Elliot Holland, thank you for joining me today on Acquiring Minds. Thank you for being uh having me here. I'm looking to have some time. Elliott, you are the founder of Guardian Due Diligence and longtime Acquiring Minds listeners will remember you from an earlier episode. So, you were on uh in the fall or late summer of last year. Then we had the chance to meet uh just a few weeks ago in Orlando at SM Bash. So, that was um fun to to break bread and have some beers. Sure. I wanted to have you back on because you are putting out content around risks that you so as a as a diligence firm in the lower middle market. You are working with searchers and looking at deals of searchers ve very characteristically similar to those that acquiring minds guests and listeners are doing. Uh and you see the same sorts of risks come up over and over again and and we hear about those risks and they come up those themes come up in the acquiring minds interviews. And there's two risks in particular um that you and I have talked about that I thought warranted some special attention from you. And so I'm going to just say what those are real quick and then hand the mic over to you for you to define them in more detail and then how you at Guardian uh mitigate those risks for for your clients so we can really we can really learn some folks in the audience can really learn how to do some of this stuff on their own. So the the two risks are industry risk which kind of speaks for itself but essentially you looking at acquiring business acquiring a business everything about that business looks good uh the business internally but of course what about the external factors is the industry that it's in about to tank or are there there's some other variable that's about to change things negatively in that industry first. Second the seller risk. So the will the sellers often are leaving the business um if not immediately imminently shortly after you take the helm. Uh and what risk does that pose? How how how um c how can the business be extricated safely from the seller? So with those two things defined, Elliot, why don't you start with the first one, the industry risk? define it with a little bit more color than I just gave it and then and then let's get into some tactics about how you at Guardian help your clients mitigate that industry risk. Sure. And the reason this is so important to to anchor it is that these are risks that you can get a clean quality of earnings and a great asset purchase agreement and great financing. And if you don't check these things, your deal could still go very poorly. And so the reason we're covering it is because these are a bit more nuance types of things. So on the industry side, what you're trying to figure out is is the industry growing, shrinking, changing, anything of that nature. And you're particularly trying to be careful around a seller who's been in business 10, 20, 30 years who's telling you it's because he had a heart attack or something, but it could be because he sees the industry going terribly poorly or he's not prepared for the new uh new normal in an industry and selling it to you for you could take that fall. You know, people talk about catching a falling knife. Um but let me tell you an example because I think that's always easier. I recently put out an article about um buying into a dying industry and it was about a deal I tried to get done in 2016 in Arkansas and the deal ended up blowing up. But when I got a chance to talk to the seller, he told me that he was selling because he thought um a certain president was going to win and that was going to sort of completely torpedo his business because some regulation was going to come in and the business was going to go down the tubes. And so he was selling to get out of that risk. And one of the reasons why that deal didn't go through is a different president won and he didn't feel that way and he kept the business. Um, but it taught me a lesson around, you know, that wasn't the three reasons he told me when I had dinner with him, his wife, and his four kids, right? So, you gota you got to be careful. And I'll give some other examples. So, um, let's talk about somebody who is buying something that looks like a pelon or some sort of home gym situation. And I'm using these recent examples because I think it'll click in people's head easier. Those businesses will have done amazingly well during the pandemic. And now you see that they're having issues already. And so if you're buying a business like that, your strict quality of earnings, right? Just that what's the trailing 12 month will come back fine. But you're not buying trailing 12, you're buying future five, future 10, future forever. So that's why industry becomes important. Um even things like Facebook marketing agencies. Right now you guys are seeing Facebook stock go down. Apple cut down on what they allow them to do. So, if you're buying a marketing agency today that's heavily focused on helping people with their Facebook ads, you have to realize that that's going to shift as a mix of most marketing companies going forward. So, these are the kind of things you have to think about. Great. Great. And okay, so so these are the industry, you know, industry risk. What is so difficult about um mitigating this risk? it it seems to me is that you you know it's a classic case of you don't know what you don't know. So you don't even know the quest questions to ask often since you're a newcomer to the industry. So anyway, te tell me what how you know guardian how you approach this for your for your clients at Guardian. So we we tend to be a bit more holistic and how we think about diligence. So our work doesn't stop at the quality of earnings. We try to help people think if the business is worth what they're paying for it. And on my website we say we stop people from buying a bad business. So, we look at things like um how do you get the information on a shoestring budget? So, I'm going to go like shade tree mechanic on you guys. So, one of the ways to do this is look at LinkedIn, look at Twitter, find somebody who's in the industry. Um, send them a message. It should not start with, I know you're busy, but I delete all of those in my inbox. It should start with, I'm buying a business in your industry and would hugely benefit from 15 minutes of your time to not sink my family with the million-dollar personal guarantee. you do 20 of those, 10 of those, you're going to get some folks to talk to you and they're in the industry. They know it back and forth and so you'll get some solid information. Another way to try to get this um cheaply, find the closest public comparable. So, if you're buying into HVAC or plumbing, you know, Google what's the biggest plumbing or HBAC company in the nation, hopefully if they're public, you can go to their investors page. Don't look at their annual report. Don't look at their quarterly reports. You want to go to their investor presentations. When they go speak to Goldman Sachs, Bank of America, um, about what the business is doing to try to cultivate new investors, what they put together is a 30-page report on what the industry is doing, what they're doing to take advantage, their financials. And so, you get all of the gain that the public company paid for for free on their website. So, that's a second way to do it. You can also look at you know Wall Street Journal, Financial Times, The Economist and a lot of times when industries are changing um articles about those will be in those places or you can Google you know uh HVAC problems you know and look in the news section of Google. I heard uh somebody put a tactic on Twitter that if you search the name of an industry industry and then like PDF or however whatever the the code is in Google to specify that you only want to see the search results of this file type like so PDF in this case it turns up great industry reports because industry reports are typically you know delivered as a PDF and so you can kind of uncover things that aren't necessarily for public consumption but Google has managed to to spider anyway. way. So, HVAC industry report PDF uh could could turn up some industry some some interesting finds. And actually on that point, Elliot, so there are of course um companies that produce industry reports uh I IBIS or Ebisworld uh I believe I'm pronouncing that correctly. Um on searchfunder.com, if you're a men member of search funer, they have a partnership with that organization and another industry reports organization. You have access to these for free. and I've I've peaked at a couple of them and they're they're they seem like they're pretty hefty 20page, you know, documents. What's your opinion on on those? So, they're a good place to start. So, my mind is the way you look at these nuance issues is the same way I look at diligence. So, I want to triangulate data. So, as a buyer on the cheap looking to get smart, you have to triangulate data. So, go to EBIS world. I think it gives you the drivers of value in those industries. I think it does a good job of sort of laying like the foundational like lay of the land for what's going on. Um, but I think those reports can be dated. They can be a bit simpler than the real sort of challenges in the industry are. And so really in the past when I've used those, I've used them to circle the drivers of value in that industry and then go dig further in how do you how do those things manifest in the business I'm looking to buy and then how are those things how can I do more research on those things to get to the answer. So I think that's a valuable tool to to add to your mix. You know, at the end of the day when you're making huge decisions, you want to be listening to more than just, you know, one or two sort of points of data. And when you say drivers of value um can you can you give me a concrete example? Yeah. So for instance in HVAC one of the big drivers of value is recurring revenue. I mean recurring revenue is the big deal everywhere right? And so a lot of HVAs companies have way more new construction work than maintenance work. And so if you want to increase the value in HVAC you want to purposefully seek out more maintenance business because that's valued at a way higher multiple. So, if you were able to read EVA's world and to find that out, now all of a sudden, you're looking at your company, the broker's giving you some mix of of new construction versus maintenance. Now, you understand why that's important, and now you can dig further into the financials or the operating metrics to see exactly how much residential stuff you have. And great I you know and to me it seems most attractive to really just talk to people in the industry like you said. So reaching out to them cold and and and saying you know with a appropriate message just getting straight to the point. I'm about to spend a million bucks on a business in your industry you know get please give me 15 minutes of your time. Uh that that seems like really effective. Um are there any you know any risks to that? Sometimes, well, a couple of risks. So, when you're speaking to a person, you always have to understand what their bias may be. So, say you get a person that's done poorly and operate in their business. They may tell you the industry stinks, but it it's not that's not accurate data because it stinks for them. So, you got to be careful about people who may have a a negative opinion because they're operating poorly or have stepped away from the business and the thing is just dwindling. The other risk, and I I would put that in air quotes, is yeah, the advice that people will give you when they've been in something 20 years can sometimes be deeper than the level that it's actually actionable for you. So, for instance, when I was looking at the same company in Arkansas, durable medical equipment, so wheelchairs and stuff like that for folks in their home taking care of themselves. I called a guy in PA, part of a family office, and asked him the same thing. Got on the phone and he's like, "Hey, you know, our whole strategy around buying durable medical equipment companies is buying them in poor areas because they people don't service that area. you get better payer mix and and you can just really really you know expand your services and blow up and you won't have the same competition you'll have in more affluent areas. That's great information. Well, the business I was buying was where it was at. Yeah. There was no way to move it. And so now that I knew that, that's great. But it didn't necessarily help me make a decision in the company that I was buying at that time. So that's one example of sort of what you get from folks can be a bit deeper level than what you can sort of actionably go do something with. Yeah. Yeah. For sure. Well, and going back to the the first example of, you know, if you talk to somebody who's just poorly operated their business and they're frankly unhappy with the industry, you can still, you know, identify what have been so, you know, ask that person what is so challenging about their business. So maybe they did things wrong, but at least you can know what a we like a potential weakness to look out for yourself might be. Sure. I think that's absolutely correct. And then I'll tell anyone and I tell all my clients, you have to be thoughtful about the stuff that people won't tell you, you know? So like in that same scenario, the person that may be having a bad business, you ask them sort of what's the challenge about it? the stuff that they say, they're not going to say, "Hey, I'm a lazy bum and I I live in the Bahamas and I turn it over to my general manager and and and and and he's terrible." You know, so again, all the reason you triangulate data is because you want to be looking at the mission critical points of your decision from multiple angles. Yeah. Yeah. And when reaching out to the existing owners, do you ever find that there's they don't want to help somebody that could be in their own industry for competitive reasons or as long as you're not in their geography, they'll be, you know, they're fine. If if they're in Florida and you're looking at buying a business in Seattle, they're not going to they'll be fine to talk to you. So that's the elephant in the room. So, you know, my email strategy or LinkedIn strategy at the time was to that direct message. Hey, putting a million dollars up in a business in your industry, 15 minutes would change my life, you know. Um, and then if I didn't get a return, the second message is the business I'm looking at is in Washington. You're in Florida. I don't think we compete. So, address it directly. Um, again, this will be a numbers game. And so, you just want to take risk away from the seller because he's not going to want to talk to you about a business in Florida if he's running one there. But, but, you know, for a regional business, you know, with trucks going places, you know, he's not opening up Washington anytime soon. Yep. Yep. One more question on this Elliot, then let's move to the second risk. The um I'm just curious. So, like for your clients, do you do the IND like where does the line where's the line between the due diligence that your client should be doing him or herself versus the diligence that they're outsourcing to you on the industry? Great question. We learned so much last year with our our 50 clients um that we actually designed a new product to help with this specifically. So when you work with Guardian, you can do a quality of earnings, right? That's what everybody does. Um but you may do a quality earnings plus and the plus program does a lot of things for you. It it it allows me to help you understand the pros and the cons and get the data set on the industry. It allows me to do the proformer model for the SBA, write your business plan for the SBA and help navigate the the process through the broker and other things thinking about a holistic deal getting done where a quality of earnings is a tool to assess the value but you still need to push to a closed deal. So in that offering you can sort of get this help and we can do it for you. What makes it nice, and I was a searcher before, so I sort of know what what you guys are thinking. Um, a lot of times we give a oneweek in executive summary. Well, when we do quality of earnings that kicks out like 85% of the deal breakers, a lot of our clients once they see the numbers aren't vastly different, that's when they choose to to upgrade. And so that's when you get sort of an industry coverage, business um plan, pro- fora, and we just help you get through the process. Sure. Sure. But and at some point still, you know, if you're buying into an industry, you need to do you need to do some of this homework yourself. It can't all be outsourced, right? So, so I imagine a lot of that even if they go with your plus offering, like you would still encourage them to be doing some of this stuff in parallel. Yeah, absolutely. And and here's the thing. So when I first got into like buying companies, right, that was the thing like, hey, you need to do it yourself. You need to work in the business. You need to be you should go work in HBSD for a VI HBSC company. And anything that's not that is stupid. I've been in this almost 15 years now. What I'll tell you is people have made a lot of money um making educated sort of decisions with data they didn't do themselves. What I would tell anyone is the more the more time you spend in your deal, the more likely you are to understand the risk. But the other thing is a lot of my clients still have nine toive jobs. Well, yeah, a lot of my clients have family, you know, constraints. And so what ends up happening is how do you solve for 40 hours at your job, you know, 10 to 20 hours with family and kids, and then this industry research that you want to get done, this bank process you want to get done, this pesky broker that's emailing you craziness, this seller you got to build trust with. So when you think about all these hats you have to cover, absolutely I recommend you do the stuff yourself. But any help you can get doesn't have to be the end of the road for your analysis. So you take the report that we give you. You don't read it and say, "All right, we're good." You know, add your spin to it because you're going to be more interested in your business and your region with your sellers. So both because the other service that we have is a done for you diligence and we have three or four clients that are working it now and they're busy making money somewhere else. So we're doing diligence for them and we check in with them once a week. Um they don't stop diligence after the weekly call and say we got it done for the week. They're doing stuff in the background but a large piece of that gets lifted off their laps. Great Elliot. Let's let's go into risk number two. Um, so can this business operate without the seller owner? Um, sometimes referred to I guess this is a version of or maybe is directly keyman risk. So So define this for us and then let's get into some tactics to to mitigate it. Sure. And and this is this is one of my more favorite ones because it's difficult. It's nuanced. Even Will and I had a conversation about kind of what is it? And then so people use keyman risk, which I think is part of it, but like keyman risk in my dealer experience is more about if you're working with a seller that's um mission critical to the business and they're going to stay on for some period, getting a life insurance policy so that they if they pass, you get to pay off your debt. And also realizing if you can sort of identify people that work at the company that are a big risk if they're not there. Yeah. But the reality for my clients is that it's not so much do the deal or not do the deal. Most times it's often is this person in the business halfime, no time, full-time, full-time, and a half. Right? And so, how do I define sort of can you run the business without the seller? To me, what that is is if the seller got hit by a bus as soon as he signed the purchase agreement, could you run the company? And and the reason that's so important is because you may have a contracting agreement with the seller for six months at, you know, 150k a year, but if you just gave the guy 2 million bucks, the likelihood they're going to do hard work for $150,000 is pretty low. So in a mechanical way, you're likely to get shorted on that. So then how do you sort of understand if you can run the business without the seller? And a lot of that is answering is the seller in the business every single day making key decisions. And so a part of diligence is kicking the tires on that question, making sure you listen to what the broker and the seller are telling you, but you should go find out yourself. Great. So, and and h how do we do that? How do we go find out ourselves? especially because this is notoriously an area that's fudgible. Uh and you know, if if it doesn't look good, if the business is somehow more fragile because of the relationships of the seller or the amount of time the seller's in the business, it's easy uh and common for them to obiscate that as much as possible. So, they know that it makes their business less valuable and they're going to do what they can to hide that from you. So, how do you how do you penetrate their their tricks? Yeah. So, this is where you got to get off your your laptop um to put down your cell phone and go do some review work. So, this is Yeah. Yeah. Yeah. You're going to get your hands dirty. Put on some boots, right? So, um let me tell you a story. So, I was working with a client recently who was buying a company that did some work with content online and the sellers had founded the business and their marketing message was heavily about their genesis story. Um, but they said in the confidential information memorandum that they hadn't worked in the business, they had stepped away, given it to the general manager and and that was that. And so as I'm dealing with my client, I'm telling them, "That's cute, but how do you know?" And so what we did is we got the client access to their operating system and how the business flowed like coming in, leads go to, you know, the customers, customers get service, service continues. And so he was able to look into the systems and processes and like think about like an Asana or any sort of project management software. So you got the sellers at the top and so you can see what they're doing in that operating software. So over, you know, eight weeks he was looking at that stuff. So that's how he got familiar. Some of you folks are doing more industrial businesses. So, I'm working with a client now that's buying a rental company and once again um husband and wife own it. Um and husband says he's completely out, wife is half out, but we can never get them on a call between 9 and 5. So, I encourage my clients to to do something that most people don't want to do. And so, I'm going to like emphatically push people to consider it. If you spend a day with the sellers, you'll you'll know who's calling them, how many emails do they have to check, what decisions do they not feel comfortable of their people making, um, all those kind of things. Now, it's hard to schedule a full day meeting with a seller. Sometimes the broker's not going to want it, but I think the way you do it is you schedule a breakfast and ask them if they can sort of not have plans after that because you want to kind of do a ride around and then just try to keep it going, right? Um, that's a great way to check in more industrial businesses. You know, if the husband has to drop his wife off immediately after breakfast, you answered your question. Great. Now, what about a case where so so what we're talking about right now is how much is the owner actually working in the business. What about a case where like the sales relationships, the key relationships or vendor relationships are just all personal relationships of the seller. And so how you know you just need to be sure that you're going to inherit as many of those. The handoff of those is going to be uh you know as seamless as possible and you're and you're going to retain as many of those as possible. um how do you uncover how personal these relationships are or and how tenuous? Sure. I mean there there's there's four or five ways, but I'll tell you the most sort of direct and this is one again where the broker is not going to want you to do it. So you're going to have to stand your ground. But what you want to know is who manages the sales relationships? Is it the owner? Is it the head of sales? No matter what they tell you, you want to sit with both of those people to understand the whole process from sort of lead to, you know, warm lead to proposal to, you know, follow up to close the business. And you want to see it happen because you want to see is it the head of sales that's managing it or is it always sort of the client call in the owner um to check on something even after the salesperson um sends things, right? Is the salesperson acting autonomously or is the owner sort of always over their shoulder doing things? And so the sales relationships, this is another one where you got to get away from the computer, put the cell phone down. You need to go sit with whoever owns the sales relationships. And so when you ask the question, who owns it? And then you say, "Hey, I want to sit with them." You've kind of put them in a pickle because if that person runs sales, they know sales is the most important thing because you can't have profit without sales. Hey, I want to talk to that person and sit with them. It's going to be tough for them to have a compelling reason why you shouldn't. I'm not saying that it's easy, folks. I'm just saying, you know, you're putting a million dollars up. You need to push for what is going to help you feel comfortable. I want to share with you a recent uh example of something related. So, Brandon Adams was an episode a few weeks ago, bought an ice delivery business. And so, you know, getting ice from point A to point B on delivery trucks is is is is the service the business offers. And everything checked out about the business. Brandon, private equity background, you know, did did serious uh thorough financial due diligence. Uh, and day one of his ownership, he finds out that the owner seller was running the business from the cab of one of the trucks. So, he was one of the basically full-time delivery people. And for the business to continue going, Brandon himself was gonna have to get in the truck and and and do the same. Not the end of the world. Brandon's a scrappy guy. He's not shy away from doing real work. There's that real work thing again. Uh but still would have liked, you know, by his own admission would have liked to have known this in advance. Um, and you know, we we talk about on the episode like what could he have asked the seller to really get at um whether or not this fact that the seller was spending all day in the cab of the truck run doing deal doing ICE brokering basically from the cab of the truck. Um and and he really he's like you know if the seller wants to obiscate this it's going to be really hard around that. Do you see do do you see in in that particular case something that you know could have helped him get closer to the truth in advance? I'm smiling only because I love this work. So, I'm not smiling as any kind of got you situation. Um, people who know me know I'm not that way. Um, you got to put the computer and the laptop down. And I mentioned it earlier not knowing it would come up again. Will, but there's certain things nobody's going to tell you. Like the broker's not going to tell you the guy sits in the truck all day. The seller's not going to tell you. So, if they're not going to tell you, then you know, de facto there's no question you can ask to get it. Exactly. But then that doesn't mean you can't get it. So, I'm amazed at how many of my clients don't sit with their sellers for a day, but oh, we're busy. Oh, the seller's busy. Oh, COVID. Oh, but million-dollar personal guarantee. Um, go sit with the seller for a day, right? You you'll learn so much. And and if you can't schedule a day with the seller, that gives you your answer. Mhm. Um, you know, another trick I saw on Twitter that I actually agree with, um, you can pose as a customer and go through their funnel and see if you engage with the seller. I think that's brilliant. So, again, like laptop down, phone down, like go do some work. You know, these are scrappy industrial businesses. You need to go, you know, take this shirt off, go put on a t-shirt and some jeans, and then go do some work. Great. anything we didn't get to on either of these two risks, Elliot? Um, no. I I I think this is very helpful. I think these are two of the most nuanced challenges that the buyers have that I don't think get addressed enough. And I think we've done a great job at giving folks um tools and letting them know if they if they have trouble, you know, please come seek us out because we can help you with that. Cool. And and how can they do that? give give us uh whatever URL or whatever would would be the best way to get in touch with you and Guardian. Sure. Um guardiandiligence.com and on the website you can download a sample report. Um my contact information, phone and email are there. I'm also on LinkedIn. I'm on search funer and I'm on SMB Twitter um Elliot E Holland and Elliot's E L IO TT. Um so you can find me in all those places and would love to speak to you. Um, you can even schedule time with me on my website. Very good, Elliot. Thanks for coming back on. Hey, thanks for having me, bro. I really enjoyed it.