How to Build Superior Financial Models for M&A With Patrick McMillan
In this episode of Financial Modelers Corner, host Paul Barnhurst dives deep into the world of Quality of Earnings (QofE) with expert guest Patrick McMillan, a seasoned CFO and transaction advisor. The conversation explores the intricacies of QofE, its importance in financial transactions, and the role it plays in assessing a company's financial health during mergers and acquisitions. Patrick shares real-world examples and insights into how financial professionals can use QofE to make informed decisions.
Patrick McMillan is a fractional CFO and transaction advisor at Amplēo, a Utah-based firm specializing in providing executive support to growing companies. With over two decades of experience in guiding businesses through periods of growth and M&A transactions, Patrick is known for his expertise in Quality of Earnings analysis. He brings a dynamic and passionate approach to finance, blending technical skill with strong storytelling abilities to help businesses navigate complex financial landscapes.
Key takeaways from this week's episode include:
The role of Quality of Earnings (QofE) in mergers and acquisitions, and how it differs from an audit.
How to differentiate between non-recurring and operating items when analyzing financial statements.
The importance of normalizing earnings for better understanding of a company’s performance.
Why soft skills like communication and storytelling are crucial in financial analysis.
Insights into how personal finance modeling can improve your financial modeling skills.
Here are a few quotes from Patrick McMillan:
"Quality of earnings isn't just an audit; it shows you how and why a company is performing in a certain way." - Patrick McMillan
"Understanding non-operating and non-recurring items is crucial to a quality of earnings report." - Patrick McMillan
"Patience is the most important lesson I’ve learned in my career, especially in communication." - Patrick McMillan
"Modeling your own personal finances is a great way to practice financial modeling skills." - Patrick McMillan
With actionable advice on financial modeling, transaction strategies, and lessons learned from his personal experiences, Patrick’s insights will resonate with professionals looking to sharpen their financial skills and improve decision-making in dynamic business environments.
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LinkedIn - https://www.linkedin.com/in/patrickmcmillan/
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In today’s episode:
[01:10] - Introduction to Patrick McMillan
[04:25] - Worst Financial Model Story
[07:30] - Quality of Earnings vs. Audits
[09:30] - Identifying Non-Recurring vs. Operating Items
[13:31] - Patrick’s Journey to Becoming the "QofE Guy"
[17:57] - The technical understanding of QofE
[24:51] - Patrick’s decision for MBA
[29:56] - Importance of soft skills in QofE
[35:20] - Rapid-Fire Financial Modeling Tips
[38:44] - Personal Insights: Mountain Biking and Life Lessons
Full Show Transcript
[00:01:10] Host: Paul Barnhurst: Welcome to Financial Modelers Corner. I am your host, Paul Barnhurst. This is a podcast where we talk all about the art and the science of financial modeling with distinguished modelers from around the globe. The Financial Modelers Corner podcast is brought to you by the Financial Modeling Institute. FMI offers the most respected accreditations in financial modeling, and that is why I completed the Advanced Financial Modeler earlier this year. I'm thrilled to welcome this week's guest to the show, Patrick McMillan. Welcome to the show.
[00:01:49] Guest: Patrick McMillan: Hey, Paul, how's it going?
[00:01:51] Host: Paul Barnhurst: It's going great. So just so our audience knows, Patrick, somebody I've known for a couple of years, we've developed a friendship. So if I give him a hard time during the episode, you'll know why it's not really expected. Or maybe it is. We'll see. All right, so a little bit of Patrick's background. Patrick is a fractional CFO and transaction advisor at Ampleo. Ampleo is a Utah based fractional executive firm. And he is known as the QofE guy, doesn't quite have the ring of the FP&A guy, but not bad. He has over two decades of experience. He specializes in guiding companies through periods of growth, providing strategic financial oversight, and playing a key role in M&A transactions, which we'll definitely get into a little bit later. At Ampleo, Patrick collaborates with a team of more than 160 consultants. It includes CFOs, controllers, CMOs, HR professionals, all kinds of different fractional support to help businesses thrive and grow. He's known for his passion for numbers and energetic approach. He brings a fresh twist to the finance world, often sporting his favorite shirt, which you can see in the background there if you're watching this on video.
[00:03:05] Guest: Patrick McMillan: Warning may start talking about EBITDA. We might even bring that up because EBITDA, after all, stands for earnings before it tumbles down again and earnings before I tricked the dumb auditors.
[00:03:20] Guest: Patrick McMillan: I've heard the second one, not the first one, I like it.
[00:03:23] Host: Paul Barnhurst: There's others I've heard, but I can't remember and I can never find them online. I should have wrote them all down. There's some great ones out there.
[00:03:31] Guest: Patrick McMillan: Definitely a controversial topic and I love the controversy around it. And all sides are true depending upon their point of view.
[00:03:37] Host: Paul Barnhurst: I go with the Warren Buffett school of thought. You know what Warren said about EBITDA?
[00:03:41] Guest: Patrick McMillan: Oh, yeah, Charlie Munger specifically.
[00:03:43] Host: Paul Barnhurst: Oh, yeah. Charlie was brutal. I worked for American Express. That's where I started my finance career. And you know, anyone who knows Warren Buffett's history, you know what company he has the largest stake in for most of his career. American Express is the largest stakeholder and so we never talked about EBITDA. So then I went to a private equity company. I'm like, why are we talking about EBITDA? Alrighty. So that's a little bit of his background. He's also really passionate outdoorsman. He enjoys riding a bike. I use that term loosely. We'll talk more about that later. Hiking.
[00:04:19] Guest: Patrick McMillan: Enjoy being on the bike.
[00:04:22] Host: Paul Barnhurst: Yes. Spending time in nature with his wife. Aaron. Worst financial model you've ever seen? You knew it was coming.
[00:04:30] Guest: Patrick McMillan: Absolutely. And I'm actually going to share two quick ones. One that was from a long time ago and one that is very recent. So the one from a long time ago. I was with a huge conglomerate of companies. I was their CFO, built basically after my job was threatened, rightfully so, because we had no idea what was going on with cash. I had no idea what financial modeling was, and so I just pretty much put together this huge, crazy, insane long spreadsheet that I would go in and update every single day with cash in, cash out, and I'm talking. I don't even remember how many tabs it had, hundreds of tabs we had. I think it was 45 entities, 55 bank accounts, 550 employees. And I modeled out to even the timing of when on average, every single employee deposited or cashed their paycheck was back when paper checks were still. Yes, I updated that thing. It took me about an hour every day to update it. The reason why it was horrendous was because of how long it took me, how cumbersome it was, and then when I finally moved on and resigned in my position and was and was training, we actually hired a CFO and a comptroller to take my spot. So I was training the comptroller on that spreadsheet and he essentially just threw up. That's when I realized how bad it was. I had since years later, talked with him and he's like, oh yeah, we moved completely away from that very quickly.
[00:06:02] Guest: Patrick McMillan: Don't blame him. So that's a long time ago. That was I don't even want to say it years ago. Recently, yesterday, I was working on one of my own models. I did a pro forma for a gal who acquired a company. And some. A lot of things changed. I mean, change drastically in it. And I am still working on revamping my model. And there's one little formula in there that's broken. I know why it's broken. I don't know how it's broken, so I'm still trying to fix that. So it's one of those things where Paul, after years and years and years of modeling and learning and growing, I still make poor decisions. And so, yeah, they're my own. I own them.
[00:06:45] Host: Paul Barnhurst: Make you feel any better? I think my wife tells me that every day. Honey, And you realize that was a poor decision.
[00:06:52] Guest: Patrick McMillan: You deserve it.
[00:06:53] Host: Paul Barnhurst: Yes, yes I do. And I'd like time to go up to my room and think about it. If anyone knows Jeff Foxworthy, that's where it comes from. So we'll take a side note for one minute. Jeff Foxworthy. There's a song where he goes, when I was first married, I used to say to my wife, honey, what's wrong? It's like I've since learned. Now, when I can tell something's wrong, I look at her and go, honey, although I don't know what I yet said or did, I'd like time to go up to my room and think about it.
[00:07:20] Guest: Patrick McMillan: I love it, and I'm from the South, so I love Jeff Foxworthy. Anyway, I probably just got myself in trouble with half the audience, but let's jump into the main section. I'm here to have fun too. So you are the self-proclaimed QofE guy.
[00:07:33] Guest: Patrick McMillan: You gave me that name, by the way..
[00:07:36] Host: Paul Barnhurst: You use it. What can I say?
[00:07:38] Guest: Patrick McMillan: I do use it. It was great. I thought about it for about 10s and I changed everything.
[00:07:44] Host: Paul Barnhurst: Well, what can I say? I'm creative. So tell our audience, what is QofE? Give an explanation of what that is.
[00:07:50] Guest: Patrick McMillan: I love it, and I love this subject because it's so, in my eyes, so important. But of course, we all think what we're working on is important. So I want to break the word down. So Q of quality of earnings. Let me break that word down to quality. Okay. Something can be of high, medium or low quality. And it's in the eyes of the person that's holding it right. Eyes of the beholder. So the quality of earnings how much is a company producing could be. And here's where we get controversial right. Could be net income EBITDA cash you know so there's so many ways to look your earnings. So the quality of earnings. Let's talk about what it isn't first. And then let's talk about what it is.
[00:08:33] Guest: Patrick McMillan: And it's not an audit. A lot of people think oh well my CPA my tax guy can do a QofE for me. Well, an audit will tell you what a company is doing that's in compliance with GAAP. Quality of earnings will tell you how they're doing it and why they're doing it that way. So that's really the difference. And they really digs and dives into not just the earnings, not just the income statement, but it takes a balance sheet to build an income statement. Right. And so it looks at everything on both sides. Statement of cash flows net working capital. It looks at customer and vendor concentrations. It looks at trends. It looks at benchmarks and metrics. Hey, how is this company doing compared to other companies? And also there's the word right EBITDA. So it really looks at how do you adjust for EBITDA on a normalized basis. So here's my Bible right here right. Quality of earnings by Thornton L. O'glove.
[00:08:33] Guest: Patrick McMillan: This was published I think in 85. And he really set the precedence. There's two things non-operating and non-recurring. Those two things need to be normalized non-operating. Let's say you as a financial modeler, let's say you go and start doing car sales and you put those car sales in your income statement. That's not part of your normal operating income. That's not what you do on a normal basis.
[00:09:51] Guest: Patrick McMillan: So we've got to strip out the cells and all the associated costs of those cars that you're selling. Right. And then a non-recurring item, let's say you go to Abu Dhabi, you know, for a family vacation, it's not operating because it's a family vacation. And it's a one time event because you don't normally go out there. And so it's really a non-recurring item. And so we're really look at normalizing earnings. That way we can understand a buyer can understand how a company would operate on a normalized basis if and when and after they acquire the company. And it's important for both buyers and sellers to understand that a lot of people don't understand that a sell side quality of earnings is very important, too, because it helps a seller truly understand how a buyer's perspective is going to be on that.
[00:10:42] Host: Paul Barnhurst: I like it, and I get what you're saying. Of all those non-recurring items, I use that term kind of loosely, because I still remember some other company that I worked with every year. They were non-recurring. You're like, okay, at what point are they no longer non-recurring? Right. And you know what I'm talking about there. There's a lot of subjectivity in that. How do you make that determination if you see it, you know, kind of something similar year after year. And I would imagine you get asked a lot of times, can't we just consider this all non-recurring? It's really one time. And how do you make that decision. Because that can make a big difference in whatever that earning is. Right? Is it EBITDA, cash flow, whatever you're looking at. That number can be quite different depending on what goes into those adjustments.
[00:11:29] Guest: Patrick McMillan: Yeah. And that's when we do get that question quite a bit. The answer to that is really if it is actually reoccurring over a certain time frame, then you know what? It's an operating thing. It's something that happens in the business. I'll give you an example. And I see this not often, but at times. Marketing. We tried a marketing project and it didn't really spin off any revenues. And so let's count that as non-recurring because it only happened over A36 month period. But I'm not going to remove that because that typically I'm not going to say all the time, but typically I won't remove that because it's a cost of doing business. You're trying your best to increase the revenue it's associated with that. It's a failed project, but it was still cash. It's still something that you paid that just didn't produce any fruits. And so things like that.
[00:12:25] Host: Paul Barnhurst: If you have an employee, it's like you're not. They were going to work on something for six months. You can't just be like, well, if that project had failed, we would have fired him and then brought them back after six months.
[00:12:35] Guest: Patrick McMillan: Yeah, but you nailed it too, though, it's still very, very subjective. It's very depended upon, you know. And that's where when I do or my team or our firm, when we do a quality of earnings, we really try to understand the holistic picture. And that's the thing a lot of people will ask, you know, well, what sets us apart or, you know, other firms or anything. We have sat in those seats as controllers, CFOs, VP of finance, FP&A professionals, where we really understand how if I pull this lever over here, what's going to happen way down the road and you got to look at a QofE that same way as well. And that's all part of FP&A. It's all trying to find out the levers and the knobs. How does that crank out stuff? You know, and everything. So all of this is really combined and it's super important.
[00:13:25] Host: Paul Barnhurst: I hear you there's definitely down the road implications. And how does it impact everything? Well let's step back. How did you get into QofE?
[00:13:34] Guest: Patrick McMillan: So when I first joined our firm Ampleo back in 2020, the CEO or our director at that time called me with a project. One of our clients had inbound interest from a private equity firm, and they needed their financials cleaned up and presented to the private equity firm. So I got in there and did that, presented and got the deal closed.
[00:13:56] Guest: Patrick McMillan: And after that deal closed, the partner that was overseeing it called me and said, you just did a quantity of earnings which normally costs X amount of money, and we just charged Y. And I'm like, why? Why did we do that? Why I need to learn how to do this. And so for the next several months, I really dug into and learned what CVS are. I'd never heard of them before, so really dug into what they are, how to develop one, and created our first model, which looks absolutely nothing like how it looks today. It was very rudimentary. And since then we've really honed on that. We've gone through many renditions. And this became important to me, Paul, because I'll even rewind the tapes back a bit. So years ago, before I was the CFO of that company, that I made that really bad model, I bought and sold a company myself, super duper small. But I went through a transaction. I had no idea what quarterly earnings, net working capital or any of that stuff was not before, during, or even after the transaction. I didn't understand what I did until now. And so all this really started kind of coming together and I'm like, oh my gosh, this is fun. This is something I really, really enjoy. And so that's how I got into it. And it's a blast. That's why I got the shirt may talk about I can't no I can't I may talk about EBITDA.
[00:15:17] Guest: Patrick McMillan: I may talk about quality of earnings. I may talk about buying or selling a business because it's a blast for me. It's a numbers game. I've always loved numbers. I just really like them when they have dollar signs attached to them because they're fun. It's a game.
[00:15:29] Host: Paul Barnhurst: I love that. It's clear you really love and you have a passion for what you do. But you know, right? You can deal with numbers in a lot of different areas in finance. Why do you like dealing with transactions? And I say transactions because usually a queue has to do with someone exploring a transaction, whether it's a sell or buy, a change of hands, a new investment, you know, a merger, whatever it may be. But what is it you enjoy so much about working on transactions and the whole transaction side of QofE?
[00:15:57] Guest: Patrick McMillan: Yeah, it's a couple of things, really that it hones in on. Number one, I love the idea that someone, a seller who has built a business, however big or small it is, can really find a way to hand that business, pass that business on to someone, or hand it over to someone who can crank it up to the next level. And while they're at it, the person that's selling it can really pull out what they've put in, plus more. That, to me, is exciting because that person has built that business.
[00:16:30] Guest: Patrick McMillan: They've supported their family, they've supported their employees' families. And now through that transaction, they're able to do that again or do it more, or those employees will continue growing, or they will learn from that and go on to bigger and better things. So that's one. The other thing is something that I'm very passionate about is just learning about people and their stories and communication about it. A CFO really is nothing but a communicator about numbers, and a communicator of stories of businesses and how those numbers have reacted in that business. And so what better way than through transactions then getting two businesses together, whether it be a person and a person or a company and a private equity firm or something like that, and can really combine their stories together, and that synergy just goes on and then creates more opportunities for more people, more families, more stories behind that.
[00:17:32] Host: Paul Barnhurst: Love it. So when I'm ready to sell my business, I need to come to you. Is what you're telling me?
[00:17:36] Guest: Patrick McMillan: Please. Yeah. We'd love to help you do it. If anybody's ready to buy Paul's business, call him today.
[00:17:41] Host: Paul Barnhurst: I don't know how much it's worth. It's kind of hard to sell the brand since I'm the logo. But, yeah, there might be a big goodwill impairment when I sell it.
[00:17:51] Guest: Patrick McMillan: Right? Yeah, because you're going to sell it for hundreds of millions when you only produce a few thousand a year anyway.
[00:17:57] Host: Paul Barnhurst: Pretty much. It's all about the brand. I have it on my balance sheet. That alone is a hundred million. The beard. All right, back to serious stuff. I'm curious with dealing with QofE. You know, are you usually the one building the transaction model, or are you building proformas of how the company will look? So what part of modeling are you doing? And kind of how does that work in the overall process?
[00:18:20] Guest: Patrick McMillan: I love this question because we've really developed kind of three very specific ways that we can help a company. Number one is so the quality of earnings itself is more about historical analysis and then adjustments for what would look like a pro forma. We're not going to pro forma out five years on a QofE, but we'll really kind of help build a model to where you as a buyer, as an acquirer, can roll that into your performance. So that's one way. Another way that we can help is we do financial due diligence, which is quality of earnings is a component of it. But let's say you're going to buy a company that's not quite necessary to get a QV. Maybe it's, you know, several hundred thousand dollars of revenue, not quite 1 million or 1 million and a half, but we'll just do, you know, kind of a block of hours or hourly rate and do some financial due diligence looking at historical stuff.
[00:19:14] Guest: Patrick McMillan: And it's a very watered down workbook on a QV now financial modeling, we also do pro forma. And I do this quite a bit on leveraged buyouts, you know, for example, or on a lot of private equity deals. So I'll do an LBO model where I'm doing a pro forma. I'm looking at the valuation. I'm looking at, you know, the returns. I'm looking at the debt ratios. I'm looking at, you know, the waterfalls. And I will pro forma that out for five years. And so, doing the pro formas really helps me to be a better shave guy, because I'm able to look at things from a future standpoint and say, okay, well, hold on a second. If the buyer is looking at doing this with the company, then I need to make sure and include that on my adjustments for the quality of earnings, because basically I'm doing the adjustments on how will the company run it on a go-forward basis. Right. So it's really that's the art and the science combined together. And so yeah, modeling has a huge role in it because in modeling you got to look at things holistically there again. Well it's the same thing for QofE. You've got to look at things holistically.
[00:20:22] Host: Paul Barnhurst: So I would assume at the end you're giving a report with a lot of write up, probably your model and some graphs and analysis. Is that the way to think of it. They get a package at the end, and they decide to look at that and say, okay, what does this mean to me on what I know about the company? So I'm assuming that QofE is what I've seen that's usually done is once you get into due diligence, you go out and hire a third party source to do your QofE. Most common is what, big four? They're doing a lot of those. Yeah. Investment bank.
[00:20:53] Guest: Patrick McMillan: Big Four's do a lot. Top 20. Then you have a lot of small, small individuals that kind of have a small firm or, or you get a boutique firm like us to do it.
[00:21:02] Host: Paul Barnhurst: Yeah. I remember on the few transactions I worked on, one of my last companies, we were using one. I don't remember if it was PwC or KPMG, but one of the big four to do all of our QofE.
[00:21:13] Guest: Patrick McMillan: They charge a lot and they throw a lot of bodies at them. Yeah. I still remember the knockdown, but they're expensive.
[00:21:22] Host: Paul Barnhurst: The one we got was a company that had been on a cash basis. So they tried to normalize everything in the QofE, and that was fun to read.
[00:21:28] Guest: Patrick McMillan: Yeah. I'll report and you can actually, I think you'll have the link in our show notes, but you can actually go to our website, to Ampleo's website.
[00:21:35] Guest: Patrick McMillan: We have a sample QofE that you can download and actually see what it looks like. It's typically a 30 to 60 page report.
[00:21:42] Host: Paul Barnhurst: Oh is that all? Only 30 to 60 pages. I thought it was a whole book.
[00:21:46] Guest: Patrick McMillan: That's it. It's an easy read. You know, five minutes. Read it before you go to bed. You'll absorb it. Well.
[00:21:52] Host: Paul Barnhurst: I'll keep that in mind. If you could send me over one to help me go to bed. All right. So you've been doing fractional work now for several years. It sounds like, since 2020. What has kept you doing fractional work versus just going to work for somebody full time? What is it you enjoy about the fractional.
[00:22:08] Guest: Patrick McMillan: Yeah. And actually even before 2020 I was doing fractional work but just as an independent. Okay. So when I left the big conglomerate of companies, I picked up just some independent companies myself as their fractional CFO and helped them quite a bit and then joined our firm in 2020. The reason why I enjoy that, Paul, is because I really like learning from several different opportunities and combining those best practices together. Plus, for me, I just guess it's where I'm always. I always like to have my hands in different pots and looking at different things and, and you know, okay, so I like to go mountain biking. Then I want to go hiking.
[00:22:49] Guest: Patrick McMillan: You know, I like variety, but I'm able to really apply those things and various ways. I've worked at the big corporate companies, and it's been a blast. I've really enjoyed, you know, my times doing those. But now the small companies really seeing them with that growth excites me. And then being able to work with, you know, the CEO who's also, you know, doing the marketing, who's also doing some of the accounting and saying, hey, you know what? Let's take that off your plate and let's put that to an expert's plate and then let's you do what you do best, which is actually running, growing, being the visionary for your company.
[00:23:25] Host: Paul Barnhurst: FP&A guy here. And as you know, I am very passionate about financial modeling and the Financial Modeling Institute's mission. I have been a huge fan of the FMI for years, and I was super excited when they decided to sponsor the Financial Modelers Corner. I recently completed the Advanced Financial Modeler certification and love the entire experience. It was top notch from start to finish. I am a better modeler today for having completed the certification. I strongly believe every modeler needs to demonstrate they are a qualified financial modeler, and one of the best ways to do that is through the FMS program. Earning the accreditation will demonstrate to your current and future employers that you are serious about financial modeling. What are you waiting for? Visit www.fminstitute.com/podcast and use Code Podcast to save 15% when you enroll in an accreditation today.
[00:24:31] Host: Paul Barnhurst: Sure, it's being able to allow them to focus on what they're good at, maximizing their abilities and their skills. Because we all know only so much time in the day and so many things we're good at, we can't all be expert QV guys and expert mountain bikers, as I like to say.
[00:24:48] Guest: Patrick McMillan: Now you're pinning me down.
[00:24:51] Host: Paul Barnhurst: All right, so I know you recently completed your MBA. I think just a few months back, if I remember right. So I know you did that probably a little later in the lot, when a lot of people go to go to grad school, what made you decide, hey, I'm, you know, in the middle of my career, I'm doing these quality of earnings and I should go back to school and get an MBA. What was the thinking behind that?
[00:25:13] Guest: Patrick McMillan: You know, I'm going to pull something back here and show you real quick. So this is because I said I would look it up if you've never heard it, what is it? Because I said it would? So when I was doing my undergrad, I knew I wanted to go on and get my MBA. I thought I was going to go straight through and get it right after, but I had a great job, so I wanted to continue on with that, and it kept it just for the next 20, 25 years.
[00:25:38] Guest: Patrick McMillan: It was, oh, I'll do it next year. Oh, I'll do it later. It takes time and money. And so a few years back, I finally was telling some friends. We watched this actually a handful of times over a couple of months. We watched this, the Ted talk because I said I would and I said, you know what? It's time. I said, I'm going to do it. I'm tired of saying it. I'm just going to do it. And so I did. I'm glad I did, Paul. I'm very glad I waited because I did the and you can call it the part time professional or executive whatever program. I was working while I was doing it, and I was able to apply things every single day. The day that I learned that I was going down the class Tuesdays and Thursday evenings down at Utah Valley University and then driving home, and that night I would log in like, I've got to do this right now, or the next day I'd be like, hey, we learned about this last night, I'm going to implement it. It was life changing. Absolutely loved it. So my why for going back to get my MBA was threefold. Number one, I love learning. I love education, lifelong learner right. Number two, I love networking and getting to know people.
[00:26:48] Guest: Patrick McMillan: Connecting. That's the key. Connecting with people. I'm an accountant. Right. One plus two equals three. So 123. So my third reason is combining those two together. It's really learning together, connecting with people and building businesses together. And I love that. And so I stay in super good touch. We're actually next week we have our alumni networking group. I'm super excited to go and reconnect with people. It's just yeah, for me it was absolutely worth it. And I know people are like, oh, well, you know what? I'm not going to change jobs. I'm not going to go and, you know, work for another firm or anything, at least as far as I know. I mean, that's not my plan. But this education really helps me to be a better q-v guy, a better CFO, a better individual, a better spouse, a better person in my community. It's really helped me to look at things from a multiplicity of areas.
[00:27:42] Host: Paul Barnhurst: I love it, and I know you're a passionate learner. I know you and I have talked. I know you've taken some of my courses. I know you've taken other courses from people on LinkedIn in the finance space. Is there any course or anything that you've been like, I love that, and I'd recommend that to others. Or maybe somebody you love to follow on LinkedIn that you've learned a lot from.
[00:28:03] Guest: Patrick McMillan: I'm going to give three names, Paul, and of course, you're one of them.
[00:28:06] Guest: Patrick McMillan: I love following you. Your courses are great. I love chatting on the phone with you. And you know, I've called you and said, hey, how do I do this and everything? You've been fantastic. Second name will be Chris Riley. Phenomenal. And I know you've had him on the podcast a couple of times. Chris and I have chatted many times too. I actually sent him an email. He did respond, by the way. Good deal. Yeah.
[00:28:26] Host: Paul Barnhurst: Everyone knows we had a conversation about something Patrick was struggling with. He's like, I emailed Chris to get the answer. Am I right?
[00:28:33] Guest: Patrick McMillan: Yeah. You did. And Chris is phenomenal. He and I have had great conversations too. And Carl Seidman, he's phenomenal too. Carl and I, we've never talked in person, but on LinkedIn we've messaged back and forth. He's phenomenal. So those oh, and I'll even name a fourth. I don't know how to pronounce his name, so I'm sorry but Bojan. Bojan. Oh my gosh. I'll have to look him up. Bojan something right?
[00:28:56] Host: Paul Barnhurst: It starts with an R if I remember right. Yes. Rodney Vick or something like that. I know who you're talking about.
[00:29:03] Guest: Patrick McMillan: These are my four favorites to follow in the talk. And I've talked with all four of you guys, you know, and many different ways to sometimes on the phone, emails, chats, texts, LinkedIn, whatever. But I've learned a ton from you guys.
[00:29:15] Guest: Patrick McMillan: And so I highly encourage people to go and take your guys' courses. Follow you guys reach out because all four of you will talk and answer to.
[00:29:22] Host: Paul Barnhurst: Yeah, great list. I've had many conversations with Chris. Chris is fabulous. I love his material. Carl is one of the best people I know. Incredible presenter, very thought provoking. He really he'll make you think so. I agree with you. He's a great one.
[00:29:40] Guest: Patrick McMillan: His videos on LinkedIn are great too.
[00:29:42] Host: Paul Barnhurst: And I've had the opportunity to meet him in person and we've chatted a number of times.
[00:29:46] Guest: Patrick McMillan: And you've had him on the podcast as well?
[00:29:48] Host: Paul Barnhurst: Yes, I had him on FP&A today, FP&A tomorrow, and next month I'm going to have him on Financial Modelers Corner.
[00:29:54] Guest: Patrick McMillan: Oh good. Okay.
[00:29:56] Host: Paul Barnhurst: All right. So I'm curious. We've talked a lot about the technical side of QofE. Right. You got to write the report you're doing modeling, pro forma a lot of accounting adjustments. You have accounting background. But what role do the soft skills communication storytelling, what role do those play in doing a QofE.
[00:30:15] Guest: Patrick McMillan: More important than the technical skills, in fact.
[00:30:18] Host: Paul Barnhurst: Why do you say that?
[00:30:18] Guest: Patrick McMillan: I can go through. I can do an analysis. I can do trends, I can make adjustments. But if I can't communicate about those, the why behind those numbers, there's absolutely no reason for me to do them, because I have to be able to say, for example, if I'm adjusting, I got an email that said, hey, one of our companies had an audit.
[00:30:43] Guest: Patrick McMillan: It was essentially an insurance audit for all intents and purposes. And they had it was a $2.3 million adjustment to the insurance, negotiated it down 700,000. And so we have to be able to communicate that adjustment to be able to say, hey, here's what happened, here's why. So that the receiver of that can understand what the impact is. Vendor concentrations, customer concentrations. On another one, that I was doing, it was a sell side and it was a high like 73% customer concentration. And when I saw that, I was like, there's no way this is going to go, you know, go well. But after learning that that is actually very typical in that specific industry for this very specific reason and how they're going to mitigate that risk, which is very important. Okay. Because everything's risky. It's how you mitigate the risk. Then that's how we're able on the sell side, to be able to present that and communicate that in a way to a buyer, whether it's a strategic which is very likely for this, one can really take that company and roll it up into their companies and reduce that risk. And so the communications, that soft skill is utterly, utterly important. And I would even say most important.
[00:32:03] Host: Paul Barnhurst: So what is the most important soft skill is the ability to communicate storytelling. What do you think it is?
[00:32:08] Guest: Patrick McMillan: Communication is the component of storytelling. I have to be able to tell the stories, tell the story from a numbers standpoint. Why did this business do what it's doing, how it's doing it, but really, truly communicate that to the receiver. When I do like a QofE, I have to understand who the consumer is going to be. Is it going to be a bank? You know, that's loaning money because it's an ETA, an entrepreneur through acquisition, you know, a self-funded searcher that's buying a company? Or is it going to be a sell side and there's potentially a private equity company, or is it going to be a strategic, you know, an existing customer vendor that's going to buy the company? Because those are different ways to really communicate that story. It's not spinning the story. It's not trying to put things only in certain light. It's to communicate in a way where you know your audience, right. You got to understand what the audience is used to, and then communicate it in the words and and way that they truly understand it.
[00:33:10] Host: Paul Barnhurst: So true. You have to speak in other people's language. If you use nothing but finance terms, their eyes will glaze over and they'll look at you like, why am I listening to you? And we've all been there. We've all been in those meetings or done it where you're just like, oh, wow, that was painful.
[00:33:28] Host: Paul Barnhurst: In a minute here, I'm going to get to some personal questions. But before I do that, I have two more for you. What's your favorite Excel shortcut?
[00:33:34] Guest: Patrick McMillan: Control open bracket and then F5 enter. Control Open bracket will basically jump to what the formula is pulling from. And then F5 enter brings you back to that original point.
[00:33:47] Host: Paul Barnhurst: I think you're the third or fourth person who said that one. I think that's now number one on this show. As far as Excel shortcuts, it's either 1 or 2,
[00:33:54] Guest: Patrick McMillan: I love it. When I tell people about that, it completely changes their life. It changed mine.
[00:34:01] Host: Paul Barnhurst: It's a great one.
[00:34:02] Guest: Patrick McMillan: I'll even combine it with something. And I was doing this yesterday. Control open bracket. And then if you're using Wall Street macros, as a control shift Y which highlights the cells. And so if I'm going through and I'm making sure everything's covered, then I'll continuously do that.
[00:34:18] Host: Paul Barnhurst: Love it. So Wall Street macros you I'm taking it. You use them.
[00:34:22] Guest: Patrick McMillan: I love Wall Street color coding.
[00:34:23] Host: Paul Barnhurst: Nice. So what's the number one lesson you've learned during your career that's benefited you the most?
[00:34:30] Guest: Patrick McMillan: Patience. It goes back to that. I have been a poor communicator in the past. I still am in a lot of ways, and I'm still learning a lot of ways.
[00:34:40] Guest: Patrick McMillan: And along with that communicating, it's asking questions to understand what their standpoint is. For example, a lot of times I'm a blue when you look at the color code, I'm a blue. It's my favorite color, by the way.
[00:34:55] Host: Paul Barnhurst: Yeah BYU I know, I get it.
[00:34:58] Guest: Patrick McMillan: Relationships are so important. And so when someone says something or does something, a lot of times I'm like, did I offend them? And so if I ask them, hey, I think this is what you're trying to communicate. Then I can understand that in a certain way, and then be able to communicate back to them in a way that we can really learn and move forward in a great progressive way.
[00:35:19] Host: Paul Barnhurst: Love it. All right. So we're going to do the rapid fire questions I think next. And then I'm going to come back to the personal question. I think we'll end there. So you've listened to this a few times. I know you're familiar with the show. Know it depends. You have to pick a side. And then at the end you can elaborate on 1 or 2. So you get no more than 15 seconds for each of these. I don't even think you'll need that circular or no circular references in your model.
[00:35:46] Guest: Patrick McMillan: No.
[00:35:46] Host: Paul Barnhurst: VBA or no VBA.
[00:35:48] Guest: Patrick McMillan: No.
[00:35:49] Host: Paul Barnhurst: Horizontal or vertical model.
[00:35:51] Guest: Patrick McMillan: Vertical.
[00:35:52] Host: Paul Barnhurst: All right. Excel dynamic arrays. Yes or no?
[00:35:56] Guest: Patrick McMillan: Yes.
[00:35:57] Host: Paul Barnhurst: All right. External workbook links. Yes or no?
[00:36:01] Guest: Patrick McMillan: No.
[00:36:02] Host: Paul Barnhurst: You thought about that one for a second? Named ranges. Yes or no?
[00:36:02] Guest: Patrick McMillan: Typically no.
[00:36:06] Host: Paul Barnhurst: Okay. Do you follow a formal standards when building your model, like fast or smart or any of those others?
[00:36:13] Guest: Patrick McMillan: My own.
[00:36:14] Host: Paul Barnhurst: All right, I get it. Will excel ever die?
[00:36:17] Guest: Patrick McMillan: No.
[00:36:18] Host: Paul Barnhurst: All right. That was quick. Authority, I like it. Will AI build the models for us in the future?
[00:36:24] Guest: Patrick McMillan: No, it will not build it for. Okay. Do you want me to elaborate on that one later?
[00:36:27] Host: Paul Barnhurst: You can elaborate. We'll say no. You're going to come back to that one. I'll let you talk to it at the end. Sheet Cell protection in your models? Yes or no?
[00:36:35] Guest: Patrick McMillan: Typically no.
[00:36:36] Host: Paul Barnhurst: Fair enough. Do you believe financial models are the number one corporate decision making tool?
[00:36:42] Guest: Patrick McMillan: Yes. And if they're not, they should be.
[00:36:45] Host: Paul Barnhurst: I like it. I had one person tell me politics. So you know what's your favorite lookup function to look up. Which one?
[00:36:53] Guest: Patrick McMillan: X lookup. Love it.
[00:36:54] Host: Paul Barnhurst: I like it. We're on the same page there. All right. I think you wanted to elaborate on AI building the models for us.
[00:37:01] Guest: Patrick McMillan: Yeah. Elaborating on AI, so I use AI occasionally to help me. Actually, I use it often, you know, for a lot of things, usually to make sure I'm clarifying myself in emails and stuff. Like I said, communications. Right? But I'll use it as well to help me look up, you know, different ways to do different formulas and things.
[00:37:18] Guest: Patrick McMillan: I think AI will really help us to build models in certain ways, whether it be to start or get in the middle or end, but I don't really feel like, at least not in the near future. I don't feel like AI will build an entire model. I think it will enhance. Actually, I know it will because I've used it to enhance my stuff, but to do it just AI, I don't see that happening. I could be wrong, but that's my feeling.
[00:37:46] Host: Paul Barnhurst: Yeah, it will be interesting. We have a lot of different opinions. I think most people have said yes, I do think we'll build the full model. It won't, but we'll still have to put in the assumptions. There's still going to be a lot of human judgment. And so there's part of how do you define and build the whole model too. But I definitely think it will be able to do all the tactical stuff for us. That's just a matter of time, but there's still always going to be some level of human judgment needed. So I get it. Like one person told me, I think it was Ian Bennett. He's like, I don't like that question. That's not really the question you should ask. And I'm like, I know, but no matter how I ask it, there's a lot of nuance to it.
[00:38:21] Guest: Patrick McMillan: And you can say that for a lot of the questions, too. For example, protected cells, most of the time I don't. I love simplicity, I love being able to send a model to someone who can take it over and use it, and I can be completely hands off and hands out. But at the same time, there's times where I got to lock cells to make sure, for whatever reason, they don't get messed with.
[00:38:40] Host: Paul Barnhurst: Sure, I get it. All right. So that's our rapid fire question. Now we're going to get to know a little bit more about you, because I know you're an avid outdoorsman. So what brought you to Utah? I'm curious. I'm sure you love mountain biking here. Was it the outdoors or how'd you end up here in Utah?
[00:38:54] Guest: Patrick McMillan: Yeah, so I'm from northeast Tennessee, Tri-Cities, Appalachian Mountains. Let's make sure we pronounce it right or I will throw an apple at you. Apple? Now you remember? No. My gosh, you're killing me, Smalls. While I don't have the accent, don't know how or why I'm the youngest of seven kids. Never did get the accent. But anyway, my ex-wife was married before, and she's from out here. So we met in Tennessee after my LDS mission and then moved out here to be closer to her family after we got divorced. I said, you know what? I love it out here. I'm going to stay. I love the outdoors. I love the economy. I love the people.
[00:39:29] Guest: Patrick McMillan: And it's just it's actually a lot more involved, you know, than I mean, Tri Cities is great. It's still a little small town, you know. And so being out here was fun. So I've been out here since I think oh four. So about 20 years.
[00:39:43] Host: Paul Barnhurst: I love it and I know you, like I said, love the outdoors. You love mountain biking. Any favorite stories or experiences you can share with us? Mountain biking. I've heard rumors that you had an incident about a year ago or so.
[00:39:56] Guest: Patrick McMillan: So for those who listen, every single phone call Paul and I have. He loves giving me crap about this. So about a year ago. Background. I've never broken a bone in my body. I've been wild and crazy, you know? And hiking, backpacking, mountain biking, all kinds, you know, playing soccer, all kinds of stuff. Somehow, never broke a bone in my body until last year. Mountain biking out here in Utah, a little place called Corner Canyon in Draper. Great spot. Check it out. Two buddies and I were mountain biking. We were going down a trail called rush. So those who are from here in Utah know the spot I'm talking about. As I mention it, I'm leading, I'm feeling pretty good and I'm not usually a big jumper. Try a little bit, but I'm feeling pretty good this day, so I'm jumping some. But at the very end of rush, there's one more small short, maybe 100 yards if that, and there's a little spot where you can veer off to the left or to the right, I usually go right.
[00:40:58] Guest: Patrick McMillan: Well, this time I decided to go left and I took what I thought was a jump. It wasn't. It was a rock. It was actually two rocks. What I thought jumped the first rock and landed on what I know was the second rock smashed into my handlebars, completely flipped over, and my buddy who was behind me saw the whole thing happen, and I can't breathe. My chest hurts. Well, long story short, I broke four ribs. It was hard. Now here's the fun rest of the story too. We slowly walk my bike back to my truck, and we're waiting on our other buddy who is behind us. Or so we thought. Long story short, way farther up the trail. Long before we even knew, he also crashed into a tree and lost consciousness. I know about broken rib and puncture the lung. It was just bruised a few. I was just oh, man. So both of us are at the hospital, you know. In separate rooms. They're cleaning us up. This guy comes and cleans me up. Hey. What happened? I'm my corner canyon? No, I broke, you know, my ribs. He's like, oh my gosh, must be in the water. I just treated another guy. I'm like, yeah, that's my buddy. Yeah, we're up there too.
[00:42:07] Host: Paul Barnhurst: If it makes you feel any better. I've ended up in the hospital for people. I've been, you know, they've gone mountain biking. We had one in California where he ended up getting. He hit a tree with his face. And yeah, it was not he. He was quite sore. He ended up being fine, but he basically it was the redwoods in Santa Cruz because a tree had fallen and he got up and over it. He bunny hopped over it, but he lost his balance a little bit. Ended up running into a tree. I think he probably would have been better just crashing over the log. You know, hindsight is always 2020.
[00:42:38] Host: Paul Barnhurst: All right. So total side note who's ever still listening at this point. Thank you. That was a little total tangent. But if you ever come out to Utah you like outdoors mountain biking come out and have some fun. Just don't jump off. Big rocks would be my advice.
[00:42:54] Guest: Patrick McMillan: Jump off them. Just make sure you know how to land.
[00:42:57] Host: Paul Barnhurst: Public service announcement. Be safe. We'll leave it at that. Be safe. Here we go. All right, let's go back to the financial modeling, the exciting stuff. So if you could offer our audience one piece of advice to be a better financial modeler today, something they should start doing. What would it be?
[00:43:13] Guest: Patrick McMillan: You know, I'm going to copy Chris Riley, and I think you've said this, and I've known others to say this to model your own personal finances.
[00:43:24] Guest: Patrick McMillan: That right there, I do it. I actually do it every single month. I close up my own books and it's incredible. It's super eye opening. It's a way to really do something that's at least a lot simpler than what a company would be, and it's very helpful to really learn how to do a financial model. So I highly recommend that.
[00:43:42] Host: Paul Barnhurst: Yeah, Chris has recommended that a number of times. It's a great approach. All right. If our audience wants to learn more about the QofE guy, how can they get in touch with you?
[00:43:52] Guest: Patrick McMillan: Definitely LinkedIn. It's the biggest, easiest, fastest way. I try to make sure I respond, you know, within a day or two. So that right there also, I think you'll have a link to our show notes to his website as well.
[00:44:03] Host: Paul Barnhurst: Yeah we will. Alrighty. Well, thank you for joining me today, Patrick. I've enjoyed chatting and you enjoy the rest of your week. Thanks a lot for coming on the show.
[00:44:12] Guest: Patrick McMillan: Will do. Thanks, Paul. Appreciate it. Pleasure.
[00:44:15] Host: Paul Barnhurst: Financial Modelers Corner was brought to you by the Financial Modeling Institute. This year I completed the Advanced Financial Modeler certification and it made me a better financial modeler. What are you waiting for? Visit FMI at www.fminstitute.com/podcast and use code Podcast to save 15% when you enroll in one of the accreditations today.