Showing posts with label #businessvaluation. Show all posts
Showing posts with label #businessvaluation. Show all posts

Thursday, September 10, 2026

Premiere - Who's going to own your small business with Michael Kerr

 


Who's going to own your small business 

New guest – Michael Kerr

I’m joined by Michael Kerr, founder of Kerr Capital and an Australian business broker and small business adviser, to explore why selling a business is far more complex than selling a house.

Tune in as we discuss business succession planning, realistic valuations, employee buyouts, community ownership, preparing a business for sale, and why key employees may be the most natural buyers.

We also examine the “silver tsunami,” the risk of vital local businesses closing, and how owners can create better exit options before time runs out.

This is a must-see event for business owners, buyers, brokers, advisers, and anyone planning a small business exit.

Join us live to ask questions. A replay will be available.

Set a reminder on YouTube:  https://youtu.be/VfNuUc4w0js 

It will be going live Thursday September 10, 2026 at 2:30 PM Atlantic Time and 1:30 PM Eastern Time

See you there!

David C Barnett


Monday, September 7, 2026

What Is Your Business Really Worth? (New Book Out Now)



**New Video Alert!

What is a business really worth? The answer isn't always one number.

My new book, Business and Asset Values, is designed for business owners, buyers, sellers, lenders, accountants, lawyers, advisors, and anyone who wants to better understand how businesses and their assets are valued.

In this video, I introduce the ideas behind the book, including fair market value, liquidation value, business valuation methods, SDE and EBITDA, cash flow, debt, working capital, goodwill, transferability, and why buyers and sellers can look at the same business and reasonably reach different conclusions about its value.


Cheers

See you over on YouTube:https://youtu.be/-1C9gmAViUQ 


David C Barnett


Saturday, September 5, 2026

Would You Sell Your Business With 100% Seller Financing?

Selling a business to a trusted employee can feel like the ideal succession plan.

They already know the company, understand the customers, and may have spent years helping build the operation.

But if you finance the entire purchase yourself, you're not simply selling the business.

You're also becoming the bank.

That creates an entirely different set of risks.


Start With Your Own Financial Position

Before deciding whether to provide 100% seller financing, look at your own financial needs.

Ask yourself whether you need the sale proceeds immediately, whether you have other retirement assets, and whether you could financially survive if the buyer stopped making payments.

If your retirement depends entirely on receiving those payments, financing the full purchase price may create too much exposure.

Evaluate the Business First

The strength of the business matters just as much as the strength of the buyer.

Consider:

  • Cash flow

  • SDE or EBITDA

  • Tangible assets

  • Goodwill

  • Working capital

  • Overall marketability

A highly desirable business gives the seller more options.

If the company would be difficult to sell on the open market, an internal succession may become more attractive—but that doesn't eliminate the financing risk.

Evaluate the Employee Like a Banker

A long-term employee may understand the business extremely well.

That doesn't automatically mean they'll be a successful owner.

Entrepreneurship requires different skills, including financial discipline, decision-making, risk tolerance, and the ability to manage uncertainty.

Look carefully at whether the buyer has accumulated savings, demonstrated financial responsibility, and shown a willingness to invest personally in the transaction.

Where Is the Buyer's Skin in the Game?

One of the biggest concerns with 100% seller financing is that the buyer may have very little financially at risk.

A stronger transaction might include:

  • A down payment

  • Personal guarantees

  • Additional collateral

  • Home equity

  • Liens against other assets

The more the buyer has at stake, the stronger their incentive may be to work through difficult periods instead of simply walking away.

Structure Matters

An asset sale and a share sale can create very different levels of risk.

If you're financing a share purchase that includes inventory, receivables, cash, and working capital, you may be financing much more than just equipment and goodwill.

An asset transaction where the buyer provides their own operating capital may reduce some of that exposure.

The important question is: exactly what are you financing?

Seller Financing Means Staying Connected

If you finance the purchase, your relationship with the business may continue for years.

You may want ongoing access to:

  • Financial statements

  • Bank statements

  • Receivables

  • Payables

  • Balance sheets

  • Key financial ratios

Loan covenants and reporting requirements can also help protect your position.

If your goal is to sell and completely walk away, 100% seller financing may not match that objective.

Consider a Staged Buyout

A gradual ownership transition can sometimes provide a better alternative.

Instead of transferring the entire company immediately, an employee can purchase ownership over time while assuming greater responsibility.

This gives both sides an opportunity to see whether the transition works before the seller gives up complete control.

It may also allow the employee to build equity and financial strength along the way.


Key Takeaways

Selling a business and financing the buyer are two separate decisions. Before providing 100% seller financing, evaluate the buyer's financial strength, your own ability to absorb a default, and whether a staged transition could reduce the risk.


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Monday, July 6, 2026

Top Questions About Selling a Small Business

 

Selling a Small Business: The Most Important Questions Every Owner Should Ask Before Selling

Selling a small business is one of the most important financial decisions an entrepreneur can make.

For many owners, the business represents years or even decades of hard work, financial investment, personal sacrifice, and relationships with employees and customers.

But here's something I've learned from helping business owners navigate sales and ownership transitions.

Most owners don't begin preparing to sell until they actually want to leave.

And by then, some of their best opportunities may already be gone.

They might discover that the business isn't worth what they expected, that buyers aren't willing to pay for future potential, or that the company depends too heavily on their personal involvement.

That's why I believe every business owner should understand the fundamentals of exit planning long before they decide to sell.

I've gathered some of the most common questions owners ask about selling a business into a resource center at HowToSellMyOwnBusiness.com.

These questions cover everything from valuation and retirement planning to finding buyers, negotiating seller financing, and protecting your legacy.

Let's walk through the most important lessons.


1. What Should I Do Before Thinking About Selling My Business?

Most owners assume the first step is determining what their business is worth.

I disagree.

The first step is understanding your personal financial needs and reasons for wanting to exit.

Suppose you're considering selling because you want to retire.

Before you calculate the business's value, you need to understand how much money you'll require to support your retirement.

What savings and investments do you already have?

How much annual income will you need?

What other financial resources are available?

How much additional money must the business sale realistically provide?

This matters because many owners fall into what I call aspirational pricing.

They determine how much money they need for retirement and then assume their business must be worth that amount.

But buyers don't determine value based on your retirement requirements.

They evaluate the financial benefits and risks associated with owning the business.

What you need from the sale and what your business is worth are two entirely different things.

Understanding that distinction early can help you make better decisions.

2. When Should I Start Planning My Business Exit?

Earlier than you think.

Ideally, owners should begin planning several years before they expect to sell.

I often recommend that business owners start thinking seriously about exit readiness three to ten years before their anticipated departure.

That provides time to improve financial records, document procedures, reduce dependence on the owner, optimize working capital, and develop a management team.

It also creates more flexibility.

Retirement is only one reason people sell businesses.

Other common reasons include burnout, boredom, poor health, divorce, relocation, and major life changes.

Unlike retirement, many of these events aren't planned.

That's why I recommend keeping your business in a condition where it could be sold even if you don't intend to leave anytime soon.

As I explained:

"The best exit options usually belong to owners who still have time." —David C. Barnett

Planning early gives you more choices.

Waiting until you're exhausted or facing a personal emergency can force you into decisions you wouldn't otherwise make.

3. How Do I Know Whether My Business Is Actually Sellable?

A business that provides income for its owner isn't necessarily a business someone else can purchase successfully.

The key question is whether the company generates transferable cash flow.

In other words, can the business continue producing economic benefits after the current owner leaves?

Imagine an owner who personally handles every customer relationship, performs most of the technical work, and makes every important operating decision.

The company might provide that owner with a comfortable income.

But what happens when the owner leaves?

If customers disappear or operations cannot continue without that person's involvement, a buyer may struggle to justify paying significant money for the business.

This is why I frequently discuss the location of goodwill.

Does the goodwill belong to the business itself?

Or does it primarily exist in the owner's personal relationships, reputation, and abilities?

A transferable business has systems, employees, customer relationships, and operating processes that can continue after the ownership transition.

4. What Are SDE and EBITDA, and Why Do Buyers Care?

When buyers evaluate small businesses, they're primarily interested in the cash flow the company can generate.

Two common measurements are seller's discretionary earnings (SDE) and EBITDA.

Seller's discretionary earnings is commonly used when evaluating smaller, owner-operated businesses.

It generally begins with earnings and makes appropriate adjustments for items such as the owner's compensation, certain discretionary expenses, interest, taxes, depreciation, and amortization.

EBITDA stands for earnings before interest, taxes, depreciation, and amortization.

It's commonly used when evaluating larger businesses or companies with professional management.

Neither measurement is identical to actual cash available for distribution.

Buyers must still consider working capital, equipment replacement, financing costs, and other requirements.

But these measurements help establish the company's earning capacity.

And that earning capacity is central to business valuation.

5. Is My Business Worth What I've Invested in It?

Not necessarily.

An owner might spend hundreds of thousands of dollars purchasing equipment, developing facilities, and building a company.

But those historical expenditures don't automatically determine what a buyer will pay.

Buyers care about what the business can earn and the risks involved in generating those earnings.

A company with expensive equipment but weak profitability may be worth less as an operating business than the value of its underlying assets.

In that situation, liquidation might be worth considering.

On the other hand, a business with relatively few tangible assets but strong, transferable earnings may command significant goodwill value.

The important thing is evaluating the economics of the company rather than relying on what you've spent building it.

6. What Is Goodwill, and Can a Business Have Negative Goodwill?

Goodwill is an important concept in business valuation.

In simplified terms, it represents the difference between the value of a business as a going concern and the value of its identifiable net assets.

A profitable, efficient business may be worth more than the tangible assets required to operate it.

That additional value can reflect goodwill.

Consider two different businesses.

A residential cleaning company might operate with relatively little equipment.

If it has recurring customers, reliable employees, and strong profitability, a significant portion of its value may be associated with goodwill.

A foundation contractor, by comparison, might require dump trucks, backhoes, concrete forms, and other expensive equipment.

Because the tangible asset investment is much larger, the business needs substantial earnings to justify additional goodwill value.

What Happens When the Assets Are Worth More Than the Business?

Sometimes the value supported by a company's cash flow is lower than the value of its tangible assets.

This can create what I describe as a negative goodwill situation.

A buyer might be unwilling to pay the full asset value for a business that doesn't generate an adequate return.

But liquidation isn't always a better alternative.

Selling equipment individually may produce less than expected.

The owner may also face employee severance, lease obligations, and other closing costs.

That's why it's important to compare the realistic proceeds from selling the business with the realistic net proceeds from winding it down.

7. Will Buyers Pay for My Business's Future Potential?

Generally, buyers prefer to pay for demonstrated financial performance.

An owner might explain that the business could become much more profitable with better marketing, expanded services, or additional employees.

But a buyer will naturally wonder why those improvements haven't already been made.

If the potential is credible and close to being realized, it may influence negotiations.

However, speculative future growth usually shouldn't be treated as though it has already happened.

The buyer is the person who must invest the money, perform the work, and accept the risk of achieving those improvements.

That's why I encourage owners to improve profitability before selling rather than expecting buyers to pay for unrealized opportunities.

8. How Much Does Owner Dependence Hurt Business Value?

It can hurt value tremendously.

If the business cannot function without the owner, the buyer faces significant transition risk.

The buyer may need to replace the seller's technical expertise, customer relationships, management abilities, or sales efforts.

That can create additional costs and uncertainty.

The solution is to begin transferring knowledge and responsibility before the sale.

Document important processes.

Train employees.

Delegate appropriate authority.

Develop reliable management information.

And make sure customers have relationships with the company rather than exclusively with the owner.

A business that can operate successfully without its founder is generally easier for buyers to understand and take over.

9. Why Does Working Capital Matter When Selling a Business?

Working capital is often misunderstood during business sales.

Owners sometimes assume that cash, receivables, and inventory are entirely separate from the value of their business.

But many companies require substantial working capital to operate.

Imagine a distributor that needs inventory on hand and must offer customers payment terms.

The buyer will need those resources to keep the company functioning after closing.

If the seller removes too much operating capital, the buyer may need to contribute additional money immediately.

And that can reduce the amount the buyer is willing or able to pay for the acquisition itself.

Working capital should therefore be considered part of the overall transaction structure.

As I explained:

"Working capital is an important part of your business, just like a forklift or delivery truck." —David C. Barnett

Owners should understand the normal working capital requirements of their companies well before beginning a sale.

Reducing unnecessary inventory, improving collections, and managing operating capital efficiently can make the business more attractive.

10. Should I Improve Profits Before Selling, Even If It Means Paying More Tax?

Usually, yes.

Some owners try to minimize reported profits through aggressive expense treatment or other questionable practices.

But when it's time to sell, buyers and lenders want reliable, documented financial information.

If profitability isn't clearly reflected in the company's records, buyers may discount the earnings being claimed.

And lenders may be unwilling to finance the transaction.

That can leave the seller with fewer qualified buyers or require a larger amount of seller financing.

Accurate financial reporting and legitimate profitability improvements can make a company easier to evaluate, finance, and sell.

The goal shouldn't be to make the business appear less profitable today while hoping buyers will somehow recognize its hidden value later.

11. Should I Sell to an Outside Buyer, an Employee, or a Family Member?

There isn't one answer that works for every business.

An outside buyer may have access to more capital or bring relevant industry experience.

An employee may already understand the company's operations and customer relationships.

A family member may offer continuity, but family succession isn't automatically the best option.

You need to consider the prospective buyer's capabilities, financial resources, motivation, and ability to manage the company successfully.

What About a Staged Buyout?

A staged buyout allows ownership to transfer gradually rather than all at once.

For example, a buyer might acquire an initial ownership interest and purchase additional shares over time.

This can give the buyer an opportunity to learn the business while reducing transition risk.

If the company continues growing, later ownership interests may also be worth more.

However, staged transactions require careful planning around valuation, control, financing, and the responsibilities of both parties.

12. How Can I Market My Business Without Destroying Confidentiality?

Confidentiality is one of the most important parts of selling a small business.

If employees discover the company is for sale before there's a clear plan, they may worry about their jobs.

Customers may become concerned about service continuity.

Competitors may try to exploit the uncertainty.

Suppliers could also become nervous.

These reactions can damage the very goodwill you're trying to sell.

That's why business marketing needs to be handled carefully.

A confidential listing should attract appropriate buyers without unnecessarily revealing the company's identity.

More detailed information should be shared through a controlled qualification and disclosure process.

13. What Is a Confidential Business Profile?

A confidential business profile is a buyer-facing presentation that explains the company's operations, financial performance, market position, and acquisition opportunity.

It should be much more than a one-page description attached to tax returns.

A strong profile helps buyers understand what the company does, why customers purchase from it, how it generates revenue, and what makes it attractive.

It also presents relevant financial information and explains important operating characteristics.

I've seen business sales suffer because very little effort was put into preparing this material.

A buyer needs enough reliable information to understand the opportunity and decide whether to proceed.

A properly prepared business profile can make that process much more effective.

14. How Do I Avoid Wasting Time With Unqualified Buyers?

Not everyone who inquires about a business is capable of purchasing it.

Some people browse listings casually.

Others submit inquiries on numerous businesses without having the financial resources or experience to complete a transaction.

That's why buyer qualification matters.

Before releasing sensitive financial information, sellers should have a process for establishing the buyer's identity, financial capacity, and acquisition intentions.

A signed nondisclosure agreement is important, but it isn't a substitute for determining whether someone is a legitimate buyer.

I also caution owners about systems that automatically distribute complete financial packages to anyone who signs an online NDA.

Without proper screening, confidential information could reach competitors or other inappropriate recipients.

The objective is to provide serious buyers with the information they need while protecting the business.

15. When Should Employees Find Out the Business Is Being Sold?

Timing matters.

Employees generally don't like uncertainty.

Announcing a potential sale too early can create unnecessary anxiety, especially when there's no certainty that a transaction will close.

But waiting too long can also create problems.

Some employees may need to participate in due diligence, meet the buyer, or prepare for the ownership transition.

There may also be legal requirements affecting when certain employees must be informed or consulted.

The appropriate timing depends on the business, the transaction structure, and applicable laws.

The important thing is having a clear communication plan rather than allowing employees to discover the sale through rumours.

16. What Matters More When Selling a Business: Price or Terms?

Many owners focus almost entirely on the selling price.

But the terms of the transaction can be just as important.

Consider two offers.

One buyer offers a lower price with most of the money paid at closing.

Another offers a higher price but requires the seller to finance a substantial portion over several years.

Which offer is better?

That depends on the payment schedule, interest rate, security, risk of default, tax consequences, and financial circumstances of the seller.

A higher price doesn't automatically produce a better financial outcome.

You need to evaluate the entire transaction.

17. Why Is Seller Financing So Common in Small Business Sales?

Seller financing means the seller agrees to receive part of the purchase price over time.

Instead of receiving all the money at closing, the seller holds a note requiring the buyer to make future payments.

This is common because lenders may be unwilling to finance the entire purchase price.

They may be concerned about goodwill, customer concentration, management transition, or other business risks.

Seller financing can help bridge the gap.

It can also demonstrate confidence in the business and the buyer.

But sellers must understand that they're making an investment in the buyer's ability to operate the company successfully.

That requires careful buyer selection and appropriate legal protections.

18. What Is an Offset Clause in a Seller Note?

An offset clause may allow a buyer to reduce amounts owed under a seller note if certain contractual claims or damages arise after closing.

For example, suppose a seller makes a material representation that later proves inaccurate.

Depending on the agreement, the buyer may have rights to offset qualifying damages against future payments.

The exact rights depend on the negotiated contract and applicable law.

This is one reason both buyers and sellers need experienced legal advice when structuring seller financing.

Clear disclosures and well-drafted agreements help reduce the risk of disputes.

19. What Happens if the Bank Puts My Seller Note on Standby?

Sometimes a lender requires seller financing to be placed on standby.

That may mean the buyer cannot make payments on the seller note until certain conditions are satisfied or the lender permits payment.

This can significantly affect the seller's expected cash flow after closing.

A standby requirement may indicate that the transaction has substantial leverage or that the lender is concerned about debt service capacity.

The seller should understand these restrictions before agreeing to the transaction.

Seller financing isn't simply a promise to receive money later.

The timing, security, and conditions attached to those payments matter.

20. What Is an Earn-Out, and When Does It Make Sense?

An earn-out is an arrangement where part of the purchase price depends on the business achieving specified results after closing.

For example, suppose a seller believes the company will experience substantial growth over the next two years.

The buyer may be unwilling to pay today for profits that haven't materialized.

An earn-out can bridge that disagreement.

The buyer pays an additional amount if the agreed performance targets are achieved.

These arrangements can be useful when future performance is uncertain.

But they can also create disputes if the targets, accounting methods, or responsibilities for operating the business aren't clearly defined.

Both parties need to understand exactly how the earn-out will be calculated.

21. Can I Sell My Business Without Hiring a Broker?

Yes.

But selling without a broker doesn't eliminate the work normally performed by a broker.

You still need a realistic valuation, a professional business profile, a confidential marketing strategy, buyer qualification, negotiation support, and coordination with legal and accounting professionals.

This is why I created the services available through How to Sell My Own Business.

My team and I help owners prepare their businesses for sale, develop marketing materials, run confidential advertising campaigns, and navigate the selling process.

Our approach uses fixed-fee services rather than a traditional success commission.

For some businesses, that can be an attractive alternative.

For others, particularly when finding a buyer may be difficult, a traditional broker's commission-based model may make more sense.

The important thing is choosing an approach that fits your circumstances.

22. How Long Should I Stay After Selling My Business?

The appropriate transition period depends on the company's complexity and the buyer's experience.

A relatively simple business may require a shorter transition.

A company with specialized operations, important customer relationships, or complicated management responsibilities may require more time.

The transition can also be structured in stages.

For example, the seller might work alongside the buyer full-time initially, then reduce involvement to occasional visits and phone calls.

It's important to distinguish between training the buyer and continuing to perform an actual job.

If the seller is expected to remain responsible for substantial ongoing work, compensation and responsibilities should be clearly defined.

23. What Should Be Included in a Business Transition Plan?

A transition plan should explain what the new owner needs to learn to operate the business successfully.

That may include introductions to customers and suppliers, employee responsibilities, financial reporting, operating procedures, software systems, purchasing practices, and other important activities.

The seller is often the person who understands these details best.

That's why I encourage buyers to ask sellers to prepare a written transition plan.

Without one, important knowledge can easily be overlooked.

A successful transition isn't simply about handing over the keys.

It's about transferring the knowledge, relationships, and management capabilities necessary for the business to continue operating.

24. How Can I Protect My Business's Legacy After Selling?

Many owners care deeply about what happens to their businesses after they leave.

They may want employees to retain their jobs, the company to remain in the community, or certain traditions to continue.

But preserving a legacy requires more than finding someone who agrees with your intentions.

The buyer must also have the financial capacity to maintain those commitments.

If the acquisition creates excessive debt, the buyer may be forced to reduce expenses or make changes that conflict with the seller's wishes.

As I explained:

"Easy, choose the right buyer." —David C. Barnett

The right buyer is someone who understands what matters to you and has a realistic plan for sustaining the business.

That includes ensuring the acquisition's financial structure doesn't undermine the very things you want to preserve.

25. What Should Buyers, Employees, and Customers Feel After the Sale?

There's one word I want every seller to remember.

Confidence.

The buyer should feel confident that they understand the company and can operate it successfully.

Employees should feel confident about the organization's future.

Customers should feel confident that the business will continue serving them reliably.

As I explained:

"In one word, confidence." —David C. Barnett

When that confidence is missing, problems can develop quickly.

Employees may leave.

Customers may move to competitors.

The buyer may struggle financially.

And if the seller is receiving payments through seller financing or an earn-out, those problems can affect the seller's financial outcome too.

A successful business sale should create a sustainable transition for everyone involved.

Final Thoughts: Selling a Business Starts Long Before You Find a Buyer

Selling a small business involves much more than finding someone willing to pay an attractive price.

You need to understand your personal financial objectives, the company's transferable cash flow, its realistic market value, and the different exit options available.

You also need to prepare financial records, reduce owner dependence, manage working capital, protect confidentiality, and select a qualified buyer.

And once a transaction is agreed upon, the work isn't finished.

A carefully planned transition helps protect employees, customers, and the financial interests of both parties.

The best time to prepare your business for sale is before you need to sell it.

That preparation can give you more flexibility, reduce transaction risks, and improve your chances of achieving a successful exit.

Explore More Resources for Selling Your Small Business

I've organized these questions and many more into a dedicated resource center where business owners can explore short answers, detailed explanations, and related videos covering the selling process.

If you're thinking about selling now or several years from now, visit the Resources section at:

How to Sell My Own Business — Exit Planning, Valuation, and Selling Resources

You can also explore my Exit Ready training program, designed to help owners prepare their companies for a future ownership transition.

👉 Want deeper dives like this? Join my email list at DavidCBarnettList.com for early access to videos, insights, and 7 free bonus gifts.

Thursday, June 25, 2026

Asking Price vs Actual Sale Price: The Gap Nobody Talks About with Nunzio Presta

In this "best-of" interview, I sit down with Nunzio Presta, founder of BuyAndSellABusiness.com, to discuss what ten years of marketplace data reveals about business buyers, sellers, valuations, and deal activity.

We explore how asking prices compare to actual selling prices, why some businesses sell above asking price, how interest rates impact transactions, the growing number of acquisition entrepreneurs entering the market, and what buyers and sellers can learn from real-world business sale data.

Monday, June 22, 2026

10 Risks of Recurring Revenue Businesses

 

10 Hidden Risks of Buying a Recurring Revenue Business: Why Predictable Sales Don't Guarantee Profit

If you've spent any time learning about buying small businesses, you've probably heard the same advice repeatedly.

Buy a business with recurring revenue.

The idea sounds perfect.

Find a company with customers who pay every month, purchase it, and enjoy a predictable stream of income without constantly searching for new customers.

Maybe it's a commercial cleaning company, accounting firm, property management business, digital marketing agency, or software subscription service.

These businesses can certainly be attractive acquisition opportunities.

But there's a problem with the assumption that recurring revenue automatically means lower risk.

Just because customers have paid a business repeatedly in the past doesn't mean they'll continue paying you after you become the owner.

And even if the revenue continues, it doesn't necessarily mean the company will generate enough profit or cash flow to support your investment.

I recently participated in a Business Buyer Boardroom Mastermind session in Cincinnati, where we discussed acquisitions in the commercial janitorial industry.

That conversation, combined with experiences shared by members of my Business Buyer Advantage group coaching program, reinforced several risks that buyers frequently overlook.

Today, I want to examine ten of those risks and explain how to investigate them before purchasing a recurring revenue business.


Why Everyone Wants to Buy a Recurring Revenue Business

I was recently listening to a podcast featuring two professionals from the business brokerage industry.

They were discussing how many prospective buyers approach brokers with almost identical acquisition criteria.

These buyers have read the same books, listened to the same podcasts, and developed the same investment thesis.

They want a business with recurring revenue and a certain level of seller's discretionary earnings (SDE) or EBITDA.

The brokers joked that they receive essentially the same inquiry 15 to 20 times a week.

And I understand why.

Recurring revenue is appealing because it suggests stability.

You make a sale once, establish an ongoing relationship, and continue receiving payments.

But the idea that recurring revenue eliminates the need for sales, marketing, or ongoing customer management is misleading.

Even major telecommunications and utility companies experience customer losses, competitive pressure, technological disruption, and changing costs.

Small businesses face those same challenges, often with fewer resources to absorb them.

Let's look at the risks buyers should understand.

1. Recurring Revenue Doesn't Eliminate Customer Concentration Risk

The first major risk is customer concentration.

Imagine you're considering purchasing a commercial cleaning business.

The company has contracts with several organizations, and its revenue appears consistent from month to month.

But when you examine the customer list, you discover that one client represents 40% of annual sales.

That's a serious concentration risk.

If that customer terminates the relationship, the business could lose a substantial portion of its revenue almost immediately.

And here's something many buyers don't fully appreciate.

A 10% decline in revenue doesn't necessarily mean a 10% decline in profit.

Businesses have fixed and semi-fixed operating expenses.

You might still need the same management team, office, software systems, insurance, and equipment even after losing an important customer.

For example, consider a hypothetical company with these financial results:

Financial measureBefore losing customerAfter 10% revenue decline
Annual revenue$1,000,000$900,000
Variable operating costs$500,000$450,000
Fixed operating expenses$400,000$400,000
Operating profit$100,000$50,000

In this example, a 10% revenue decline produces a 50% decline in operating profit.

That's why customer concentration matters, even when contracts are in place.

What Buyers Should Investigate

Review the percentage of revenue generated by the company's largest customers.

Pay particular attention to the top five accounts.

Understand their contract terms, renewal dates, payment history, and relationships with the seller.

Then model what would happen financially if one or more important customers disappeared.

A recurring revenue business can still be extremely vulnerable to the loss of a single account.

2. Customer Contracts May Not Transfer to a New Owner

The second risk involves contract transferability.

This issue can be especially important when acquiring businesses that serve government agencies or large corporations.

A member of my Business Buyer Advantage group coaching program has completed several acquisitions in the janitorial industry.

In some cases, he needed to acquire the shares of the existing company rather than simply purchasing its assets.

Why?

Because certain customer contracts were tied to the original legal entity and its employer identification number.

If the buyer had acquired only the assets and transferred operations to a new company, the customer might have been required to put the contract out for competitive bidding again.

That could have placed a significant portion of the acquired revenue at risk.

Asset Purchases Versus Share Purchases

In an asset purchase, the buyer acquires specified assets and potentially assumes certain obligations.

Customer contracts may need to be assigned or replaced, depending on their terms.

In a share purchase, the buyer acquires ownership of the existing legal entity.

The company may remain the contracting party, although change-of-control provisions can still require customer consent.

This distinction can dramatically affect acquisition risk.

If important contracts cannot be transferred or continued under the proposed structure, the buyer may not receive the revenue they expected.

What Buyers Should Investigate

Have an experienced acquisition attorney review material customer contracts.

Look for assignment restrictions, change-of-control provisions, termination rights, and renewal requirements.

Don't assume that purchasing the business automatically means acquiring every customer relationship.

The legal details matter.

3. Customers May Be Loyal to the Seller, Not the Business

The third risk involves goodwill.

I've discussed goodwill many times because it's one of the most important concepts in small business acquisitions.

Goodwill can be associated with the company's brand, location, systems, or the personal relationships of its owner.

A recurring revenue business may have customers who have remained for years.

But why have they stayed?

Perhaps they love the company's service.

Or perhaps they have a strong personal relationship with the current owner.

Those are two very different situations.

Imagine an accounting firm where clients have worked with the same accountant for 20 years.

If that accountant retires, some clients may decide to explore other providers.

The same thing can happen in commercial cleaning, consulting, property management, and other service industries.

Recurring payments don't guarantee transferable goodwill.

What Buyers Should Investigate

Determine who maintains customer relationships.

Are clients primarily interacting with employees and established company systems?

Or do they rely heavily on the owner?

Review customer communication practices, service delivery procedures, and the seller's role in retaining accounts.

If the goodwill is primarily personal, the ownership transition may create significant retention risk.

4. Recurring Revenue Can Hide Serious Cash Flow Problems

A company might invoice customers every month and still struggle to generate cash.

Why?

Because invoicing isn't the same as collecting payment.

Some commercial customers take 30, 60, 90, or even 120 days to pay their bills.

Meanwhile, the service provider must continue paying employees, suppliers, insurance, and other expenses.

I spoke with a former facilities management business owner who had a particularly challenging situation.

Much of the company's revenue came from one major customer.

That customer regularly took 90 to 120 days to pay.

The business owner was effectively financing the customer's operations.

And that required a substantial amount of working capital.

Why This Matters During an Acquisition

Suppose you're buying a company with $100,000 in monthly revenue.

The business has attractive profit margins, but customers generally pay 90 days after being invoiced.

You may need a significant amount of cash to fund operations while waiting for receivables to arrive.

If you're purchasing the business through an asset transaction and the seller retains existing accounts receivable, you could face an even larger cash requirement immediately after closing.

Your investment isn't necessarily limited to the down payment and acquisition expenses.

You may also need substantial operating capital.

What Buyers Should Investigate

Review accounts receivable aging reports, historical collection patterns, bad debts, and normal working capital requirements.

Understand how much cash the business needs to operate after the ownership transition.

A company can be profitable on paper while creating serious cash flow pressure for its owner.

5. Recurring Customers Still Leave: The Reality of Churn

The fifth risk is customer churn.

Churn measures the rate at which customers stop purchasing a product or service.

And every recurring revenue business experiences some degree of it.

Patrick Dieter, a previous guest on my channel who works in the accounting and consulting industry, shared an interesting observation about churn.

He suggested that accounting firms can experience annual client churn of approximately 15%, while digital marketing agencies may experience rates closer to 40%.

These were figures discussed in his commentary, not universal industry benchmarks.

But they illustrate an important issue.

If a business loses 40% of its customers annually, it must continually replace those customers just to maintain its existing size.

That requires ongoing sales and marketing.

And it challenges the idea that recurring revenue eliminates customer acquisition work.

Why Customers Leave

Customers may terminate recurring relationships for many reasons.

A competitor might offer a lower price.

A new purchasing manager may prefer another vendor.

A government contract may be subject to rebidding.

A customer's financial circumstances might change.

Or the service provider may simply fail to maintain satisfactory performance.

I've personally benefited from this dynamic.

When I worked in the corporate card division at American Express, I developed relationships with financial decision-makers at companies.

Sometimes those individuals moved to new employers.

Because they already understood the value of our services, I could reconnect with them and potentially help their new organizations adopt our products.

That meant replacing another provider's recurring relationship.

It's a reminder that recurring customers can move between competing businesses.

What Buyers Should Investigate

Review historical churn rates, customer retention, contract renewals, and customer tenure.

Look at the number of customers lost and gained each year.

Understand how much sales activity is required simply to maintain existing revenue.

And investigate whether churn is increasing.

6. Recurring Revenue Doesn't Automatically Justify a Higher Valuation

The sixth risk involves valuation.

Some sellers believe that recurring revenue automatically deserves a premium purchase price.

And in certain circumstances, recurring revenue can justify a higher valuation multiple.

But the quality of that revenue matters.

Imagine a software company charging customers $30 per month for a product that saves them $1,000 in operating costs.

If those customers are substantial businesses, the service may represent a very small expense relative to the value it provides.

They may have little incentive to reconsider the purchase.

That could make the revenue relatively durable.

Now compare that with a service provider representing 20% of a customer's operating expenses.

That customer has a powerful incentive to negotiate pricing, reduce usage, or investigate alternatives.

Both companies may generate recurring revenue.

But their customer relationships have very different economic characteristics.

When a Premium Multiple May Not Be Justified

A recurring revenue business may still have customer concentration, weak margins, difficult contract transfers, high churn, or substantial working capital requirements.

Those risks can offset the benefits of recurring revenue.

As I explained:

"don't pay a premium for recurring revenue until you understand how durable that revenue is." —David C. Barnett

A buyer should evaluate the actual risks and earning capacity of the company rather than assuming that recurring billing automatically makes it more valuable.

7. High Recurring Revenue Doesn't Mean High-Quality Profit

The seventh risk is confusing revenue with profitability.

A company might have a large portfolio of recurring contracts but earn very little profit from servicing them.

This is particularly important in labour-intensive businesses.

Consider commercial janitorial services.

When preparing a quote, an experienced operator may examine the square footage of the facility, the number of wastebaskets, the layout of offices, and the amount of furniture that needs to be moved.

These details affect the time required to complete the work.

A building with individual offices may require a different amount of labour than one filled with cubicles.

An inexperienced buyer might see a $10,000 monthly cleaning contract and assume it's attractive.

But without understanding the labour requirements, they cannot determine whether the contract is profitable.

The Risk of Underpriced Contracts

A seller preparing to exit may have an incentive to maintain revenue even when contracts aren't particularly profitable.

For example, the business might lose a large customer and replace that revenue with a new contract.

On the surface, total revenue remains unchanged.

But if the new contract has significantly lower margins, the company may be worth less.

That's why buyers need to investigate profitability at the customer or contract level.

Recurring revenue is valuable only when the underlying relationships generate an adequate economic return.

8. The Seller May Be Exiting Before the Problems Become Obvious

The eighth risk involves seller motivation.

When buying a business, you should always investigate why the owner wants to sell.

Perhaps they're retiring.

Maybe they're experiencing health problems.

They might be relocating or simply want to pursue other interests.

Those can all be legitimate reasons.

But buyers should also consider whether the seller knows something about the company's future that isn't obvious in the historical financial statements.

For example, a major customer contract may be approaching renewal.

A large customer could be unhappy.

Competition might be intensifying.

Or labour costs may be increasing faster than the business can raise prices.

The Minimum Wage Problem

Imagine a labour-intensive service company where employees earn $20 per hour.

If minimum wage increases to $21, that's a 5% increase in the hourly wage rate.

But what happens if the company's customer contracts only permit annual price increases of 2%?

The business may have to absorb the difference.

If labour represents a substantial portion of operating costs, that can significantly reduce gross margins.

And if the seller knows these increases are approaching, they may be motivated to exit before the financial impact becomes visible.

What Buyers Should Investigate

Don't stop at asking why the seller wants to retire or change careers.

Examine upcoming contract renewals, wage pressures, competitive developments, customer satisfaction, and changes in the industry.

Ask whether there are identifiable risks that could materially affect earnings after closing.

Historical stability doesn't guarantee future stability.

9. A Larger Competitor May Be the Natural Buyer

The ninth risk is particularly important when you're competing against established companies.

Not every business is equally valuable to every buyer.

Suppose you're considering purchasing a janitorial company with a large customer representing 35% of revenue.

For a first-time buyer acquiring that business as their primary source of income, the customer concentration risk could be substantial.

But imagine a much larger janitorial company acquiring the same business.

That customer might represent only a small percentage of the combined company's revenue.

The larger buyer may also have existing management, employees, equipment, and administrative systems that can absorb the acquired operations.

The acquisition could make excellent financial sense for them.

But it might not make sense for you at the same purchase price.

Don't Compete With Strategic Buyers on Their Terms

A strategic buyer may be willing to pay more because they expect operating efficiencies, cost savings, or other benefits unavailable to a standalone buyer.

If you try to match their price, you could end up paying for advantages you won't actually receive.

That's why I encourage buyers to ask an important question.

Am I the natural buyer for this business?

If the company makes more sense as an addition to an existing competitor, you need to recognize that.

Don't let a bidding war or the frustration of a long acquisition search push you into accepting risks that another buyer is better equipped to handle.

10. The Business May Have Hidden Project Revenue

The tenth risk is one of the most deceptive.

A company may present itself as a recurring revenue business while a significant portion of its annual sales actually comes from one-time projects.

Imagine a service company that provides monthly maintenance contracts.

The seller explains that customers pay regularly and that the business generates predictable annual revenue.

But when you investigate individual invoices, you discover that a substantial portion of revenue comes from special projects.

Those projects might involve repairs, installations, upgrades, or additional services.

And unlike the regular maintenance contracts, there's no guarantee that customers will purchase them again.

Why Hidden Project Revenue Matters

A buyer might believe they're purchasing a company with minimal sales requirements.

They expect customers to continue paying automatically.

But after closing, they discover that the seller had been making a major effort every year to secure new project work.

The recurring revenue provides only part of the company's income.

The rest depends on continuous selling.

That changes the operating requirements and risk profile of the acquisition.

It may also affect the appropriate valuation.

What Buyers Should Investigate

Separate recurring contract revenue from one-time project revenue.

Review customer-level invoices and classify revenue by source.

Determine how much revenue is contractually recurring, how much is historically repeat business, and how much requires new sales activity.

Then investigate who is responsible for generating the non-recurring revenue.

If the seller personally drives those sales, the ownership transition could create additional risk.

A Practical Due Diligence Checklist for Recurring Revenue Businesses

Before purchasing a recurring revenue business, I recommend investigating the following areas.

Risk areaKey due diligence question
Customer concentrationHow much revenue comes from the largest five customers?
Contract transferabilityWill important contracts remain in force after the acquisition?
GoodwillAre customers loyal to the company or primarily to the seller?
Working capitalHow much cash is required to fund operations and receivables?
Customer churnHow many customers leave each year, and why?
ValuationDoes the durability of revenue justify the asking price?
Contract profitabilityWhich customers and contracts generate the most profit?
Future risksAre renewals, wage increases, or competitive pressures approaching?
Strategic buyer advantageWould an established competitor be a more suitable acquirer?
Revenue qualityWhat percentage of sales is genuinely recurring versus project-based?

This isn't an exhaustive acquisition checklist.

But it addresses some of the risks that buyers frequently overlook when they become attracted to the idea of predictable monthly revenue.

Why Industry Experience Still Matters

One theme connecting these risks is the importance of understanding the industry you're entering.

You might be an excellent manager.

You may understand financial statements and have access to acquisition financing.

But if you don't understand how contracts are priced, how customers make purchasing decisions, or how labour and operating costs behave, you can still make a costly mistake.

This is especially important in industries where the quality of revenue depends on technical knowledge.

An experienced janitorial operator may immediately recognize an underpriced contract.

Someone unfamiliar with the industry may see only the attractive monthly billing amount.

That's why I encourage buyers to develop industry knowledge or involve experienced professionals during due diligence.

The goal is to understand what you're actually buying.

How to Evaluate the Durability of Recurring Revenue

Instead of asking only whether a business has recurring revenue, I recommend examining four important characteristics.

Durability

How likely are customers to continue purchasing?

Consider historical churn, contract renewals, customer satisfaction, competitive pressure, and the importance of the service being provided.

Transferability

Will customer relationships and contracts survive the ownership transition?

Consider contract assignment provisions, change-of-control requirements, and dependence on the seller.

Profitability

Do the recurring contracts generate enough gross profit and operating cash flow?

Examine customer-level margins, labour requirements, overhead expenses, and potential cost increases.

Financeability

Can the business support acquisition debt, working capital, necessary reinvestment, and reasonable owner compensation?

Even attractive recurring revenue can create financial pressure if customers pay slowly or the purchase price is too high.

These characteristics provide a much better framework for evaluating a recurring revenue acquisition.

Recurring Revenue Is Attractive, but It Isn't Magical

I've owned rental properties in the past.

And I understand the appeal of recurring income.

When I rented an apartment for $1,000 per month, I thought about that relationship as potentially generating $12,000 over the coming year.

That encouraged me to maintain the property and attract good tenants.

Recurring revenue can create meaningful long-term value.

But even rental properties involve vacancy risk, maintenance expenses, customer turnover, and changing market conditions.

The same principles apply to other recurring revenue businesses.

You still need to understand customer retention, operating costs, competition, and the financial requirements of the company.

Recurring revenue may reduce certain risks.

It doesn't eliminate business risk altogether.

Final Thoughts: Are You Buying Predictable Income or a Fragile Customer List?

Buying a recurring revenue business can be a smart strategy.

But only if you understand the quality of the revenue you're acquiring.

Contracts can expire.

Customers can leave.

Margins can deteriorate.

Receivables can consume cash.

And some supposedly recurring revenue may actually depend on constant sales efforts.

That's why I believe buyers need to move beyond the simple idea that recurring revenue is always better.

As I explained:

"The issue is how durable, transferable, profitable and financeable is the recurring revenue after I become the owner." —David C. Barnett

That's the question that matters.

A company with recurring revenue, diversified customers, healthy margins, transferable contracts, and manageable working capital requirements can be an excellent acquisition.

But a business with high concentration, weak margins, difficult contracts, and significant customer churn may be much riskier than it initially appears.

And if you fail to recognize those risks, you could end up purchasing something very different from the predictable income stream you expected.

Don't buy a business simply because the revenue repeats. Buy it because the underlying economics make sense.

Learn How to Evaluate Recurring Revenue Businesses Before You Buy

If you're considering buying a small business, my Business Buyer Advantage program teaches you how to analyze financial statements, evaluate cash flow, investigate acquisition risks, understand valuation, and structure transactions more effectively.

You can also explore my group coaching and consulting services for additional guidance as you evaluate real opportunities.

Explore Business Buyer Advantage

If you want to understand whether recurring revenue can realistically support operating expenses, debt payments, working capital, and owner compensation, my Cash Flow Forecasting and Business Plan Writing Program can help you build a financial model and evaluate the economics of an acquisition.

Explore Business Plan School

👉 Want deeper dives like this? Join my email list at DavidCBarnettList.com for early access to videos, insights, and 7 free bonus gifts.

Monday, June 8, 2026

The Most Expensive Mistake Business Buyers Make

 


**New Video Alert!

Many people think they understand business cash flow.

Then they buy a business and discover they forgot one critical expense.

Depreciation.

In this video, I explain why depreciation and capital expenditures are some of the most important concepts in business acquisition, and why ignoring them can lead to disappointing returns and expensive surprises.

Watch the video here: https://youtu.be/x9qkUhcqzmo 

Cheers

See you over on YouTube


David C Barnett



Saturday, May 2, 2026

How to Evaluate a Business Broker Before You Buy a Business

 When buying a business, most people focus on the seller and the financials—but overlook a critical player in the deal: the business broker.

The wrong broker can delay or even kill a deal. The right one can help it close smoothly.

Don’t Go Around the Broker

If a business is listed with a broker, always go through them.



Trying to contact the owner directly can:

  • Damage trust

  • Create unnecessary friction

  • Reduce your chances of completing the deal

Respecting the process keeps negotiations professional and productive.

Understanding the Broker’s Role

A competent business broker typically handles:

  • Valuing and preparing the business for sale

  • Marketing and finding buyers

  • Assisting with deal structure and financing

In many cases, they act as an intermediary, advisor, and facilitator all in one.

The Two Types of Brokers

Not all brokers operate the same way.

Some act like “shopkeepers”—taking listings at any price and simply trying to match buyers.

Others act like “experts”—setting realistic expectations, guiding sellers, and ensuring deals are viable.

The second type is far more valuable to you as a buyer.

Why Expectations Matter

A well-prepared seller understands:

  • What the business is worth

  • What terms are realistic

  • How deals are typically structured

If the broker hasn’t set these expectations, you may face:

  • Unrealistic pricing

  • Resistance to financing terms

  • Deals that fall apart late in the process

How to Vet a Broker

Before engaging seriously, do basic due diligence:

  • Review their background and experience

  • Check their online presence and activity

  • Ask about past deals and deal structures

  • Listen for how they talk about pricing and financing

Strong brokers will provide clear, practical answers—not vague or evasive ones.

What Good Brokers Do Differently

A skilled broker:

  • Sets realistic pricing with the seller

  • Educates sellers on deal structures like financing

  • Encourages reasonable offers

  • Focuses on closing deals—not just listing businesses

This creates a smoother path for buyers to complete acquisitions

Key Takeaways

The quality of a business broker directly impacts your ability to complete a deal. Choosing brokers who set realistic expectations and understand deal structure will significantly improve your chances of success.

👉 Want deeper dives like this? Join my email list at DavidCBarnettList.com for early access to videos, insights, and 7 free bonus gifts.