As a business buying culture, we are very aligned with growth by acquisition. However, are there times when this growth path can cause issues for buyers?

One of our clients was considering a business with a management team that had been around and working with each other for a long time. The management team was planning to stay with the business after the sale. We start the Quality of Earnings process, and we notice that the salaries of this veteran management team aren’t representative of their experience level. The buyer wasn’t initially worried about this detail. As long as the team was planning to stay with the business and wanted to continue working for their current salaries, he figured that they weren’t relevant to the deal.

We started with a new client who was a bit antsy and anxious—which is typical for someone doing their first deal. We talked to him about how the Quality of Earnings (QoE) is a tool that provides the bank with a properly formatted set of financials. It helps the bank understand the business thoroughly. The purpose of the QoE is to provide a true picture of the company’s profit and cash flow. This analysis is more substantial and better supported than tax returns.

Businesses either use cash or accrual accounting. You should be cognizant of which accounting style is being used during your due diligence process for your acquisition deal.

Last month, I discussed the four main reasons owners sell their companies: divorce, retirement, the industry is hot, or being burnt out. Another reason owners opt to sell is if they know their industry or business is about to tank. For the seller, this is a great opportunity to sell the business to a less-informed party. These sellers will negotiate as reasonable, friendly people, but in reality, they're trying to convince you to buy up all of their risk.