Why Messy Books Kill Business Sales | Frank Feiler on M&A, Seller Discretionary Earnings, and Valuation

FRANK FEILER (00:00)
And typically I can walk into an establishment, any kind of a business.

and decipher in the first 30 minutes what a close proximity of the owner’s actual net income is.

Dylan Silver (01:46)
Hey folks, welcome back to the show. Today we’re joined by Frank Feiler, a veteran business intermediary with over 40 years of experience in mergers and acquisitions, business sales, and consulting for business owners. Frank has spent decades helping entrepreneurs navigate the complexities of buying, selling, and scaling businesses. His experience spans deal structuring, negotiations, and advising owners through some of the most important financial decisions of their lives, bringing a deep understanding of what it takes to create

and transfer value. Frank, thanks for joining us today.

FRANK FEILER (02:19)
My pleasure to be here. Good morning.

Dylan Silver (02:21)
Good morning, good morning. You’ve been in &A for over 40 years. If we go back to the beginning, how did you get started?

FRANK FEILER (02:30)
It was all by accident. I grew up in the restaurant industry and I moved to South Florida, 1979. Didn’t know what I was gonna do here. I had completed my corporate America job. I left the Washington DC area where I was vice president of operations for the National Restaurant Association. So I had a good upbringing of knowing a little bit about the restaurant industry. I came here.

started to do consulting work and helping restaurants to stay in business, make money and be more profitable. Well, long story short, what happened was that when I presented my invoice for my first two jobs, they said, we don’t have the money to pay you. We like what you’ve done, but perhaps you can help us sell the restaurant. could pay it. And that’s kind of just a stroke of luck. When I got into this business, 1986, so it was a

just the whirlwind from there and then all of sudden there were very few business brokers. In fact, nobody even knew what the term meant back in 86. Business brokerage was a term even today is not well recognized. If you ask somebody, what is a commercial real estate agent, they do know. Most people know one or two or three residential real estate agent, but nobody ever knew a business broker. And I’m sure our listening audience today,

is thinking the same thing. I don’t know a business broker, so… But we are people that do the same thing as ⁓ residential agents do for houses, commercial agents do for building and real estate. The only difference is we don’t deal with the real estate component because most every place we sell has got a landlord-tenant situation. So we’re dealing with landlords, which is not real estate. So it’s a different kettle of fish. We deal with tax returns.

We deal with penal statements, we deal with ⁓ lots of other things that people don’t really realize what goes into the makeup of purchasing or selling a business.

Dylan Silver (04:41)
Now, when you’re

valuing a business, what specific numbers are you looking at first? Revenue, EBITDA, margins, what sticks out?

FRANK FEILER (05:41)
Well, ⁓ people that are going to buy a business are going to be buying it based on past performance, not future predictions. So somebody says, well, I’m going to make a million dollars next year. That’s not what people are buying. They’re buying past history. So we want to go back three years. What has been the actual numbers on the tax return, assuming we have tax returns and we don’t always have, we’ll talk about that in a minute.

because not everybody files a tax return. So the bottom line is that we first request that we get three years past history in the tax return area. We get a year to date P &L statement if we’re now in the month of April, we would want the first three months of this year so we can get an accurate picture of what are they doing presently, income, expenses.

and then to determine what we call seller’s discretionary earnings. Now seller’s discretionary earnings is a term that’s misused oftentimes, sometimes it’s referred to as net owner’s benefit. In other words, how much did the owner really take out? Because many times in business operations, the owner is running all kinds of expenses through the business that really are not business related.

And when that happens, our job is to sort out those things of how much is the owner really taking out of the business? Because that’s what the future owner is going to be purchasing the business based on. How much can they take out of the business with what we call ad backs? Ad backs are those things that might be the owner, his car or his and her car, maybe a wife too, maybe two kids involved.

in the family. None of them working in the business other than the owner himself, but there four cars that are being paid for by the company. So we’re going to add back those other three cars plus the percentage of the owner’s car that’s going to be used for the business. And so we’re going to take all those little items that maybe they went to Costco and they bought a television set for $3,000. We’re going to find that and we’re going to add that back because the…

The purpose of that is that the new owner is not going to be going to Costco. The new owner is going to be putting that money in his pocket. So those are called add backs. And so what we want to determine is what is the total seller’s discretionary earnings. If he didn’t go to Costco, if he didn’t charge all cars and telephones, insurance, travel and entertainment, and so many other things that get buried in the books and records.

Our job is to decipher what those items are, add them back to become what is the total owner’s benefit? What is the total owner actually taking out of the business? And we use that with a multiple to determine what the value is based on other comps. Other comps would be similar businesses that would be sold in the same industry.

Dylan Silver (08:47)
Now, when you’re doing forensic accounting bookkeeping, like you’re describing, going back in time, identifying what was a personal expense, what was a business expense, and people might not have filed taxes. In many cases, they’re doing their own books and not necessarily always doing the best job at that. Realistically, how long does it take to do that forensic analysis and say, okay,

This is what the books look like for last year, the last several years. How long does that process take?

FRANK FEILER (09:21)
You know, that’s really a great question. And I teach other brokers, business brokers, and I’ve been doing that for number of years. I’ve actually taught over 500 business brokers how to become a business broker. ⁓ And so I teach a course on how to determine what is the owner’s benefit, what is the seller’s discretionary earnings. Once you have a trained eye and you know what you’re looking for, the process is pretty similar. ⁓ Whether it’s…

⁓ All P &L statements, all tax returns have listed expenses, okay? People typically don’t hide income, okay, because they wait to report the income. What oftentimes is they over-exaggerate the expenses so as to minimize the amount of tax burden that are to be paid. But with a trained eye, and I’ve been doing this a long time, I’ve trained other people how to do it, it’s relatively simple process.

It’s consistent process. have worksheets that allow that to happen. And then we have to depend obviously on the owner of the business to help us identify.

Now we want to express that we’re not from the IRS. job is to make the business a realistic picture of what the future owner can expect to realize from the business. So it’s a process we go through time after time.

And typically I can walk into an establishment, any kind of a business.

and decipher in the first 30 minutes what a close proximity of the owner’s actual net income is.

Dylan Silver (11:34)
Now, in a negotiation for someone that’s looking to acquire a business, what are the key terms beyond earn outs, financing terms, bottom line price, right? That actually determine the out.

FRANK FEILER (11:53)
Well, obviously what a buyer is buying is an income stream. That’s really what their objective is, is to buy an income stream. Whether they’re selling pizza or whether they’re doing dry cleaning or whether they’re doing auto repair, multitude of different retail businesses that we are exposed to. And I don’t want to just minimize it at that because we sell attorney firms, we sell doctor offices.

We sell every kind of conceivable business where there’s an income and expense. It is a business at the end of the day. And so there is a market for that business. Now, obviously there are many businesses that are more desirable because the learning curve is easier. If you’re gonna buy a restaurant, for example, typically people know how to cook at home and may or not cook in the masses, but the point of the matter is they do know how to cook. And now they can just extend that to what they’ve learned all their life.

But then you have a more complicated business, engineering, construction. It could be a roofing company. It could be any number of different industries that we deal with. And so as a result, we want to determine what is the owner actually going to be able to take out of the business. And that is the basis of what the asking price or the selling price will be.

Dylan Silver (13:14)
Now, you mentioned the importance of a ⁓ recurring revenue, so cash flow effectively, but for a lot of investors, realtors, right, they might have larger deals that can sway their annual numbers, but that are kind of outliers, if you will. And so when you’re looking at that type of ⁓ fluctuation in earnings, how important is a one-time large windfall

that happens maybe irregularly versus the underlying consistent income throughout the

FRANK FEILER (13:51)
That can work both ⁓ positive and negative. Obviously, we always look at one time non-recurring expenses, one time non-recurring income. ⁓ It could be the weather conditions. For example, here in South Florida it’s common that we do have adverse weather hurricanes. And if you’re in the roofing business and you have a hurricane, that’s going to be a boom year because your sales are going to be off the charts.

that may not happen every year so as a result we’re going to take that into consideration and normalize the three years that’s why we get three and sometimes five years track record to take ⁓ those bumps in the road ⁓ off the table so to speak to normalize it and average it out what would an average year look like and so it can work both in favor and adverse obviously

There are other non-recurring expenses if the company moved during the course of the year and they spent $100,000 relocating the company from one location to another. That’s a non-recurring expense. So we’re not going to charge that every year to the, this is not going to happen for the next 15 years. So each item we have to look at independently, individually.

Dylan Silver (15:48)
What’s the fastest way for someone who’s looking to potentially sell their business to increase valuation in a year’s time?

FRANK FEILER (15:58)
Well, obviously good books and records. Nothing can ever replace good books and records. And many times we go into a business and as you’ve already pointed out, they don’t carry good books and records and we have to reconstruct from the beginning. And that sometimes takes, could take six months to reconstruct what they haven’t done in the last five years. I’m working with a company right now. I’ve been working with them for the last six months to get reconstruct their numbers from.

2025 because they just did not keep good books and records and they have a revenue income of over $4 million. And so we’re trying to identify where the actual expenses because they have not kept the books and records. So they answer your question is books and records 10 times over is the best way to get evaluation on a company that understands

How much are they really taking in? How much are they really spending? And how much is really going into the owner’s pocket?

Dylan Silver (17:03)
What’s one thing that owners themselves think adds a lot of value, but in most cases doesn’t really move the needle?

FRANK FEILER (17:13)
⁓ anticipated growth which is not really reflective of ken that’s not history that’s projected ⁓ the difference between then there’s three ways to buy a company you can buy an existing company which is what we sell mostly you can buy a franchise operation which has no track record other than what other franchisees are doing but you’re buying projections you’re not buying history when you buy a franchise you’re starting from ground

zero or you ⁓ can start a business ⁓ on your own and the failure rate is extremely high that one out of every three businesses is going to fail in first two years. So those are the only three ways you can get in business. So the most positive way is something that’s already has a track record already has a history behind it already know what you’re getting into because everything is already there you have an established location.

You have an established clientele. You have established vendors. You have established formulas and recipes if you happen to be in the food business. So you already are buying something very established and ready to go.

Dylan Silver (18:26)
We are coming

up on time here, Frank. Any new projects that you’re working on and then as well, what’s the best way for folks to reach out to you or your team?

FRANK FEILER (18:36)
Well, I appreciate that. ⁓ Yes, I’m working on some new projects. We’ve recently expanded our company, FD Feiler Consultants here in South Florida. Our website, let me mention that, is businessconsultantusa.com. That’s businessconsultantusa.com. And I say we’ve expanded. We’ve also recently got licensed in the state of Florida to be a professional auctioneer.

where we can do liquidation sales that we haven’t done in the past. We also are doing expert witness testimony work for law firms all over the country. When good deals go bad, unfortunately things happen and litigation takes place. And as a result, a law firm will come to us for a expert witness testimony. be in Colorado Springs next week to appear at a court. ⁓ And then the most interesting thing recently, we’ve opened a brand new school.

of training business brokers that we can train 16 hour class all over the country on Zoom and certainly reach out to us on that anybody is interested in finding out or learning more about becoming a business broker, we’re certainly equipped to handle them and show a successful track record of over 500 graduates of our school.