As a quality of earnings specialist, I tend to be the anti-hype person in a deal. Even though I’m usually one of the first people to the party, my job is to bring the hype down. Once things have settled, it becomes easier to talk about what’s really going on with the business being evaluated. Lately, I’ve been seeing far too many deals where the earnings on paper are higher than the earnings in reality. With that in mind, I wanted to share a quick snapshot of what I think is going on in the market right now. Thanks for reading QOE Prep! Sign up below for more M&A updates. What I’m Seeing Among Buyers First thing to know: Multiples are climbing. This is true even for smaller businesses. A large part of this change is that private equity has come down market to compete for deals that used to be too small for them to bother with. But now, there’s enough dry powder in PE to film the next Dune movie. PE entering the space has created a strange dynamic. On the one hand, winning the LOI is harder because there’s more competition at higher prices. On the other hand, it’s also harder to get that LOI funded. Lenders don’t want to move their debt service coverage ratios just because the purchase price went up. The difference between what a deal costs and what a lender will fund needs to get filled. There are typically two ways to do so: the buyers come up with more of their own capital, or they give up equity. I’m also seeing buyers who are willing to buy almost any company in almost any industry, rather than looking for a business they’re uniquely suited to run. I have a much stronger preference for the sniper vs. the shotgun approach. Buyers should be selective about what they target rather than taking a “spray and pray” shot at things. As a CPA, I know I’d be reasonably good at running most accounting firms. I also know for a fact that I would not be good at running a tech company or a marketing agency. If I was looking to buy, I would lean into this smaller buy box as a point of differentiation from all the other buyers, self-funded or not. By knowing what you want and why you want it, you’re elevating your pitch far above any buyer who’s only looking for certain financials to line up. I just covered the story of Adam Markley, someone who has walked the walk of buying a business, and buyer-business compatibility was a central point of his. What Buyers Aren’t Worried Enough About Debt. That’s it. It’s debt. I could really move onto the next section, but the SEO gods have told me to keep my word count up so I’ll break it down a bit more. I don’t think buyers fully grasp what is on the line when they acquire a business and how delicate an M&A transaction can be. When you buy a company, you’re buying something that was profitable and cash flow positive under an owner at a certain point in time. Even adjusting for all the ways the owner was personally responsible for the business’s success and setting aside the dreaded J-curve, you still need to account for room to cover the debt load you’re about to take on. You are now responsible for paying down principal and paying interest, every month, without fail, as well as all the other expenses that go into this business. Few people can appreciate what that obligation does to a business, or to the person running it, until they’re living it. If I can climb onto my soapbox for just a minute. Another thing people need to watch out for is relying on AI-generated quality of earnings reports. I’ve consistently seen AI QoEs miss massive adjustments that materially matter. AI will give you an answer, but more often than not, it will give you an answer you want to hear. I asked it if my “dry powder / Dune” joke was funny, and it said it was. I told it that it wasn’t actually that funny, and it agreed. If it can’t make up its mind about a very mediocre joke, then you shouldn’t trust it to advise you in making the biggest purchase of your life. The point is, you can easily prompt an AI to produce a seller-friendly QoE or a buyer-friendly QoE, and you’ll get two very different answers to the same question. It will tell you what you want to hear. I, on the other hand, will not. Like I said at the beginning of the article, I’m here to bring down the hype and show the risks, opportunities and adjusted EBITDA in deals. What to work on as you search One of the biggest make-or-break factors for a new owner is if they can make sales. The moment you buy a business, your pipeline is likely to shrink. It’s common for small businesses to have many of the previous owner’s sales come from close relationships and personal referrals. You’ll likely lose some of those. On top of that, your closing rate is probably going to dip too, simply because it takes time to learn how to sell the way the previous owner did. Getting better at selling is one of the most important things a new owner can do. If you have a buy box that suits you well, you can already start familiarizing yourself with the sector and with local networks in order to hit the ground running when you find the right business. Wherever you are in the search process, feel free to reach out to me and set up some time to talk. It’s a difficult market, and we’re here to help.