deep on this show. So what are the first 90 days post close decisions that determine whether a deal value compounds or it erodes, and how do you set that up before close?

Holli Moeini  

Yeah. So, I mean, I love that, because even the question is, like, you have to set it up before close, so if you're making decisions post close, you're already behind, and you're eroding value 1,000% right? And so, so, yeah, typically, what I see is buyers spend all their time and effort working on the deal. And I think this is another reason to have your Caboose with you, at least your CFO Caboose, or somebody that can kind of ride along with you as you're doing the deal. I was the ride along, that's how I learned. I was the ride along with the CEO with every conversation. So I'm listening for what he's not listening to, and I'm helping, I'm planning for integration. Because what you have, Ryan is you have a situation in many companies where the person that's going to do the integration is not the person in these conversations. So everything gets kind of siloed and and, and so if you're not creating a plan, so what I'd say is, first, you need to create a plan, an integration plan. That integration plan and those decisions need to be made in the very beginning, like, who is important in the team that I need to make sure we put a plan together for systems, culture. No, everybody downplays culture. I can't tell you how important that is. You think that it takes them, you know, 100 days to get their AR, and you think, oh, magic, we're not going to accept all that for working capital, but magically, when they're with you, they're now going to get paid quicker. Now, why would you think that? Okay, like, you know, so there's change management things. This needs to be part of the integration plan and it's not a financial exercise, it's, it's, it's a human one, and your people don't care about the deal. They care about what it means for me. 

Holli Moeini   

So, yeah, so I would say that those are some of the most did I answer the question? Some of the most important decisions are, do it up front, make sure you have somebody outside of just the CEO that's helping orchestrate this, put the plan together and then work, and then show up at the day of closing, and make sure that you're addressing all the employees and their needs at the time and meeting with key players in the process. I can't overstate how important that is. You find out all kinds of things that you add to the plan post closing after you're talking to these people that you need to do now. So culture, change systems. I was called Change Management, such a corporate word, change management, you know, but it's behavior in humans, and at the end of the day, we want our humans to be happy. I had a situation with accounting firm. My buyer was buying an accounting firm. We show up to do this show with here's our new cool company, and here's your new cool benefits. And little did we know that the the next leadership bench, which we were excited about, right? They were promised partnership, and now these the partners just sold the firm out from under them, and they were angry. So when we met with them, we had an angry mob and I was like, we need to be the superheroes and come through. We lost one. We did lose value. So you do lose value. We lost one key person, which you couldn't, you couldn't replace that. So it's a real thing. It's important keep your ears open and know we're having, we're working with humans here, and that's the most important thing. 

Ryan Miller  

Yeah. And when someone on the finance side, like yourself that also understands the human factor, that is brilliant, and, you know, speaking of that, let's unpack that, because you're right, like we've been talking about finance and working capital and spreadsheets, and that's true for sure. That's a huge part. But there's also people who have trusted a certain company that's either up for sale or is about to maybe bring in a new company, and there's culture, there's feelings, there's emotions, there's all kinds of things, right? A lot of times, and deal come, I was in a company in early my career that was getting sold, and people are freaking out because they're like, am I guess we know you're not going to need two analysts to this, two CFOs. So how is this going to work? So emotions run high for the people who are doing the work. So with that said, Holli, how do emotions like fear, confidence and optimism alter the trajectory of a deal? And what's your method for managing them in the room?

Holli Moeini 

Yeah, it's a big deal. I like how you said feelings. It was great. Yeah buyers get excited. The feelings are happening, and they overlook red flags. We've got sellers like anchor to a number, they become unreasonable. Everybody starts taking things personal, that is a true thing, that is true. And so I think how I manage this is that we got to get grounded back in surprise the facts. Okay, so we go to the data, we go to the original structure, and we go to what were we willing to accept or not accept, and not take things personal. We all have to manage our own selves. I think you said that before Ryan and so you got to be in charge of yourself. But at the end of the day, I'm always like a calming person, and I'm like, all right, well, what, this is what I heard you say months ago, you know. And this is what we said, we will, will accept. Are you changing that, should we talk about that? Do you need to go talk to your wife about that. We have, we have quite the discussion around it. But again, ground things in truth, in facts, get out of the personalities. It's going to happen, though, it always happens. It's in every crime scene. You know, emotions are in every crime scene. So and not take anything personal. So decision making when you're taking things personal is the worst time to make any decisions. So cool off. Go back to data. Sounds boring. Works. That's what I say.

Ryan Miller   

Yeah. And I remember you talking about when you're between, you know, the one CPA that you were talking to and that deal, and he was getting a little upset. I saw that to your point about don't take things too personal, then you didn't right, so the other person might but this is good, no matter what side of the negotiation table you're on is just say we're just here to close the deal. Get our facts straight, make sure we all agree on the price, we all agree on the story, we all agree on the future of this company. What's going to happen? There's a lot of things we got to figure out as we hand it off. We accept a company, you accept their money, or vice versa, and we're often it's nothing personal. We're just trying to align it. But the beauty of it, and I think that this does not get enough attention, is during a transaction. And you know this during a transaction, it requires the cleanup. And so whoever's taking on that company, or even if you don't end up selling, maybe you just can't find a right buyer, you still get a really nice cleaned up company. And so the process of doing this is, I guess, a little bit of a purification or trial by fire. So I love that is that, would you agree with that?

Holli Moeini  

I do agree with that. And I do think, like, let's go a little further on this. I do think that that emotions for me, like that guy was yelling at me, and the broker tried to come in and save me. I was like, no, no, don't save me. I want him to yell at me, like, I want him to be mad. I want I don't care if he thinks I'm stupid. He knows I know I'm not stupid. Like, just let him do it because this what. It doesn't matter who it is. If it's the buyer, it's the seller, it informs you in negotiations, I swear it does. And so that was a particular point. But in negotiations, when things get heated, how people behave, you can see the stress point, and you can figure out how to utilize that for your own good. 

Ryan Miller   

Yeah, spot on. And it's still data. Even if they're yelling that data at you, you're still collecting part of the story, the temperament, and the biggest of all is some pressure points. And so you push, you pushed on someone that maybe didn't like that. You push on. And that's still data, to say, I wonder why that bothered them. Is that a personal thing? Is there a problem that I did? This guy freak out because I'm onto something. Either way, I need to investigate so it's still data, so you can't take it personal, and just know, no matter what happens, I'm just I'm absorbing the information no matter how it comes wrapped. I mean, so I love that. Now, when it comes to say seller, seller readiness, build me a checklist, or at least a verbal, few list items. What must a founder have in order, either financially or operationally, before they ever take a buyer's call?

Holli Moeini   

Yeah, okay, so let's talk about the financial story first. But let's put it in a different slant, because we've been talking about numbers a lot. Before you take a call, you have to maximize your numbers and you have to get your financial statements institutional ready. What does that mean? That means the first thing that you look at is usually your chart of accounts is wrong, so meaning your direct costs are sticking in SGA or OPEX, whatever you want to call it, you need to move them in the right category. And so that is expected. So that is really important. So I'll give you Adam Coffey's guide. I love his, his mutual friend of ours, and his guide is the 30/20/10 rule. So everybody needs to follow this rule, put things in the right buckets, and then look at yourself in the mirror. And if your gross profit isn't greater than 30% you need to fix something in your pricing or your volume. You can, we don't need to diagnose right now and then the operating costs need to be less than 20%. If they're above 20% then you need to go to work fixing that. And then if your profit isn't over 10% then you are not ready. You need to work on your business  and nobody's going to buy you. You don't have enough cash to even grow at if you're below 10% you must work on your business. So I love Adam's rule, I use it all the time, and that's how you know that's step number one. So we put financials in a new kind of lens for our audience. 

Holli Moeini  

And then the second thing is revenue quality. Is it concentrated? Is it erratic? Are there heavy one offs? Is it stable and reliable? So if your revenue isn't stable and reliable, your cash flow isn't going to be stable or reliable, therefore you're not going to sell, or you're heavily discounted. It's not good for you. So that's number two on the checklist. And then your operations, in your team, the business cannot if it's dependent on the founder, and it can't run without you. That is less value you might still be bought, that your multiple isn't going to be very high. So getting if you want to get ready and you want to be serious about it, get that operations in team. And we've already kind of talked about that. Then you know, then you got to get your systems and your processes, get a strategic plan. I mean, like, get a plan all the things that we're telling you to do reduces the risk to the buyer. That post closing, you're going to be able to come in, out of the gates, running, and meet their 30% growth, or whatever margin that growth percent that they want, metric they want. So I think that's really important. I think that those are the highest ones on my list.

Ryan Miller  

Okay, perfect. So make sure your chart of accounts are there. Your numbers are good. How does, let's say, the bench, depth of leadership or quality of revenue. How does that tie into and even processes? How do those tie in? 

Holli Moeini   

Well, those tie in, because those are really important value drivers in your company. So you and your company's multiple range is a range of whatever it is six to eight, or whatever it is you want to be closer to the eight than the six, and these things actually get you closer, get you a higher multiple. So the more you invest there, the more enterprise value at the end of the day. And it's important to show up and say we're ready to be private equity. I can't tell you how many and even a sophisticated buyer. We're not just talking about private equity here, I guess, but, but I can't tell you that there's a big leap to going from CEO of your company to running a private equity shop. That is like structure, processes, practices. I mean, it becomes the driving force, and a lot of CEOs aren't prepared for that. And so, you know, those things are important to drive value. That's why they need to be on the checklist before you even take a call. You want to make sure you've looked at all these things. It doesn't mean that you're not going to sell if you haven't dealt with, you know, having a second leadership bench, it just makes you very risky. Just makes you risky. Risky means that you're going to be priced lower than everybody else.

Ryan Miller 

Okay, now that's the sellers. Now let's turn our gaze to the buyers. So when you're on the buy side, what's the red flag in the financials that tell you a seller is hiding something, and how do you verify it?

Holli Moeini  

Well, okay, so, so, from the buyer side, it the issue, the lens goes to if the numbers and the behavior don't align. We talked about this already a little bit. When the story the CEO that doesn't align, its red flags, that's why you want to get a bunch of information as quick as you can, so that you're not spending money and quality of earnings before you have to. So what I say from a buyer's perspective is that most buyers don't look at a full financial statement, they don't look at the balance sheet. Well, the balance sheet is an integral part of the financial statements, and I've seen most deals fall apart because they didn't look at their balance sheet. Most balance sheet adjustments, guys are negative to your EBITDA. And I'm going to tell you why, I mean, it's very simple, simple answer to that is that when cash comes in, it's usually revenue, right? Accountants know where to put that but when cash goes out, what is it for? Is it for cost goods, sold items, your you know, Country Club dues, I don't know, like people don't know. And they put things on the balance sheet, nobody looks at it. Then when it comes to scrutiny, it falls apart. So buyers, you got to go to the balance, get a full package and yeah, if people are withholding, if there's inconsistency and see if there's behavior. You can read the room. You can read the room. 

Holli Moeini  

And once you get into diligence, like there's some rules, I'm going to give Adam Coffey a shout out for this rule as well. So let's say you get to diligence as a buyer, if the quality of earnings turns at EBITDA, that's within 10% of what of what the seller is showing up. That's just business noise, it's fine. No retraining, no going back to the LOI, none of that. If it's 20 to 30% you know, it is a different conversation. You're going to, they're going to go back to the LOI and you're going to start negotiating again. If it's over 40%, disciplined buyers walk away. They just walk away, because it's not even the same company after that, right? And so, and you don't want to insult the seller either. The sellers think that you get value from, you know, blood, sweat and tears. It's not the it's not the truth, it's all the things we talked about today. And so, yeah, I think that that's kind of the and I've tried, I've had a buyer try to go back and salvage a 45% reduction. I'm like, okay, I let them do what they want to do. And like, okay, and he walked away. So they, the buyer, spent a lot of money, he walked away and that's probably the way it should happen, right? That they need to go back and fix their company. I always give, if I'm involved, I always give the gift of what I mean, they didn't ask me for advice but I love giving advice, it's hard on me to not give it. So I would give them advice and say, here, go back and fix these things, and then come, like, I'll call you in a year or something, and let's talk. Because oftentimes, like, that's how I got my pipeline when I was buying a bunch, you want to get them in the pipeline. So you don't want to just, you know, discard them, like, maybe they there is a way for them to turn it around. So I was like to give them something and invite them to a conversation the future. And I did have that was one of the ways that I got business without going through brokers. So that was one of them. So that's the buyer's lens.

Ryan Miller  

Oh, I love it. So sounds like the wild west at times. Maybe it feels like just sorting through this stuff, and you just got to figure out, where's the truth, where's the value, and just mine for the gold. I love it. So, Holli, final question for you before we wrap things up, this has been absolutely incredible. If a business owner listening to this right now has 24 months before they want to exit what are the three highest leverage moves they can make and should make starting today? 

Holli Moeini  

I love that question. Okay, number one is focus on EBITDA growth. So most founders focus on revenue growth only. And I'd like to challenge our founders to actually when they plan for their year, I want their EBITDA to grow even more than their revenue. That's the goal. And so revenue growth, I want them to show a great story of revenue growth consistent, and that's repeatable, and that's what you're going to get. You're going to get the top dollar for that's number one. Number two. I mean, I sound like a broken record. Get your numbers clean, tell a consistent story. You have to do that, and it start 24 months. You're going to be looking at three years. So, yeah, do you want to go back and clean up that third year? Yeah, you probably do. But you know, that's something that you need to think about. So I actually like a little bit more time, Ryan, if I could more than 24 months. But okay, and then there is the business cannot just depend on you, all right. So when it runs through you, it lowers value. So those are, like the three moves that you'd want to do right now today, if you're going to exit. 

Ryan Miller  

I love that. So before we wrap things up, is their final thoughts and ways people can get to know you. Maybe the your book. Tell them about that anything at all. Yeah, I love that.

Holli Moeini 

Well, people can find me on LinkedIn or social media and find my book on Amazon. It's funny that you said the Wild West, because I actually say that you're in the wild west of M&A. I actually put that in my book. So I love that you have that in there. So, so the whole map, the whole terrain, is in the book, and I, I'd be happy to connect with anybody in your audience. Thank you. Yeah.

Ryan Miller  

Awesome. So just to summarize everything that Holli and I spoke about, when you're looking to buy, explore what's happening in working capital. It's more than that, but that is a really important part to really understand what's going on if there's problems in the business, that's probably where it starts to show up first. The next one is, maybe try Adam Coffey's 30/20/10 framework, and just look at it right from the start. Is there a short list, does this even look like something we even want to entertain into resources at buying? And then three is just ensure that when selling, that the business can operate without you. You do these things, and you too will be well on your way in your pursuit of Making Billions. 

Ryan Miller  

Wow, what a show, I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better, and make sure to come back for our next episode, where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends, stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.