Schedule A Call With Philip

Episode 3

This is my new episode.

Please see below for the episode audio and full transcript.

Listen Now

Podcast Introduction

Hanny Akl is a Partner at Warren Averett leading their transaction advisory services group.  He and his team assist with an average of 130 deals every year.  Hanny delivers some gold nuggets to help you on your journey towards acquisition entrepreneurship.

Show Notes

Philip Arthurs

This is the business miner podcast. This is a show about incredible journey to becoming an acquisition entrepreneur. Learn what action to take to find business deals. You'll hear from average people who have taken it to fast track to business success in acquisition entrepreneurship. We'll dig deep into their stories to uncover their processes and businesses. They did it and so can you. Hello business miners! I'm your host Philip Arthurs, the evangelist for the better way to becoming an entrepreneur. Alright, today's guest comes to us from Birmingham, Alabama. He is a partner at Warren Averett and he's the leader of their transaction advisory group. Thank you for coming on the show today, Hanny, how you doing?

 

Hanny Akl

I'm doing great. Thanks for having me.

 

Philip Arthurs

Absolutely. He and I were just chatting here before we hit the record button, and I was just admiring his “You're killing me smalls” shirt. That's great.

 

Hanny Akl

We’ll start off with a bang.

 

Philip Arthurs

That's right. I'm really excited to have Hanny Akl on our show today.  Hanny and I actually used to work together a while back. And one of the smartest guys when it comes to due diligence and protecting his clients’ interest. So today, he's going to share with us some gold nuggets, and some things that are going to help you on your journey to acquisition entrepreneurship. Hanny, tell us a little bit about your firm and then maybe follow that up with a little bit of advice to our audience members about buying a business.

 

Hanny Akl

Yeah, absolutely. And thanks for the flattering words, we definitely have some war stories together that I'm guessing we won't get into on this particular podcast, so we'll save it for another day. But just a quick thirty-second overview of what I do and what we do as a transaction advisory practice, we actually sit on both the buy side and sell side. So we represent sellers trying to sell their businesses, we represent buyers trying to buy businesses and we find ourselves in a wide variety of deals as well. Across the country, we've got several that are international deals and in different industries, but our focus areas are generally technology, healthcare and manufacturing /distribution. We see more deals in those areas than any others, but we do have a few sprinkle in from others. And then sizes, we're working on million dollar deals all the way up to probably 500 to 600 million dollar deals. We see a wide variety of relationships and clients of the firm and being relationship focused we find ourselves in a lot of different deals. I'll be coming from the context of just that, wide spectrum of deals that we happen to see and work on 100 to 130 deals a year is about where our count is and we see a lot.

 

Philip Arthurs

I know you've had clients that are startups and clients that have bought businesses. Could you maybe discuss that further and provide some general advice to people as they're going through that process?

 

Hanny Akl

Absolutely. I think I failed to mention that, in my spare time, I'm a mentor at several accelerator programs, especially here in Birmingham, but there's a couple in Atlanta and one in Tampa, as well. We see a lot of startups as well. And those guys are usually trying to raise capital and think about how do I put my stuff in order, how do I think about growth,  and we do spend a pretty good bit of time with startup community and working through, just the general questions that come from there. I think your general audiences is thinking about, buying businesses, maybe for the first time, and so a few things that we try to say to our startup community, but also folks that are just trying to get into the acquisition M&A Trail, we try to tell them to, , stick to what you know. A lot of times you may have a look at or maybe thinking about a particular industry that's hot right now, let's just say its HVAC, and plumbing and industrial services. But you happen to be a dentist, it may not be the best answer to try to go after that. I'm not saying that you can't understand that business or any business for that matter.  If you study it enough, I'm sure you can figure stuff out. But I've always said if you're just now getting into M&A, and trying to really own a business for the first time, you really want to stick to what you know. And what you know, could be a wide variety of things but try to stick to what you know  that'll give you a leg up when you get there. Again, let me back up for a second, business ownership is very, very risky. We just have to say that and make sure everybody understands, while you're talking to your friends that are business owners or folks that are super successful and have owned businesses in the past. Most people just breezed through the fact that you could lose that in a fraction of a second and we saw that this year, unfortunately, it came to light very much so with Corona coming around in February to March. A lot of businesses have struggled or have had to shut down and that's the harsh reality. Just remember that business ownership is risky, and we're going to not touch on that anymore, because business ownership has a lot of value as well and has its own intrinsic value too. Remember that business ownership is risky and try to de-risk as much as you possibly can. A lot of things we're going to talk about today will come from that perspective. Stick to what you know to give yourself a leg up. Try to be focused and disciplined, because those are two very important things and if things aren't adding up, you have got to walk away. Discipline becomes one of the most important factors as you’re thinking about what businesses to buy or start, or how to look at things; just be extremely focused and disciplined. Also try not to cast a super wide net. Again, a lot of folks come thinking about, "Hey, I want to own a business so I'm going to look at anything and everything that comes around” that really doesn't work very well. A targeted approach has made more sense from what I've seen, which means stick to what you know, define specific targets that you really want to see and then go after those targets. And I think Philip, you're going to go over cold calling  and other podcasts. There’s certainly a way to figure out how to find businesses that match the criteria that you've set. I'm not saying list out 10 different criteria, because you probably won't find anything that matches all 10, but lay out two, three, four or five boxes that you need to check. Once you feel like you've checked those, then you move to the next step and you don't have to wait for a business owner to put a "for sale" sign on their business to go after that. Again, you'll cover that particular segment later and that’s a really important aspect of getting into this M&A perspective.

 

Philip Arthurs

That's really great advice. One thing that struck me is, go with what you know. I think you would agree with don't necessarily go with what you're passionate about because action doesn't always bring dollars. Hanny mentioned plumbing and HVAC, it's not a sexy business, but it's steady Eddie, it's not going to get disrupted by crazy technology, and it's got a cash flow. You have to understand that your business has got a cash flow. I was reading the other day that the number one reason for business failure, like startup, or any kind of business failure is lack of a good product, a sellable product. As a startup, they say, I'm going to do this crazy company, I got this awesome idea that people are going to love it, and then nobody loves it then it doesn't sell right. Then the second is cash flow. Buying an established business, you've got the cash flow proven. It’s there, it's going to cash flow and then you have to manage it. I would add that little tidbit. But that's great advice. I appreciate that. Hanny, you're doing 130 deals a year on average, I know you've seen some booger mistakes. What are some of the top three or five or just a few most common mistakes you see people make when they're doing like due diligence or putting together an LOI or a purchase agreement?

 

Hanny Akl

We do see a lot of mistakes and some of them are unintentional. Like you get into a deal and you don't know what you don't know until you get into the diligence phase where things start to come to light. I'm not going to say this is a true mistake. I think you have to keep these things in mind as you come in. Coming into the deal with eyes wide open is really important. Countless of times entrepreneurs or folks looking for businesses, they just almost look at things through rose colored glasses. It's tough and it goes back to being disciplined as mentioned earlier. Let's just take an example, you walk into a business and most of the time the business owner provides you with some sort of schedule what they believe their add backs are, so I'm going to talk about add backs pretty good bit so you'll hear me say that, so all these sellers’ discretionary income, SDE seller's discretionary earnings, or EBITDA, earnings before income taxes, depreciation, and amortization, and we'll use those terminologies back and forth. Think about those. When you walk into a business, owners will say, "Hey, here's what my business cashflow says to fill up your point", you're walking in trying to figure out what the cash flow is and what it looks like. A lot of times, business owners will add back a lot of things, their salaries, their personal expenses, all these things that could be cut from the business. What I find fascinating is that oftentimes, the acquirer actually takes those and takes them at face value, with not very many questions about "Well, okay, I'm going to add back your salary", but what about the person that would be doing the role that you're doing, which will lead to the next mistake. One thing that you have to keep in mind is don't look at it through rose colored glasses, try to look at it realistically, what is this business true cashflow? If the business owner is telling you that you can cut certain expenses, like rent, the question is, why haven't you cut them already? What exactly is stopping you from saving yourself money and making more money? And if that doesn't make sense, as a business owner, it's counterintuitive to the point of why you're in business. Just really thinking about that something you and I have always talked about in real estate, businesses and whatnot, pricing the business based on current value versus future value. You end up talking to business owners that are selling their businesses and they're telling you all the ways that this business could be awesome, all the ways they could grow and all the ways they can cut costs. Your discretionary income should be a million, and I'm only showing 500 on paper, but you know you'll make a million for sure and that’s it's going to make a lot of money. Then you price the business on that million versus the 500,000, you really need to price the business based on what it's doing today. If the seller has made mistakes along the way, then they're going to have to pay for that. That's the harsh reality of how this works. First mistake is looking through rose colored glasses.

 

Philip Arthurs

When you say rose colored glasses, you're like, "Oh, I really got to buy this business, I want to buy a business so bad that I will do a bad deal to get one".

 

Hanny Akl

That's right. You almost discount things that are truly important and we actually should talk about deal killers in a bit. It’s thinking about these things that are actually really important to how a deal is risky. Therefore you have to devalue the business and get a better deal to make up for that risk that you're about to take. A lot of times people get really hot on a business and they start to overlook those things, because they want to that they  ignore something major and make it seem like it's not that big of a deal by saying "I'll figure it out". By looking at things through rose colored glasses  you get into a bad deal, you pay too much, and you can't cover your debt. So next mistake, putting too much emphasis on the owner and the transition period that occurs. Don't get me wrong, if I was doing a deal tomorrow, I'd still try to lock down an existing owner as long as I could so I have the option of having them around for a while. But what we've seen is oftentimes the existing owner, so the current owner versus you as the next owner, they just don't mesh as far as strategy goes, you all can be the best of friends even before the deal. But once you get in bed together, it just doesn't seem to mesh as well. You have your own philosophies on the business and try to get him into what you know, so you have your own thoughts on how to run this business and things to do and how your own leadership style and your own culture and values. Trying to keep the existing owner there alongside the new owner, sometimes just doesn't mesh very well. And people, the employee base, kind of get in the limbo, trying to figure out who do they listen to while thinking this was my boss for 50 years, and now you're the new boss then you guys have conflicting stories here. How do we deal with that? One mistake that we've seen is folks trying to lock down the owner and keeping them there for as long as two to three years, and that just doesn't ever seem to work. The owner sometimes they'll walk away themselves, because it just isn't what they signed up for. They've always been their own boss and now they report to you and your style. You just have to think that through  in the diligence phase, so that you're not surprised three months into the deal and you're now trying to figure out how to unwind this owner who has hurt me for the last three months, or it didn't transition the way they should have. Because we were thinking we had 18 months together and now I'm trying to shrink that down to six. You got to walk in thinking that the existing owner should not hang around more than three months or six, depending on the business, and just try to figure out a transition plan quickly to get through all the things that you need to get through during that time period.

 

Philip Arthurs

I like what you said working with the existing owner for at least three to six months and that's a good advice. I would also advise people that when you buy business, don't come in like a bull in a china shop and just start changing everything about the business. Correct me if I'm wrong, but I think you need to wait at least three months before you start making any changes. Unless there's like a gaping hole obviously change it like they're just burning money in this one area. But in general, don’t go starting to change a million things, but get to understand the business fully first. You're buying another business in your industry, coming in and you've got new people, they're looking at you like, who is this guy? What's he going to do to our company? He's going to change everything. Well, go in and build a relationship, understand, ask questions and be in a learning mode for at least three months until you get an understanding of the business and then slowly start making some changes.

 

Hanny Akl

Yeah, and I don't know that there's a rule of thumb out there, because every business is different in the way you kind of approach things and leadership styles. But I don't disagree that coming in and changing everything on day one is probably not the best answer. Waiting around for 12 months may not be the best answer either. Three months seem to be a pretty reasonable amount of time, it's not too long, but it's just enough to get to know the business better. Walk into a business that you know, but that doesn't mean you already know this business, that industry, and things about the business and not that particular business. There’s a period of time that you just need to learn, listen, watch and just understand the way things were done before and then provide value after that. I will say in the spirit of kind of what are the mistakes during diligence, I think the key to what we're talking about there and boxing that in is having a good plan. A lot of times people are so focused on buying the business and the aspects of the diligence process and getting to closing, they forget that they need a plan day one, and we call it as day one readiness. But you got to have a day one plan that runs you through day 90, day 120 and day 180. You really got to lay that out, you got to put it on paper, get a whiteboard, a lot of times pull up a blank whiteboard and just talk about all the things we're finding and diligence and how do we plan around that. Key people, key customers, key vendors, anything and everything needs to hit that plan. It goes to the point that you're making where you may not want to change things for the first three months but that doesn't mean you don't have a plan. Here are the things that we saw during diligence and leading up to the moment that we close and now, these are the things that we want to execute on going forward. In the spirit of diligence, just make sure you have a day one readiness plan, that's probably a common mistake that we see. Just a couple more, running out of time happens a lot. As soon as you sign the LOI and you've got exclusivity, you need to hit the ground running. A lot of times people will wait a week, two or three before they do things and they're waiting on the lender to give them some term sheets until unfortunately, they just run out of time. There's a lot of diligence to be done, you may have 30 days exclusivity, you may have 90 and you need to move quickly through your diligence. One thing that I found that folks make mistake with is not focusing on the deal killers first. We'll talk about deal killers in just a second, but not focusing on the deal killers first. There are more important diligence items and there are less important diligence items. A lot of times people go to the less important diligence items because they're easier, they're faster and can tick those off real quickly. Well, all they're doing is creating a distraction. You also may have fees for an attorney or a CPA or whomever that you've hired to be your expert to help you through this process and those fees are adding up. If you don't focus on the deal killers first you might find yourself with those guys have already done whatever they're doing with their reports and then you get 60 days into it and call it $20,000, $50,000 or $100,000 worth of fees later then you're literally having to walk away from this deal because things aren't adding up. Even more important goes back to being disciplined. You may find talking yourself into the deal, because you now have $20,000, $40,000, $50,000 or $60,000, racked up and you feel like you need to do the deal because you've just invested all this money. If you're doing  one, five or ten million dollar deal, what is $20,000 to that? But it's hard to get past that, it's hard to swallow that pill of "Hey, I just spent this much money, am I really going to walk away over this or this or this" and them all together the hindsight says you should walk away. You’ll be thinking about that on the front side and saying, look, I see all these things, forget the fees that are just meant, let me focus on what I know and I know that this business probably isn't investable today so I probably need to walk away. You’ve got to be disciplined but running out of time is what the message I'm giving here is and just making sure you focus on deal killers first and make sure you start taking away those things so you don't run out of time and make any rational decision with not all the information that you need.

 

Philip Arthurs

That makes perfect sense. There are a lot of deal killers out there. I can think of a few just off the top of my head but what would you say are some of the top deal killers you've seen out there?

 

Hanny Akl

Yeah, so we've talked about deal killers again. I'd love to hear your thoughts on this. So let's see.

 

Philip Arthurs

Honesty is a big deal to me. A deal killer to me is catching the seller and a lie. It’s pretty easy to catch somebody in a lie. But if they're starting to lie about something, what else are they lying about? So honesty is a big deal to me. That's a very high level deal killer. Obviously, revenues got to be there, I know, but you're my guest I want to hear from you.

 

Hanny Akl

I think you're touching on two very important things. We see more often than not, so it's hard to walk away from a deal when smaller things don't add up. When expenses aren't quite right, I can't get a handle on this key person that maybe I need and maybe I don't. And when revenue doesn't add up and really doesn't, they tell you they have a million dollars of revenue, and when we get to do in our diligence, we find it’s closer to 800,000, or 700,000, or something else. That's a natural deal killer, right there and just shuts down everything. Because everything builds off that revenue because that’s what you're buying.

 

Philip Arthurs

I'd like to do a proof of cash when I'm trying to prove out. And that's a super easy way. I used to be an auditor and proof of cash was a good and excellent way to audit your revenue. Because you factor in your beginning and ending receivables and there's some other little things in between, but you should prove out your revenue through your cash and your AR.

 

Hanny Akl

We build in a proof of cash almost in every deal that we do, unless it's an audited company. You might remember this, proof of cash is a fraud fishy procedure, believe it or not. There's a reason that it's a fraud procedure. And so we build in proofs of cash most of the time. The only time we don't is generally when the business is audited, and even then we think about it being audit, we still do it anyway. Because again, it's only if you find fraud, or you suspect fraud so therefore, you build that into your audit, or there's other measures that make you. But definitely if the revenue doesn't add up, that’s a shut down deal killer right there. We spend a pretty good bit of time beating up revenue, looking at customer concentrations, looking at contracts, thinking about how's this revenue going to be going forward, thinking about growth, thinking about churn and have you lost customers in recent years. So we've come across a few deals where the revenue looks like it's growing but if you looked behind the curtain, you've seen really high churn where they lost 50 customers in the last six months and they gained 51 customers in the last six months or 52. It’s this constant churn of customers that makes the revenue look good but that indicates a serious problem behind the scenes of why can't you retain your customers.

 

Philip Arthurs

Those are excellent points. I've actually seen similar instances along the same vein as the revenue side but dramatically underestimating costs as well. I actually saw this one time, where the owner decided to shove a bunch of the costs from the company and stuck it into construction and progress, which is kind of like a fixed asset account away like when you're capitalizing something and you're putting it on your balance sheet but you're not amortizing the depreciation. So you're not depreciating that fixed asset. That's another thing I think along the same lines of being dishonest on the revenue and we'll also look to make sure that the cost of goods sold and other expenses aren't being shoved up into some kind of asset account.

 

Hanny Akl

Right. And that's why we try to apply some critical thinking and that's something I forgot to say earlier. But being a critical thinker is really important in M&A. It’s important in any business, but most importantly in M&A. We spend a good bit of time critically thinking about a business like are there missing expenses. A lot of times if the business is not audited, and we don't have time to perform an audit which certainly not what we do, we only spot check certain things to source documents and we'll try to tie it to a tax return. What's interesting about that, is a tax return you self-prepared but doesn't have to be 100% accurate. Sometimes it's not and we do know is that a lot of business owners shove as many expenses as they possibly can into their tax returns. We like to compare the general ledgers to the tax returns from that perspective, moving off of revenue for a second, thinking about expenses now where our business owners are not showing you all the expenses and painting a rosy picture again, that maybe isn't inaccurate. A lot of times we'll go to the tax return and that anybody listening to this podcast can do just like the proof of cash which is a very easy procedure; this is something that you can do to just gut check expenses. Business owner may on his balance sheet and income statement shift expenses often into their balance sheet and not think twice about it and think they pulled the wool over your eyes. Well, if you try to tie it to the tax return, I can guarantee you that person tried to expense as much as they possibly could to get their tax as low as they possibly can. And if you find a discrepancy between the total expenses on the tax return, versus what they're showing on the income statement, you now have more fuel to ask, like "Hey, what's happening". Then on the flip side, talking about critical thinking, think about the business, again sticking to what you know, you should have some idea of what gross profit should be, what SG&A should be, and things on the income statement that should just be routine costs, is there rent, internet fees, or copiers and there should be these kinds of expenses. If you don't see them, you need to be asking about them. Those are the things that we kind of look at and say, okay, critical thinking goes, how should the income savings be built? Do we see everything we need to?  I don't mean this in a bad way but we're on the sell side and the buy side, and so a lot of times we're on the sell side, this goes back to your honesty comment, which I agree completely that honesty is the best policy.  But when you're in the situation of trying to sell something, a lot of times you want to pretty it up and make it look nice and get the value bigger and get the most you can, we're not going to call that dishonest that's just prudent business practice, that's fine. But we see ourselves at sell side meetings where business owners will ask the question like, do I need to tell them this? Do I need to tell them that? Do I really need to show this? How should I do that? And you know, our coaching is always saying, you want to be honest in everything you do, because the last thing you want is for this to show up in diligence, or even at the closing table, or even worse after they close the business and there's reps and warranties and ways for them to call back. You want to be as honest as you can all the way through the process. Now, that doesn't mean that you're just going to disclose every little thing that may not be that important. Let's go over the 20 things that you'd love to tell someone, if someone gave you truth serum and you were out there having to just tell the world everything, what would you say? So we have that conversation, we hear all those things and then we say, okay, well, let's make sure that we tell this story correctly. Because what I'm hearing you say as an independent person is not what you're intending to say. Let's just make sure we get the story straight but that doesn't mean we're trying to fabricate the story, either. We just want to make sure that, we're telling the right story. I agree with you that honesty is important but you got to remember these people are prepared for telling you certain things, you just got to dig deeper and not all people are going to be as honest as we all want them to be. You really do have to check and that's why we're doing diligence.

 

Philip Arthurs

Two things I want to hit on that you mentioned kind of go hand in hand. One, when he's talking about checking the expenses to the tax return, there are some things in your tax returns, like M-1 or M-3 adjustments that are booked as tax differences. Because it doesn't line up at first glance, they'll say, "Oh, this person is committing fraud, they're lying to me".  Into my second point, which we'll go tie in together with the first point is you got to have a good team. You notice Hanny keeps saying "we", so then Hanny's brilliant, he is a critical thinker, but he also has other critical thinkers around and when critical thinkers get together and they put their heads together, there's an energy that's created, brain juices start flowing and ideas are born. You gotta have a good team. I always say, number one person on your team should be your spouse. Make sure they're on board with you, make sure they're good, make sure you gotta spell it and if you're not married, have a significant other or a best friend or somebody who knows you and is willing to call you on your BS. Number one is that. Number two, you also need an attorney, you need an advisor like Hanny here and you need a good tax accountant. You know those should be your minimum team right there. You can have others on your team, but I think at the very least you need to have those three. And part of our The Business Miner coaching program, is help people through that whole process from beginning to end and connecting them with the right people, bringing on other guest coaches into the program and guiding people on their journey through acquisition entrepreneurship. Hanny, you're dropping gold nuggets,

I love it. I could talk to you all day. You and I get to talk in, and get to talk in is southern for continuing on talking. Anyway, were there any other deal killers out there that you've had?

 

Hanny Akl

Yeah, let me highlight a couple and yes, you're correct, we could talk for hours about this and every deal is different. If we got to talking about a specific deal, in southern talk, we could end up saying a lot of different things. I'll say a couple other things and I know you would expect a CPA to say this but if the books aren't clean, meaning things aren't adding up, they can't produce financial statements, they can't produce revenue by customer, they can't find their bank statements and they don't reconcile bank statements every month, there's a lot of things that from a bookkeeping perspective that we're looking for and if the books are not clean, sometimes the business just isn't investable. And I hate to say that, but it may have good bones as a business but if you can't prove all this stuff out through like true results, because that's what you want, and if you can't check all these things out then the business is not investable. Unfortunately, you have to pull the plug. I don't know that you can discount enough to take on that much risk and quite frankly, these things that aren't adding up, you can't just continue to turn a blind eye to them, it goes back to looking through rose colored glasses. One, two or three things maybe you work your way through, but if there's several things that just aren't there and it's taken a long time to produce information, and it seems like they're producing it on the fly, there is such a thing as a business that's not investable. I would say being disciplined, you have to shut it down. That's just like the revenue not being real, which is an easy, like plain vanilla deal killer, everybody understands that and you need to understand that if the books aren't clean, that's a straight up deal killer and I know you'd expect CPA to say that you have to understand that things don't check out.

 

Philip Arthurs

And a huge red flag, if they take a while to get you the information and then the information they give you is all in Excel, you should at least get some kind of like system generated. I like and love Excel, and there's a lot of software you can export your stuff out into Excel, but I'm a little weary of Excel documents, because they can be easily manipulated and  your system generated files can be manipulated as well. But what do you guys do to account for that Hanny? You're going through due diligence and these companies are providing a secure server or have offsite file storage, it's secure, it's encrypted and they can put all their documents in there and then you open it up and your P&L, balance sheet and all your fixed assets are all in these different files and  all are in Excel.

 

Hanny Akl

It’s a bit of a red flag, just thinking about the size of the business is important here because smaller businesses lend themselves to using QuickBooks which we see and then we actually had $100 million company on QuickBooks. But QuickBooks is a great product, and it's easy to use and that's not a problem. The point is, smaller businesses if it's got several Excel workbooks it lends itself to errors and so you just have to be even more careful that it's not an end to all situation. But to your point, does it take a long time to create stuff? Is it all coming out of Excel? Does it all add up together? Do they have file storage system somewhere where they're actually keeping track of things, therefore they're organized? These are all important. I would say if I saw a bigger business, that's run very disorganized, that would be a red flag not quite on the financial side but more on the operational sophistication side. What else has this business owner chosen not to invest in? If you're earning a certain amount, a million, 2 or 3 million of SDE in a business, you should have a decent system enough to be able to do things. If I, as a business owner don't value seeing good financial statements every month and knowing where I am and making sure that things are in place, what else don't I value? What else is there? Now in some cases, you can say, "Hey, that may be low hanging fruit", therefore I can get a good deal on a sophisticated business and raise the value just by doing that. You have got to look at it from both sides of the coin. I'm not trying to say focus on one or the other but I do think that it's important that the systems are in place, the books are clean, things not clean be clean, to the point where they're perfect, but things have to be there for you to be able to do your diligence and make sure you feel good about what you're investing in.

 

Philip Arthurs

It's something else that you  said along those lines that reminded me of something I read on an article a few years ago, where over 90% of spreadsheets have some sort of error in them. When you're looking at the company's books and records, there may be some complex transactions that they're dealing with and they hand you their Excel document that it might be like their main document. And every company has one that have like one or two key spreadsheets that's helping them book revenue or cost or something that they're using that spreadsheet for and there's a really good chance there's an error. Then when you click to do the formula audits, look at what's kept recalculating, get that spreadsheet out, recalculate it then you'll be floored how many spreadsheets you come across and that things don't foot or cross foot, or the number that you think it's supposed to be multiplying is not multiplying that number, it's some other number. So be very disciplined as Hanny said.,

 

Hanny Akl

Absolutely. It lends itself to a little bit more air to the point you made. I'll make one more point. You walk into a business and the business owner is everything to the business. What I mean by that is, they hold almost all the customer relationships, they're the ones maybe even doing the bookkeeping, and the ones managing all the people. Everybody reports to them, vendor relationships, they negotiate all of that, they may even be in the field, performing some of the services with which we also see. That devalues a business very quickly, which is interesting, because most business owners believe they raise the value of the business by being in everything. Everything must be right, because they're watching at all, and when you walk into a business like that, it gets very hard for you to transition the business to you. And to do things the way you need to do them, will take a little bit longer. Remember that the owner and your styles may be different. And that’s if you feel like you need 12 months to transition, because they are in the middle of everything and we know from our statistics that most of the business owners that sold their businesses don't last more than three to six months, then there's an issue there. Keep in mind it does relate back to financial diligence, when we see that and actually finding it within our reports,  it's something that you need to keep in mind that if a business owner is so integral to the business, that it can't function without them, then the business has devalued right there, and may not be investable, either. You have to be real careful, again, not to look through rose colored glasses and assume that you could figure this out quickly, that you can kind of untangle this person, this person who has been in the business for 30 to 40 years, you can't just untangle that after three months and move on. You don’t assume that it's going to be easier than it really is. When you see that, that it's not a deal killer, and is just plain vanilla, like the revenue not adding up but it certainly can and most of the time is a deal killer. Most people will approach it, try to work around it and figure it out and in different ways try to find ways to work this person out over the next 3,6, or 9 months and it's easier said than done.

 

Philip Arthurs

Would you say that, that is more of a problem in some of the smaller deals? Or do you also see that as a problem in some of the $500,000 or $500 million deal? So do you see that as a common theme in smaller businesses or?

 

Hanny Akl

I would say you will see it more often in smaller businesses than in larger ones and it lends itself to that, because they have less discretionary income. And you got to spread, the owner has to wear multiple hats, but we still see it in larger businesses. I was going to say a $500 million business that we've worked on, also have folks that are so critical to the business that you got to tie them down. And in some cases, they're the business owners. I would say that it lends itself more to small businesses, but it still happens across the board.

 

Philip Arthurs

Yeah.  So, in a business where the owner is so important that you cannot remove the owner, and the business still stay afloat, I would argue that that's not really a business. I would say that is a job that the owner has created and has some a little bit of processes. I think an actual business is something where there's employees or contractors, there's processes in place and you've got people on your team and you're starting to grow it. I'm a big fan of the book, The E myth by Michael Gerber. He goes into that a lot about the different personalities, you got to be to be a business owner, you got to be an entrepreneur, you got to be a manager and you got to be a technician. Some of these businesses where the owner can't be removed, he's basically a technician. He's not really a manager, he may be somewhat of a manager but he may not be an entrepreneur. He may not want to get any bigger than where they are right there and it's so hard to take the reins there and grow that from what they've got it. Absolutely great advice Hanny and I'm really happy that you came on the show today.

 

Hanny Akl

We’ve been all over the map today.

 

Philip Arthurs

And that’s what I love – to sit back and talk about doing deals, things that pop up and things to watch out for. Everybody have their unique perspectives on doing deals. You have unique perspectives having 130 deals on average every year, getting to see the buy and the sell side. That’s definitely not everybody has. Last thing I wanted to ask before going to the gold nugget round, the idea of doing the due diligence checklist, which we’ve heard before, can you really have that checklist with every deal is different like a fingerprint or people with different personalities or different ways of selling a product. What are your thoughts on that due diligence checklist?

 

Hanny Akl

We get asked that all the time. Is there a diligence checklist out there? There’s a lot floating around but we don’t have a checklist per se but we do have is a diligence request list that could serve as a checklist to the point that it could address deals that are different. Even like two HVAC deals, exactly the same size will be very different depending you seeing their processes, is the owner deep in it or not. You just have to work through that. We operate with very few checklists so we can critically think about every business in and of itself, every transaction in and of itself and what are these people looking for. Let’s do what we have to do to dissect the things that we need to consider.

 

Philip Arthurs

You critically think with the team.

 

Hanny Akl

With the team, absolutely, there’s no question about it. We don’t do anything by ourselves. So yes, there can be a diligence checklist floating around and you can Google it where you’ll come across something. And we’re happy to share a template we’ve created and put out there but I’m happy to share a couple diligence request lists as examples to anybody who’s looking for something like that just to get things started. But checklists are hard to come by in this business because it’s very much different in every deal.

 

Philip Arthurs

I agree with that. So to the gold nugget round, Hanny, what business books on diligence or business acquisitions would you recommend to my fellow business miners out there? What books should they be reading if they want to learn more about mining business?

Hanny Akl

There’s so many books out there on this and a lot of them sound similar. There are some wildly different philosophies out there. I read Buy Then Build not too long ago and thought it was a really good book. I got a lot of stuff from there, because believe it or not it helps us in what we do in the sell side as well as the buy side and I’ve got that always handy. So Buy Then Build is a really good, easy read if you’re starting in this M&A space and it really shows you a lot of things to think about.

 

Philip Arthurs

That’s Walker Deibel’s Buy Then Build. I read that book a few months back and he really did a good job on that book. That’s a good recommendation. Lastly, what final gold nugget could you impart on the business miner community?

 

Hanny Akl

Let’s summarize everything in four words or less. 

Philip Arthurs

You said “discipline” at least five times and “we” for two million times.

 

Hanny Akl

Yeah, you’re hitting those exactly. Being disciplined, I can’t stress that enough. Being focused which goes along with discipline, that’s really important. Being a critical thinker, really looking into things and deep diving into what does this mean realistically. And something you heard earlier in the podcast was stick to what you know. That doesn’t mean you can’t learn but you stick to what you know especially if you’re just getting into this. You want to give yourself the most advantages you possibly can and those four or five nuggets are probably the way I would look at.

 

Philip Arthurs

Absolutely. I’m a big believer and readers are leaders. If you talk to any successful person, pretty good chances they’re going to be a reader. Hanny mentioned discipline a bunch of times and I think that is a very important term in life but especially in buying businesses. If you want a good book on discipline, Brian Tracy has book called Eat That Frog and it’s a really solid book on discipline. Darren Hardy has a book called The Compound Effect, that’s a really good book about doing little things consistently over time and that they compound and turn into really great things. The guy Jim Rome, probably their mentor, anything he’s written you might want to check out cause they’re all about discipline. If you want to be successful, you have to be disciplined. You business miners out there, Hanny has delivered us some really good gold nuggets today, you want to check him out either by finding him on the website Warren Averett dot com or by his email [email protected] .com, if you have any questions or maybe a business that you want to sell. He does value curation work and assess people in buying small and large businesses. He’s a great guy, has a lot of wisdom and can really help you out. Thank you so much Hanny for being on the show today and God bless.

 

Hanny Akl

Thank you Philip, thanks for having me.

Want To Start Your Own Acquisition Entrepreneurship Journey?

Step 1
Schedule A Call

Schedule a call with someone from our team to see if we are a good fit for each other. While we wish we could, we cannot take everyone due to limited capacity.

Step 2
Enroll In Program

We enroll you in our business miner coaching program, the most proactive acquisition entrepreneurship coaching group on the planet!

Step 3
Realize Your Goals

Watch the course modules, attend group sessions, attend one-on-one sessions and engage with other business miner students as you fulfill your entrepreneurship dream!

Schedule a Call with Philip

[Free Download] The Business Miner's Letter of Intent Template

Want to buy a business, but don't know where to start? Philip's Letter of Intent template will get the conversation started quickly and effectively! The template covers:

  • Key considerations leading into the buying process
  • A documented understanding of the initial deal terms
  • Important factors that should be part of the negotiation process.

Don't be at a disadvantage when you buy your next business. Get Philip's Letter of Intent template today and start the buying process clearly and confidently.

About Philip

Philip is an investor, entrepreneur, certified public accountant and experienced advisor who thrives on helping others succeed!

He has served numerous public and private companies in roles such as a transaction advisor, turnaround/restructuring advisor, external financial statement auditor, internal auditor, internal controls consultant, CFO, and Corporate Controller.

Philip owns multiple companies and has helped many others buy and sell businesses.

Companies Philip Has Helped

Businesses and clients I've helped with my expertize and coaching program.

Frequently Asked Questions

Isn't It Time To Make Your Business and Entrepreneurial Dreams a Reality?

Book a Free 1-Hour Consultation with Philip and Learn How to Buy A Cash Flowing Business Today!

Schedule A Call With Philip

Podcast
Read This Before You Buy A Business

About Philip
Contact Philip

Log In
My Programs
Forgot Password

Terms & Conditions
Privacy

Schedule a Call with Philip

Join the Business Miner coaching program and learn how to buy a cash flowing business.

Schedule a Call with Philip