Financial Leadership with Mike Jerman

Let's Chat with Jim Parker, Business Broker

LINK TO YOUTUBE: http://www.youtube.com/@JimParkerBusinessBroker

My Website: https://www.JimParkerBuinessBroker.com

EPISODE NUMBER: 2

RELEASE DATE: Feb 15th 2024

SHOW NOTES:

In this episode of 'Let's Chat,' host Jim Parker, a business broker specialist, sits down with Mike Jerman from Hollywell Partners to discuss the vital and often underappreciated aspect of business transactions - Quality of Earnings (QOV), from the perspective of both brokers and businesses. Topics discussed include Mike's role in providing quality of earnings reports, the necessity of these reports in business transactions, the role of due diligence, and how understanding quality earnings can impact business valuations and sales.

00:07 Introduction

00:28 Understanding Quality of Earnings

00:53 The Role of Hollywell Partners

01:48 Peek into Past Transactions and Client Experience

02:31 Understanding QOV Light

05:34 Decoding Financial Due Diligence

08:29 Importance of Detailed Revenue Testing

09:52 Costing of Quality of Earnings light

17:51 Pre-deal Evaluations and Broker's Perspective

31:03 Relevance of Working Capital in Deal Discussions

34:05 Wrap Up & Contact Information

BLOG:

In a recent episode of the show 'Let's Chat', host Jim Parker sat with Mike Jerman from Hollywell Partners to shed light on the topic of the Quality of Earnings (QoV) in business transactions. Jim, a specialist in selling businesses that have gross sales between $1 million and $10 million, is equipped with revealing knowledge of the business brokerage sphere.

The conversation kicked off with a detailed introduction to QoV. This concept seizes the spotlight when the stakes are high, and the companies involved in the transactions are significantly large. The understanding of quality earnings is crucial for business brokers, as it's needed from time to time. Mike Jerman, a leading figure in creating QoV reports, shared his insights on the topic.

Jerman shared insights into his company's operations, stating that Hollywell Partners, at the end of the day, are a group of hard-core accountants. As a registered CPA firm, Hollywell Partners specializes in producing QoV reports. Their services particularly cover non-attest diligence, which deals with M & A transactions on both the buyer's and seller's end.

The company's operations also include on-site field exams and verification of assets. Despite the prevalence of audited financials, companies often request a QoV to get focused on operational metrics instead of financial statements. Mike revealed that the firm worked with Jim on a recent transaction, providing his first-hand experience of Hollywell Partner's top-notch services.

When the conversation moved towards the subject of QoV light, Jerman elucidated its purpose and highlighted its relevance to smaller transactions. Essentially a condensed version of QoV, its main functions include the analysis of P&L and working capital. Business brokers often encounter situations where a QoV report becomes a necessity. In these instances, Mike advises them not to panic, as it is an excellent process for the buyer to ensure the quality of their investment.

QoV light is tailored for deals under $25 million, including enterprise value or gross sales. In the business world, these are considered small transactions. The tool is geared to smaller transactions, rendering it ideal for a company size within the $1 to $10 million range that Jim focuses on.

Jerman emphasized the importance of distinguishing between the shiny piece of paper that cosmetics financial statements and an actual QoV that includes testing. Hollywell's method includes a 'cash proof' that independently verifies against bank statements to review revenue recording and assess the operational cash flow.

Honesty from the seller's side is paramount to a successful QoV. Jerman highlighted that sellers can avoid unnecessary hassle by being upfront about certain transactions. A cover-up will likely be discovered during the evaluation, leading to credibility issues and potential deal-breakers.

Jerman hailed the crucial role brokers play in a smooth business transaction. Business brokers' expertise comes in handy in navigating the highs and lows of the selling process. With QoVs shedding light on the financial health of a company, they are empowered to make more informed decisions, hence the need for a QoV before a purchase.

In instances where irregularities are unearthed during a QoV, Jerman's team seeks to identify the root cause of the error first. They then share the potential effects of the irregularity with the buyer and leave the ultimate decision to them. Jerman stressed that even when a deal is audited there is never an absolute 100% comfort. However, a transaction can move forward with a relative degree of certainty.

Mike Jerman provides significant insight into a complex but crucial component of business transactions the Quality of Earnings (QoV). Whether you're a broker preparing to list a business or a business owner considering selling going through the QoV process with professionals like those at Hollywell Partners will provide essential transparency and increase the likelihood of success.

PODCAST TOPIC KEYWORDS:

Let's Chat, CPAs, business brokers, Mike Jerman, quality of earnings reports, Hollywell Partners, remote basis, audited financials, QOV, transaction, buy side, sell side, metrics, working capital, EBITDA, adjusted EBITDA, inventory turn, sell side QoV, QoV light