Cheaper to Run, Harder to Sell
Why the shortcuts that keep an owner-run business lean and profitable can cost you when it's time to sell
In last month's Insight I wrote about the numbers owners hear when businesses sell, the ten or twelve times earnings that gets passed around, and why so few of them have much to do with the business in front of you. Some of that is because businesses aren't uniform. Some of it is because what a private equity fund sold a company for is a very different number from what it paid going in, and because the headline leaves out the terms that decide what an owner actually takes home.
I ended that piece by saying most of the gap tends to come back to one thing. This is the harder half of the conversation, and it's about the owner.
What the bigger buyers are paying for
A fund buying a platform, the first business it buys in a space and intends to build around, is buying something it can hand to a management team, grow for a few years, and then sell to another buyer who will ask exactly the same questions it's asking now. So the questions are mostly about whether the business works without the people who built it. Is there a layer of management that makes real decisions? Do the customer relationships belong to the company, or to a person? Can someone outside the building read the financials and understand the business without a two-hour walkthrough from the owner?
Industry matters, and so does quality. Margins and customer concentration move the number, and owners are right to pay attention to them. But in the lower mid-market, I'd put more of the gap between where most family businesses trade and the numbers their owners hear about down to owner-dependence than to anything else on the list. The buyers who pay the higher multiples are buying a machine. A business organized around one person's relationships and judgment can be an excellent business, profitable and well run, and still not be one yet.
Most of what makes a business a machine is its systems, more than its people. A buyer wants to see how work gets won, delivered and kept without all of it running through one person's head: how new business comes in, who owns the client relationship once it does, how decisions get made when the owner isn't in the room. Buyers will put up with a fair amount of owner involvement on the operating side, the approvals and the finances and the day-to-day, because those things can be handed off with a bit of time and the right hire. What they won't look past is a business where the revenue depends on the owner. If the client relationships leave when you do, there's nothing to hand off.
Plenty of owner-operated businesses never build those systems, and usually for understandable reasons. It's faster to handle something yourself than to write down how it's done and teach someone else. It's also cheaper. A business making $1.5 million with the owner looking after the finances is a business making $1.35 million once there's a controller doing it, and most owners would rather keep the difference. A business that runs lean around its owner, without a layer of managers or a sales process that works without you, is often a very profitable one, and that's a great outcome for the owner year after year. It just doesn't survive the sale very well. A buyer is going to account for the controller you never hired, usually by taking that cost back out of the earnings when it normalizes them, and then look harder at the multiple because so much still runs through you. The savings were real while you owned the business. At the sale, the buyer is the one who has to build what the owner chose not to, and the price reflects it. Sometimes the cost is more than a lower price. A business that can't show a buyer how it runs without its owner can struggle to find a buyer at all, or watch one walk away halfway through diligence.
This is also why size and owner-dependence tend to travel together. A business often stays small for some of the same reasons it stays dependent on its owner, and the ones that have built past their founder are usually the ones that have grown into the higher tier. So when I said last time that the market sorts mostly by size, a good part of what it's actually sorting by is this.
When a buyer does see that kind of dependence, it tends to show up in the terms as well as the multiple. A buyer worried that the key relationships will walk out with the owner can leave the headline number where the seller wants it and move the risk into the structure: a bigger earnout tied to those customers staying, a longer consulting arrangement that keeps the owner in the building, more of the price rolled over or paid later. The same goes for a business where a handful of clients make up most of the revenue. The seller still gets to say ten at the club. Whether they ever collect it depends on the very things the buyer was worried about in the first place.
Every name leads back to you
I spent years inside a family business before I ever advised on one, so I know where this lands. Being indispensable is usually the whole story of how the business got where it is. The customer who stayed through a bad year because you called them yourself. The supplier who extended terms on the strength of a handshake from twenty years ago. The decisions nobody else in the building can make, because nobody else has seen what you've seen. Those things weren't accidents. They were the work, and in a lot of cases they were the reason the business survived long enough to be worth selling.
A buyer at the top tier reads every one of them as risk. They aren't wrong to, either. If the relationships leave when the owner does, the buyer has paid for something that walks out the door at closing.
I've watched owners come to this realization during diligence, which is about the worst time to have it. A buyer asks for a list of the company's key relationships, and the owner sits down to write it and slowly notices that every name on the page leads back to them. There isn't a comfortable way to feel about that. The same thing you're proudest of is the thing being discounted, and no amount of reframing makes that sting much less. It's worth sitting with for a while before deciding what, if anything, to do about it.
The case for staying the size you are
The obvious advice from here is to build the business into something that can run without you, and I've written before about what that looks like in practice. For some owners it's exactly the right move. But that advice is a lot easier to give than it is to live through.
Building a real management layer, and the systems around it, means paying for it before it pays you back, often for years. It means handing over decisions you're better at making, and watching some of them go worse than they would have gone with you. It means becoming a manager of managers, which is a different job from the one most owners chose, and plenty of them don't want it. And at the end of all that, there's no promise the market will still be paying what it paid when you started. Owners who spend four years building toward a higher tier are making a bet on the market as much as on themselves.
Meanwhile, the buyers who already fit your business often want exactly the things a fund would discount. An individual buyer who plans to run the company is usually counting on a long, personal handover of the relationships you built. A strategic buyer may already have the management depth and simply want your customers, your people or your reputation in a market. A family office may be content to hold the business as it is for a very long time. Those buyers will typically pay less than a platform multiple. They can also close faster, disrupt less, and leave the people who stay in a better position than a fund on a five-year clock would. In a 2023 survey by the Canadian Federation of Independent Business, nine in ten owners planning to sell said protecting their current employees was the most important factor. I've seen owners turn down larger offers for exactly that reason, and in the right circumstances it can be a perfectly sound decision.
A lower multiple from the right buyer can be the better outcome once you account for the years and the risk involved, and for what you actually want the next chapter of the business to look like. Selling to a buyer who fits the business today is a legitimate strategy in its own right.
Knowing which market you're in
Both of those paths are real. Some owners will look at all this and decide the next tier is worth building toward, and they'll go into it knowing it's a multi-year project with an uncertain payoff. Others will decide the business is the right size already and that the buyer who wants it as it is deserves a serious look. Either can be a good decision.
What makes either one a decision, though, is time. Building systems, handing client relationships to someone else, hiring the controller and letting them settle in, none of that happens in the months before a sale. It takes years, and it goes best when nobody is in a hurry (I wrote more about that gap between feeling ready and being prepared in Building to Leave). An owner who starts thinking about this three or four years out gets to pick a path. An owner who starts when an offer shows up has mostly had the choice made for them.
What tends to go badly is arriving at the table without having made either one. An owner carrying a number from a different market, for a different size or kind of business, bought by a different kind of buyer and quoted without any of its terms, is going to measure every real offer against it and find each one disappointing. Sometimes they walk away from a perfectly good buyer over it, holding out for a number that was never on offer to a business like theirs.
So the useful starting point is an honest read on where your business actually sits, early enough to do something about it. Who can realistically buy it, what they'll be looking for when they do, and how much of what they're buying is you. The multiple tends to follow from that, more than from anything you heard at the club.
If you're weighing whether to build toward the next tier or sell to the buyer who fits the business as it is, I'm always glad to talk it through, and the earlier the better. It doesn't need to be the start of anything.
If you missed it, Part 1, Nobody Brags About Deal Terms, covers the market side of this conversation.
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