What the person across the table is actually looking at
I’ve watched owners spend six weeks preparing for a meeting and get the document wrong. Not badly written. Wrong subject.
They come in with three years of growth, a margin story, a slide on the second site, and a page on the team. All of it true. Most of it good. Almost none of it the thing being assessed. Then, somewhere around the twenty minute mark, the person opposite stops writing about performance and starts asking about holidays. When did you last take one. What happened while you were away. Who signed things off while you were gone.
The owner hears small talk and relaxes. That was the assessment. Everything before it was manners.
I’ve been on both sides of that table. When I was buying, the growth chart wasn’t what I was reading. I was working out one thing, and I was working it out from the moment I walked in: what is still here in eighteen months if this person is not. That’s the whole enquiry. Every question underneath it is a way of getting at it without saying it out loud, because saying it out loud sours the room and makes people defensive, and defensive owners stop telling you things.
You’re arguing about the wrong number
Every deal, whether an outright sale or an investor taking a slice, comes down to two numbers multiplied together. Earnings, and a multiple.
Owners turn up ready to fight about earnings. They know that ground. They have the add-backs listed, the one-off costs flagged, the argument prepared about why last year understates the run rate. Fair enough, and some of that argument usually lands.
But earnings are the smaller half. On a business earning a million, the difference between a three and a six is three million dollars, and no amount of arguing about a hundred thousand of add-backs gets near it. The multiple is where the money is, and the multiple is not a market average someone looks up. It’s a risk score. It’s the buyer’s private estimate of how likely those earnings are to still exist once you’ve gone, expressed as a number.
So the conversation you think you’re having is about how well the business performs. The conversation actually being had is about how much of that performance is the business, and how much of it is you.
What’s being scored, concretely
Not a philosophy. Here’s the specific stuff, and the order it tends to come in.
Who decides when you’re not there. Not who has the title. Who has the authority. A buyer will ask about the last time something went badly wrong and listen for whose name comes up. If it’s yours, the business has a single point of failure and that failure is the asset they’re being asked to buy.
Whose name the relationships are in. Your ten most important customers and suppliers: are they dealing with the business, or with you? An owner will say “with the business, obviously” and then, two questions later, explain that the big account renews every year because he and the buyer go back fifteen years. Both of those things were said honestly. Only one of them is true.
Whether next year has to be won again. A buyer separates revenue that arrives from revenue that must be earned from a standing start every month. Contracted, subscribed, or genuinely habitual on one side; everything else on the other. And concentration underneath it. One customer at forty per cent doesn’t usually reduce the headline price. It changes the structure, which is worse, and I’ll come back to that.
Whether anyone else can read the numbers. Not whether they’re good. Whether they’re legible. Three years of reconciled accounts, produced inside a week, telling the same story as the tax returns, with the personal spending identified rather than buried. If a buyer can’t assess it, they don’t pay a lower price for it. They stop.
Whether what makes it good survives you. This is the one that hurts, so I’ll put it plainly below.
The bit that gets good operators the worst
Here’s the thing almost nobody tells owners, and it’s the reason genuinely excellent businesses get valued badly.
The better you are, the worse this can go for you.
Take a business where the standards are high, the customers are loyal, the margin is better than the sector, and the reason for all three is the owner. He set the standard, he holds the standard, he’s the one who notices when something goes out that shouldn’t have. He is, by any fair measure, extremely good at this.
A buyer looks at that and sees excellence with no mechanism underneath it. Quality that lives in one person’s judgement isn’t a system, it’s a habit, and habits don’t transfer at settlement. So the buyer is being asked to pay a premium multiple for performance whose engine is walking out of the building on completion day. They won’t do it. Not because they doubt the numbers, but because they believe them and can see where they come from.
That’s the paradox at the centre of this, and it’s worth sitting with. A weaker owner running a properly built business gets a better multiple than a brilliant owner running one that is really an extension of himself. The market is not rewarding mediocrity. It is pricing transferability, and it is right to.
The risk you can’t remove gets converted into your time
Now back to structure, because this is where owners get caught after they think they’ve won.
When a buyer sees risk they can’t price away, they don’t always cut the headline number. Often they leave it high and move it behind conditions. Some at completion, more paid over two or three years against performance you have to be present for. Earn-outs, deferred consideration, retention, a consultancy agreement with real obligations in it.
The owner walks out having got the number he wanted and tells everyone he did well. Eighteen months later he works out what actually happened. He did not sell a business. He sold a minority of it up front and signed a three-year employment contract to earn the rest, on someone else’s terms, with someone else deciding what the targets are.
Every one of those conditions is the buyer pricing the same thing: the risk that the business is you. If it isn’t, you take the money and go. If it is, you stay and earn it, and you find out how it feels to run your own business as an employee.
What to do with this
I’m not going to tell you to go and fix all of it, because that’s the sort of advice that sounds useful and changes nothing.
I’ll tell you the one thing worth doing this week, which is to stop assuming the assessment is about performance. It is not. Take the last ninety days and count the decisions that came to you that somebody else could have made. Then go and ask yourself honestly what happens to those ten relationships if you’re not the one on the phone.
That number and that answer are closer to your valuation than your P&L is.
Most owners never learn the gap between the two, because they only find out at the one moment when it’s too late to do anything about it, which is halfway through a meeting they spent six weeks preparing the wrong document for.