Why You Should Never Pay a Seller for Future Potential

 I want to talk a little bit about business valuation, specifically when you’re buying an existing franchise location—and how to avoid one of the biggest traps buyers fall into: paying for future potential instead of proven performance. https://youtu.be/Yu1xkgI8X9I 

The Franchise Valuation Case

I was recently hired to evaluate a franchise restaurant that was for sale.

When I perform a business valuation, I start by normalizing the income statement to calculate Seller’s Discretionary Earnings (SDE)—the total cash flow available to an owner-operator.

That SDE needs to be enough to:

1. Pay the owner a reasonable salary
   
   

2. Cover any loan payments for the purchase
   
   

3. Provide a return on the buyer’s investment

4. Cover CAPex needs as machinery and equipment wear out
   
   

Once I have that SDE, I compare it to data from hundreds of past business sales—properly normalized and tracked by the International Business Brokers Association (IBBA).

In this case, the restaurant’s cash flow supported a valuation of about $175,000. That represents the enterprise value—the business plus its inventory, working capital, and equipment, but not including real estate (since it was a leased location).

The Problem: Renovations and “Future Growth”

Because it’s a franchise, there were some obligations tied to the sale.

The franchisor required the new owner to complete a $100,000 renovation and pay a $30,000 franchise fee for the latest décor and menu updates.

The seller and their broker claimed these upgrades would increase sales by 20%—and therefore, profits would rise too.

So, they were asking for $150,000 for the business, plus the $130,000 investment for the upgrades.

What the Buyer Was Really Paying For

Here’s the thing: the only thing we know for certain is the cash flow that exists today.

If you agree to pay for the business plus invest in renovations because someone told you sales “should” go up, you’re essentially paying the seller for your own hard work and risk.

That’s not smart buying.

As I always teach in my business buyer seminars:

You pay for what you get. You buy for what you believe you can create.

But you never pay the seller for the future potential that you have to deliver.

The Reality Check

So I told my client:

If the cash flow supports a value of $175,000, and you have to invest $130,000 after buying it, your offer should be $175,000 minus $130,000 — or roughly $45–50K.

He made the offer.

And of course, the seller said no.

The business has now been sitting on the market for over two and a half years because nobody is willing to pay for blue sky.

“But I’ll Benefit From the Renovation…”

My client asked a fair question:

“Shouldn’t I pay a bit more since I’ll benefit from the renovations?”

Here’s the logic I shared:

If those renovations truly guaranteed higher sales and profits, the seller would have already made them.

They’d spend the money, see the higher profits, and then sell the business for a higher price.

But they’re not doing that—because they know it’s a gamble.

They want you to take on that risk and pay them as if the results were already proven.

That’s not how smart buyers think.

The Bottom Line

When evaluating a franchise (or any business), pay for the results that exist today, not the story of what “might” happen tomorrow.

If a franchisor or broker is trying to sell you on “potential,” remember: Potential is free. Proven cash flow costs money.

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Don’t Pitch Investors Without a Plan: Why Preparation Matters More Than Enthusiasm

I remember years ago, I met with a gentleman who believed he had a promising business opportunity tied to a piece of land. He had already borrowed money against the property, and now he was hoping to attract investors to pay off his debt and help him launch his idea.

On the surface, this might sound like the beginning of a great entrepreneurial journey. But there was one big problem: he had no plan. https://youtu.be/w0pJN4QB6Jk 

The Investor’s Checklist

If you’re seeking outside capital, investors want to know four simple things:

1. How much money do you need, and what will it be used for?
   
   

2. What’s the worst-case scenario, and what’s your Plan B?
   
   

3. What kind of return or cash flow can they expect?
   
   

4. How secure and sustainable is that return?
   
   

If you can’t answer these clearly, you’re not ready to pitch.

The Danger of Going Out Too Soon

In this case, the entrepreneur couldn’t answer basic questions like:

• What equipment do you need?
  
  

• What are your expected sales and terms of payment?
  
  

• How long will it take customers to pay you?
  
  

He assumed everyone would pay in cash—yet his market (the construction industry) typically runs on progress payments and holdbacks. That means he could be waiting 90–120 days to collect. Without a sales forecast, he had no idea how much capital he would need to finance receivables.

If he rushed out to pitch with this half-baked story, he’d risk burning bridges with the very few people in his network capable of writing six-figure checks. Once you make a poor first impression, it’s much harder to come back later with a polished plan.

Build a Plan for You, Not Just the Investor

Too many entrepreneurs treat business plans like marketing documents—something designed to convince banks or investors. That’s a mistake.

The real purpose of a business plan and cash flow forecast is to show you whether the business is actually viable. If the numbers don’t make sense on paper, they certainly won’t work in real life.

Creating rosy projections without a foundation in reality isn’t planning—it’s salesmanship. At best, you’ll waste time. At worst, you’ll come across like a con artist.

The Bottom Line

Before you ever approach investors, make sure you can clearly answer the four questions above. Build a plan, test your assumptions, and stress-test your numbers.

When you finally do sit down with potential investors, you want to look prepared, professional, and credible. That way, your enthusiasm will be backed by a solid story that makes sense—not just excitement and hope.

If you’re serious about buying or selling small businesses, check out: My Business Buyer Advantage course at BusinessBuyerAdvantage.com

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The Future of Business: What’s Coming, and How It Could Impact You

 Last week, I got back from a trip to Europe. It was part vacation, part business and full of fascinating conversations.

As some of you know, many entrepreneurs in their 40s (myself included) are in “round two” of life: new relationships, new perspectives, and, often, new ventures. On this trip, I noticed something interesting: many of the other guests were also business owners or professionals.

I found myself inside conversations about our own businesses with people ranging in age from mid-30s to late-60s, including some very seasoned entrepreneurs. https://youtu.be/2gdoI_KGSOU 

One evening, a group of us started talking about the future big shifts that could reshape the economy and everyday life. Some people had already made major business moves based on these predictions.

Here’s a condensed version of the list.

The Decline of Cities as We Know Them

Cities have always thrived because people needed to be physically close to do business. But that’s changing.

Several entrepreneurs on the trip had already sold off expensive commercial properties, believing their long-term value will fall maybe in 5–10 years, almost certainly in 20.

Why?

• Telecommuting is becoming more mainstream.
  
  

• The original reason to “live near the action” is fading.
  
  

• Rural and smaller-town living offers a better lifestyle and lower costs.
  
  

If fewer people need to be in cities for work, demand for urban real estate could fall — and when demand drops, prices can drop fast.

2️⃣ Commercial Real Estate’s Ripple Effect

If offices and retail space are worth less, city governments will feel it. Many rely heavily on commercial property taxes. Lower values mean:

• Higher residential taxes or
  
  

• Cuts to services
  
  

This could shift the balance of where people want to live and do business.

3️⃣ Self-Driving Cars & the Shrinking Auto Industry

Autonomous vehicles could radically reduce the number of cars we need.

Imagine:

• Your car drops you at work
  
  

• Drives Grandpa to the bowling alley
  
  

• Pick up your uncle for the dog park
  
  

• Returns to get Grandpa later
  
  

If families can share fewer cars, demand for vehicles plummets and so does demand for everything tied to them (sales, repairs, fuel, parts).

One entrepreneur pointed out:

• Location won’t matter for repair shops once cars can drive themselves.
  
  

• Large, low-cost, centralized facilities could replace today’s high-traffic “quick lube” spots.
  
  

4️⃣ Why Long-Term Business Financing Gets Riskier

If you’re buying a business especially with a 10-year loan you can’t assume the world will look the same in a decade.

We already know recessions happen roughly every 10 years. Add in technological shifts, real estate changes, and evolving industries, and the long-term risk increases.

Shorter payback periods give you more flexibility and less exposure to unpredictable change.

Takeaway for Buyers & Owners

If you’re thinking about:

• Buying a business
  
  

• Purchasing a building
  
  

• Taking on long-term debt
  
  

…be sure to factor in big-picture trends. These shifts may not happen overnight, but over the next 5–20 years, they could dramatically reshape the business landscape.

Smart entrepreneurs look ahead and act before the change is obvious to everyone.

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– David C. Barnett

How Do You Know If Someone’s Ready to Be an Entrepreneur?

 Sean asked a great question recently:

"How can I tell if someone’s truly ready for the challenges of owning a business?" https://youtu.be/tJuCAlwidRE 

If you work with aspiring entrepreneurs whether they’re thinking about starting or buying a business this is one of the most important things to figure out early on. The hard truth is: not everyone is cut out for entrepreneurship, and diving in unprepared can lead to costly mistakes.

When I was a business broker, I saw this all the time. People would come to me with the dream of buying a business often leaving behind secure jobs with pensions and perks without fully grasping what they were walking into.

So how do you test their readiness?

Here are two simple but powerful filters I’ve used over the years to separate dreamers from doers:

1. The “Late-Night Credit Card Terror” Test 😱

Running a small business isn’t always glamorous. Sometimes, it's 3:30 a.m. and you’re lying awake trying to figure out how to make payroll because a client payment fell through and rent just cleared your account.

This happened to me. I realized at that moment that my only option was to take a cash advance on my personal credit card to pay my receptionist.

It felt awful — but it worked. That’s the gritty reality of small business ownership. It’s not just about vision boards and product launches. It’s about resilience, resourcefulness, and doing what it takes.

I now ask aspiring business owners:

“Have you ever had to take a cash advance to cover payroll?”

You’d be surprised how many seasoned owners nod their heads. If someone can’t even imagine that scenario or is clearly horrified by it it may be a sign they’re not mentally prepared.

2. Can They Sell? 

Sales is the oxygen of a business. No matter what kind of company you run, if the sales don’t happen, the business doesn’t survive.

Even if you hire salespeople, you are still the chief salesperson as the owner. That’s why I always ask:

“Have you ever worked in a commission-only sales role?”

If they say yes, great. They’ve already had to survive on performance. They know the pressure of “eat what you kill.” They’ve learned how to handle rejection, stay composed, and deliver value without coming off as desperate (what I call “commission breath”).

If they say no? That’s a yellow flag.

I often recommend:

• Try door-to-door fundraising for a nonprofit
  
  

• Do cold calls for a charity or community cause
  
  

• Practice telemarketing for something meaningful
  
  

The idea is to test their comfort with selling, especially when there’s no safety net. If they won’t try it even when their job and mortgage are safe, how will they perform when their livelihood is on the line?

Bottom Line

Entrepreneurship isn’t just about skills, it's about mindset, stress tolerance, and grit. Before someone takes the leap, they need to understand the true nature of the journey ahead.

✅ Are they ready to make tough calls in tough times?
✅ Can they sell without fear or desperation?
✅ Do they know what it’s like to live without a safety net?

If the answer is yes, they might just be ready.
If not better to find out now than 6 months (and $60,000) too late.

Got more questions like Sean’s? Keep them coming.
And if you’re looking to dig deeper into buying or selling a business, check out the free resources and videos at DavidCBarnett.com.

Don’t forget—join my email list for early access to my latest videos and insights at DavidCBarnettList.com. You’ll even receive 7 FREE gifts when you sign up.