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.

Retirement, divorce, or a hot industry are the most common reasons businesses are sold. Sometimes, entrepreneurs are just tired. When you initially ask for the reason an owner is selling, they’ll have a standard, lofty story. It always sounds great, but it will usually follow one of those four themes.