Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How to Sell a Business Without Losing Control
Transcript
- Lucas: The number one reason small business deals fall apart right now isn't the price. It's the payment terms. Buyers have learned that when capital is tighter than it was two years ago, they can push sellers to take on more risk in exchange for a slightly higher headline multiple. We are seeing a structural shift where cash is no longer king. It is now just one piece of a much more complex puzzle. Luna: Right, and the interesting part is that this isn't just about interest rates anymore. It is about confidence. Buyers want assurance that the business will keep running smoothly after the founder walks away. Lucas: Exactly. And that assurance comes in the form of seller financing. When I look at recent transactions in the mid-market range, something like forty percent of the purchase price is now being financed by the seller themselves. That means the previous owner gets paid over time, usually three to five years, with an interest rate attached. It bridges the gap between what the buyer can borrow from a bank and what the seller thinks the business is worth. Luna: So effectively, the seller becomes the bank for their own exit. Is that not dangerous if the new owner struggles to make those payments? Lucas: It is risky, which is why we need to talk about how these structures actually work under the hood. Most seller notes are secured against the assets of the business. So if the new owner defaults, the seller has a claim on the inventory, the equipment, or even the customer list. But here is the catch. The interest rate on those notes is rarely competitive with market rates. We often see them floating around eight to ten percent, which is significantly higher than what a commercial loan might cost today. Luna: That seems like a tough trade. You get your money back slower, and at a higher cost to the buyer. Why would anyone agree to that? Lucas: Because without it, the deal dies. Let me give you a concrete example from last quarter. A regional HVAC distributor was looking to sell. The seller wanted twelve times earnings. The buyer, who was using a leveraged buyout structure, could only support eight times earnings based on current cash flow. That is a four-point gap. In the old days, the seller would have lowered the price. Now, they bridge it with a five-year seller note for that missing four points, plus an earn-out tied to revenue growth for the next two years. Luna: An earn-out. Those always feel like a negotiation trap. How do you prevent disputes when future performance is the variable? Lucas: Disputes are common, but they are manageable if the metrics are defined early. The most successful deals use simple, objective metrics like gross revenue or EBITDA. Avoid anything subjective like customer satisfaction scores or employee retention rates. For that HVAC deal, the earn-out was strictly tied to top-line revenue. If the new owner kept the same client base and grew prices by standard inflation adjustments, the seller got the full bonus. It removed ambiguity. Luna: I think that is key. If the metric is vague, the buyer has an incentive to suppress results to avoid paying out. Sellers end up feeling like they are working for free during the transition. Lucas: Precisely. And that leads to one of the most critical parts of any exit: the transition period. This is where the seller stays on for six to twelve months as a consultant. During this time, they introduce the new owner to key clients, train management staff, and hand over vendor relationships. It is not just about transferring knowledge. It is about transferring trust. Buyers need to know that the customers will not walk away when the founder leaves. Luna: But doesn't that create a conflict of interest? If the seller knows they are leaving, why would they invest in long-term improvements that benefit the new owner? Lucas: Good point. The best contracts include clawbacks or holdbacks on the seller note. Say twenty percent of the final payment is withheld until the end of the transition period. If the seller bails early or sabotages operations, they lose that chunk of cash. It aligns incentives. The seller wants a smooth handoff because their own wallet depends on it. It forces them to act like stewards, not landlords. Luna: That is a smart structural safeguard. What about the non-compete? Isn't that standard in these deals to protect the buyer? Lucas: Non-competes are absolutely standard, and they are enforceable in most jurisdictions now. Typically, they restrict the seller from starting a competing business within a specific geographic radius for three to five years. But here is where people get tripped up. The definition of competition matters. If you sold a bakery, the non-compete shouldn't stop you from opening a coffee shop across town unless they directly cannibalize your core revenue. Brokers sometimes draft overly broad clauses to scare sellers, but courts strike those down frequently. Luna: So specificity is protection for both sides. A narrow non-compete preserves value for the seller while giving the buyer peace of mind. Lucas: Exactly. And speaking of preserving value, we need to talk about the role of the business broker in all this. Many owners try to DIY these transactions to save fees, which typically run around five to eight percent of the sale price. But in a complex deal involving seller notes and earn-outs, legal fees alone can eat up half of those savings. A good broker brings together accountants, attorneys, and bankers to coordinate the timeline. They manage the due diligence process so emotions don't derail the contract. Luna: I have seen deals collapse because the seller got offended by a lowball offer during due diligence. Emotional intelligence is half the job. Lucas: Without a doubt. Which brings us to a quick reality check about how we make this show. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that is literally what funds making this many of these episodes. No ads, just listener support keeping the research deep and the analysis honest. If you find value in these conversations, consider joining that group. It helps us keep bringing you this kind of detailed breakdown without corporate interference. Luna: Thanks for the support. It really does allow us to dig into the nitty-gritty details like these deal structures that most mainstream media ignores. Lucas: Back to the deal mechanics. Once the letter of intent is signed, the clock starts ticking on due diligence. This is where buyers pull the financial curtains back. They review tax returns, bank statements, and customer contracts. This is also where hidden liabilities often surface. Things like unpaid payroll taxes, pending lawsuits, or obsolete inventory can kill a deal instantly. Luna: So clean books are not just a best practice. They are a prerequisite for a fast close. How long should an owner ideally prepare for this phase? Lucas: At least eighteen months. You cannot fix sloppy accounting in three weeks. If your P&L looks like a guesswork exercise, buyers will discount your valuation heavily or walk away. We recommend normalizing your expenses. Add back personal vehicles, travel, and discretionary spending. Show the true recurring profit. That normalized number is your EBITDA, and it is the primary driver of your sale price. Luna: Normalizing sounds simple, but it requires discipline. Owners often mix personal and business finances until the day they sell. Lucas: They do. And that confusion creates risk. Buyers hate risk. The more you can demonstrate that the business runs independently of the owner, the higher the multiple you will command. Think about operational systems. Are there documented procedures for hiring, billing, and quality control? If the business falls apart when you take a week off, it is not a sellable asset. It is a job. Luna: That is a harsh distinction. A job versus an asset. But logically sound. Assets scale. Jobs cap out at the owner's time. Lucas: Correct. And scaling is what buyers are looking for. Private equity firms and strategic competitors want businesses they can replicate across other markets. If your model is too dependent on local relationships or custom solutions, it limits your buyer pool. A broader buyer pool increases competition, which drives up the price. You want at least three viable acquirers for your business before you even start marketing it. Luna: So preparation starts years in advance. Who is the ideal buyer for a typical mid-sized service business? Lucas: Usually, it is either a strategic competitor looking to expand market share or a financial sponsor like a private equity firm. Strategic buyers understand the industry deeply and may pay a premium for synergies. They can cut duplicate costs faster. Financial sponsors are purely focused on returns. They might pay less upfront but offer better terms for the seller if they believe in the growth trajectory. Knowing your buyer type helps you tailor your pitch. Luna: Tailoring the pitch. That implies different narratives for different audiences. What does a strategic buyer care about that a financial sponsor might not? Lucas: Synergies. Cost savings. Cross-selling opportunities. A strategic buyer wants to know how your customer base complements theirs. A financial sponsor cares more about debt capacity and cash flow stability. They want predictable returns. If you are selling to a competitor, highlight your unique technology or exclusive contracts. If you are selling to PE, highlight your recurring revenue streams and low churn rates. Luna: Recurring revenue again. It seems to be the golden ticket in every conversation about valuation. Lucas: It is. Because it reduces risk. Predictable income allows for better forecasting and easier financing. Businesses with subscription models or long-term service contracts often trade at multiples of ten to fifteen times earnings, whereas transactional businesses might only hit four to six times. If you are still in a product-based model, think about how you can layer in service agreements to lock in recurring income. Luna: That is actionable advice. Move from one-time sales to ongoing relationships. It changes the entire character of the business. Lucas: It does. And it makes the exit smoother. Buyers love continuity. They do not want to inherit a business that relies on random windfalls. They want a machine that prints cash reliably. That reliability is what justifies the premium. Luna: What about the tax implications? Sellers often overlook the tax hit of a large capital gain. Lucas: Tax efficiency is huge. Structuring the deal as an asset sale versus a stock sale has massive tax consequences for both parties. Generally, sellers prefer stock sales for lower capital gains rates, while buyers prefer asset sales to step up the basis of the assets and increase depreciation deductions. Finding a middle ground requires skilled negotiation. Sometimes, utilizing Section 338 elections or installment sales can mitigate the immediate tax burden. Luna: Section 338. That sounds technical. Can you explain simply how that helps? Lucas: It allows the buyer to treat a stock purchase as an asset purchase for tax purposes. This gives them the depreciation benefits they want without forcing the seller into a messy asset sale structure. It is a sophisticated tool that good M&A advisors use to align interests. Ignoring it can leave thousands of dollars on the table or add unnecessary complexity to the closing. Luna: Complexity kills deals. Simplicity sells. But only if the numbers work for everyone. Lucas: Exactly. Ultimately, a successful exit is about alignment. The seller wants maximum value and a smooth transition. The buyer wants risk mitigation and growth potential. When you structure the deal with seller financing, clear earn-outs, and robust non-competes, you create a framework where both parties win. It is not zero-sum. It is a partnership that ends with a payout. Luna: A partnership that ends with a payout. I like that framing. It reminds us that the relationship continues until the final signature. Lucas: Until the final signature and then some, with that transition period. As we wrap up, I want to leave you with a question to ponder. If you were to sell your business tomorrow, would the new owner thank you for the systems you built, or would they be overwhelmed by the chaos you left behind? Luna: That is a powerful way to end. It shifts the focus from the price tag to the legacy you leave behind. Lucas: Legacy is expensive. But it is the only thing that lasts after the check clears.