Mastering Business Valuation: The Power of Quality of Earnings

Hey everybody, welcome to another episode of the Business Lunch Podcast with your hosts, myself, Roland Frasier, and the inimitable Ryan Deiss.

Can't be imitated.

Can't. No, you would never seen anybody do it successfully. I've seen people try, but most of them that were drunk, so, you know, I don't know.

I'd wait to get pretty close actually. Oh man.

How the heck are you? I'm doing great. Got, uh, got a new, uh, little one in the family. So that's, uh, that's an interesting. Adventure for my son, his first child. So, uh, you've been through this 4 times. Uh, this is actually, I, I, I, well, it'd be first time I've had a grandkid for sure. And, um, so it's been interesting.

Yeah. First time really around like baby babies, right? Like, so this is a—

no, I've, I've been around, I've been around babies before. I've, that you can't get to this, this age and not have people in your life having babies, but yeah, fair, fair enough.

Yeah. But, um, so now my question is, are you going to change diapers? Like, is this something that you're going to— no, you're, you're definitely not. No.

Uh, I'm a big fan. Uh, I think it's the second evolution of our five evolutions is delegation, uh, going from doing to delegating. So I like to hop in, you know, and, and mostly, you know, I would do it, but if I'm not practicing what we preach, then I don't feel like I'm in integrity with the program.

Yeah, you're more of like a visionary grandparent.

Yeah.

Yeah. Than like a in the trenches. And by trenches I mean, you know, PC.

Well, it's actually, it's kind of like you and I were talking about, I don't really get into operations. Yeah. You know, uh, I'm not really the, you know, that, that's, you know, like you and, you know, the father and those things, you know, that, that would be kind of an operational component. Um, my thing is really more like, you know, kind of strategic, uh, visionating, um, that sort of stuff, you know?

Yeah, you should definitely change that kid's diaper. That, that smells terrible. That's more your, your style. Sounds awful.

I'm sure people don't want to hear about that though.

So, no, I think we just talk about diapers and, and parenting and grandparenting the rest of this episode. Yes.

Let's hop into, uh, something that our audience might actually find interesting, which you and I were having a kind of a cool discussion the other day. Um, I'll let you launch it and then we'll, uh, we'll dive in.

Yeah, we were, it was cool because I always learn something, you know, anytime we talk, I'm always learning from you. You're like wealth. You're very smart and good looking and, you know, all of the above.

Mostly the latter.

Yeah, mostly the eye candy of the partnership. But no, but yeah, I mean, the last time when we were talking, we were, I don't know if we were like brainstorming ways to increase company values and, you know, margin expansion. And you just threw out this term, you're like, oh yeah, you know, QoE. And I was like, yeah. And I kind of nodded along like I knew what I was talking about. And I was like, okay, I know what that is. I've heard the term QoE. I've heard of quality of earnings, but I'm not sure I actually know what it is or why it exists. And I learned a ton. And so I thought it'd be worth us just kind of talking through that because Uh, it wasn't a concept I was just incredibly familiar with. I've talked to a number of our clients, they weren't either. And yet out there in PE world, when it comes to valuing companies, this is a really important critical metric. There's entire, you know, audits that happen around, you know, QoV now. So I, I think just chatting about that, what the heck is it? Why does it matter? How do you optimize it? All the above.

Yeah, I, uh, it's really interesting. So a lot of the acquisitions that we're doing our scale and exit consults for right now are, you know, finding that the Q of E, that quality of earnings report is really important. And they're expensive, by the way, to get. You, like, when you get a company, 'cause there are companies that do those, you're talking somewhere between $100K and $300K to get that done. Now, obviously, if you're selling a, you know, million-dollar business, you're not going to do that at that level. But when you get to higher-level exits, even $10 million or so, the buyers are really concerned about risk. And as credit has tightened and gotten more expensive and companies have failed to realize their value that they thought they were going to get when they bought other companies, it's really become a trend to where Q of E reports are one of the key things that that's going to come up. If you've got one, you'll definitely find that it helps you get more money because the pricing on your company, the valuation is going to be directly related to the amount of risk the buyer's going to take when they go. And a good QOV report will reduce that risk, which will allow you to command a higher price. So what is it? It's basically just how risky is what you've got coming in as revenue in terms of the ability for somebody that takes the company over after you to continue to receive that revenue and have it grow the way it has in the past. And so they're really going to be looking at, um, several things. One, uh, which we've talked about a whole lot is recurring revenue because revenue that doesn't have to be earned every single month or every single year, revenue that's on contracts that are annual or monthly, um, that's You know, that's a risk reducer. So they're going to be looking at, you know, how much of the revenue in total is recurring, the more the better. Then they're going to be like, okay, well, how sure are we that these people who are on recurring revenue programs are going to continue to pay us, you know, uh, when the new bill comes? And, um, that's really going to go to churn and, uh, retention. And then, uh, net retained revenue.

I'm guessing also like the quality of the customers, right? So I mean, if you're, if a significant chunk of the revenue is coming from, let's say you're B2B and it's coming from larger enterprises, that's gonna be more durable than if you're primarily selling just to, you know, SMBs and startups and things like that.

Yeah, I, I was gonna get there. And, um, not, not so much that, that, uh, client mix, um, but more like the creditworthiness that they've got. So if they have good credit, Um, and, and that can go to their performance with you, you know, are they paying on time? Are they paying late? Um, all of those things, because, because churn is like they're gone, but there's also, uh, accounts receivable cycles, right? So we'll look at that and say, you know, are, is our accounts receivable cycle, you know, good? Is our, uh, is our accounts receivable write-off rate good? Um, what does net retained revenue look like? You know, those, those are all things that they're going to look at in addition to What's customer concentration? And, um, and they're even going to look at what is the prospect for the industries of the clients that you've got. Uh, because if like they're facing major disruption, like a lot of businesses are right now with AI, then that you might get a ding for that. So those are all things that are going to go into it. And ultimately they're going to put together this quality of earnings report and, um, that's going to go to the buyer and the buyer's going to say, You know, okay, that, that sounds good. Or we're going to need to make some adjustments or more likely, the structure of the deal is going to change from cash where you are getting cash and the risk is really on the buyer to something that has deferred components. It might be seller financing, it might be contingent value rights or CVRs are really becoming big. It might be earnout, like all of those things. What's CVR?

What's contingent value, right?

You mean CVR is basically a, kind of a contractual version of an earnout. It's, it's like, think of it as very often it can be kind of anything, but it's, it's more decoupled from the business to just a right that you get based on the occurrence of certain things as a contract, as opposed to it being, um, directly related to the business's performance like an earnout is. So it's, it's, it's kind of hard to explain the nuance honestly, but, um, but it is more decoupled from the transaction itself. And, uh, it's better for you as a seller to have a CVR generally than to have an earnout because I think that it's in the 80% plus range of earnouts that don't perform like the seller expected them to, to where they get that money. So a lot of those headline numbers that you hear about companies selling for, you know, it sold for $100 million, uh, or it sold for $20 or $30 million. If there's an earnout component, which there frequently is, then a lot of the times that's like the, the, the actual proceeds to the seller are significantly less. The other component would be a roll-in, like the amount of reinvestment of whatever you're getting from the sale that the buyer wants you to put back into the company once it's done to, you know, kind of continue your investment. That has trended from a typical 20% up to about 35% these days. And so like, if you think about it, if you're going to get a big payday and 35% of it has to be rolled into the new entities, which is indicative of how confident you are that the buyer's going to be able to make money. Now you're down to 65%. And let's say you take, you know, earnouts are ranging between 10% and 40%. Let's say you get a 20%. 5% earnout, you know, now you're at, you know, 60, 50, 40%, you know, and then maybe there's 20% seller financing. You really only get 20% of that headline price upfront and everything else is later. That's definitely not as good. And so a weaker Q of E could result in a structure that gets you significantly less of that headline price. And that's not even including holdbacks. Like there might be another, 10 or 15%, 3 or 4-year holdback in escrow. Like the money's there, but you don't get it because the buyer's saying, you know, hey, if we find things once we close the deal that we didn't expect, or some of the reps and warranties that, you know, that you've said were going to happen, didn't happen, then we need to have something to go after. And then you're going to argue that they should buy reps and warranties insurance, but that is something that costs money too. So like all of those things are eating away at this, you know, this amount that you thought you were going to get and you kind of get into this fatal subtraction where you don't really get what you thought and you might not even get enough to be able to replace your income that you were making from it if you've got a really profitable business. So, so that's like, that's really all kind of what goes into that and why it's important. Yeah.

And the reason it's so cool is because when, and why I think this is something we're talking about is most people when they think about selling a business, they think about EBITDA multiples, right? I mean, that's, I'm going to sell my business. My business has a certain, you know, earnings before interest, tax, depreciation, blah, blah, blah. That's our profit. And then I'm going to earn a multiple off of that. Well, a couple of things with that. I mean, that's, that's true, but also oversimplistic because the, so you're going to have a multiple. True-ish. Anybody who's done a deal knows, no, what you're going to have is a multiple range. And that range could be a 3 to 6, it could be a 6 to 9, a 9 to 12. It could be, you know, all across the board.

And we hear probably most common with, with, you know, larger companies like 10 million in EBITDA and even really 5 or 6 if they're professionalized. Like it, it, that, that there's operational quality also that I know we're going to talk about, but like that it's not just is the earnings good, but how stable are the operations and how able will they be, you know, to realize scale and everything. So that's going to fit into that too. But companies with good operating systems and good QoV, I'm seeing most of the offers start in the 6 to 8, 8.5 range. But we can very often with good QoV and good quality of operations, we're, you know, very often pushing to double digits, you know, in the 10, 12, even 15 range.

And that's the point. Like I think that's the big thing I want to double-click on because it's not just that you can get a higher multiple range. Also within that multiple range, you can be on the higher end of the range. And also once you finally agree on where the multiple is going to be within the range, you can get a better deal to get more of the money that is multiplied by that. So it's one of these things where if you think about the difference between having really strong QV, it, it truly could be the difference between instead of being a 6 with massive earnouts, lots of holdbacks, you know, all these things work with you getting 35 to 40% of the, of the headline price. Yeah. Of the headline. Exactly. Versus let's say a 10, maybe it's not all the way up to, let's say it's a 10. Um, and you know, now, now you're getting 60%, 70% of it there. It's not just that you doubled, it's that you double doubled. I mean, so you're talking about a difference between maybe you're taking home, you know, half a million bucks versus taking home, you know, 4, you know, 5, like on the transaction on a small deal. Now we're talking about like a big deal.

Yeah. It can be, it can be $100 million plus, right? It's significant.

So you mentioned in terms of QoV, you mentioned recurring revenue is a, is a good way to impact it. How do we get more of our, the revenue that's coming in to just happen automagically? Quality, I heard customer quality was in, in there as well. I know customer diversity is also a thing. So you're not necessarily limited, the creditworthiness, which that made me think, I remember the very first time I wanted to rent office space. They wouldn't rent to me. Uh, and they said, because you're not a class A, like credit kind of thing. And I was super pissed. I'm like, but I'll pay, like, I promise. They're like, we believe you, but we want to be able to sell our property to someone else.

And they're going to look at who our tenants are and ascertain their creditworthiness.

And you don't have credit because you're a brand new business. And so they literally would not rent me office space. Because they knew that I would bring down the value of their property when they sold. And that's, that's what you're talking about here coming into traditional business. So what, what other, what other factors can impact QOV?

So channel diversity. If you're counting on one thing, particularly if you're dependent on a platform, like all your sales come through Amazon, um, then that's a big risk and you're gonna, you're gonna def definitely take a ding for that. Um, founder dependency as well. Like if the founder is primarily generator of the revenue, then that's going to be a problem. And if the business to receive the revenue in terms of fulfillment requires the founder to perform, that's a challenge. Like, so that's why speaking and guru-type businesses have a really hard time selling and sell for really, really low multiples because that's like, that's all around that identity of that one person. So those are things that definitely are going to go into it as well.

So what are some things that people should be thinking about right now? They, they've got a business, um, you know, they're doing a few million bucks a year, solid business. Um, what, what are some things that people should be doing right away that are easy, low-hanging fruit that can improve their QOV?

I think the, the number one thing is, is going to be recurring revenue that doesn't churn. And, and like, if I was going to pick one metric, it would be net retained revenue. Like that's, that's going to be kind of the, you know, the, the target that we're going to want to keep is that, that, that the revenue that we've got, if we didn't sell another customer is going to continue to grow. And so we'd have, if we didn't sell another customer between all the people we have and keep and the people that they're going to bring in and the growth of their business, we're going to ultimately be better off a year from now than we were today. And so if, if, if you're over 100%, you know, then that's magic, you know, wonderful, wonderful place to be.

And, and somebody might be hearing this and be like, over 100% revenue retention, basically I get 100% everybody to stay and like, and then they bring a friend, but it really is, you get a significant portion to stay, hopefully 90% plus, and then the ones who do stay, They're expanding, so they're actually spending more year over year. So introducing higher, higher tiers of service is one way. Once you've implemented a monthly recurring revenue model, now having higher tiers of service so that people have the ability to ascend.

Yeah. Upsells and, um, yeah. Uh, uh, growth that they like natural growth of them in the business, um, upsells the ability to get a larger share of the business from them. So, you know, perhaps they're using multiple vendors to diversify their supply chain, you know, and so you're one of many, you know, if you can get a bigger share of wallet, that's, that's going to be a big deal to them.

It's the inverse of this is happening right now to a lot of SaaS businesses because part of the reason SaaS businesses are valued so high is because they had massively high net revenue retention. Uh, because these companies would come in, they'd start using like a Salesforce or a HubSpot and their businesses were growing. So they need more seats. And now what we're seeing because of AI is a lot of these businesses are actually getting smaller. And so their net revenue retention is going down, even though usage is still, people still value the software. They're not going anywhere. These businesses just aren't growing. And it's just taken, you know, the, the knees out of the valuation. A lot of these, a lot of these companies, just because they're not getting that revenue retention, they're having to figure out, and I think this is a good question to ask is, in what ways do people value our services? That will continue to grow. Because it, it maybe if, if your business is going to, if the people you're serving, let's say you are B2B, if you're on a seat license and you don't see a tremendous amount of headcount growth in that space because of AI, I'd consider tweaking your pricing model because that's going to be a knock now in terms of your QoV, whereas before it might've been an improvement.

Yeah. The other thing would to consider, I think, would be your product range. So, you know, the, the, the greatest example that most of us can remember for product range is that Apple had, I think, 13 or 15 products instead Steve Jobs when he came back and replaced John Sculley. He's like, nah, we've got 2 products for professionals and 2 products for consumers, 4 total. That's it. Everything else is gone. And it made a big difference in the change of the company. I think looking at your product range and saying, what are our most profitable products or services that we've got? And, um, and how do we sell more of those? And should we trim some of the other things off that perhaps are, you know, the 80% of the effort, you know, that are only contributing 20% of the profits. That's like that quality of the margin in the different products and services you have in your product range makes a lot of sense to look at. And then the other thing is, you know, an Apple, definitely Tim Cook has been a master of this. Can you add more services on? Services tend to be recurring, you know, or lend themselves more easily unless you've got, you know, a product like toothpaste or cell phone minutes, you know, kind of hard to get people to buy a new car every week or even every year. But if you've got service maintenance contracts and things like that that you can sell that you're not selling now, or you can increase your efforts on selling more of those, then that's, you know, those are the types of things that we would be looking at to try to improve QOV. And really similar to exiting, it's better to start doing these things a year or two before you have to get your QOV report because it's hard to make the change once you've got it.

Yeah. When, and also, so let's say you get a report and the report says, yeah, you suck in these areas. So you're like, okay, we're going to go fix those. Well, now you got to wait a year or two to get for the data to show up. So even if you decide you're going to make the changes, buyers aren't going to believe that. So until the data shows up. What about, so customer diversity, channel diversity, how much have you seen these be a real knock in some of the QV reports that you've looked at?

I mean, every time it's, it's, it, 'cause it's risk. It's just, it's a straight, like it's a financial calculation of risk and there's objectivity and subjectivity when you're looking at those things objectively, if you've got You know, a high churn rate, you're losing customers faster than you can replace them. And you'll have to, you know, very often you'll find like, you know, 4% churn a month. That's 48% of your customers are churned out, you know, every year and compounding that it's probably higher.

Yeah, it's even worse, I think, than that. Right.

Compounding. But let's just say, you know, simple math. If you're losing half of your customers every year, you've got to find a way to replace half your customers every year. So if you're going to grow just to get growth, You have to be at more than a 50% growth rate. That's tough, right? So that's, you know, those, those dings are significant and palpable because they're, the buyers are going to look at it and just, and say, you know, okay, so where are those people coming from? You know, well, they're coming from ad campaigns and this and that and the other, and then you're going to get into channel diversity and, you know, blue sky and all that kind of stuff. But, um, it, it, it really does have a significant impact. And like I said, even if you manage to stay in the range and get a deal, your structure of the deal is going to be significantly less favorable to you in terms of cash certainty. You're, you know, like if you put a lot of risk on the buyer, the buyer's going to just put that risk back on you.

Are there any other like big ass, so big aspects of this? So definitely try to implement some type of monthly recurring subscription-based component. I know that also, you know, if you have contracts, obviously, you know, that, that automatically renew, that that's meaningful. Somebody would look at that and say, yeah, that's more durable revenue, especially if the contracts are signed by creditworthy groups. We want to, um, what are you looking for percentage-wise to, to show well in terms of customer diversity and not being kind of too, uh, it depends on the business and the dollars that are involved.

Uh, it's, you know, um, but really if you've got more than 10% dependence on any customer, it starts to impact. If you've got, um, a high dependency on a small cluster of customers, we have one company right now that's got like 40% of their income is 3 or 4 customers. And that's scary because, you know, let's say that they're all equal and let's say that they were all, let's say that you had a deal where each of the customers was 8% of the business, but if you lo— and you had 5 of them, but if you lost those 5 customers, you'd lose 40% of your revenue. And depending on your margin and your fixed cost ratio, that could mean you go from profitable to loss, right? To a losing proposition. So those are things that are gonna, you know, be looked at carefully.

What about channel diversity? Is there, is, is it the same kind of thing? No more than like 10%? Same thing.

Yeah. I mean, it, it's like, it's, it's hard to say. 'Cause if you're, if, and channels are like, if your channel is dependent upon affiliates, but you've got 100 affiliates, that's not going to be as big of a challenge as if you've got 2 platforms and 1 platform, Amazon, is 70% of your business.

Right.

That's gonna be a problem. Right. So that, that it's, it's, so I wouldn't say it's the same in that like it's more than 10% cuz you could have, you know, 80% of your revenue coming from advertising across, you know, what, you know, 2 or 3 platforms. Um, but the pla— if the platforms had multiple, uh, you know, uh, sources as components, like it's Google, you know, then it's gonna be less of an issue, I think.

Okay. So what else, I mean, what else should I be thinking about? Like, let's say I've optimized for, um, we've got some MRR and what percentage does that need to be of the revenue to where it's like, okay, this is meaningful?

I mean, I, I don't have enough data to say, you know, I would say that if you are, uh, you know, 50% or more, that's going to be good. You know, if you're in that 50% plus range, you know, they would like to see 70, 80. It depends on the type of business too. If you're SaaS, it's definitely way more than if it's, you know, lawn mowing, but, um, right. Something to think about.

So we've got that dialed in. We got solid, um, customer and, and channel diversity. We've got good systems and documentation. So the, the owner, the seller is essentially out of the day-to-day. So they don't believe that this is necessarily going to be dependent upon, uh, them to keep the flywheel spinning. Can we say like that, that's, that's pretty good.

Or are there, If, if the categories, it's all the things we talked about, but if you have those, you know, the, it's, it's like anything, they typically look at deciles, you know, like the lowest 10% and the highest 10%. You know, if you want to get in the range of, let's say that 6 to 8 typical opening offer from, you know, a PE firm, if you want to be more in the 8 and less in the 6, you know, in the higher decile of that, then the more of these things that you've got going for you, the less the risk is to them, the easier it is to get your offer in at, you know, 8, 8.25, 8.5, you know, and then you can negotiate from there. It makes it so much easier in the negotiating to start at 8 than to have to get to 8 from 6. 'Cause, you know, 6 to 8 is what, a 33% increase, you know, like, and they will be aware of that, you know? So like, if I can go from, you know, if I can get a, you know, a 50% increase on an 8, I can get to a 12. If I can get, you know, if I have to get, a 33% increase just to get to 8, that's, you know, it's harder. It's not impossible. We've done it, but it's, it's definitely harder. Yeah.

And the people writing big checks tend to have people around them who are pretty good at math.

Yes.

So you're going to want to have this stuff figured out on the front end. Is there a way, I mean, so somebody's listening to this and they're thinking, okay, sounds cool. I'd love to get a sense of, you know, I'm not really clear on where we are right now. I'm certainly not going to go and pay some company $100, $300 grand to do this. Is there a way to, to, you know, load up a bunch of financials into like AI and, you know, have it prompt you on this stuff and like, I mean, the financials could be tough without the detail that goes behind.

Um, but we've got a Q of E light, you know, report that we give to people at Scalable. So we could, uh, we could make that available to people and, um, maybe probably should.

Yeah. I, 'cause I do think that this is one, it's one of those things that Again, everybody thinks about, um, EBITDA and they think about revenue growth, but what nobody's talking about and what is going to absolutely be picked apart is this, because this is the thing where all these private equity people like Tiger Global, like they just lost their fricking butt on so many of these deals when, when they were just throwing money around left and right. And they're like, oh, you got this revenue. We're going to give you this money. And then what do you know, the revenue did not show up after they, uh, after they bought it and they're a little pissed off about it. Let's just say. Exactly.

And entrepreneurs to our, to our credit, we're typically scrappy hustlers that are like, you know, okay, let's get some growth, you know? And so we're so focused on it. And that's like, that's one of the biggest risks that I don't really see them driving into. Diving into that, like if I would, if I could say what's the biggest thing that I see in failure of acquisitions by private equity and other companies to realize their value is a failure to understand how scrappy and hustle culture the entrepreneurs that are making that company or that built that company are because when you replace them, as PE for sure will, when you replace them with MBAs and, you know, people that are straight outta school and have come from McKinsey, and even though they're quant smart, they're not street smart and they will not hustle like an owner that has skin in the game. They are employees and they don't typically have great vision. You know, they're not entrepreneurs. They haven't lived that. They're not scrappy. They're not going to work, you know, 70 hours a week. And so that's to me like that hidden thing that entrepreneurs have going for them that when they sell is most missed. And so even replacing yourself and having a team is designed to make that happen. Having systems is designed to make that happen. But entrepreneurs that are a force are a force, you know, Apple, Amazon and, uh, Tesla do not grow like they grew with all the things they had going for them if they don't have scrappy entrepreneurs, right?

Yeah, 1,000%. So, but what we don't want to look like from the outside anymore is that scrappy entrepreneur.

We don't.

We wanna look like some McKinsey dude can, or dudette can just walk in here and, you know, run this thing and everything's gonna run super super smoothly. So would you say if somebody's sitting there today and they're like, we've been growing pretty well, profits are okay, is there a secret? And I, because I know the answer is everything. You need to have growth. You need to have profit, you know, profitability, outsized margins.

EBITDA is number one. EBITDA is number one, right? That's, that's going to be the very first, that's the table stakes. And then it's going to be, okay, well, let's break that down and see what is CAGR, you know, what's the compound annual growth of that EBITDA and how does that compare to the industry? And does it hit any, you know, metric that exists in the industry? You know, like the rule of 100 or the rule of 90 or the rule of 30 and, you know, PE or, you know, like there's all these rules of, you know, that are made up of some, you know, the rule of 40 is the one that you used to hear about all the time in the SaaS world is that, you know, profitability plus growth needs to be 20% and at 40% or more, uh, some combination of those things, you know. Um, I think so it's EBITDA, I think, to get in the door, and then it's CAGR to show that you've been, um, that you've been growing and are likely to continue to, and you're not a declining company. And then they're going to dive into QoV, and the first thing in QoV is going to be how much recurring revenue do you So it's third, but it's not a distant third. No. And it's like I said, the others are table stakes. Now we're getting down to, you know, like what is the shape of the deal going to look like in terms of multiple and cash versus deferred payments? And that's going to matter to you every bit as much as the other thing as soon as you get there. It's just, you don't even get into the door if you don't have those other things, right?

But if you have this one figured out, when you get into the door, that's when frankly the people on the private equity side, on the, on the acquirer side, they know they're dealing with a pro.

They do.

Yeah. And not just with some, you know, cowboy entrepreneur. They know that they're dealing with somebody who they're gonna, they're gonna need to kind of land in the top, top part of the, they will be disappointed. Yeah.

Why? Because it's now I'm gonna know that it's, there's less risk. No, they're gonna be disappointed because that the value arbitrage between what they're able to buy you for and what they're going to sell you for once they run their playbook is, you know, they're going to lose some of that upside because you've got your stuff together. It's not going to stop you from getting bought. It's much more likely, honestly, that you're going to be looked at as a platform acquisition, which commands a higher multiple anyway, than a tuck-in, you know, one of many companies that they'll buy after they buy the good big, bigger company.

So, um, explain that concept real quick. I know we're kind of coming up on time, but that, I know that right there, because just about any time private equity buys any, anything, they're buying it with the goal in mind of doing some kind of a roll-up. Yes. And the goal when you're selling is to be the thing that other businesses are rolled up into, not to be, you, you want to be a roller, not a rolly.

Thank you so much. I was getting ready to say exactly those words. Yes.

Yeah. So this is a way, this is how you signal that we're a platform business. And that's what it means to be a platform business in a roll-up. You are the business that has the systems, has the team, has all their crap together that they're willing to quote unquote overpay for because they know that it's going to make all of their other, all the other acquisitions that they make when they do the, uh, that roll into this one more viable, better. Because if all you do is just buy a bunch of crappy businesses, you just have a really crappy portfolio company.

Yeah.

You don't have a roll-up. 100%. Uh, which is, which is what they're trying to do. And so they're not getting any multiple, uh, increase from that.

Exactly.

Well, anything else? I feel like, I know, I feel smarter today. Thank you.

I feel like you did a really great job of, uh, of drawing out all of the things in, um, that, that are going to matter. And, um, I can't think of anything that we didn't cover. There's always something, but definitely nothing significant enough to matter. And if, you know, if you take nothing else from this, but that just because you've got good profitability and growth, it's not, that doesn't mean you're going to get a great deal or have a great valuation or get a great deal structure. You really, in the current market, need to go deeper. And I think the thing that we talked about last, may be the most important in that, you know, like the most important reason is that you will have so much more upside and ability. You'll most likely be required to roll in, you know, there are acquisitions that are 100% and there are companies and private equity firms that will only buy 100% interest in companies, but a lot of the smarter ones have been burned by that. And so unless they have this platform that they can put something in, they're going to be really concerned about doing 100% acquisition because you're going to be like, got my cash, I'm out. And so the ability for you to have good QoV beyond the EBITDA and the CAGR is going to mean the difference between you being that company that is the platform company, being the roller and not the rolly. And that alone gets you to the higher end of the multiple spectrum and gives you so much more upside. Both in terms of negotiation on the front end and in your second bite at the apple when that business sells to somebody else. So I think that's a, that's like that takeaway is one I would not forget.

It also gets you optionality in terms of your involvement in the business post, post-sale, post-acquisition, because maybe you're like, this business is my baby and I want to keep riding this thing. Like I want to participate at the next level. I'm excited. To do this deal with this big private equity company, because they're going to fund it and we're going to be able to do a roll-up and I want to be a part of that. Or maybe you're thinking to yourself, I want nothing to do with this. I want to be able to exit stage left as soon as I can, because screw these guys, just let me take my money and run. Either way, if you want either of those, making sure that you have solid QV, that you're that platform, that's the best way to ensure it because If you have it all in place and everything's dialed in and they can tell that they don't need you, okay, well then you don't, you don't have to stay. Also, if you've proven that you have the ability to create phenomenal, you know, systems and organizations, they may want you to stay and you may want to take them up on it. So if you just want the option, make sure that you do this. It's also just going to make you a whole heck of a lot more money at the end of the day. And what it's also going to do is it's going to, if you never sell the business, it's going to, you're going to have a better business that is stronger and more durable while you own it. So kind of in every way, this is something that, that you need to be looking at and thinking about.

100%. Yes. It will make your life easier if you have a higher QOV.

Love it. Any final words of wisdom?

No, but if you guys enjoyed this, please, uh, let us know. We're on the socials, forward slash our names almost everywhere. And, um, also please, uh, give us a 5-star review if you feel like that is merited. And, um, The best thing you could do is share this with a friend and also take this, take this stuff and use it and then let us know how it's working for you. That's, that's—

if you don't share the, if you have a friend who's thinking about selling their company soon and you don't share this episode with them, bad person. I would say that, um, you're not a good friend. Yeah. Yeah. You're just, you're a bad friend. We'll see you next time, guys.

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