Your Business Gets Priced Twice

Every business that sells gets priced twice. The first price is the one in the letter of intent, the LOI, the number that gets talked about at the kitchen table. The second price is set weeks later, after the buyer's accountants and lawyers have been through the books, the customer list, and the operation, and it is the second price that ends up on the cheque. The distance between the two numbers is where most of the money in a sale is quietly won or lost.

I have been on the selling side of that table with companies of my own: a systems integration firm I built and sold to a public company, and a couple of others along the way. Since then I have spent years working on client transactions, acquisitions as well as sales, and most of what follows was learned across those deals. The pattern does not change much from one business to the next. Buyers arrive with a price in mind for the business they hope they are buying. Diligence is where they find out whether they are buying it.

McKinsey's research on the great ownership transfer puts the stakes clearly enough: of the US small business exits it counted in 2022, about 92 per cent ended in closure and about 5 per cent in a completed sale. Most owners who want to sell are not beaten by the market. They are beaten by what a buyer finds, or cannot find, once the looking starts. The good news buried in that is that almost everything a buyer finds was fixable, given time. Time is the whole subject of this article.

The records have to make sense to a stranger

The first thing a buyer's accountant asks for is three years of financial statements, and the first test is whether those statements can be read by someone who has never met you. In an owner-run business, the books usually carry the owner's life inside them: a vehicle or two, a family member on the payroll, a salary set for tax reasons rather than market ones, expenses that made sense to the person who approved them because he also paid them. All of that is typical for businesses at this size, and none of it is a character flaw. It is simply unexplained, and unexplained numbers get priced as risk.

What the buyer is doing, line by line, is rebuilding your profit the way it would look under an owner who was not you. Every line they cannot verify comes off the earnings, and earnings are what the multiple multiplies. Owners are often surprised to learn that the argument is rarely about whether the money was earned. It is about whether it can be proved to a stranger, from paper, without the owner in the room telling the story. Clean, reconciled, boring financial statements are worth real money in a sale, and they take two or three clean year-ends to produce. They cannot be produced in the six weeks after an LOI lands.

The customer list is a risk table

Ask an owner about his largest customer and he will tell you about the relationship, how long it goes back, how solid it is. A buyer reads the same fact as a percentage. Buyers usually start with your three largest names together. If one customer is 40 per cent of revenue, then 40 per cent of what the buyer is purchasing can leave with one decision made in someone else's office, and the price adjusts for that whether or not the relationship is genuinely strong. The buyer is not doubting the customer. The buyer is pricing the concentration.

The fix is unglamorous: sell more to other people until the biggest name is a smaller share of a bigger whole. It is also slow. Winning two or three mid-sized customers and growing them takes a year or two of deliberate selling, which is exactly why concentration is the item owners most often meet for the first time in diligence, when there is no longer time to change it. The same applies, in miniature, to the supplier you cannot replace and the one employee who holds a key relationship. Each one is a line in the buyer's risk table, and each one moves the second price.

The business has to run when you are not in the room

Somewhere in diligence, usually without announcing it, the buyer works out what the business looks like on the first Monday after the owner has gone. Who prices the work? Who do the big customers call? Who can sign, hire, and settle a problem? If the honest answers all point at the owner, the buyer is not purchasing a business so much as renting the owner's job back from him, and the terms start to reflect that: money held back, payments stretched over years, the seller's price tied to the seller staying.

This is the factor owners feel most personally, and it should not be taken personally. A business that needs its owner for every key decision is not badly run. It is unfinished in one specific way: the knowledge and the relationships live in one head. Moving them out takes time and intention: a second person who can estimate and be wrong safely, relationships introduced and shared while the owner is still there to vouch, decisions written down the way they are actually made. Businesses that have done this work hold their price. Businesses that have not discover that the buyer's discount for owner dependence is one of the largest numbers in the whole negotiation.

Who is buying changes what it is worth

Owners tend to assume there is a price for their business, as if it were a fact about the business. In practice the same business is worth different money to different buyers, because buyers are purchasing different things. A strategic buyer, often a competitor or a company one step up the chain, is buying what your business adds to theirs: your customers, your territory, your capacity. They can sometimes pay for value that only exists once the two businesses are combined, and they usually want a clean exit for the owner once the handover is done. A financial buyer, such as a private equity group, is buying the cash flow standing on its own. They pay for what is already there, they test it harder, and they commonly want the owner or the management team to stay involved, sometimes keeping a share of the business alongside them.

Neither buyer is better. But they reward different strengths, they ask different questions, and they load the risk of the deal onto the seller in different ways, through holdbacks, earn-outs, and vendor financing that can quietly hand back a good part of the headline price. Knowing which kind of buyer your business suits, and preparing the file that buyer wants to read, is worth more than a small difference in the opening LOI.

The shape of the sale gets decided early, whether you decide it or not

A sale takes one of two shapes: you sell your shares, or the business sells its assets. Sellers usually prefer a share sale, for the tax treatment and the cleaner break. Buyers usually prefer assets, for the step up in value and the liabilities they can leave behind. The shape affects the price, the tax bill, and what you remain responsible for afterwards, and parts of it cannot be rearranged at the end: the tax position of a share sale depends on the company's history going back years. It belongs on the same list as the records and the customer list: a decision to make early, with advice, rather than a term to negotiate at the end.

The work is measured in years, and the looking takes weeks

Set the fixes in those sections side by side and one fact runs through all of them: each fix is measured in years, and diligence is measured in weeks. Financial statements need two or three clean year-ends. Concentration needs seasons of selling. A second-in-command needs time to be trusted by customers, not just appointed. None of it is difficult, and none of it can be rushed at the end.

None of that means an owner on a shorter clock is out of luck. The full round of work wants at least a year, and two or three years is better, but a good part of it can be compressed when it has to be. Records can be cleaned up and reconciled in months when someone works on them deliberately, rather than waiting for clean year-ends to accumulate. The structure decision can be taken now instead of at the end. A second pair of hands can start being introduced to customers this quarter. What cannot be done is everything at once on a short clock: the shorter the runway, the more the work has to be chosen, the two or three items that will move the second price most, and done in that order. A partly prepared business still prices better than an unprepared one, and every month the work has had to settle makes it price better still.

The lawyers and the family advisors keep a list of their own for a sale like this, about family alignment, what each shareholder actually wants, and what life looks like afterwards. That work matters, and it is theirs to lead. This article is about the business itself, because the business is the part the buyer prices. An owner who starts the business work three years out is not preparing to sell on a schedule. He is making the business worth more and easier to run in the meantime, which happens to be the same work. If no buyer ever knocks, he still owns the better business.

Six questions, answered honestly

Score your own business the way a buyer's team will, privately:

1. The records. Could your last three years of financial statements be handed to a stranger's accountant, without you in the room, and still make sense?
2. The adjustments. If a buyer rebuilt your profit with a market salary for your job and the personal items taken out, how much profit is left, and could you prove every line of it?
3. The concentration. What share of revenue are your three largest customers, and what does the business look like in the month after one of them leaves?
4. The Monday test. If you took a month away and could not be reached, what would stop working first, and who would your biggest customers call?
5. The second pair of hands. Is there one person who could run the operation for a season, and have your customers already accepted them in that role?
6. The structure. What kind of sale do you want, a share sale or an asset sale, and do you know how the choice affects your taxes and the price?

Where the answers are uncomfortable, they are also, in my experience, the most valuable information an owner can have while there is still time to act on it. The first price is the buyer's opinion. The second price is the evidence. The evidence is yours to build.