Hello Again & Other Tidbits on Acquiring a Business

[u/JCMW_Cap_1222]

A couple of years ago I posted here after we helped a client through an acquisition and shared some general thoughts from the experience.

Since then, we have worked through a number of additional deals. There are a few things we pay more attention to now after seeing them come up across different transactions.

There have also been some recent changes around SBA-financed acquisitions, but do not want to make this an SBA rules post. These are more just a few observations from deals we have been working through recently.

Just Believe in the Future and Pay for It Now

One thing I see fairly often is a business being valued partly on what it is expected to do over the next 12-18 months, rather than what it has actually done.

Maybe there is a strong backlog, a few large projects about to start, delayed work moving into next year, new salespeople coming online, etc. Sometimes the story is very believable.

But we have looked at businesses where the historical earnings support one valuation and the asking price really only works if next year's forecast gets hit.

My advice: I would separate what the business has actually proven from what you think it can do. There is nothing wrong with believing the upside, but I would be careful paying the seller upfront for all of it.

More Critical Eye To Earnings [Editor's Note: Which Should Have Always Been the Case]

I talked about addbacks and SDE in my original post, but I think the financial diligence around acquisitions has become more important.

The interesting questions usually aren't whether depreciation or interest gets added back. It is the less obvious stuff.

Does the owner's compensation really go away? Is the rent changing after closing? Did margins move materially? Is something being called "one-time" that actually shows up every year? Does the current year look like the trailing numbers?

On larger SBA transactions, there can also be more formal financial diligence involved now, including QoE work in certain situations.

My advice: Treat the seller's adjusted EBITDA or SDE as a starting point. I would want to understand fairly early what the earnings really look like once the adjustments and addbacks are actually tested, and how a lender is likely to view them.

So....What Does the Owner Actually Do?

This has come up a lot in businesses we have explored with clients.

An owner may say they only work 10 or 20 hours a week, which sounds great initially. Then you find out they hold the license, handle the largest customer, price the difficult jobs, maintain the bonding relationship or are still the person employees call when something goes wrong (but again, they only work 10 to 20 hours a week, right?)

That is very different from an owner who is genuinely replaceable.

The newer SBA rules provide some additional flexibility around seller transition in certain situations, which helps. But especially in plumbing, HVAC, electrical and similar businesses, that does not solve the licensing issue by itself. State and local requirements still matter.

My advice: Don't just ask how many hours the owner works. Figure out what they actually do and what has to be replaced when they are gone.

Don't Try to Diligence the Whole Business Before an LOI (Seriously)

I see buyers go too far in both directions here.

Some want to ask 30 questions and effectively complete diligence before putting an offer in. Others submit an LOI after looking at little more than the CIM.

Neither is ideal.

Before an LOI, I am really trying to figure out whether there is anything that materially changes the valuation, structure or whether we want to pursue the business at all. Once there is an agreed framework and exclusivity, that is when you can spend the time validating everything properly.

Sellers and brokers also have a limit on how much information they are going to provide before they know you are serious.

My advice: Get comfortable with the few things that could change your decision before submitting an LOI. Save the detailed diligence for when you actually have a deal to diligence.

Be Very Careful With the Word "Recurring"

This one comes up more than I expected.

A business may have customers that have used them for 10 years, maintenance work that comes back regularly, or general contractors that send them projects every year. That can all be very valuable.

But it is not necessarily the same thing as contractual recurring revenue.

We have looked at businesses where a large percentage of revenue was described as "recurring," but when you dug into it, much of it was really repeat project work based on relationships. In other situations, the work was tied to a contract, certification or program that needed to be understood in the context of a change of ownership.

My advice: Understand what actually causes the revenue to come back. A long customer relationship is a positive, but I would not treat repeat business, contracted revenue and true recurring revenue as the same thing.

Not All Backlog Is Created Equal

A large backlog can make a business look a lot more attractive, particularly in construction and the trades.

But I have learned to be careful with the headline number.

Some backlog is under signed contract. Some is awarded but not started. Some is really a verbal commitment or work the seller expects to receive.

And even when the work is real, the margins on those jobs may look very different from what the business has historically earned.

We have looked at companies where the backlog sounded great at first, but once you got into what was actually contracted, when the work would start and what the expected margins were, the picture was a little different.

My advice: If backlog is an important part of the story, understand what is actually contracted, when it is expected to convert and whether the economics look similar to the historical business. I would not treat a dollar of backlog as automatically equivalent to a dollar of historical revenue.

Will leave it there for now.

One thing we have seen more clearly over time is that a good business does not always make for a good acquisition.

The company can have good employees, real earnings and plenty of upside, and the price, financing or transition can still make the transaction difficult.

On the other hand, some deals that look complicated at first can still work if the underlying issues are manageable and the buyer, seller and lender are aligned on the path forward.

Would be interested to hear from people who have bought a business recently or are currently going through the process. What has come up that you did not expect when you started looking?

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[u/quiet_horizons1]

Treat the qualifier license as a closing condition found out before the LOI, not after. A seller who says they only work part time is often still the license holder, and their transition period does not move the license to the buyer. Confirm whether the buyer already has a qualifying individual who meets the state requirements or has someone lined up who will. If not, the valuation is not supportable, because the business cannot operate in that trade without the qualifier.

[u/Mistr_John_Alex]

The base price should sit on trailing earnings, with the forecast upside tied to an earnout or seller note that pays only if those milestones actually show up. That way you are not debating whether the story is believable, you are just refusing to fund it until it clears the bar. If the seller balks, that is useful information.

[u/JCMW_Cap_1222 → u/Mistr_John_Alex]

Agree completely.

[u/ClearAuthorityOS]

The numbers matter, but the ownership gaps are what usually break the first 90 days.

Ask who can approve a hire, a spend above a set amount, and a contract change. If those answers are “the founder” or “we figure it out,” the business does not have a decision system. It has one person. That becomes your bottleneck the day the seller leaves.

Look for written rows: one owner per decision, a threshold, and who is only informed. If those rows do not exist, price the time you will spend building them.

[u/Curious-Chemistry-70]

New salespeople coming online is the weakest item on that list. They take a couple of quarters to ramp and most of them are gone before that, so it's a cost, not a reason to raise the price.

[u/JCMW_Cap_1222 → u/Curious-Chemistry-70]

Truly. Included that because we do see “new salespeople coming online” used as part of the forward earnings story.

We would generally give very little credit for it until there is actual production behind it. Ramp time, historical rep productivity and retention matter a lot more than simply having added headcount.

[u/285418]

How many is 'a number of additional deals'? Three, thirty? You say pricing off next year's forecast keeps coming up across transactions, but there is not one multiple or concrete example anywhere in the post to show it.

[u/JCMW_Cap_1222 → u/285418]

Fair question. It varies by client and how active they are in their search. I try to avoid getting into specifics on client deals, but we have seen this come up across multiple industries. Sellers putting a lot of weight on what they expect to earn next year rather than what the business has historically produced (when the inverse is the focus from the buyer standpoint)

[u/Shoddy_Sale_7915 → u/JCMW_Cap_1222]

To me this is just a sign of an unserious seller who is trying anything to get a 4X multiple on a 2.7X business.

[u/JCMW_Cap_1222 → u/Shoddy_Sale_7915]

More common than buyers realize.

[u/Shoddy_Sale_7915 → u/JCMW_Cap_1222]

BizBuySell 🤝 FB Marketplace

“No lowballs I know what I got”

[u/No-Molasses-2097]

The recurring revenue point is worth repeating. A long-time customer with no contract or switching cost is still basically goodwill. That can be real value, but the model should treat it as retention you have to earn, not revenue you already own.

[u/JCMW_Cap_1222 → u/No-Molasses-2097]

This can literally be a deal breaker if not negotiated properly. We understand why sellers value those relationships, but it becomes a different conversation when you are asking a buyer to pay for revenue that has a flight risk upon close.

[u/talk2myreps]

Supplier terms, sometimes a business get a better pricing or longer payment terms just because the owner has known the suppliers for years. No guarantee you’ll get the same deal when you take over

[u/JCMW_Cap_1222 → u/talk2myreps]

Ah...The fun details that can get overlooked and disrupt a business. A robust diligence process is key to making sure you can capture key details such as this particular for transaction document purposes.

[u/nictan93 → u/talk2myreps]

Do buyers normally get to confirm those terms directly with the suppliers before handover? An old invoice shows what the seller was paying, but not whether the supplier will offer the same pricing and payment terms to the new owner.

[u/patient_signals]

The licensing qualifier question is easy to skip until after the LOI, and then it becomes a closing problem. If the seller personally holds the license that lets the business operate, the buyer needs a qualifier before taking over, not just a transition period. An employee who can qualify solves it because the license stays with the shop. If nobody on staff holds the right credential, you are buying a business that cannot legally do the work until you bring someone in.

Check this before price. Ask whether the seller is the qualifier, whether any employees hold the license, and whether the state allows a temporary qualifier during transition or requires the buyer or a designated person to pass the exam first. Some states make this quick, others do not. The SBA flexibility around seller transition does not override local licensing rules, as the post says.

Does the seller personally hold the qualifier license, or is there already a licensed employee who could take over on day one? That answer changes whether the valuation should hold.

[u/JCMW_Cap_1222 → u/patient_signals]

This is literally the crux of questions on Pre-LOI basis. If there is no valid pathway to license transference, then it is best to get to that answer as early as possible in the deal evaluation process and move on to other opportunities.

[u/DrunkenGolfer]

What was surprising for me is that I built a very detailed and comprehensive model of the business and the business tracked almost to the dollar, like less than 1% out on any given category of revenue or expense. Good diligence makes a ton of difference.

The other thing that surprised me was how much residual risk was in the business. Commitments made to clients that were not papered, promises that left liability exposure, etc. There were a lot of holes to close up and most involved heroic effort or some sort of spend that had no ROI other than risk reduction.

[u/careful_keys]

If the price only works on next year's numbers, don't make the whole purchase price depend on them. Keep the guaranteed portion tied to what the business has already earned, and put the forecast upside into a seller note or earnout that pays only if actual EBITDA hits the target over the next year or eighteen months. That way the seller keeps some of the forecast risk instead of handing it all to the buyer. One trap is writing the earnout on revenue or gross profit instead of earnings; a business can hit the top line and still miss on margin after rent, payroll, or owner replacement costs change. If the seller won't accept a contingent piece, that tells you how much they believe the forecast themselves.

[u/FounderInTheMaking]

Solid list, the "what does the owner actually do" one is underrated. I'd add another that burned me early on: talk to the employees before you close, not after.

On my first deal the numbers checked out, the seller was cooperative, diligence was clean. What I didn't do was have real conversations with the two people actually running the day to day. Six months in I found out the senior person had been interviewing elsewhere for a year and left the moment retention bonus hit her account. The business looked great on paper because she was quietly holding the whole thing together.

Now I always ask to speak with key staff before closing, framed as "getting to know the team I'll be working with." You learn more in 20 minutes with them than in 200 pages of diligence. If the seller refuses or hovers over every conversation, that tells you something too.

Also agree hard on the recurring revenue point. "Recurring" just means the customer hasn't cancelled yet. Until you've seen two or three renewal cycles it's aspirational, not revenue.

[u/JCMW_Cap_1222 → u/FounderInTheMaking]

Would never close a deal without speaking to key employees. A complete dealbreaker if an owner insists that key employees can only be read in after a deal.

[u/ExtensionBoard8318]

A couple of years, a number of deals, "fairly often", "sometimes". How many transactions is that actually built on? And on the ones where you say the price only works if next year's forecast lands, what was the gap between what the historicals supported and the ask?

[u/Strong_Blackberry367]

si el pronóstico del próximo año fuera real no estarían vendiendo. el vendedor siempre vende justo antes de la caída y tú pagas la prima.

[u/Commercial-Radio-715]

the forecast part is on you anyway. if that backlog was real he'd of taken an earnout instead of arguing about it for three weeks

[u/1click1vote]

The owner’s actual role and how reliable the earnings are seem especially easy to underestimate. A business can look great on paper but be a very different deal once you dig into the details.

[u/JCMW_Cap_1222 → u/[deleted]]

The tricky thing is that each deal is different. But generally, you can get a feel for which key items tend to reoccur like validity of addbacks or customer concentration to name a few items that come to mind. With more experience, you can get better at focusing on core items to diligence Pre-LOI to reduce the amount of time spent on a deal while still doing adequate diligence work.

[u/JCMW_Cap_1222 → u/[deleted]]

Nothing wrong with leaning on your accountant. You will naturally get better at spotting things as you review more deals. Recommend to try to get more comfortable questioning some of those addbacks early on, especially since the more detailed financial diligence usually comes later in the acquisition process just given the volume of deals you may be reviewing.

[u/Southern_Charge_750]

the 'what does the owner actually do' part is the one that stands out. i've looked at small shops where the owner says 15 hours a week, but he's also the license holder, the guy who prices the weird jobs, and the only one the big customer trusts. that's not a business you're buying, that's a job with debt attached.

i'm starting from scratch instead, partly for that reason. slower, but at least i know what's actually mine.

[u/JCMW_Cap_1222 → u/Southern_Charge_750]

The hours by themselves can definitely be misleading. If the owner is the license holder, handles pricing, and owns the key customer relationships, those 15 hours will increase quite a bit under a new owner to say the least.

I can also see the appeal of starting from scratch for that reason. You give up the existing customer base and cash flow, but at least you know you are building around systems and relationships that are actually yours from the start. Each path requires a certain level of patient to say the least.

[u/JCMW_Cap_1222 → u/[deleted]]

Exactly. Earnouts can be tricky to structure, especially with SBA financing, but if a big part of the asking price is based on future growth, it's fair to ask the seller to share some of that risk.

[u/Interesting-Sock9435]

ules post" is missing its subject. Presumably "but I do not want to".ules post" is missing its subject. Presumably "but I do not want to".

[u/Angalourne]

Solid information

[u/JCMW_Cap_1222 → u/Angalourne]

Thanks