What It Really Takes to Sell a Business

Anne McGinty is unusually well placed to conduct this interview. She sold her own company through Loren, so when she asks how long a sale takes or why a buyer wants money left in the business, she is asking from memory rather than curiosity.

Loren's route into brokering started with a bad experience of his own. He graduated into the 2008 recession, built a series of consulting businesses in New York, and sold a couple of companies along the way. The brokers he dealt with reminded him of used car salesmen, telling him everything was going well when it plainly was not. In 2018 he met a future partner who had reached the same conclusion, and the firm came out of that shared frustration.

How these businesses are actually valued

Headlines about technology companies selling for enormous sums while losing money have badly distorted what most owners expect. Those valuations come out of the venture capital world and describe almost nothing about a normal operating business.

For the bulk of small and lower middle market companies, the answer is simpler. Around ninety percent of the time, a business sells for somewhere between three and seven times its adjusted profit.

The word doing the work there is adjusted. Most owners structure their books to minimize tax, which means the profit on the tax return understates what the business actually produces. Personal expenses and fringe benefits get added back during the valuation, so a company that looks thin on paper may be considerably more valuable than its owner assumes. What matters is what the operations genuinely net.

What to fix before you sell

Loren's first piece of practical advice is narrow and specific, and it matters more than it sounds: keep personal expenses and add-backs out of your cost of goods sold.

The reason is financing. A bank underwriting a buyer's loan cannot credit add-backs buried inside COGS, which means the business will not support the loan a buyer needs. Anything that belongs below the line should sit below the line.

The second is harder and takes longer. Build a layer of people who could step up, a capable second in command or a few employees who could be elevated. There is an awkward irony here, since owners who lack that layer are often precisely the ones who want out because of it. But buyers are not shopping for headaches. A business netting a million dollars through sheer force of the owner's effort, held together by workarounds, is a difficult sell when there are smoother businesses available. A company that is running well and growing is the one people want to buy.

Working capital: the problem nobody warns sellers about

Loren calls this the single biggest challenge in a transaction, second only to lawyers, and it is the part of the conversation most likely to save a reader real money.

When a business changes hands, it has to keep operating. If you run a construction company that gets paid sixty or ninety days after the work is finished, the new owner must cover payroll and suppliers for that entire stretch before any cash arrives. Someone has to fund that gap.

Sellers find this maddening, and the instinct is understandable. The work was done on your watch, you already paid your crew, and the money owed is yours. The buyer's position is equally reasonable: without that cushion, they are injecting capital on day one simply to keep the lights on, which comes straight out of what they will pay you.

Loren's approach is to raise it early, before a letter of intent rather than during diligence, and to negotiate a level that genuinely works. Enough that the account dips low for a few weeks and then recovers, rather than the generous cushion a private equity buyer would prefer. He is candid that it took him years to appreciate how much damage this does when it is left until late.

Who actually buys these businesses

The buyer pool is more varied than most sellers imagine, and the type of buyer changes the character of the whole process.

SBA buyers, generally for businesses up to around seven million, are often individuals or couples. The SBA 7(a) program lets a buyer put ten percent down on a loan the government backs, which means someone with a couple of hundred thousand dollars can acquire a business netting six hundred thousand a year. Loren likes these deals because everyone, including the broker, ends up on the same side working through the bank's requirements together.

Private equity and rollup groups operate differently. The people across the table are associates working within a fund's constraints, and the negotiation becomes a matter of reading how far they can be pushed before they walk, because they do not need any particular deal. It is transactional, with less feeling in it, though when a group genuinely needs what you have, they can pay very well.

Independent sponsors work rather like wholesalers in real estate. They tie up a business under a letter of intent and then go and raise the money.

Search funds back recent MBA graduates to go out and acquire a company. Loren's view is mixed. Some are excellent. Others are young, have never had to struggle, and arrive believing they are above the business they are buying, which rarely ends well for a hands-on service company.

Strategic buyers come with the biggest misconception attached. Conventional wisdom says a competitor or industry player will pay the highest price, and occasionally that is right, usually when a large operator is simply buying market share. More often the opposite is true. A strategic already understands how your business works and what makes it tick, which means they need you less than you think and will pay accordingly. Loren's experience is that you often do better selling to one of the groups trying to assemble five companies like yours in order to compete with that strategic.

How long it takes, and why

In an ideal case, a sale runs about six months: roughly a month to gather financials and build the confidential information memorandum, two months to find a buyer, and three months of diligence.

Nine to twelve months is the realistic expectation. A first letter of intent may fall through. Banks, lawyers, and accountants all introduce delay. The stretch between Thanksgiving and the new year is close to impossible for closing anything, which can absorb two months on its own.

The line worth remembering is that finding a buyer is the easy part. Getting the money into the bank is the hard part. Loren describes the role as part project manager, part therapist, part dealmaker, and mentions one transaction where most of his work was mediating between three co-owners who wanted different things, none of it to do with the buyer. He says nearly every deal, even the good ones with reasonable people on both sides, comes close to falling apart around ten times.

How buyers actually get found

The mechanics here surprise most sellers. Business Exits maintains a pool of more than twenty thousand buyers and equity groups, but the listing itself is rarely what produces the buyer.

Loren will take a business out to two hundred people and ask them to sign an NDA and have a look. Almost none of them turn out to be the buyer. What happens instead is that fifty of them point him toward someone else, and the eventual buyer surfaces two or three steps out from that first approach. It is a referral network rather than a listing service, which is why relationships matter as much in this business as they do anywhere else.

If you're on the buying side

Loren's strongest advice to buyers is to change nothing for a year unless the seller agrees it is a good idea.

His example is a buyer in Texas who moved the business out of its office above a check cashing store and into a high rise, assuming a smarter address would impress customers. It did the opposite. Customers had liked dealing with somebody who did not seem wealthier and more important than they were, and that move damaged the business.

There is a real opportunity in buying from an older owner, and he is clear about it. A business built over decades may have an outdated website, no marketing funnel, and no social presence, and relatively basic improvements can add meaningful value. But the knowledge sitting in the current owner's head took years to accumulate, and a buyer should spend serious time understanding why the business works before deciding they know better.

For more on what to look for as a buyer, including the arithmetic on an SBA deal, see our recap of Loren's conversation on Deal Flow with Ryan Ray.

Why the unglamorous businesses win

Asked what he would tell a twenty-five-year-old, Loren goes straight to HVAC, and his reasoning is worth following because it generalizes.

The margins are high. You are paid the moment the work is finished, or the customer finances it through a third party and you are paid on day one either way, which means the working capital problem that haunts other businesses is close to zero. Most importantly, demand announces itself. Nobody needs convincing that a broken furnace is a problem. They simply search for someone to fix it, which makes customers findable in a way that most businesses would envy.

He contrasts that with companies where the hard part is persuading people they have a problem at all, which he has tried and found far more difficult.

The story he tells to make the point is about a car mechanic in Los Angeles who built an HVAC company to a couple of million in profit over three years, sold it through Loren, waited out his non-compete, and then built a second one with a new brand, twelve trucks, and roughly the same profit. He had no HVAC background. The certifications are not difficult to get.

Other sectors he rates include staffing, particularly in home care and nursing assistance, where a short training course can take someone from fifteen dollars an hour to forty-five in parts of California, and demand keeps rising as the population ages. His general rule is to serve people in a specific niche rather than take on something broad like general construction or property development.

One more observation that affects valuation directly: recurring revenue earns a substantially higher multiple. He floats a plumbing or HVAC business built around an honest membership model, where customers pay a modest annual fee for coverage and reliable service, as something that would both treat people better and be worth more at sale.

Being a person people want to deal with

The theme running underneath the whole conversation is transparency. Loren's advice to both sides is to be honest about problems early and solve them together, because the alternative is discovering them at the worst possible moment.

He extends that to who you transact with at all. Do not buy a business from someone you do not trust, and do not sell to someone you dislike, because that person will inherit your employees and the thing you spent your life building.

On the purchase and sale agreement, his framing is useful. When the representations and warranties arrive and look aggressive, the question to ask is what the other side is trying to protect themselves against, rather than reacting to it as an attack. Most of the time there is a reasonable middle, and most of the heat in late-stage negotiations comes from lawyers pushing for terms that make no sense for anyone.

He is blunt about the standard he holds himself to. If someone is not a decent person, he will not sell their business, and he will not entertain them as a buyer either.