Migrating my International Consulting Business to xero

 

Why I Switched From Sage 50 to Xero After 20 Years: My Small Business Accounting Migration

For almost 20 years, I managed my business bookkeeping using desktop accounting software.

I knew how the system worked. I understood where everything went. And because I'd been using it for so long, I felt comfortable handling the bookkeeping myself.

Best of all, I wasn't paying a monthly subscription fee.

So why would I want to change?

Well, as my consulting business grew and became more international, the accounting system that once worked perfectly well started creating problems.

I was spending hours manually entering transactions, reconciling bank statements, correcting currency differences, and duplicating invoices that other members of my team had already created.

And perhaps the biggest problem was that my accounting reports weren't giving me the timely financial information I needed to manage the business properly.

I eventually realized that the software I thought was saving me money was actually costing me time, creating unnecessary work, and limiting my visibility into the company's performance.

That's why I decided to move my business from Sage 50 Desktop to <Entity category="software" value="Xero" disambig="cloud-based small business accounting software"/>.

In this article, I'll explain what went wrong with my old bookkeeping process, why I considered Sage, QuickBooks, and Xero, how I approached the migration, and what I've learned from the experience.

Disclosure: Xero sponsored the original video associated with this article. I had already selected Xero for my business before the company approached me about the sponsorship. The experiences and opinions discussed here are my own.

My Accounting Journey Started With Simply Accounting in 2006

I've been involved in business for several decades.

One of my earliest ventures was a junk removal business that I started with a partner around 2006.

At the time, we needed a system to keep track of our financial transactions.

There was an accounting program called Simply Accounting, so I hired a woman with bookkeeping experience to come to my house and teach me how to use it.

We sat down at my computer, and she walked me through the process.

That was my introduction to computerized bookkeeping.

Over time, Simply Accounting evolved into Sage 50 Desktop, and I continued using the software through December 2024.

I upgraded it several times, but I eventually reached a point where I was using an older desktop edition rather than moving to a subscription-based platform.

Why I Stayed With Desktop Accounting Software

My reasoning was straightforward.

In the old days, you could buy a software package, install it on your computer, and use it without paying an ongoing monthly fee.

I liked that arrangement.

I already understood how to do the bookkeeping, and I felt very much in control of the process.

Why should I pay a monthly subscription when the software I already owned appeared to do everything I needed?

For a long time, that reasoning seemed perfectly sensible.

But my business had changed.

And my accounting process hadn't kept up.

The Problem: My Consulting Business Had Become International

Today, my business, Advantage Liquidity Partners, provides consulting services related to buying, selling, financing, and valuing small and medium-sized businesses.

Our work includes helping people who want to buy or sell businesses, along with business valuations and machinery and equipment appraisals.

We serve individual clients, business owners, lenders, accountants, attorneys, and other professionals involved in transactions.

We also generate revenue through books, online courses, and other educational resources.

But consulting remains our largest source of revenue.

And because we work with clients in Canada, the United States, the United Kingdom, Australia, New Zealand, and elsewhere, we regularly deal with international payments.

That's where things became complicated.

Managing Canadian and U.S. Dollar Invoices

Our business needs to invoice clients in both Canadian dollars and U.S. dollars.

With my old desktop accounting process, I had developed workarounds for handling those transactions.

But those workarounds weren't ideal.

Imagine issuing a $1,000 U.S. dollar invoice on November 30.

Your business keeps its books in Canadian dollars.

What amount should appear in the accounting system?

You need to consider the exchange rate on the transaction date.

But what if the client doesn't pay until December 4?

The exchange rate may have changed.

There may also be foreign exchange fees or payment processing charges.

Now you need additional entries to reflect what actually happened.

Instead of one straightforward transaction, you're dealing with currency conversions, adjustments, and reconciliation.

And if you're doing that manually, the process becomes tedious.

My Workaround Created Another Problem

Rather than record the original invoice and subsequently account for the payment and exchange difference, I sometimes waited until the payment arrived.

For example, I would issue the invoice through Stripe.

Then, when the payment was settled and I knew the Canadian dollar amount received, I would enter that amount into Sage.

That was easier.

But it meant the accounting system might record revenue in December for work that had been invoiced in November.

The result?

My reports didn't accurately reflect when the underlying business activity occurred.

This is one of the reasons I wanted to move toward a better accrual-based bookkeeping process.

When revenue and expenses are recorded in the wrong periods, it becomes harder to understand how your business is actually performing.

Why Cash-Based Workarounds Can Distort Business Performance

There's an important distinction between cash accounting and accrual accounting.

Cash accounting generally focuses on when money is received or paid.

Accrual accounting recognizes revenue and expenses in the periods to which they relate, subject to the applicable accounting rules.

For management purposes, accrual accounting can provide a clearer picture of performance.

Suppose you perform consulting work in November but receive payment in December.

If you're looking at November's results, you want to understand the revenue earned during that period.

If the revenue only appears when the money arrives, your monthly reports may not reflect the actual work completed.

That makes it harder to compare performance across periods.

And it becomes particularly frustrating when you're trying to make decisions about staffing, marketing, spending, or future investments.

I wanted a system that could properly record international invoices and account for exchange differences without requiring me to calculate and enter every adjustment manually.

That became one of my most important requirements.

Problem #2: I Was Manually Reconciling Every Bank and Credit Card Statement

Another major frustration was the amount of manual bookkeeping I was doing.

At the beginning of each month, I would download or print my bank statement.

Then I would generate a report from Sage showing the transactions recorded in the bank account.

I'd compare the two documents, checking off entries that matched.

Anything missing would need to be entered manually.

Then I'd repeat a similar process for my American Express statement, where many of our business expenses were charged.

The Monthly Bookkeeping Routine

Here's roughly what that involved:

• Downloading the bank statement

• Printing or reviewing the accounting records

• Comparing transactions

• Entering missing deposits and payments

• Recording credit card purchases

• Checking sales tax treatment

• Investigating differences

• Making corrections before the accounts could be considered reconciled

I was spending approximately 45 minutes to an hour reconciling the bank statement.

Then another 30 minutes to an hour reconciling American Express.

And there were often small discrepancies.

Sometimes I'd reach the end of the process and discover that the account was out by $2.65 or some similarly small amount.

I'd search for the error.

Often, the problem involved a missing or incorrect sales tax indicator.

Sometimes I couldn't find the difference and would record it in a cash-over-short account.

That was a practical workaround, but it wasn't the level of accuracy I wanted.

With modern accounting technology, there should be a better way.

Problem #3: My Expense Reports Weren't Telling Me Enough

Here's something I didn't fully appreciate when I first learned bookkeeping.

How you enter transactions affects how useful your financial reports will be later.

When I started using Simply Accounting, I asked the person teaching me how to record credit card purchases.

She explained that I could treat the credit card as a separate account and enter transactions as they occurred.

Or I could use a simpler method that involved recording the charges from the monthly statement.

At the time, I chose the easier option.

I would enter the transactions under a name such as David Barnett.

That approach worked for recording the expenses.

But years later, I discovered a problem.

Why Vendor-Level Expense Reporting Matters

Suppose I wanted to know how much my company had spent on travel during the year.

I could generate an expense report.

But many of the transactions would simply show David Barnett rather than the actual supplier.

That meant I couldn't easily see how much we'd spent with Air Canada, a particular hotel chain, or another vendor.

The information existed somewhere in the underlying records.

But it wasn't organized in a way that made management reporting useful.

I wanted to be able to answer questions like:

• How much did we spend on travel this year?

• Which suppliers received the most money?

• Are particular expense categories increasing?

• How have our operating costs changed over time?

• What is the gross margin on different types of consulting work?

Those are important management questions.

And I wanted my accounting system to help answer them without requiring a separate manual investigation.

Problem #4: I Had Become the Bottleneck in My Own Business

My desktop accounting system had another limitation.

I was the only person with access to it.

That might be manageable when you're operating a very small business by yourself.

But it becomes inefficient when you have team members handling different parts of the operation.

For example, someone on my team might create an invoice through Stripe and send it to a customer.

The customer would pay.

Then I would need to enter the same transaction again in Sage.

Think about that.

Someone had already created the invoice.

The payment had already been processed.

But the transaction still needed to be manually recreated in my accounting system.

We were duplicating work.

What I Wanted From a Cloud-Based Accounting System

I wanted a system where authorized team members could:

• Create new customer contacts

• Prepare invoices

• Send invoices directly to clients

• Connect invoices to available payment options

• Work within permissions appropriate to their responsibilities

I also wanted transactions to flow into the accounting system automatically wherever supported.

Instead of manually entering every hotel charge, bank fee, or supplier payment, I wanted to review transactions and confirm that they were being categorized correctly.

In other words, I wanted to move from being the person who enters everything to being the person who supervises the process.

That's a much more scalable way to operate.

Why I Compared Sage, QuickBooks Online, and Xero

By August, I'd decided it was time to investigate cloud-based accounting software.

I used ChatGPT's agent mode to research different platforms and compare their features against the requirements of my business.

The three main options I considered were:

1. Sage's online accounting options

2. QuickBooks Online

3. Xero

I wasn't simply looking for the most popular accounting program.

I wanted to find the platform that best addressed my specific problems.

My Accounting Software Selection Criteria

Requirement	Why it mattered
Multi-currency invoicing	We bill clients in Canadian and U.S. dollars
Automated bank feeds	I wanted to eliminate manual transaction entry
Bank reconciliation	I wanted faster, more accurate monthly records
Team access	Employees needed appropriate invoicing permissions
Stripe integration	We use Stripe for international client payments
Accrual-based reporting	I wanted revenue reflected in the appropriate periods
Useful financial reports	I needed better visibility into spending and margins
Accountant access	I wanted to simplify year-end adjustments
Affordable subscription	The benefits needed to justify the recurring cost

After comparing the options, I concluded that Xero appeared to be the best fit for my business.

One feature was especially important.

Multi-Currency Support Was a Deal-Breaker

Several accounting platforms offered multi-currency functionality.

But I found that the feature was sometimes restricted to more expensive subscription tiers.

Xero also placed multi-currency support in a higher-tier plan.

However, at the time I compared the available plans, the price difference was more manageable for my needs.

That mattered because multi-currency accounting wasn't an optional extra for my business.

It was one of the main reasons I was changing systems.

The exact features and prices of accounting software can change, so I encourage you to verify current plan details before making your own decision.

Why I Chose January 1 for the Migration

After deciding to try Xero, I signed up for a free trial and began exploring the platform.

I found it relatively intuitive.

But I still needed to decide when to make the actual transition.

At that point, we were approaching the end of the calendar year.

My business has a December 31 year-end.

So rather than switching in November and managing two accounting systems during the final months of the year, I decided to complete the year using Sage.

Then I would begin the new fiscal year in Xero on January 1.

That gave me a clean starting point.

Do You Need to Wait Until Year-End to Change Accounting Software?

No.

A business can migrate accounting systems at another point in the year.

But I think choosing a clear cutoff date, such as the beginning of a month or fiscal period, can make the transition easier to organize.

You need to think about outstanding invoices, account balances, historical records, and any other information required for the new system.

Larger businesses with more transactions may need a more extensive migration plan.

For my relatively small consulting business, the beginning of the new year was a practical choice.

How I Set Up Xero for My Consulting Business

One of my biggest concerns was the amount of time required to learn and configure a new accounting system.

I'd been using the same basic software for nearly two decades.

I knew where everything was.

And I wasn't particularly excited about spending days trying to understand a new platform.

But the initial setup turned out to be much easier than I expected.

I spent approximately two and a half hours over the holidays getting the system set up and operational.

That was my experience with a relatively straightforward consulting business, not a promise that every migration will take the same amount of time.

Here's how I approached it.

Step 1: Create a Better Chart of Accounts

The first major task was setting up the chart of accounts.

If you're unfamiliar with the term, the chart of accounts is the organized list of categories used to record the financial activity of your business.

It includes accounts that appear on your income statement, such as revenue and expenses.

It also includes balance sheet accounts for assets, liabilities, and equity.

To get started, I generated an income statement from Sage.

Then I used the existing categories as a starting point for my new chart of accounts in Xero.

But I didn't simply copy everything without thinking about it.

I took the opportunity to improve the structure.

Why I Added More Revenue and Direct Cost Categories

My company provides different kinds of services.

We do consulting work.

We perform business valuations.

We conduct machinery and equipment appraisals.

And we have other sources of revenue.

I wanted better visibility into how those different activities performed.

So I created additional revenue categories and corresponding direct cost categories where appropriate.

This would allow me to better evaluate the gross margin associated with different lines of business.

Why Gross Margin Matters

Gross margin measures the amount remaining after subtracting the direct costs associated with producing revenue.

The basic calculation is:

Gross Margin = Revenue − Cost of Goods Sold

Gross margin percentage is:

Gross Margin % = Gross Margin ÷ Revenue × 100

For example, imagine a service line generates $100,000 in revenue and has $30,000 in direct costs.

The gross margin would be $70,000, or 70%.

That information helps you understand how much revenue remains to cover overhead and contribute toward profit.

I've created several videos about gross margin because I believe it's one of the most important numbers a business owner should understand.

And your accounting system should be organized so you can calculate it meaningfully.

Review Your Chart of Accounts Every Year

Here's a practice I recommend to other business owners.

At the beginning of each fiscal year, review your chart of accounts.

Ask whether the existing categories still reflect how the business operates.

Are there new revenue streams that deserve separate reporting?

Should certain expenses be tracked more specifically?

Would additional categories help you understand profitability?

You don't necessarily need to rebuild the entire chart.

But a periodic review can make your financial statements much more useful.

Your income statement and balance sheet should help you manage the business, not simply satisfy bookkeeping requirements.

Step 2: Connect My Business Bank Accounts

After creating the chart of accounts, I connected my business bank accounts.

In my case, I bank with Scotiabank.

I used the connection process to authorize access to the appropriate business accounts.

The setup involved the bank's authentication and verification procedures.

I also had a personal credit card associated with the same bank, but I deliberately excluded that account.

I only wanted the relevant business accounts connected.

Once the accounts were linked, Xero could display available imported transactions for review and reconciliation.

Why Bank Feeds Change the Bookkeeping Process

This was one of the biggest improvements I wanted.

Under my old system, I had to enter transactions manually.

With the bank feed, the transactions can be brought into the accounting software.

My job becomes reviewing them, assigning the appropriate accounts, and confirming the entries.

For example, I showed a government tax payment of $966 in the original video.

I identified the payee and categorized the transaction against the appropriate HST payable account.

I also included a description indicating that it related to a fourth-quarter HST payment.

The important difference is that I wasn't manually creating the bank transaction from a paper statement.

I was reviewing an imported transaction and determining how it should be recorded.

Using Rules to Make Reconciliation Easier

As recurring transactions are categorized, the software can suggest or apply matching rules based on the configuration and available features.

That means familiar transactions can become easier to process over time.

For example, recurring bank charges or payments to known suppliers may be recognized and categorized more efficiently.

You still need to review the information.

Automation doesn't eliminate the need for bookkeeping oversight.

But it can reduce repetitive data entry.

And that's exactly what I wanted.

Step 3: Get More Timely Financial Information

With my old bookkeeping process, I often didn't have a fully reconciled picture of the previous month's activity until the fourth or fifth day of the following month.

I had to wait for the statements.

Then I had to enter the missing transactions.

Only afterward could I review the updated financial reports.

With connected accounts and more frequent reconciliation, I can work toward a much more current picture of the business.

That doesn't mean every balance is automatically correct at every moment.

Transactions still need to be imported, categorized, reviewed, and reconciled.

But the process no longer depends entirely on waiting until the next month to begin entering everything.

For me, that's a major improvement.

I want to know what's happening in my business while there's still time to respond.

Step 4: Use the Built-In Tutorials and Onboarding Support

Another concern I had was learning how to use unfamiliar software.

What if I couldn't find a particular feature?

What if I didn't understand how to enter something?

What if I made a mistake during setup?

I was pleasantly surprised by the help resources available.

As I explored the software, I found tutorial videos associated with different screens.

I also searched YouTube for a question I had and found a short Xero tutorial that helped me resolve it.

At the time of recording, I'd been officially using the platform for approximately six days.

I'd already received an email offering a free one-on-one onboarding consultation.

That gave me additional confidence that I could get assistance if I encountered problems.

The experience was much less intimidating than I'd expected.

Step 5: Give Team Members Access Without Giving Up Control

My next step was to learn the invoicing process thoroughly.

I wanted to create the first few invoices myself so I understood how everything worked.

Then I planned to bring team members into the system.

One of the advantages of a cloud-based platform is the ability to provide different users with appropriate access.

For example, I want authorized team members to be able to create customer contacts and send invoices without waiting for me.

That should reduce the number of handoffs involved in billing.

It should also help us invoice international clients more efficiently.

The goal isn't to give everyone unrestricted access to the company's finances.

It's to delegate specific responsibilities while retaining appropriate oversight.

Why Delegation Matters for Small Business Owners

This is about more than accounting software.

Many small business owners become the central point through which everything must pass.

Employees need their approval.

Customers wait for their response.

And routine administrative tasks pile up because only the owner knows how to complete them.

That's not a scalable way to operate.

A better system allows routine work to happen without requiring the owner to personally handle every step.

For my business, improving the invoicing workflow is part of that broader objective.

How Moving Invoicing Into Xero Could Reduce My Stripe Costs

Here's an interesting part of the story.

One of my reasons for staying with Sage 50 Desktop was avoiding a monthly subscription fee.

I thought I was saving money.

But we were using Stripe to create and send invoices to international clients.

And Stripe charged us for that invoicing functionality.

In some months, those invoicing charges were higher than the cost of subscribing to Xero.

So while I was avoiding one software subscription, I was paying for other services to compensate for the limitations of my existing setup.

That's a good example of why you need to evaluate the total cost of a process rather than focusing on one expense.

What Changes With Xero and Stripe?

My plan was to continue using Stripe for payments from international clients.

But instead of relying on Stripe's invoicing feature, we could create invoices through Xero and use the available payment integration.

That would allow us to avoid the separate Stripe invoicing charges associated with our previous workflow.

Normal payment processing fees and any applicable integration or subscription charges still need to be considered.

The point is that changing how we create invoices could reduce duplication and certain costs.

And the time savings could be even more valuable.

Why Cloud Accounting Makes Working With My Accountant Easier

Another frustration involved the year-end accounting process.

With Sage 50 Desktop, I needed to create a special accountant's copy of the company file.

Then I had to get that file to my accountant.

It was often too large or inconvenient to email, so I would upload it to Google Drive and share it from there.

My accountant would review the records and prepare year-end adjustments.

Then I would receive a list of journal entries or corrections that I needed to enter into my system.

It worked.

But it was cumbersome.

My accountant already works with Xero.

That means I can provide appropriate access to the cloud-based records.

Instead of passing files back and forth, we can work with the same accounting environment.

That should simplify the year-end process.

And it reduces my involvement in moving information between systems.

Accounting Software Doesn't Replace Your Accountant

I want to be clear about something.

Moving to cloud accounting doesn't mean you no longer need an accountant or bookkeeper.

I do much of my own bookkeeping because I learned how to do it years ago.

But I still rely on my accountant for professional accounting and year-end work.

If you already work with a bookkeeper, they may have been encouraging you to move to a cloud-based system for some time.

And I can understand why.

The right software can make collaboration and recordkeeping more efficient.

But it still needs to be configured and used properly.

What I Learned About the Real Cost of Outdated Accounting Systems

When I look back at my decision to keep using Sage 50 Desktop, I realize that I was focused on one particular cost.

The monthly subscription fee.

I didn't fully account for everything else.

There was the time I spent entering transactions.

The duplicated invoicing work.

The difficulty handling multiple currencies.

The expense of separate invoicing services.

The inconvenience of exchanging files with my accountant.

And the lack of timely, useful financial reporting.

Those costs weren't always obvious.

But they were real.

The Cheapest Software Isn't Necessarily the Cheapest System

This is an important lesson for business owners.

A software package that costs very little may still be expensive if it requires significant manual work.

And a subscription that initially looks like an unnecessary expense may be worthwhile if it saves time, reduces errors, or improves decision-making.

Of course, that doesn't mean every business should immediately replace its accounting system.

If your existing software is meeting your needs, there may be no reason to change.

But if you're spending significant time on workarounds, it's worth investigating alternatives.

The important question isn't simply how much the software costs.

It's whether the entire process supports the way your business operates.

Why Better Accounting Can Help You Manage Your Business

One of the things I'm most excited about is the information I'll be able to collect over time.

As we use the new system, I'll have more consistent records of revenue, direct costs, operating expenses, and supplier activity.

That should help me compare results across periods.

For example, I'll eventually be able to compare 2027 performance with 2026.

I'll be able to examine changes in spending.

I can evaluate the performance of different service lines.

And I can make more informed decisions about where to invest time and resources.

That's the real purpose of this change.

As I explain:

"The accounting isn't just for taxes. I believe it's for managing your business more wisely." —David C. Barnett

Your accounting system shouldn't simply be a place where you record transactions for your annual tax return.

It should help you understand the financial condition of the business throughout the year.

Should You Run Two Accounting Systems During a Migration?

When I first considered moving to Xero, I thought about operating both systems in parallel.

I could begin using the new platform while continuing to maintain Sage.

That would give me time to learn the software and compare the results.

For some businesses, that may be a sensible approach.

Especially if the company has substantial revenue, complicated accounting requirements, or large volumes of historical data.

But after experimenting with Xero, I became comfortable enough that I didn't want to duplicate all the bookkeeping work.

Instead, I decided to finish the year in Sage and start the new year in Xero.

That approach suited my circumstances.

What About Businesses With More Complex Records?

If you operate a larger company, the migration may require more planning.

You might need to transfer customer information, outstanding invoices, historical transactions, and account balances.

You may also need to reconcile the old and new systems to ensure the opening information is correct.

Xero offers import options, but the appropriate migration method depends on the existing software and the complexity of the records.

For a more complicated business, I would strongly consider involving an accountant or experienced migration specialist.

The objective is to improve your financial records, not create uncertainty about whether the new information is accurate.

Is Xero the Right Accounting Software for Every Small Business?

Not necessarily.

I chose Xero because it addressed several specific problems in my consulting business.

We have a small team.

We provide professional services.

We bill clients in different currencies.

We use Stripe.

And I wanted a system that would support team access, bank feeds, and better financial reporting.

Those requirements made Xero attractive to me.

But another company may have different needs.

For example, a business with complicated inventory management, manufacturing processes, or specialized industry requirements may need different functionality.

And some businesses may find that another accounting platform offers a better combination of features and pricing.

That's why I recommend identifying your requirements before choosing software.

Questions to Ask Before Switching Accounting Platforms

If you're considering a change, ask yourself:

1. Does my current accounting system support the currencies I need?

2. Am I entering the same information more than once?

3. Can I easily reconcile my bank and credit card transactions?

4. Can authorized team members complete their work without depending on me?

5. Can my accountant access the records efficiently?

6. Does my chart of accounts provide useful management information?

7. Can I identify gross margins for different products or services?

8. Am I receiving financial reports quickly enough to make decisions?

9. What is the total cost of my current process, including software, fees, and time?

10. What would be involved in migrating to another system?

The answers can help you decide whether your existing system is still appropriate.

My Early Experience With Xero

At the time I recorded the video, I'd been officially using Xero for only six days.

So I want to distinguish my initial experience from the long-term results I expect.

The setup had been straightforward.

I had connected my bank accounts.

I'd created a more useful chart of accounts.

I'd begun working with imported transactions.

And I was preparing to move more invoicing responsibilities to my team.

I was pleased with how intuitive the software felt.

But the real test would come over the following months as we used it for everyday operations.

I expected the biggest benefits to come from reduced manual entry, improved reporting, more efficient invoicing, and easier collaboration with my accountant.

Those were the problems I was trying to solve.

And based on the early experience, I felt confident I'd made the right choice for my business.

Final Thoughts: Your Bookkeeping Should Help You Run the Business

After nearly twenty years of using desktop accounting software, switching platforms felt like a major decision.

I'd built habits around my old system.

I knew how to make it work.

And I was reluctant to introduce a monthly subscription expense.

But eventually, I realized that my existing process was creating more problems than it was solving.

The international invoicing workarounds were becoming complicated.

I was spending too much time reconciling transactions manually.

My team couldn't handle invoicing directly inside the accounting system.

And my financial reports weren't giving me the information I wanted.

Moving to Xero was about fixing those problems.

But the broader lesson applies regardless of which software you use.

Your bookkeeping system should give you reliable information that helps you make better business decisions.

If you're spending hours entering transactions manually, working around software limitations, or struggling to understand your financial results, it may be time to reconsider your approach.

That might mean changing accounting platforms.

It might mean working with a different bookkeeper.

Or it might simply mean reviewing your chart of accounts with your accountant and improving the way information is recorded.

Whatever you choose, don't think of bookkeeping as something you do only to prepare your taxes.

Think of it as one of the tools you use to manage and improve your business.

Explore Xero and More Small Business Resources

If you're interested in seeing whether Xero might be suitable for your business, you can explore the platform and its current features on the official website.

In the original sponsored video, Xero offered viewers 90% off for the first six months through a special promotional link or QR code. That offer was available at the time of recording and may have changed or expired. Check the original video's description for the promotional link and current eligibility details.

Explore Xero Accounting Software

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Would You Buy These Tiny Businesses Real Reddit Posts Reviewed by David C Barnett

 

Are You Buying a Business or Just Buying a Job? 3 Real Small Business Deals Analyzed

Buying an existing business can be a great way to become an entrepreneur without starting completely from scratch.

You may acquire existing customers, employees, equipment, established revenue, and a reputation in the marketplace.

But there's an important question that many first-time business buyers overlook.

Are you actually buying a profitable business, or are you simply paying someone for the opportunity to take over their job?

The distinction matters because not every company with revenue, customers, and employees produces a meaningful return on investment.

Some businesses depend almost entirely on the owner's labor, expertise, and personal relationships.

When that owner leaves, much of the value may disappear.

I recently spent some time looking through Reddit discussions about very small business acquisitions. I found three interesting situations involving a landscaping company, a home renovation business, and an IT network consulting firm.

Each example raises a different question about business valuation, seller's discretionary earnings, personal goodwill, and how to structure an acquisition.

Let's examine these three deals and what buyers and sellers can learn from them.

Deal #1: Is a $50,000 Landscaping Business Worth Buying?

The first Reddit post came from someone considering purchasing an established landscaping company.

The owner was preparing to retire after approximately 30 years in business.

The prospective buyer had learned about the opportunity through a friend who worked there.

Here were the numbers.

Business detail	Reported information
Asking price	$50,000
Average annual revenue	$384,000
Owner's annual salary	$60,000
Average annual reported profit	$10,000–$15,000
Employees	3, excluding the owner
Seasonal staffing	1–2 additional part-time workers
Business history	Approximately 30 years
Revenue model	Includes recurring monthly contracts

The buyer wasn't expecting passive income.

They planned to operate the company full-time and hopefully grow it.

They wanted to know whether the $50,000 asking price was reasonable and whether business valuation multiples should be applied to the reported profit or include the owner's salary.

Those are good questions.

But before calculating a valuation, there are several things I'd want to investigate.

What Kind of Landscaping Business Is This?

The word landscaping can describe several different types of operations.

Some businesses specialize in lawn mowing and property maintenance.

Others build patios, install interlocking stone, plant trees, or construct outdoor living spaces.

Those activities have different labor requirements, equipment needs, customer relationships, and seasonal patterns.

The Reddit post mentioned recurring monthly contracts.

That suggests at least some of the revenue may come from regular property maintenance.

But we don't know how much.

We also don't know whether the company provides winter services such as snow removal or salting.

That matters because a landscaping business in a seasonal climate may generate most of its revenue during only part of the year.

The buyer needs to understand the actual services, revenue mix, seasonality, and workload before deciding whether the opportunity is attractive.

The Owner's Workload May Be Greater Than It Appears

The post described the owner as someone who just runs the admin side of things.

That wording caught my attention.

What does running the administration actually involve?

Does the owner answer customer calls?

Prepare estimates?

Schedule employees?

Purchase materials?

Handle complaints?

Manage contracts?

Collect payments?

Supervise jobs?

Those responsibilities can add up to a substantial workload.

An owner who says they only handle administration may still be working long hours.

And if you're buying the company, you'll need to perform those duties or pay someone else to handle them.

That cost has to be considered.

Why the $60,000 Owner Salary and $15,000 Profit Matter

Let's assume the business earns approximately $15,000 in annual reported profit after paying the owner a $60,000 salary.

A buyer might look at those figures and conclude that the company produces $75,000 in seller's discretionary earnings.

That's a reasonable starting estimate, subject to confirming the financial statements and making appropriate adjustments.

But here's the problem.

Seller's discretionary earnings is not the same thing as profit available to an investor.

For a small owner-operated business, SDE often combines the economic benefit of the owner's work with the return generated by the business.

When you buy that business, you're effectively wearing two hats.

You're becoming the operator.

And you're becoming the investor.

Those are different roles.

What Seller's Discretionary Earnings Really Represents

As I explain:

"Seller's discretionary earnings is actually a budget." —David C. Barnett

From that budget, you may need to cover your own compensation, acquisition debt payments, capital expenditures, taxes, and other financial obligations.

Consider a simplified illustration.

<text color="secondary" weight="medium" size="xs">ILLUSTRATIVE ANNUAL CASH FLOW</text>

Item	Amount
Estimated SDE	$75,000
Owner compensation	−$60,000
Remaining before other obligations	$15,000

That $15,000 isn't necessarily free cash flow.

The company may need to replace equipment.

You may have borrowed money to fund the acquisition.

There may be taxes or other obligations to consider.

And you need a financial cushion for unexpected expenses.

So even though the business appears to produce $75,000 in SDE, the investment return could be much smaller.

The Hidden Risk: Landscaping Equipment Replacement

Another important issue is the equipment included in the $50,000 purchase price.

The Reddit post didn't provide an equipment list.

We don't know whether the company owns several trucks, trailers, commercial lawnmowers, or specialized landscaping tools.

We also don't know their age or condition.

That's a major information gap.

Commercial landscaping equipment can experience heavy wear.

A mower operating throughout the working day requires far more maintenance than the machine someone uses occasionally at home.

Eventually, equipment must be repaired or replaced.

These future expenditures are known as capital expenditures, or CapEx.

Why CapEx Changes the Value of a Small Business

Imagine buying a landscaping company that generates $15,000 in annual profit beyond the owner's compensation.

If the business needs to replace a major piece of equipment shortly after closing, that expense could consume a substantial portion of the cash generated.

This is why you cannot value a business using a multiple of SDE without understanding its capital requirements.

You need to investigate:

• The equipment included in the sale

• Its age and condition

• Maintenance history

• Expected replacement schedule

• Current market value

• Any financing or liens associated with the assets

An equipment appraisal may be useful if machinery represents a significant portion of the transaction.

The buyer needs to know not only what the company earns today, but also what it will cost to keep operating.

Is the $50,000 Asking Price Reasonable?

Interestingly, I don't think the asking price is necessarily far off.

But that doesn't mean the business is a good investment for everyone.

Let's look at the situation differently.

Suppose you've always wanted to operate a landscaping business.

You understand the industry.

You've worked in landscaping or construction.

And you're prepared to manage employees, customers, scheduling, and equipment.

How long would it take you to build a new company generating approximately $384,000 in annual revenue?

It might take a year or two.

Possibly longer.

You'd need to find customers, purchase equipment, hire employees, and develop a reputation.

By purchasing this existing operation, you may be able to skip much of that startup process.

You're acquiring a head start.

And that has value.

Why I Might Offer $30,000 Down and Seller Financing

If I were interested in this business, I might propose a structure such as:

Payment	Amount
Cash at closing	$30,000
Seller-financed balance	$20,000
Repayment period	18 months
Approximate monthly principal payment	$1,111

This is an illustrative structure before any negotiated interest, security, or other terms.

The idea would be to allow the acquired operation to help generate the cash required to complete the purchase.

But I'd still need to confirm that the company could comfortably support those payments.

And I'd want to investigate the equipment, contracts, customer relationships, and actual owner workload.

My Verdict on the Landscaping Business

For someone with industry experience who wants to operate and grow a landscaping company, this could be a reasonable opportunity.

But I wouldn't approach it as a passive investment.

As I explain:

"I don't necessarily consider this buying a business. I consider it buying a job or a head start." —David C. Barnett

You're paying for an established operating platform that may help you avoid some of the difficulties of starting from zero.

Whether that's worth $50,000 depends on what you're actually receiving.

Deal #2: Should an Employee Buy His Boss's Home Renovation Business?

The second Reddit post involved an employee whose boss had offered to sell him a small renovation business.

The company performed residential remodeling work.

That included electrical work, plumbing, framing, tiling, flooring, painting, and bathroom renovations.

The operation consisted of the owner, the employee, and a part-time helper.

The employee had approximately seven or eight years of experience in the trade and had worked for the owner for five years.

He already handled many of the technical tasks.

At one point, he had even managed job sites while the owner went out to prepare estimates.

But he was worried about taking on the additional responsibility and stress of owning the operation.

He wanted to know whether buying the business or entering a partnership would make sense.

My first question would be:

What exactly is he buying?

The Difference Between a Renovation Company and a Skilled Tradesperson

A small renovation operation can be a profitable way to earn a living.

But that doesn't automatically make it a transferable business.

Imagine a contractor who works with one helper.

Customers call because they know him personally.

They trust his workmanship.

They recommend him to friends.

And they hire him again when another project comes up.

The customer relationship is largely connected to that individual.

Now imagine a larger renovation company.

It has an office.

An employee handles incoming inquiries.

A salesperson prepares estimates.

Several foremen supervise different crews.

And customers recognize the company name rather than depending entirely on the owner.

Those are two very different situations.

The second operation has more of the organizational structure that allows it to continue functioning after ownership changes.

The first may be little more than a skilled individual selling their labor.

Where Is the Customer Goodwill?

The renovation business in the Reddit post appeared heavily dependent on the owner's relationships.

The company reportedly had recurring work from rental property owners.

But that doesn't necessarily mean those customers would continue using the business after a sale.

I used to own apartment buildings.

I had tradespeople I called regularly because I trusted them.

Often, there wasn't a formal contract.

I simply knew who did good work.

If I called the same number and someone different showed up, I might give that person an opportunity.

But whether I continued using them would depend on their performance.

That's the risk here.

The buyer may think he's acquiring an established customer base.

But those customers may actually be loyal to the current owner.

When the owner leaves, the relationships may leave with him.

Personal Goodwill vs. Business Goodwill

This distinction is fundamental when valuing small service businesses.

Personal goodwill is the value associated with an individual's reputation, relationships, expertise, and personal involvement.

Business goodwill is value associated with the company itself, including its systems, brand, employees, processes, and transferable customer relationships.

In the renovation example, much of the goodwill may belong to the owner personally.

That's why I would be cautious about paying a large amount upfront for the supposed value of the business.

The buyer could end up paying for customer relationships that don't survive the transition.

A Better Deal Structure: Turn the Owner Into a Salesperson

Rather than immediately purchasing the entire operation, I would consider proposing a different arrangement.

The employee could take over the day-to-day operations.

He would manage the projects, employees, scheduling, and administration.

Meanwhile, the existing owner could gradually step away from physical renovation work.

Instead, the owner would focus on customer relationships and sales.

He could answer inquiries, meet prospective clients, and prepare estimates.

And the new operator could pay him a commission on the work he brings in.

Why Commission-Based Transition Payments Make Sense

The important difference is that the former owner would be paid based on the business he actually generates.

Instead of writing a large check for customer relationships that might disappear, the buyer would compensate the seller when those relationships produce revenue.

For example, the arrangement might involve:

1. The employee taking responsibility for operations.

2. The existing owner continuing to handle sales and customer relationships.

3. The new operator paying commissions on qualifying work.

4. Customers gradually becoming familiar with the new operator.

5. The seller eventually retiring from active sales.

6. Continuing commissions on specified recurring customers for an agreed period, perhaps three years.

The details would need to be negotiated and documented carefully.

But the principle is useful.

The seller has an incentive to introduce customers and help maintain relationships.

The buyer avoids paying a large amount for goodwill that may not transfer.

And the transition happens gradually rather than overnight.

Why This Is Similar to Selling an Architecture Firm

I often use architecture firms as an example of personal goodwill.

Imagine a well-known architect whose designs have been featured in magazines.

Clients seek out the firm because of that individual's reputation.

If someone buys the company, the buyer may want the architect to remain involved for several years.

Why?

Because the buyer needs time to transfer the relationships and reputation from the individual to the organization.

The same principle applies to the renovation business.

If customers are hiring the owner personally, the buyer needs a transition process that encourages those customers to continue using the company.

That may be more valuable than purchasing the business outright and hoping everyone stays.

My Verdict on the Renovation Business

I wouldn't rush into paying a substantial purchase price for this operation without understanding what is transferable.

There may be tools, equipment, vehicles, or other assets worth purchasing.

But the customer relationships require special attention.

A commission-based transition could allow the employee to build a more independent operation while compensating the existing owner for the business he continues to generate.

It may also allow the retiring owner to reduce his workload without immediately losing all his income.

For both parties, that could be more practical than a conventional business sale.

Deal #3: How Do You Sell a Small IT Consulting Business Built Around Your Expertise?

The third Reddit post came from a business owner rather than a buyer.

He operated a network consulting company.

The business had been operating for approximately ten years.

It generated revenue through annual service contracts.

The owner described it as very profitable, with little overhead beyond payroll.

He had one junior-level employee.

But there was a significant problem.

The new owner would need the same technical skills as the seller or would need to hire someone with those skills.

The seller wanted to know how to find a buyer.

Should he approach a competitor?

Should he hire someone to replace himself and eventually sell the company to that person?

Those are interesting options.

But they create different risks.

The First Question: How Profitable Is the Business Without the Owner?

The Reddit post didn't include financial statements or actual earnings figures.

So we can't calculate a reliable valuation.

But I would want to understand what the owner could earn if he took a job with a larger technology company.

Suppose his technical expertise would command a substantial salary in the employment market.

That compensation represents an economic cost of operating the business.

If the company reports strong profit because the owner isn't paying himself a market-level salary, the profitability may be overstated from a buyer's perspective.

Normalize Earnings Before Calculating Business Value

When evaluating an owner-operated service business, you need to distinguish between the return on the owner's labor and the return on invested capital.

Imagine a consulting business reporting $180,000 in earnings before accounting for the owner's compensation.

If replacing the owner with a qualified professional would cost $150,000 annually, only $30,000 remains before considering other necessary adjustments.

Those figures are hypothetical.

But they illustrate the issue.

A company may appear highly profitable until you account for the cost of replacing the person who performs its most important work.

That's why normalized EBITDA can be particularly useful when evaluating small professional service businesses.

It forces you to consider what the company would earn if it had to pay someone else to perform the owner's responsibilities.

Why Hiring a Replacement Before Selling Can Be Risky

One possibility would be to hire someone with similar technical skills.

The owner could train that person, introduce them to customers, and gradually reduce his involvement.

Eventually, the new employee might purchase the business.

That sounds reasonable.

But there are two concerns.

Risk #1: The Replacement Salary Could Eliminate Most of the Profit

If the business needs to pay a qualified replacement a substantial salary, there may not be much profit remaining.

The owner might discover that the company is less valuable as an independent investment than expected.

Risk #2: The Replacement Could Develop Their Own Customer Relationships

Once the new employee becomes familiar with the clients, they may develop relationships of their own.

If the proposed acquisition doesn't happen, the seller may worry that the employee could leave and compete for those customers.

That doesn't mean the employee would necessarily behave that way.

But it's a risk the seller needs to consider.

The business's value may depend heavily on relationships that aren't protected by organizational systems or long-term contractual commitments.

Why Selling to an Existing Competitor May Be the Better Option

For this type of business, I'd look seriously at a strategic buyer.

A strategic buyer is someone who already operates a business and sees value in acquiring another operation.

Many sellers immediately imagine a large corporation.

But that isn't necessarily the best buyer.

In this case, I might look for another small network consulting company with an experienced owner.

Perhaps the buyer is somewhat younger.

They've already been operating successfully for several years.

They have technical expertise.

And they're interested in expanding.

That could create a natural fit.

Why a Similar-Sized Buyer May Be Attractive

An existing IT consulting business may already have the systems and technical knowledge needed to serve the acquired customers.

The buyer might not need to hire a highly paid replacement for the retiring owner.

They may be able to absorb some of the work into their existing operation.

They could also acquire the junior employee and potentially use the additional revenue to justify hiring another technician.

That could make the acquisition more valuable to them than it would be to someone starting from scratch.

And the seller would have an opportunity to evaluate the buyer's technical competence before completing the sale.

Both Buyer and Seller Need to Perform Due Diligence

Here's something important about acquisitions involving personal goodwill.

The buyer is worried about losing customers after the seller leaves.

But the seller may have concerns too.

Suppose the transaction includes seller financing or payments based on future customer revenue.

The seller now depends on the buyer's ability to operate the business successfully.

If the buyer provides poor service, customers may leave.

And that could reduce the payments the seller receives.

So both parties need to investigate each other.

What the Buyer Needs to Investigate

The buyer should examine the annual service contracts, renewal history, customer concentration, profitability, technical obligations, and dependence on the owner.

They also need to understand whether contracts can be assigned or transferred and what customer approvals may be required.

What the Seller Needs to Investigate

The seller should consider the buyer's technical capabilities, customer service philosophy, financial position, operating history, and management experience.

If the seller will receive payments over time, the buyer's financial reliability becomes particularly important.

As I explain:

"Everyone has to do due diligence on each other, both sides." —David C. Barnett

This is especially true when the transaction involves continuing payments tied to the performance of customer relationships.

How to Structure the Sale of a Small IT Consulting Business

For this type of operation, several payment structures might be worth considering.

The appropriate structure depends on the actual financial statements, customer contracts, and risk allocation.

An upfront payment: The buyer pays an agreed amount at closing for the assets, contracts, and other transferable business value.

Seller financing: The seller receives part of the price over time, subject to negotiated repayment terms and protections.

An earn-out: Some of the purchase price depends on future performance, such as customer retention or revenue.

Revenue-based payments: The seller receives an agreed percentage of qualifying revenue generated from transferred accounts over a specified period.

These arrangements can help bridge disagreements about how much the customer relationships are worth.

But they also create additional risks.

For example, a seller receiving an earn-out may have limited control over how the buyer manages customers.

That's why the agreement needs clear definitions, reporting requirements, and appropriate protections.

My Verdict on the IT Consulting Business

I would focus on finding an established operator with the skills and experience to take over the customer relationships.

A similar-sized company may be a better fit than a much larger corporate buyer.

The seller could help with the transition and potentially receive a combination of upfront money and future payments.

But I wouldn't assume the business has substantial transferable value simply because it has annual service contracts and reported profits.

The real question is whether the customers will continue paying after the owner leaves.

What All Three Small Business Deals Have in Common

Although these examples involve different industries, they share several important characteristics.

Each business depends significantly on the owner.

Each has questions about the transferability of customers or operating responsibilities.

And each requires careful consideration of how much financial benefit remains after compensating the person who performs the owner's work.

That's why small business acquisitions can be difficult to evaluate using simple valuation multiples.

When SDE Multiples Become Misleading

Many small businesses are discussed in terms of multiples of seller's discretionary earnings.

But when most of the SDE represents compensation for the owner's labor, applying a multiple to the entire amount can produce misleading conclusions.

Imagine two companies that each report $100,000 in SDE.

In the first business, the owner works 60 hours a week and performs nearly every important function.

In the second, the owner works 10 hours a week because trained employees handle daily operations.

Those businesses may have very different investment characteristics.

The headline SDE figure doesn't tell you enough.

You need to understand the labor, management, capital expenditure, and risk requirements behind the number.

Buying a Job Isn't Necessarily a Bad Decision

I want to make an important distinction.

Buying yourself a job isn't automatically a mistake.

For some people, it can be a perfectly reasonable way to become self-employed.

Suppose you're an experienced tradesperson who wants to operate your own company.

Buying an established operation with equipment and customers might be easier than building everything from scratch.

You may be able to generate revenue immediately.

You might inherit employees who already understand the work.

And you may have a foundation for future growth.

Those are meaningful advantages.

The mistake is paying a price based on the assumption that you're acquiring a passive investment when you're actually acquiring a full-time operating responsibility.

Evaluate the Opportunity Based on Your Goals

If you want to replace your employment income and build a business over time, a small owner-operated company may fit your goals.

But if you want a business that produces substantial returns without requiring your daily involvement, these opportunities may not be suitable.

The key is understanding what you're buying.

Five Questions Every Buyer Should Ask Before Purchasing a Very Small Business

Before making an offer on a small owner-operated business, I'd encourage you to answer these questions.

1. What Does the Owner Actually Do?

Don't accept a vague description such as handles administration.

Understand the owner's daily responsibilities, working hours, technical contributions, and customer relationships.

2. What Would It Cost to Replace the Owner?

Estimate the market compensation required to hire someone with the necessary skills.

This helps distinguish operating profit from compensation for labor.

3. How Much Capital Will the Business Need?

Investigate equipment replacement, maintenance, working capital, and other ongoing investment requirements.

A company that generates cash but constantly needs expensive equipment may produce less free cash flow than it initially appears.

4. Will Customers Stay After the Sale?

Understand whether customers are loyal to the company or the individual owner.

Review contracts, customer concentration, renewal history, and the proposed transition plan.

5. Can the Purchase Price Be Structured Around Actual Performance?

Consider whether seller financing, commissions, or other contingent payment structures could help manage the risk of customer relationships failing to transfer.

Not every seller will accept these arrangements.

But they can be useful when much of the business's value depends on future performance.

Final Thoughts: Understand What You're Really Paying For

These three Reddit discussions illustrate why very small business acquisitions require careful analysis.

The landscaping company might be a reasonable $50,000 opportunity for someone who wants to enter the industry and build on an established foundation.

The renovation business may be better transferred through a gradual, commission-based arrangement rather than a large upfront purchase.

And the IT consulting company may be most attractive to another established operator who already has the technical skills to serve its customers.

Different situations require different solutions.

But the underlying lesson is the same.

Don't assume that revenue, customers, or a long operating history automatically make a business a valuable investment.

You need to understand what the owner contributes.

You need to determine how much profit remains after accounting for that contribution.

You need to evaluate equipment and other capital requirements.

And you need to consider whether the customer relationships will survive the ownership transition.

Sometimes you're buying a business.

Sometimes you're buying a job.

And sometimes you're paying for a head start that could help you build something much larger.

Any of those outcomes might make sense.

But only if you understand the difference before signing the purchase agreement.

Get Help Buying, Selling, and Valuing a Small Business

If you're considering buying a small business and want to understand how to evaluate opportunities, structure offers, analyze cash flow, and manage acquisition risks, explore my Business Buyer Advantage program.

It includes online training, group coaching, and consulting services designed to help prospective buyers approach acquisitions more confidently.

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If you're a business owner thinking about retirement or selling your company, my team and I can help you understand the process, prepare your business for buyers, and explore your exit options.

Learn More About Selling Your Business

For a deeper understanding of business valuation, equipment values, and how owners, buyers, lenders, and advisors should evaluate financial performance, explore my book Business and Asset Values: How Owners, Buyers, Sellers, Lenders, and Advisors Should Think About Small Business & Equipment Value.

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You can also find more articles, videos, books, and educational resources about buying, selling, financing, and managing small and medium-sized businesses on my website.

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David's 2026 Small Business Deal Predictions

How Economic Uncertainty Changes Small Business Deals: 7 Lessons for Buyers and Sellers

Buying or selling a small business becomes a very different exercise when lenders get cautious, operating costs rise, consumers pull back, and nobody is quite sure what next year’s earnings will look like.

That does not mean deals stop happening.

It means buyers, sellers, and lenders start looking at risk differently.

Financing becomes more important. Seller notes become more common. Buyers scrutinize customer relationships and working capital. Sellers may discover that the highest headline price is not necessarily the best—or most realistic—deal.

Here are seven things every small-business buyer or seller should understand when the economic environment becomes less forgiving. 

1. A Profitable Business Can Become Risky When You Add Too Much Debt

One of the easiest mistakes in an acquisition is assuming that because a business has historically produced good cash flow, it can safely support a highly leveraged transaction.

Those are two different questions.

A business may have operated comfortably for years with little debt. A buyer can acquire that same company, add a substantial acquisition loan, and suddenly create a much more fragile operation.

As I often point out:

“A business's risk, its riskiest point when you do an acquisition deal is always the day after you do the deal.”

That is when acquisition leverage is at its highest.

If sales decline, wages increase, a supplier raises prices, or a major customer disappears, the business still has to make its loan payments.

A relatively small decline in revenue can create a disproportionately large decline in profit because many operating expenses do not fall along with sales.

The lesson for buyers is simple: Just because a lender will finance a deal does not necessarily mean you should borrow that much.

2. Why Does Seller Financing Become More Important in Uncertain Markets?

When banks become more conservative, the financing gap does not magically disappear.

Someone has to fill it.

Often, that someone is the seller.

Seller financing can also help buyers address uncertainty about the future performance of the business. A buyer may ask the seller to accept a note, deferred payment, contingent payment, or earnout rather than receiving the entire purchase price at closing.

That becomes particularly relevant when the seller is effectively saying, “This bad year isn't representative. Things will improve.”

Maybe they will.

But if the seller wants the buyer to pay based on that expected recovery, the buyer may reasonably want some of the purchase price tied to whether the recovery actually occurs.

Seller financing therefore isn't simply a substitute for bank financing. It can also become a way of allocating risk between buyer and seller.

3. Business Value and Valuation Multiples Are Not the Same Thing

When discussing business prices, people frequently confuse the company's earnings with the multiple applied to those earnings.

For smaller owner-operated businesses, buyers generally understand that much of the future upside will depend on their own effort after closing. That puts a practical limit on what they are prepared to pay.

So even if valuation multiples remain relatively stable, the value of a business can still decline when its earnings fall.

In larger small businesses and the lower middle market, financing conditions can have a greater effect on multiples. Cheap capital can help buyers justify higher prices. More expensive or restrictive financing can do the opposite.

This is why sellers should be careful about anchoring themselves to valuations achieved under very different financing conditions.

A business has to support its purchase price under the conditions that exist when the transaction is being completed—not under the conditions that existed several years earlier.

4. Buyers Should Ask: Why Will These Customers Stay?

Buying an existing business is often promoted as safer than starting one because you acquire existing customers, employees, revenue, systems, and infrastructure.

Those can absolutely be advantages.

But experienced buyers know that existing revenue isn't automatically protected revenue.

Ask:

• Are customers loyal to the company or personally loyal to the seller?
• Is there meaningful customer concentration?
• How does the company attract new customers?
• What prevents a competitor from offering the same thing?
• What would prevent a new entrant from starting from scratch?
• Will the reasons customers buy from this business continue after ownership changes?

This is where the idea of a strategic moat becomes important.

If there is no meaningful reason customers need to remain with the business, a buyer should understand exactly what they're paying for.

As I put it when discussing due diligence:

“Why do the customers have to keep doing business with this business? If they don't, why are they choosing to, and will these conditions continue after I am the new owner?”

Those are fundamental acquisition questions.

5. Buying a Business Isn't Automatically Easier Than Starting One

There is a lot of online content suggesting that certain categories of businesses are somehow easy acquisitions.

The reality of small-business ownership is less glamorous.

Employees quit. Customers leave. Suppliers increase prices. Equipment fails. Competitors arrive. Regulations change. Margins get squeezed.

“Small business is a difficult thing to do and you can lose money.”

This becomes particularly important when distressed businesses begin closing.

Their equipment, inventory, locations, employees, or other resources may become available inexpensively. Suddenly, an experienced operator comparing “buy versus start” may find that starting a competing business is economically attractive.

For a seller, that means the competition isn't necessarily another business for sale.

Your business may also be competing against the buyer's ability to start one.

6. Due Diligence Should Be a Cost-Control Process

Uncertainty makes due diligence more important, not less.

Buyers should resist the temptation to rush through expensive third-party work before resolving the biggest potential deal killers.

Due diligence should happen in a sensible order.

The objective is to identify major problems before spending money investigating smaller ones.

Financing can become one of those deal killers. A buyer might make an offer expecting a particular loan structure, only to discover that the lender will finance less than anticipated or requires additional collateral.

That can force the buyer back to the seller with a revised structure involving a lower price, larger seller note, different payment terms, or more buyer equity.

Sellers should anticipate this possibility rather than automatically treating every financing-related renegotiation as evidence of an unserious buyer.

7. The Opening Balance Sheet Matters

Purchase price gets enormous attention in acquisitions.

Working capital often doesn't.

In an asset purchase, the buyer may not receive all the cash, accounts receivable, or other operating capital that previously supported the company. The seller may retain certain assets and settle certain liabilities before closing.

The buyer therefore needs to calculate how much capital the company will require to operate safely after ownership transfers.

That money has to come from somewhere.

If the buyer needs more cash inside the company, there may be less cash available for the seller at closing.

This can lead directly back to seller financing, deferred payments, earnouts, or other structures.

The important point is that closing the acquisition is not the objective. Owning a financially resilient business after closing is.

A Good Deal Has to Work After the Closing

Economic uncertainty doesn't eliminate good small-business acquisitions.

It exposes weak ones.

Buyers need to understand leverage, customer durability, working capital, financing risk, and what could happen if the company's performance deteriorates.

Sellers need to understand what buyers and lenders can realistically support—and recognize that refusing a workable deal while waiting for a perfect one carries its own risk.

A high purchase price, generous financing, and an optimistic forecast may make a transaction easier to sell emotionally.

But the real test begins the day after closing.

Learn How to Evaluate a Business Before You Buy

If you're considering buying an existing business, Business Buyer Advantage: Online Training is designed to help you understand the acquisition process and evaluate opportunities more carefully. The issues discussed here due diligence, financing, deal structure, risk, and determining whether a business actually makes sense to buy are exactly the kinds of things a buyer needs to understand before committing capital to a transaction.  www.BusinessBuyerAdvantage.com 

How Much Is My Business Worth? Understanding Real Business Valuation

How Much Is Your Small Business Worth? Why the Purpose of the Valuation Matters

“How much is my business worth?”

It sounds like a straightforward question. Many business owners expect there should be a formula: enter the earnings, apply the correct multiple, and get the answer.

Unfortunately, small-business valuation doesn't work that way.

A business can legitimately receive very different valuations depending on why it is being valued, who is doing the valuation, what assumptions are being made, and what the resulting number is supposed to represent.

That's particularly important for an owner planning an exit. A technically sophisticated valuation isn't necessarily the same thing as a realistic estimate of what an outside buyer might actually pay for the business.

What Is the Valuation Actually For?

Before hiring someone to value a business, determine the purpose.

A valuation might be required for:

• A business sale
• A business acquisition
• Tax planning or transferring shares
• A shareholder dispute
• Divorce or other legal proceedings
• Investment purposes
• Retirement and exit planning

Different purposes can require different methodologies.

For example, valuing a minority shareholding for tax or legal purposes can involve questions about control and discounts. A court-related valuation may require a credentialed professional capable of defending the methodology.

But an owner asking, “What could I realistically sell my business for?” is asking a different question.

For that purpose, we use what we call a Most Probable Selling Price (MPSP) evaluation.

The objective isn't to produce the largest theoretical number. It's to estimate what an outside buyer might reasonably pay in an actual transaction.

Buyers Really Want Answers to Two Questions

When someone evaluates a small business for acquisition, there are two fundamental questions:

“What is the cash flow?”

And then:

“Will the cash flow continue after I become an owner?”

The first question helps determine what a buyer might be willing and able to pay.

The second can determine whether they're willing to buy the business at all.

That's why valuation cannot be reduced to multiplying earnings by a number.

A buyer also needs to understand customer concentration, systems and processes, owner dependency, employee relationships, competitive position, and where the goodwill of the business actually resides.

If most of the goodwill resides personally with the owner, for example, the historical cash flow may become less valuable to a buyer who isn't certain it will survive the transition.

Why You Can't Just Average Comparable Business Sales

Actual transaction data can be extremely useful.

If you're valuing a restaurant, for example, you can look at sales of other restaurants and examine what buyers have historically paid.

But you have to interpret the data.

Imagine finding a small café that sold for five or six times Seller's Discretionary Earnings (SDE). At first glance, you might conclude that comparable cafés deserve a five- or six-times multiple.

Then you discover the café generated only $13,000 of SDE.

What probably drove the transaction?

The espresso machine, refrigerators, counters, furniture, fixtures, and other assets may have been worth enough that the resulting sale price merely happened to equal five or six times SDE.

Simply averaging transaction multiples can therefore produce misleading conclusions.

As I often remind people, business valuation is not a cookie-cutter exercise.

Can a Valuation Be Mathematically Correct but Still Wrong for Your Purpose?

Absolutely.

A spreadsheet can contain perfectly correct mathematics and still produce a number that isn't useful for the question you're trying to answer.

I encountered this with a restaurant owner whose accountant had completed extensive valuation work and concluded that the business was worth approximately $1.6 million to $1.65 million.

When we normalized the financial statements for an MPSP evaluation, we calculated approximately $230,000 in SDE.

Our estimate of the most probable selling price was approximately $571,000.

That's an enormous difference.

It doesn't necessarily mean somebody couldn't create a methodology that mathematically supported the higher number. The problem was whether an outside buyer in the small-business marketplace would actually pay it.

That distinction becomes critical when the owner is building a retirement plan around the expected proceeds from selling the business. Pasted text

Be Careful About Valuations Based on Future Growth

Another situation involved a buyer examining a company that sold and installed materials used in housing.

We calculated approximately $113,000 in SDE based on the company's current performance. Even if the business returned to previous performance levels, we estimated SDE would be approximately $242,000.

The seller had received a discounted cash flow valuation estimating enterprise value at approximately $1.5 million.

The mathematics wasn't necessarily the problem.

The assumptions were.

The valuation assumed substantial future revenue growth while cost of goods sold and overhead remained relatively constant.

For a small owner-operated business, there's another problem with paying for projected growth.

“If you think you can grow the business, why would you make that growth part of what you pay the seller?”

If the buyer will be doing the work required to generate future growth, the buyer will generally want the purchase price to reflect what the seller has already built—not all the improvements the buyer hopes to create afterward.

That's why forward-looking analysis in an MPSP evaluation is generally limited. When appropriate, current year-to-date performance might support a forecast of the current year, but that is very different from pricing years of assumed future growth into today's valuation.

Why an Unrealistic Valuation Can Damage Your Exit Plan

An inflated valuation doesn't just create disappointment when you eventually list the business.

It can distort years of financial planning.

If you've been told your company is worth $1.6 million, you may start planning your retirement as though $1.6 million will eventually become available.

But if the actual market of qualified buyers is closer to $600,000, your retirement plan has a major hole in it.

That's why owners should investigate probable selling price years before they intend to sell.

Discovering a valuation problem early gives you time to do something about it.

How Can You Increase the Value of Your Business Before Selling?

An early MPSP evaluation can identify areas that may make the business more attractive to buyers.

One tool we use is a Locus of Goodwill analysis, which looks at whether goodwill resides primarily with the owner, the company's brand, or its location.

Benchmarking can also identify operating improvements.

Suppose your gross margin is two percentage points below comparable businesses in your industry.

If you can improve purchasing, bidding, or pricing and permanently increase gross margin by two percentage points, that additional profit can flow to the bottom line.

Now apply an appropriate valuation multiple to the improved cash flow.

You've potentially increased the value of the company while also enjoying greater profitability during the remaining years you own it.

The Best Time to Learn What Your Business May Sell For Is Before You Need to Sell

Most small-business owners are experts at operating their businesses.

They're not necessarily experts at selling them.

That distinction matters.

If you're planning an exit, don't begin with the question, “Who can give me the highest valuation?”

Begin with:

“What type of valuation answers the question I actually need answered?”

If the goal is to sell the business to an outside buyer, you need to understand the cash flow a buyer will recognize, whether that cash flow is transferable, what comparable transactions indicate, and what deal would realistically make economic sense for someone on the other side of the table.

Knowing that several years before your exit gives you something even more valuable than a number.

It gives you time to improve it.

Find Out What Your Business Could Realistically Sell For

If you're considering selling your business now or planning an exit several years from now, David and the ALP team offer Most Probable Selling Price evaluations as part of their seller and exit-planning services.

The process can help you understand normalized cash flow, probable selling price, where the goodwill resides in your business, and areas you may be able to improve before going to market.

Learn more about preparing and pricing your business for sale:
https://howtosellmyownbusiness.com

 

Why Every Business Owner Needs an Exit Plan (Before It’s Too Late)

Why Every Business Owner Needs an Exit Plan Years Before Retirement

Most business owners spend years building their companies, improving operations, and increasing profits. But when it comes to planning how they'll eventually leave, many put it off until retirement is just around the corner.

That's a potentially expensive mistake.

The problem often starts with a misunderstanding: exit planning isn't simply selling your business.

Selling may be one possible outcome. But a proper exit plan should help you understand your personal financial needs, whether your business is transferable, which exit strategies are available, and what needs to happen before you can step away.

And the earlier you start, the more options you may have.

Why Do Business Owners Avoid Exit Planning?

Many owners know they should be planning for retirement, but they never seem to get around to it.

Sometimes it's because they're busy running the business. Other times, they may be uncomfortable with what the planning process could reveal.

What if the company isn't worth as much as they think?

What if they can't afford to retire?

What if nobody wants to buy the business?

Avoiding those questions doesn't make the problems disappear. It simply reduces the time available to solve them.

That's why I encourage owners to begin exit planning years before they expect to leave.

Exit Planning Starts With Your Personal Finances

Before you start calculating what your company might sell for, look at your financial position outside the business.

Ask yourself:

If my business disappeared tomorrow, what would I have left?

Consider your home, savings, investments, retirement accounts, pensions, and other financial resources.

Then determine what retirement will actually cost.

I've asked business owners how much income they want in retirement and received answers like wanting to be comfortable.

But comfortable isn't a financial target.

You need to understand the lifestyle you want, the income required to support it, and whether your spouse or partner shares the same expectations.

Only then can you determine how much money your business needs to contribute.

Is Your Business Actually Saleable?

Once you understand your personal financial requirements, the next step is evaluating the business itself.

This means looking beyond revenue and profitability.

You need to understand Seller's Discretionary Earnings (SDE), EBITDA, capital expenditures, working capital, and the factors that influence what a buyer might pay.

But you also need to ask whether the company can function without you.

Does the business depend on your personal relationships?

Are important processes documented?

Can employees operate independently?

Will customers remain after ownership changes?

A company can generate excellent income for its owner while being difficult to sell.

That's why understanding sellability is just as important as understanding profitability.

Selling Isn't Your Only Exit Option

Once you've assessed your personal needs and business, you can start examining possible exit strategies.

Selling to an outside buyer is one option, but not the only one.

You might transfer the company to family members, arrange an internal succession, or consider another ownership transition that allows you to remain involved.

Different strategies can offer different combinations of financial returns, timing, control, and legacy.

For example, some owners prioritize receiving the highest possible sale price. Others care more about protecting employees, keeping the business in the family, or maintaining its presence in the community.

The right strategy depends on your priorities and circumstances.

That's why choosing an exit strategy should come after understanding your financial position and business.

Why Should You Start Preparing Years Before Selling?

One of the biggest mistakes I see is owners waiting until they're ready to sell before investigating what could make their business more valuable.

By then, it may be too late to make meaningful improvements.

"This is not something that you leave until a year before you think you want to sell."
—David C. Barnett

Preparing a business for sale can involve developing management, documenting procedures, reducing owner dependency, improving financial reporting, and addressing operational weaknesses.

Those improvements take time.

I've worked with owners whose businesses could potentially have achieved substantially better sale prices if they had started preparing two or three years earlier.

Ideally, owners should begin considering their exit strategy as much as ten years before their intended departure.

That gives them time to improve the business and evaluate alternatives rather than accepting whatever options happen to be available at the last minute.

Would Your Business Survive Buyer Due Diligence?

Imagine receiving an extensive due diligence checklist from a serious buyer.

Could you produce the requested documents within ten days?

Would you know where everything was?

Would the information be current and accurate?

Buyers may want financial records, contracts, inventory information, employee details, equipment records, and evidence supporting the company's operations.

They may also examine working capital requirements.

A business that needs substantial operating capital can create complications during negotiations, particularly when buyers and sellers have different expectations about what will remain in the company at closing.

Preparing for these questions early can reduce surprises and help make the eventual transaction smoother.

Understand What Business Buyers Are Thinking

Business owners understand the importance of knowing their customers.

But when they decide to sell, they encounter a different kind of customer: the business buyer.

Buyers have their own financial limitations, concerns, expectations, and decision-making processes.

Some are serious and financially qualified. Others may express interest without having the resources to complete an acquisition.

Understanding the buyer's perspective helps sellers prepare the right information, evaluate potential purchasers, and avoid wasting time with unsuitable candidates.

It also helps explain why a buyer may request certain conditions or financing arrangements.

Don't Evaluate an Offer Based on Price Alone

Receiving an offer doesn't mean you've successfully exited.

The terms matter.

A higher purchase price might involve seller financing, future performance requirements, or other conditions that introduce risk.

A lower offer may provide greater certainty or a more attractive transition.

Before accepting an offer, consider how much money you'll receive at closing, what obligations remain, and what could prevent the transaction from completing.

The objective isn't simply to get the highest number.

It's to negotiate an exit that actually meets your needs.

Who Is Responsible for Your Exit Plan?

You may work with accountants, lawyers, financial advisors, business brokers, and other professionals throughout the process.

But there's one person who remains responsible for coordinating everything.

You.

"Your exit plan is ultimately up to you and you have to be the quarterback amongst all your different advisors."
—David C. Barnett

Each advisor brings expertise in a particular area.

Your responsibility is to make sure their advice supports your overall objectives.

Just as you were responsible for planning and operating the business, you're responsible for preparing for the next stage of your life.

What Happens After You Leave the Business?

An exit plan should also address what happens after the ownership or management transition.

That includes your personal financial arrangements, estate planning, and the future of the business.

For example, an estate plan created while you owned a company may need substantial changes once that business has been sold.

You may also need to consider how the new owner or management team will take over operations.

And don't overlook the personal side.

After spending decades building a company, what will you do when it's no longer part of your daily life?

Your exit should support the life you want afterward—not simply complete a financial transaction.

The Cost of Waiting Can Be Greater Than You Think

Some business owners eventually discover that their companies aren't worth enough to fund retirement.

Others learn that their businesses are worth more than they expected.

Either discovery is valuable when there's still time to act.

David has also discussed research suggesting that business owners often retire later than employees. One possible reason is that some owners reach retirement age and discover they cannot afford to stop working.

Instead of retiring, they continue operating the business.

That can cost them years they hoped to spend doing something else.

Wouldn't you rather discover a financial shortfall ten years before retirement than one year before?

Understanding your situation early gives you the opportunity to improve the business, increase savings, change your plans, or consider another exit strategy.

The goal of exit planning isn't simply to sell your company. It's to give yourself more control over how and when you leave.

Start Preparing Your Business Exit With Exit Ready

If you're planning to leave your business in the next several years—or you're unsure whether your company is saleable—David's Exit Ready: The Owner's Guide to Profitable and Timely Exit provides a structured approach to planning.

The online program walks business owners through seven stages, from personal financial readiness and business sellability to exit options, business preparation, marketing, deal-making, and transition planning.

It also includes practical worksheets, checklists, calculators, and planning tools to help you identify what needs attention before your exit.

Learn more about Exit Ready and start preparing for your future:

https://howtosellmyownbusiness.com/