Why We Passed on a "Good Deal"
Hey there entrepreneurs,
Welcome to the Better Business Brief, where I share takeaways from:
- running businesses I’m building to sell for millions
- My advisory with other business owners building to sell for millions
- tips and tricks you can use to do the same
Recently, one of the advisors on my team and I were deep into due diligence on a business that seemed perfect at first glance.
We were seriously considering purchasing it in order to add it to our portfolio because…
✅ It was in a niched commercial service with a nice high barrier to entry
✅ It had incredibly sticky recurring revenue
✅ It was selling for a very reasonable 2x multiple on profit
But after digging in… we walked away.
So today, in less than 5 minutes, I’ll give you:
🚩 3 Reasons We Said No to This Deal
📉 What They Looked Like in Due Diligence
🧠 How to Use These as Red Flags in Your Own Search
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As you read through these, try to imagine deals you’ve looked at in the past or are looking at right now and see these things in your own situation.
These were things that were not immediately obvious until we really dug in on the deal.
🚩 RED FLAG #1:
The Owner WAS the Business
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This guy wasn’t just “involved.”
He was doing full days in the field, wearing many hats.
When we tried to get in contact to talk about the business, he couldn’t really pull away during the day from his responsibilities.
What does that mean?
Without him, the business doesn’t work.
And unless we wanted to go back to school for specialty certifications, we’d have to replace him… and fast.
You should always ask: “Could I run this business without BECOMING the full-time operator?”
If the answer is no, you’re buying a job, not a business.
There’s not inherently anything wrong with that, but you should pay a lot less for a job than for a self-sufficient business.
🚩 RED FLAG #2:
Seller’s Discretionary Earnings (SDE) Was Overstated
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The broker advertised $150k+ in discretionary earnings..
But once we accounted for some of the differences that would be reflected with an ownership change, that had left out…
- Raises needed to retain the team
- Other hires that would need to be made to replace major jobs the owner was covering in the business
- Our lack of certifications
…that $150k dropped closer to $50k in leftover cash flow by the time you reflected all these changes.
..which also made the deal a bad deal, at more of a 5-6x multiple on SDE for a tiny owner-dependent job.
Always recast the SDE with you in the picture.
Do not pay for a business based on what it’s done in the past.
Pay based on its ability to bring YOU cash flow in the FUTURE.
Think how much are you really walking away with after replacing the owner and covering what’s missing?
If the answer wouldn’t get you out of bed in the morning, don’t do the deal.
🚩 RED FLAG #3:
Declining Profit + Messy Accounting
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The financials showed a downward trend.
Not horrible or a definite dealbreaker, but paired with vague and messy books and some discrepancies in how things were reported, it didn’t sit right.
When things don’t add up during diligence, trust your gut.
Buying a business is already full of hidden challenges.
There are going to be skeletons in the closet, so if it feels sketchy before you even start finding them, it’s probably time to pass.
Don’t start off in a hole that you have to dig yourself out of.
The truth is, we were really excited about this one at first.
It looked great in the teaser and checked a lot of boxes.
But great deals are about more than just what’s on paper.
You’ve got to be brutally honest about what it would take to step in and make it work.
And if that answer is “more than I can realistically give”..
Then it’s not the right deal.
Want help thinking through deals like this?
We run a private weekly call for people working on active acquisitions..
..from home services to manufacturing to healthcare, and we help you sort through all the same questions we’re answering in real time.
You can try it out free for a week at the link here.
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Happy value-building to you!
See you next time for Better Business Brief,
-Brody
