Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How Non-Competes Changed Business Valuations
Transcript
- Lucas: The biggest change I see in private business sales right now isn't about interest rates or EBITDA addbacks. It is the sheer paralysis caused by the Federal Trade Commission's push to ban non-compete agreements across the country. Luna: That makes sense because if a buyer cannot stop key employees from walking out the door with client lists, the asset they are buying feels much more fragile. Lucas: Exactly. We have been talking for years about owner dependence being a red flag, but now we are seeing it compounded by legal uncertainty. When I look at recent term sheets, I am seeing buyers explicitly pricing in the risk that the management team will leave within eighteen months, simply because there is no longer a clear legal mechanism to keep them here. Luna: So they are essentially betting against the stability of the workforce unless there is something else holding people in place. Lucas: Right. And since the FTC proposal dropped in April twenty twenty-four, we have seen a distinct freeze on deals that rely heavily on human capital. A software firm might still sell fine because the code is the asset, but a consulting firm or a specialized staffing agency? Those valuations are getting hammered because the primary asset—the people—is legally untethered. Luna: It forces the buyer to ask whether they are buying a business or just leasing a group of freelancers who happen to use your brand name. Lucas: Precisely. Let me give you a concrete example from last month. A boutique digital marketing agency in Ohio was looking to exit. They had strong recurring revenue and solid margins, but their success relied entirely on three senior strategists who held all the client relationships personally. Normally, the seller would have used non-competes to guarantee those strategists stayed for two years post-close. Luna: And now that leverage is gone, so the buyer has to assume those clients will follow the strategists out the door. Lucas: That is exactly what happened. The buyer refused to pay the standard four times EBITDA multiple they had seen in comparable transactions last year. Instead, they offered three point five times, arguing that the revenue stream was too risky without those legal protections in place. The seller ended up having to accept a fifteen percent haircut on the headline price just to get the deal moving. Luna: That is a steep penalty for something that was previously considered standard operating procedure for protecting goodwill. Lucas: It is steeper than that because it changes the structure of the entire deal. Since the seller couldn't command the full price upfront, they had to agree to provide forty percent of the purchase price as seller financing, extended over five years, to bridge the gap. That ties up the seller's capital and increases their risk if the new owners mismanage the transition. Luna: So the seller is effectively lending money to the buyer to compensate for the lack of employee retention guarantees. Lucas: Yes, and that is becoming a very common pattern in sectors like IT services, professional staffing, and custom manufacturing. If your business value is tied to specific individuals rather than systems, you are suddenly in a weaker negotiating position. Buyers know that the court system is currently in flux regarding these agreements, so they are waiting to see how state laws evolve before committing large sums. Luna: It creates a massive information asymmetry where the buyer knows the rules are changing but the seller is still pricing based on old norms. Lucas: Right. And some sellers are trying to adapt by using non-solicitation agreements instead. These prevent former employees from poaching clients or hiring staff, even if they can work for competitors. But buyers are skeptical because non-solicits are easier to bypass than broad non-competes. You can just tell a client to hire your friend directly, and technically you haven't solicited them. Luna: Which means the protection is only as good as the enforcement, and litigation is expensive and unpredictable right now. Lucas: Exactly. So what is the practical takeaway for someone planning an exit in the next twelve to twenty-four months? You have to decouple your business value from individual personalities as aggressively as possible. This means documenting every process, centralizing all client communications through company-owned channels, and ensuring that no single employee holds a monopoly on a major revenue stream. Luna: It sounds like you need to build institutional memory that survives the departure of any one person. Lucas: Yes. And secondly, you need to strengthen your employment contracts with robust retention bonuses tied to specific milestones post-acquisition. If you cannot legally force someone to stay, you have to financially incentivize them to stay. That shifts the dynamic from coercion to alignment. Luna: So instead of saying you won't let them leave, you are paying them extra to want to remain part of the new organization. Lucas: Precisely. I saw a healthcare compliance firm do this successfully last quarter. They structured earn-outs that paid out heavily if the core team remained intact for the first two years. The buyer accepted a higher multiple because the financial incentives were clear and immediate, removing the guesswork about retention. Luna: That is a smarter way to handle risk than relying on a legal document that might not hold up in court anyway. Lucas: It is. And it also helps during due diligence because you can show the buyer that you have thought about continuity without relying on potentially unenforceable restrictions. It signals maturity and operational resilience. Luna: Do you think this trend will reverse once the legal landscape settles down, or is this a permanent shift in how businesses are valued? Lucas: I think it is a permanent shift in expectations. Even if courts eventually uphold certain non-competes, buyers will have learned that human capital is volatile. They will continue to demand stronger evidence of systematized operations and retention incentives. The era of selling a business primarily on the strength of the founder's personal relationships is ending. Luna: Which means the businesses that survive and thrive in this environment are the ones that have built brands and processes bigger than any single employee. Lucas: Exactly. And that actually leads into a broader point about intellectual property. When you cannot lock down people, you need to lock down data and proprietary methods. That is where the real long-term value lies. Luna: It feels like the definition of a valuable asset is shifting from who runs the company to what the company owns and knows independently of its staff. Lucas: That is a really sharp way to put it. And it raises the bar for entrepreneurs who want to exit cleanly. You have to be willing to invest in infrastructure that doesn't necessarily boost short-term profits but protects your long-term exit optionality. Luna: So if you are listening and you have a small team holding all the keys, maybe it is time to start building those locks and keys for the rest of the organization. Lucas: Yes, and document everything. Because when the buyer asks why you deserve a premium multiple, you should be able to show them a machine that runs smoothly without you. Luna: If these conversations have moved your work forward in some small way, consider supporting the network directly. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo. It helps us bring you more detailed breakdowns like this one without ads cluttering the signal. Lucas: We appreciate it, because deep dives into structural market shifts like this require research and access that don't come free. Back to the deal dynamics. Luna: Let us circle back to that healthcare compliance example you mentioned. How did they structure the earn-out to make it attractive to both sides? Lucas: They tied it to revenue retention percentages. If the top five account managers stayed for twenty-four months and retained ninety percent of their book of business, the founders received an additional ten percent of the enterprise value in cash. It was simple, measurable, and aligned everyone's interests. Luna: So the risk of losing clients was shared, but the reward for keeping them was clearly defined and substantial. Lucas: Yes. And it removed the ambiguity that usually kills deals in uncertain regulatory environments. The buyer knew exactly what they were getting, and the seller had a clear path to their target price. Luna: It seems like clarity is the most valuable currency in today's private market, more than even EBITDA itself. Lucas: I would argue that is true. Buyers are willing to pay for certainty, and they are discounting heavily for ambiguity. As long as the legal framework around non-competes remains unsettled, that premium for clarity will persist. Luna: So for sellers, the advice is to reduce ambiguity through documentation, incentives, and systematization rather than relying on restrictive covenants. Lucas: Exactly. Build a business that stands on its own legs, not one that is held up by legal tape. That is the only sustainable way to maximize value in this cycle. Luna: It makes you wonder which industries will adapt fastest to this new reality and which ones will struggle to find buyers at all. Lucas: Highly specialized technical firms with unique IP will likely hold their value best. Service-heavy firms without proprietary tools will face the most pressure. It is a bifurcation we are already starting to see in the data. Luna: So the winners will be the ones who treated their knowledge as a company asset, not a personal one, long before the regulations changed. Lucas: Yes. And those are the businesses that will command the highest multiples when the dust finally settles on this debate. Luna: Interesting perspective. It suggests that preparation for exit is really just preparation for resilience, regardless of who ends up buying. Lucas: That is a great way to frame it. Whether you sell or stay independent, a systematized, low-key-person-risk business is always worth more.