Why Working Capital Mistakes Kill Business Sales

One of the biggest reasons business sales fail has nothing to do with profit—it’s a misunderstanding of working capital.

Many business owners believe that if their company is valued at a multiple of earnings, that number represents what they’ll walk away with. It doesn’t.

That number is enterprise value—the value of the cash flow assuming everything needed to run the business is included. https://youtu.be/on4RmO0egMM 

The Missing Piece: Working Capital

Working capital includes cash, receivables, and inventory required to operate the business.

If a buyer has to inject additional money after the purchase to keep things running, their total investment increases—and the deal quickly stops making sense.

For example, a business priced at $900,000 may actually require $1.1M+ when working capital is added. Buyers will either lower their offer or walk away.

Why Deals Fall Apart

From a buyer’s perspective, working capital is no different than equipment. If a key asset is missing, they must replace it—and adjust the price accordingly.

This is where many sellers go wrong. They assume:

• Cash is “theirs”

• Receivables belong to them

• Working capital is separate from the sale

In reality, it’s part of what makes the business function.

The Real Fix: Prepare Early

The root issue is often poor balance sheet management—too much inventory, slow collections, or excess cash tied up in operations.

To fix this:

• Streamline inventory

• Improve receivables collection

• Reduce unnecessary capital needs

Most importantly, start early. Buyers rely on historical data, so improvements should be made well before going to market.

A Smarter Way to Think About Value

If you want to sell successfully, think like a buyer.

Ask yourself:
Would I pay this price and still earn a reasonable return after funding the business?

If the answer is no, the deal won’t work—no matter what a broker says.

Key Takeaways

Working capital is essential to business operations and must be included in the value buyers are paying for. If not properly managed, it will reduce offers or prevent a sale entirely.

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The Subtle Red Flags of a Struggling Business (And the Smartest Way to Test a New One)

 Sometimes the biggest insights in business don’t come from spreadsheets or boardrooms—they come from observation.

Two thoughtful questions once sparked a conversation that led straight to the heart of how businesses fail… and how new ones can quietly prove themselves before risking too much.

Let’s unpack both sides of that coin. https://youtu.be/-QQyx_F4RTg 

Part 1: The Quiet Warning Signs a Business Is Running Out of Gas

When people think about diagnosing a troubled company, they imagine diving into financial statements, ratios, and forecasts.

But if you’re on the outside looking in, you rarely get access to those.

Fortunately, you don’t need them.

One of the clearest indicators of financial strain is something far more visible:

Deferred maintenance.

When a business stops fixing the little things, it’s often because it can’t afford to—or doesn’t want to admit it can’t.

Look for clues like:

• Burned-out lights that stay burned out
  
  

• Broken fixtures that linger for weeks
  
  

• Peeling paint, worn signage, or neglected cleanliness
  
  

• Equipment patched together instead of properly repaired
  
  

These aren’t just cosmetic issues. They’re evidence of cash preservation mode.

When money gets tight, owners delay anything that doesn’t immediately generate revenue. Unfortunately, those small compromises accumulate, slowly eroding customer experience—and often signaling deeper financial trouble beneath the surface.

In many cases, the condition of the premises tells you more than the balance sheet ever could.

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Part 2: The Simplest Way to Know If a New Business Idea Will Work

Now flip the perspective.

Instead of evaluating a struggling company, imagine you’re considering launching something new. The big question becomes:

How do you know whether the market actually wants what you plan to offer?

Many aspiring entrepreneurs fall into the trap of over-planning:

• Endless research
  
  

• Complex projections
  
  

• Expensive build-outs before the first customer appears
  
  

But there’s a far more practical approach.

Try to make a sale before you build the business.

Yes—sell first. Then build.

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A Smarter Kind of Market Research

Consider this strategy:

Before investing heavily in infrastructure, test demand using the smallest possible commitment:

• Run advertisements
  
  

• Set up a phone line or landing page
  
  

• Offer the service before fully developing it
  
  

• Even resell someone else’s product temporarily
  
  

If customers respond, you’ve validated demand.

If they don’t, you’ve saved yourself from building something nobody wanted.

This kind of real-world testing beats theoretical analysis every time. Markets don’t lie. Buyers either show up—or they don’t.

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Why This Approach Works So Well

Because it answers the only question that truly matters:

Will someone pay for this?

Not “Do people say they like the idea?”
Not “Does the spreadsheet suggest profitability?”
Not “Do friends think it’s clever?”

Actual demand is proven only when money changes hands.

By testing early, you shift risk away from capital investment and toward small, controlled experiments. That’s how experienced operators evaluate opportunities without betting the farm.

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The Big Lesson: Watch Behavior, Not Just Numbers

Whether you’re assessing an existing business or exploring a new venture, success leaves clues—and so does failure.

• Struggling businesses reveal themselves through neglect.
  
  

• Promising ideas prove themselves through early sales.
  
  

In both cases, reality speaks louder than theory.

If you train yourself to observe these signals, you’ll make better decisions than most people who rely solely on reports, assumptions, or gut feelings.

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Seller’s Lawyer Killed the Deal (What Went Wrong?)

 

Lawyer Killed the Business Sale? How to Prevent Legal Disputes From Destroying Your Deal

Imagine spending months working toward the sale of a small business.

You've found a serious buyer. The seller is interested. Due diligence is progressing, and both parties appear to agree on the major terms.

Everything seems to be moving toward closing.

Then the lawyers get involved.

Suddenly, there's a disagreement about when the final purchase agreement should be negotiated. Deadlines begin approaching. The buyer becomes concerned about losing their deposit, and the seller starts questioning whether the transaction should happen at all.

Eventually, the entire deal collapses.

That's the situation described in a Reddit post from a business broker who believed the seller's lawyer had ruined a transaction.

The broker also contacted me through LinkedIn and pointed me toward the discussion.

After reviewing the story, I think there's a lot more to learn here than simply blaming one attorney.

The real problem may have involved the structure of the Letter of Intent (LOI), how the transaction was managed, and whether the parties had the right legal advisors involved.

Let's examine what happened, what may have gone wrong, and how business buyers, sellers, and brokers can reduce the risk of experiencing the same problem.

The Business Sale That Fell Apart Over a Share Purchase Agreement

The story came from a post in Reddit's business broker community titled Lawyer Just Killed a Deal.

According to the broker, the transaction had been progressing smoothly.

The buyer wanted to purchase the business.

Due diligence appeared satisfactory.

Both sides seemed aligned on the transaction.

The proposed acquisition was structured as a share purchase, meaning the buyer would acquire shares of the company rather than purchasing selected business assets.

The Letter of Intent included a condition requiring both parties to agree on the final Share Purchase Agreement (SPA) before the buyer removed the conditions.

This was important because the buyer's deposit would become non-refundable once those conditions were waived.

The buyer wanted to know exactly what they were agreeing to before putting that money at risk.

That sounds reasonable, doesn't it?

The Seller's Lawyer Refused to Negotiate Before Conditions Were Removed

The buyer's lawyer drafted the Share Purchase Agreement and sent it to the seller's lawyer.

That's when the disagreement began.

According to the broker, the seller's lawyer refused to negotiate the SPA until after the buyer removed the conditions.

Think about what that meant.

The buyer was being asked to make their deposit non-refundable before knowing whether the final binding purchase agreement would contain acceptable terms.

Share purchase agreements can be complicated documents.

They often include representations, warranties, indemnities, closing obligations, and other provisions that can materially affect the parties' rights and responsibilities.

I've seen purchase agreements that were twenty pages long.

I've also seen agreements that were a hundred pages long.

These are not documents you should agree to without understanding their contents.

The buyer understandably didn't want to waive the condition before the final agreement was settled.

Meanwhile, the seller's lawyer continued insisting that the conditions be removed first.

The transaction stalled.

Then, on the deadline for removing the conditions, the seller announced that something didn't feel right and decided not to proceed.

The deal died.

The broker was understandably frustrated.

But was the lawyer entirely responsible?

I'm not convinced we have enough information to say that.

Problem #1: The LOI Created an Unnecessary Deadline Trap

Let's start with the Letter of Intent.

When I worked as a business broker, and when I teach people how to buy businesses through Business Buyer Advantage, I generally recommend beginning with a non-binding offer or agreement, with appropriately drafted exceptions for any provisions intended to be binding.

Why?

Because buying a business involves significant investigation and negotiation.

The buyer needs an opportunity to evaluate the company.

Financing may need to be arranged.

And the final legal documentation must be negotiated.

In the Reddit story, the LOI included conditions covering these matters.

But there was one important structural problem.

The agreement established a deadline when the conditions had to be removed, after which the deposit would become non-refundable.

That structure resembles what we often see in residential real estate transactions.

For example, a buyer might have ten days to complete a home inspection.

Once the inspection condition is removed, the transaction proceeds under the agreed contract.

But buying a business is different.

The final legal documentation can be considerably more complicated.

And sometimes the parties need additional time to work through the details.

Why I Would Separate the Conditions

Here's how I approached this when I was a business broker.

I would establish specific deadlines for certain activities.

For example:

• A defined period for completing financial and operational due diligence

• A deadline for arranging financing, where applicable

• Timeframes for other agreed investigations or approvals

But I would treat approval of the final purchase documentation differently.

The transaction would remain subject to both parties and their legal advisors agreeing on the final documents.

That condition wouldn't necessarily disappear simply because the due diligence deadline had passed.

This distinction is important.

The buyer might complete due diligence and decide the business is acceptable.

But if the lawyers subsequently discover that they cannot agree on essential contractual terms, the buyer should not automatically lose their deposit merely because the earlier investigation period has expired.

Of course, the precise rights and obligations depend on how the agreement is drafted and the applicable law.

That's why the structure needs to be established carefully with qualified legal advisors.

Why Buyer Confidence Matters

When I was working with business sellers, I regularly emphasized the importance of making buyers feel comfortable proceeding.

As I explained:

"we have to make it absolutely certain that they understand that their deposit money is never at risk" —David C. Barnett

That reflects the buyer-protective approach I preferred in structuring transactions.

It doesn't mean every deposit in every business acquisition is legally refundable.

The agreement must expressly establish the relevant rights and conditions.

The principle is that buyers need to understand their financial exposure before committing to the transaction.

If they believe they're being forced into an uncertain legal arrangement, they may decide not to make an offer or proceed with the deal.

Problem #2: The Business Broker Lost Control of the Transaction Process

The next issue concerns the broker's role.

One thing that stood out to me in the Reddit story was how the communication appeared to be happening.

The buyer's lawyer drafted the Share Purchase Agreement.

The document went to the seller's lawyer.

The seller's lawyer then communicated with the seller.

And the broker seemed to be learning about the resulting problems after they developed.

Now, we don't know every conversation that took place.

The broker may have been more involved than the Reddit post suggests.

But the story raises an important question.

Who was coordinating the transaction and making sure everyone understood what needed to happen next?

When I worked as a business broker, I considered that coordination a central part of my job.

Why I Preferred to Coordinate Communication Between the Lawyers

In the transactions I handled, I usually had direct contact with the buyer, seller, and both parties' legal advisors.

I would discuss the LOI with the lawyers and help establish expectations for the work ahead.

I also preferred to review draft purchase agreements before they were circulated between the legal teams.

Some lawyers initially found that approach unusual.

But after working with me, many came to appreciate the efficiency.

The reason was simple.

I wanted to catch obvious differences between the LOI and the draft agreement before those differences created unnecessary negotiations.

This wasn't about replacing the lawyers or providing legal advice.

It was about managing the business terms and keeping the transaction organized.

The lawyers remained responsible for advising their respective clients and negotiating the legal protections.

Problem #3: The Purchase Agreement Might Not Match the LOI

Here's something that surprises many first-time business buyers.

Lawyers don't necessarily draft every purchase agreement from a blank page.

They often begin with an existing template or precedent document.

That's perfectly understandable.

Business purchase agreements contain many recurring provisions, and using an established starting point can save time.

But it also creates opportunities for mistakes.

The Problem With Boilerplate Contracts

I've seen agreements containing provisions that didn't relate to the actual transaction.

Why?

Because the lawyer started with a template and didn't remove everything that was irrelevant.

I've even encountered draft agreements containing the names of companies from other transactions.

That happens when someone reuses an earlier document and doesn't update it completely.

The bigger problem is that a standard template may contain terms that differ from what the buyer and seller agreed upon in their LOI.

And if nobody identifies those differences early, they can lead to unnecessary disagreements.

How I Reviewed Draft Purchase Agreements

My approach was straightforward.

First, the buyer's lawyer would prepare the initial agreement.

Then I would compare it with the LOI.

I would look for obvious inconsistencies involving matters such as:

• Purchase price and payment terms

• Seller financing arrangements

• Assets or shares being transferred

• Closing conditions

• Transition and training commitments

• Other commercial terms previously negotiated

If something appeared inconsistent, I would raise it with the drafting lawyer.

Once the business terms appeared aligned, the document could move forward for the seller's legal review.

Again, this was a commercial consistency check.

It wasn't a substitute for legal review, and the broker should never interfere with a lawyer's professional judgment or a client's ability to obtain independent legal advice.

The objective was to identify avoidable problems before they turned into expensive disputes.

Problem #4: The Seller May Have Been Confused About What Was Happening

Now let's consider the seller's perspective.

According to the Reddit post, the seller became increasingly emotional, confused, and stressed as the lawyers disagreed.

That isn't surprising.

Selling a business can be one of the largest financial transactions of someone's life.

The owner may have spent decades building the company.

They may be retiring or making a major lifestyle change.

And now they're hearing conflicting information about deadlines, deposits, conditions, and legal agreements.

Without clear communication, that situation can become overwhelming.

Why Setting Expectations Matters

Imagine a more coordinated process.

The broker has reviewed the draft agreement for consistency with the LOI.

The buyer's lawyer has addressed the commercial discrepancies identified.

The broker then informs the seller that the draft is ready for the seller's lawyer to review.

The seller understands what stage the transaction has reached.

They know the legal advisor is being asked to examine the document, identify concerns, and provide advice about the proposed terms.

That doesn't eliminate disagreements.

But it gives everyone a clearer understanding of the process.

The broker can help explain the commercial context while the lawyer advises the seller on the legal implications.

When those roles are properly coordinated, there's less opportunity for confusion.

Why the Broker Needs to Be the Transaction Coordinator

As I explain:

"the broker really is supposed to be the quarterback in managing all this stuff." —David C. Barnett

That doesn't mean the broker should control the lawyers' independent advice or prevent direct lawyer-to-lawyer communication when it is needed.

It means someone needs to keep track of the transaction's progress, outstanding commercial issues, responsibilities, and deadlines.

The broker is often well positioned to coordinate those activities.

Without that coordination, relatively small disagreements can become major obstacles.

And when the parties are already under emotional pressure, those obstacles can threaten the entire transaction.

Problem #5: The Parties May Have Hired Lawyers Without the Right Experience

The Reddit broker concluded that the seller's lawyer may have approached the business sale too much like a real estate transaction.

That raises a broader issue.

Not every lawyer has the same experience with small business acquisitions.

A lawyer may be excellent at residential real estate transactions.

They may have helped you purchase a home, prepare a will, or handle a rental property.

But that doesn't automatically mean they're experienced in negotiating share purchase agreements or complex business acquisitions.

These transactions can involve specialized issues.

For example, a share purchase may require careful consideration of the company's existing liabilities, representations and warranties, indemnification provisions, and other legal risks.

An asset purchase may involve different questions about which assets and obligations are being transferred.

The structure matters.

And the legal advisor should understand it.

Why Familiarity Isn't Enough

Many business owners choose lawyers based on existing relationships.

They've worked with someone before.

They trust them.

And they assume that person can handle the business sale.

Sometimes that's perfectly reasonable.

But in other situations, the lawyer may not regularly work on acquisitions.

That lack of familiarity can lead to delays, unnecessary disagreements, or missed issues.

For a transaction that may represent the seller's retirement savings or the buyer's largest investment, choosing an appropriate legal advisor is important.

How to Choose the Right Lawyer for a Small Business Acquisition

In my Exit Ready program, I provide business owners with guidance on evaluating business brokers before hiring one.

That includes using a structured interview process to understand the broker's experience and capabilities.

I think business brokers could apply a similar approach to helping clients evaluate legal advisors.

For example, a broker could prepare a guide explaining what buyers and sellers should look for when hiring a business transaction lawyer.

The guide could include questions like these.

Questions to Ask Before Hiring a Business Transaction Lawyer

1. How many small business acquisitions or sales have you handled in the past year?

You want to understand whether business transactions are a regular part of the lawyer's practice.

2. How often do you represent buyers versus sellers?

Experience on both sides can help a lawyer understand the competing concerns involved in negotiating a transaction.

3. How many share purchases and asset purchases have you handled?

These transaction structures involve different considerations.

Relevant experience matters.

4. What is your process for reviewing an LOI and preparing the final purchase agreement?

This can help reveal how the lawyer approaches negotiations and manages the transition from preliminary terms to binding documents.

5. How do you coordinate with business brokers, accountants, lenders, and other advisors?

A business acquisition often involves multiple professionals.

Clear communication between them is important.

6. How do you identify and resolve disagreements without unnecessarily delaying the transaction?

You want an advisor who can protect your interests while also helping you understand the practical implications of different options.

7. What legal work is likely to be required, and how are your fees structured?

Legal costs can increase when negotiations become prolonged.

Understanding the expected scope and billing arrangements can help avoid surprises.

8. Have you handled transactions of a similar size and complexity?

A lawyer experienced primarily in very large corporate acquisitions may not necessarily approach a small owner-operated business sale in the most practical way.

The objective isn't simply to hire the lawyer with the most impressive credentials.

It's to find someone whose experience fits the transaction you're trying to complete.

How Business Brokers Can Help Clients Select Legal Advisors

When I was working as a business broker in Moncton, I regularly dealt with several local lawyers.

Over time, I developed a sense of who had experience with these transactions and who was easier to work with.

When clients asked for recommendations, I could provide several names for them to consider.

Today, the market is changing.

Buyers and sellers increasingly participate in transactions involving people in different cities or regions.

Some lawyers now market their business acquisition services across much larger geographic areas.

That means buyers and sellers may have more options.

But it also makes evaluating the advisor's qualifications important.

A broker who provides clients with a structured attorney-selection guide could help them ask better questions and make more informed decisions.

The final choice of legal advisor should remain with the client.

And each party needs independent advice appropriate to their interests.

Could the Seller Have Used the Lawyer to Escape the Deal?

There's another possibility worth discussing.

What if the seller had already decided they didn't want to sell?

The Reddit post says the seller ultimately withdrew because the situation didn't feel right.

That may have been a genuine emotional reaction to the legal disagreement.

But it's also possible the seller had developed doubts earlier.

We simply don't know.

I've encountered situations where a party wanted to withdraw from a transaction but was reluctant to say so directly.

Sometimes the legal process becomes the place where those concerns surface.

Why a Seller Might Not Want to Withdraw Directly

Depending on the listing agreement, a seller might face contractual consequences for withdrawing a business from the market while an active offer exists.

There could be provisions dealing with fees or compensation owed to the broker.

The exact consequences would depend on the agreement.

That creates a possible incentive for a seller to avoid being the person who openly ends the transaction.

In some circumstances, an advisor may be asked to take a negotiating position that makes the transaction difficult to complete.

I'm not saying that's what happened in this Reddit story.

There isn't enough evidence to establish that.

But it's one possible explanation for why the seller's lawyer appeared unwilling to negotiate the final agreement before the condition deadline.

Why You Shouldn't Automatically Blame the Lawyer

A lawyer's position may reflect legal advice, instructions from their client, or concerns that aren't fully described in a third-party account.

We don't have the complete LOI.

We don't have the correspondence between the lawyers.

And we don't know everything the seller was thinking.

So blaming the attorney alone may overlook the real problem.

The more useful question is how the transaction could have been structured and coordinated to reduce the chances of this situation developing.

Two Changes I Would Make to Prevent This From Happening Again

If I were advising the broker who shared this story, I would focus on two practical improvements.

1. Help Clients Choose Lawyers With Relevant Business Transaction Experience

Don't assume that every lawyer is equally familiar with small business acquisitions.

Create a structured guide that helps buyers and sellers evaluate potential legal advisors.

Encourage them to ask about experience with share purchases, asset purchases, due diligence, purchase agreements, and transaction coordination.

This can reduce the risk of delays caused by unfamiliarity with the process.

It also helps clients understand why selecting the right legal advisor matters.

2. Separate Due Diligence Deadlines From Final Agreement Approval

This is the structural change I consider especially important.

A buyer can have a defined period to complete due diligence.

They can also have a deadline to arrange financing.

But approval of the final purchase documentation can be treated as a separate condition.

That way, completing due diligence doesn't automatically mean the buyer must accept legal terms that haven't been negotiated.

The agreement should clearly establish what happens to the deposit if the parties cannot agree on the final documentation.

As I mentioned earlier, the precise drafting must be handled by qualified legal advisors.

There are legitimate competing concerns here.

A seller may not want to remain committed indefinitely while a buyer continues negotiating.

And a buyer needs protection against being forced to accept unacceptable legal terms.

The goal is to establish a process that manages both parties' risks without creating an unnecessary deadline trap.

Why This Matters for Both Buyers and Sellers

It's easy to view a failed transaction as simply a disagreement between two parties.

But the consequences can be significant.

For the buyer, a failed deal may mean lost time, legal expenses, due diligence costs, and a missed opportunity.

For the seller, it may mean restarting the sale process after months of negotiations.

The business may have experienced disruption.

Employees may have become concerned.

And the owner may be forced to delay retirement or another important life decision.

That's why transaction management matters.

A good business sale process isn't simply about finding a buyer and agreeing on a price.

It's about moving the transaction from initial agreement to closing while controlling risk.

That requires appropriate legal advice, clearly structured conditions, organized communication, and realistic expectations.

The Hidden Cost of Poor Communication Between Advisors

Legal costs can become substantial when advisors repeatedly exchange drafts containing unresolved commercial disagreements.

Imagine a buyer's lawyer preparing a purchase agreement using standard provisions.

The seller's lawyer reviews it and identifies several terms that don't match the LOI.

They respond with revisions.

The buyer's lawyer reviews those revisions.

Then another draft is prepared.

Each exchange takes time.

And each lawyer may be billing for that work.

Some negotiation is unavoidable and necessary.

But unnecessary discrepancies between the LOI and the purchase agreement can often be identified earlier.

That's one reason I preferred to review the commercial terms before the legal teams became involved in extensive back-and-forth negotiations.

The goal wasn't to eliminate legal scrutiny.

It was to make the process more efficient.

A well-coordinated transaction can help everyone focus on the issues that genuinely require negotiation.

What Buyers Should Do Before Removing Conditions

If you're purchasing a business, don't treat condition removal as a minor administrative step.

Before waiving conditions, you need to understand what you're agreeing to and what happens afterward.

In particular, make sure you and your lawyer have addressed the following:

1. The final agreement: Have the essential purchase terms and legal protections been agreed upon, or is approval of the final documentation still an outstanding condition?

2. The deposit: Under what circumstances does it become non-refundable, and what happens if the transaction cannot close?

3. Due diligence: Have you completed the investigations necessary to understand the business and its risks?

4. Financing: Are the necessary funds available, and have any required financing conditions been satisfied?

5. Closing obligations: What must each party do before the transaction can be completed?

6. Remaining contingencies: Are there unresolved issues that could prevent closing or create additional financial exposure?

The answers will depend on the transaction documents and applicable law.

But the principle is straightforward.

Don't waive contractual protections without understanding the consequences.

Your lawyer should help you evaluate those risks before you make a binding commitment.

Final Thoughts: Don't Let a Poorly Managed Process Kill a Good Business Deal

The Reddit story raises an interesting question.

Did the seller's lawyer kill the deal?

Maybe the lawyer contributed to the breakdown.

Maybe the seller got cold feet.

Or maybe the transaction was structured in a way that created unnecessary pressure at exactly the wrong moment.

We don't have enough information to know for certain.

But there are lessons here for anyone buying or selling a small business.

The LOI needs to establish a sensible path toward closing.

The buyer shouldn't be forced into unreasonable uncertainty about the final agreement and deposit.

Both parties should have legal advisors who understand the type of transaction involved.

And someone needs to coordinate the process so that commercial disagreements don't turn into avoidable crises.

As I explain:

"a lot of the time that lawyers spend in going back and forth with each other can be avoided if the paperwork actually matches the LOI to start with." —David C. Barnett

That's one of the biggest takeaways from this situation.

Good transaction management doesn't eliminate every disagreement.

But it can prevent unnecessary problems from becoming deal-killers.

And when you're dealing with the sale of a business that someone has spent years building, that's worth taking seriously.

Get Help Buying or Selling a Small Business

If you're preparing to sell your business, my team and I can help you understand the process before you meet your first buyer.

Through our zero-commission business selling program, we can help you understand what your business may be worth, prepare the information package buyers need, run confidential advertising, and coordinate the selling process.

You can also explore my Exit Ready program and the second edition of my book, How to Sell My Own Business, to learn more about preparing for a successful exit.

Explore How to Sell My Own Business

If you're planning to buy a business, my Business Buyer Advantage program provides online training, group coaching, and consulting services covering the acquisition process.

Learn how to evaluate opportunities, structure offers, manage due diligence, and understand the risks involved before committing your money.

Explore Business Buyer Advantage

For more articles, videos, and educational resources about buying, selling, financing, and managing small and medium-sized businesses, visit my website.

Visit DavidCBarnett.com

If you're interested in the financial side of business transactions, including how owners, buyers, sellers, lenders, and advisors should think about company and equipment values, explore my book Business and Asset Values.

Learn More About Business and Asset Values

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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 

Why Goodwill Matters When Buying A Business

 

***New Video Alert!

Everyone loves a bit of good cheer, but what exactly is Goodwill?

This week, some basic terminology and how it’s often misused when people are talking about buying and selling businesses.

Check it out in this week’s new video: https://youtu.be/p_F_OJt-iLY 

Cheers

See you over on YouTube

David C Barnett

#smallbusiness #mergersandacquisitions #M&A 

Silver Tsunami 2025 Explained | Baby Boomer Business Sales & Closures

The Silver Tsunami: Are Baby Boomer Businesses Really a Buying Opportunity?

Millions of baby boomer business owners are approaching retirement. Does that mean we're about to see an enormous wave of profitable small businesses for sale at bargain prices?

That's the promise behind the so-called silver tsunami business opportunity.

You've probably heard the story. Baby boomers own millions of businesses, they're getting older, and eventually they'll need to sell. With so many businesses entering the market, prices should fall, creating incredible opportunities for aspiring entrepreneurs.

It sounds logical.

But after years of working with small business buyers and sellers, I think this narrative leaves out some very important realities.

Not every business is worth buying. Not every business owner is prepared to sell. And not every profitable business can support the financing required for a new owner to purchase it.

I've been questioning the silver tsunami narrative for years. Back in 2019, I discussed it with Mike Finger in an interview called Surfing the Silver Tsunami.

The concerns we raised then remain relevant.

So let's examine what the silver tsunami actually means for small business acquisitions, why many baby boomer businesses may never be sold, and where I believe the real opportunities exist.

What Is the Silver Tsunami in Small Business?

The term silver tsunami describes the anticipated wave of business ownership transitions as baby boomers retire.

The basic argument is straightforward.

Millions of businesses are owned by people approaching retirement age.

Eventually, those owners will want to exit.

That should create a significant increase in businesses available for acquisition.

And if the supply of businesses rises faster than buyer demand, the assumption is that prices will fall.

An Entrepreneur Magazine article published in January 2025 described approximately 12 million baby boomer-owned businesses as potentially available for transition in the United States.

It's an attention-grabbing number.

But there's a big difference between a business owned by someone approaching retirement and a business that's actually available, transferable, profitable, and worth purchasing.

That's the distinction I think gets lost in much of the online conversation.

Why Millions of Baby Boomer Businesses Won't Necessarily Be Sold

Here's something I've learned from reviewing financial statements from hundreds of businesses.

A business can be successful for its current owner without being a particularly attractive investment for someone else.

Suppose someone owns a business that generates $100,000 annually for them.

That sounds pretty good.

But what if managing that business requires 50 or 60 hours of work every week?

And what if someone with similar skills and experience could earn $100,000 working for another company?

In that situation, the owner may have created a job rather than a valuable, transferable business.

The business supports their lifestyle, but it doesn't necessarily generate meaningful earnings beyond the value of their own labour.

This is a distinction I think every aspiring business buyer needs to understand.

A Business That Pays Its Owner Isn't Necessarily a Good Acquisition

Imagine buying that business for $400,000.

Now you have to operate it, service the acquisition debt, maintain the equipment, and deal with unexpected expenses.

If the business only generates enough cash to compensate someone for managing it, where is the money going to come from to repay your investment?

This is one reason I don't believe the silver tsunami will automatically produce an enormous inventory of attractive acquisitions.

Some businesses simply don't generate enough cash flow to justify a meaningful purchase price.

Others may be profitable only because their current owners have paid off the equipment and other investments over decades.

A buyer who must borrow money to purchase those same assets faces a completely different financial situation.

The Business Succession Planning Gap

Even when a business is profitable, that doesn't mean it's ready to be sold.

This is another important problem with the silver tsunami narrative.

Many business owners assume that when they're ready to retire, they'll advertise the business, find a buyer, and complete the transaction.

But selling a business is much more complicated than that.

A buyer needs to understand the company's financial performance, operating systems, customer relationships, employees, and future risks.

And the seller needs to demonstrate that those elements can be transferred successfully.

Why Exit Planning Matters

In my original discussion, I referenced Canadian surveys suggesting that many business owners expected to exit within the following decade, while only a small percentage had actionable succession plans.

The exact figures and survey dates should be independently verified before being treated as current statistics.

But the underlying issue is something I encounter regularly.

Business owners are often experts at delivering their products or services.

They're not necessarily experts at selling businesses.

They may have spent decades learning how to operate their companies without ever learning what a buyer or lender needs to see before approving an acquisition.

This creates what exit-planning professionals often call the succession planning gap.

Owners want to exit, but their businesses aren't ready to change hands.

What Makes a Business Transferable?

Buyers want confidence that the company will continue generating cash flow after the current owner leaves.

That means they need to understand how the business operates.

Are there documented procedures?

Can employees make decisions without the owner?

Will customers continue doing business with the company after the sale?

Can a new owner maintain the company's profitability?

If those questions can't be answered convincingly, the buyer may decide the risk is too great.

And that brings us to a possibility that doesn't receive nearly as much attention as the promise of bargain acquisitions.

The Silver Tsunami May Cause More Business Closures Than Sales

What happens when a baby boomer business owner wants to retire but can't find a buyer?

Sometimes the business simply closes.

The owner sells the equipment, collects outstanding receivables, pays remaining obligations, and shuts down operations.

It's not necessarily the retirement outcome they hoped for.

But it may be the only practical option.

This is why I think the silver tsunami could have a very different effect from what some online commentators are predicting.

As I put it in my discussion:

“The silver tsunami may wash away businesses rather than float them into new hands.” —David C. Barnett

That's a very different outcome from millions of successful companies changing ownership at discounted prices.

Business Closures Create Opportunities Too

Interestingly, this doesn't mean the silver tsunami will have no economic opportunities.

Suppose a local business closes because its owner retires.

Its customers still need the products or services they were purchasing.

Where will they go?

Probably to other businesses in the same market.

That creates opportunities for existing competitors.

A plumbing company might gain customers when another plumbing company closes.

A local manufacturer might receive new inquiries when a competitor shuts down.

And a service business might be able to expand without purchasing another company's assets or assuming its liabilities.

In some cases, the opportunity may be to capture customers from retiring competitors rather than acquire the competitors themselves.

I think that's an important part of the silver tsunami discussion that often gets overlooked.

Will the Silver Tsunami Make Small Businesses Cheaper?

One of the most popular claims about the silver tsunami is that a flood of businesses for sale will create a buyer's market.

The logic is based on supply and demand.

More businesses for sale should mean lower prices.

But small businesses aren't interchangeable commodities.

A profitable company with reliable cash flow, experienced employees, established systems, and reasonable capital requirements isn't equivalent to an owner-dependent business with declining revenue and aging equipment.

They're entirely different investment opportunities.

Good Businesses Still Attract Strong Buyer Demand

When I worked as a business broker during the recession around 2009 and 2010, I noticed something interesting.

If I listed a good business that operated during normal weekday hours and generated more than $100,000 in seller's discretionary earnings, I could receive around 25 inquiries within the first 48 hours.

That was during a recession.

And it illustrates something important.

There has long been strong demand for businesses that offer attractive cash flow and manageable operating requirements.

Inflation has changed what buyers consider attractive earnings, but the underlying principle remains.

A good business doesn't automatically become cheap simply because other businesses are entering the market.

In fact, experienced buyers may compete aggressively for the relatively small number of businesses that meet their acquisition criteria.

Why Seller's Discretionary Earnings Can Mislead New Buyers

I see another problem developing alongside the silver tsunami hype.

People with little business experience are being encouraged to purchase companies based on simple multiples of seller's discretionary earnings.

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

It generally reflects earnings available to an owner-operator before certain adjustments, including the owner's compensation.

But here's the important part.

SDE isn't the same thing as passive investment income.

An Example of Overpaying for a Small Business

I came across a university student discussing a plan to purchase a business generating between $250,000 and $700,000 in SDE.

The student expected to pay three to five times SDE, operate the business for several years, and eventually hire a manager.

I found the assumptions concerning.

Let's use the lower end of that range.

Suppose you purchase a business generating $250,000 in SDE.

You pay three times SDE.

That's a purchase price of $750,000.

Now suppose the market value of your full-time work managing that business is $100,000 annually.

After accounting for that labour, you're left with approximately $150,000 before considering acquisition debt service, taxes, and capital expenditures.

You've effectively paid five times that adjusted $150,000 earnings figure.

And that's before evaluating whether the company's cash flow is sustainable.

What happens if you pay five times SDE instead?

The financial pressure becomes even greater.

This is why I get concerned when people talk about buying businesses based on simple valuation multiples without understanding the underlying economics.

You need to understand the difference between SDE and EBITDA before making acquisition offers.

And you need to understand how the purchase price affects your ability to operate the business after closing.

Why Capital Expenditures Matter When Buying a Business

Another factor that gets overlooked in small business acquisition discussions is capital expenditure, commonly called CapEx.

CapEx includes spending on equipment, vehicles, machinery, and other long-term assets.

Imagine you're considering two businesses.

The first is a consulting firm with relatively little equipment.

The second is a manufacturing company with expensive machinery that needs periodic replacement.

Both generate similar EBITDA.

But the manufacturing business may require substantial ongoing capital investments to maintain its earnings.

If you borrow heavily to acquire that company, you'll need enough cash flow to service the debt and replace equipment when necessary.

A valuation based only on EBITDA may not fully reflect those future cash requirements.

This helps explain why some businesses are difficult to sell even when their current owners are earning a reasonable living.

The existing owner may have paid off the equipment years ago.

A new buyer has to finance the acquisition and may also need to fund future replacements.

The economics can change dramatically.

Seller Financing Is Another Barrier to Business Acquisitions

Even when a buyer finds a profitable, transferable business, the transaction still has to be financed.

Most buyers don't simply write a cheque for the entire purchase price.

They contribute some of their own money and arrange financing for the balance.

That financing might involve a bank, an SBA-backed loan in the United States, or financing provided by the seller.

And seller financing can be particularly important when traditional lenders won't provide the full amount required.

Why Buyers and Sellers Disagree About Financing

In my original discussion, I referenced a BizBuySell survey reporting that 62% of buyers expected seller financing, while only 23% of sellers were willing to offer it.

Those were survey findings from the period discussed in the transcript, not verified current market figures.

But the mismatch illustrates a challenge I encounter regularly.

Buyers often want sellers to finance part of the transaction.

Sellers frequently prefer to receive their money at closing.

So how do you bridge that gap?

It starts with understanding the relationship between the buyer and seller.

Don't Ask for Seller Financing Before Building Trust

One of the mistakes I see inexperienced buyers make is asking sellers for financing during their very first conversation.

Think about what you're doing.

You're meeting someone who doesn't know you.

They don't understand your experience, your financial position, or your plans for the business.

And you're immediately asking them to lend you money.

Why would they feel comfortable doing that?

As I've explained when discussing seller financing:

“You don't go and meet a seller on the first day and say, hey, by the way, will you finance this for me?” —David C. Barnett

There are ways to structure seller financing even when a seller initially resists the idea.

But those conversations require preparation, negotiation, and trust.

Simply asking every seller whether they'll finance your acquisition isn't a serious strategy.

Why Retirement Doesn't Automatically Mean a Business Will Be Sold

There's another assumption behind the silver tsunami narrative that I think deserves attention.

People often assume business owners sell because they reach retirement age.

But retirement is only one reason people exit their businesses.

Other common reasons include burnout, boredom, fatigue, divorce, relocation, and poor health.

In other words, business sellers come from many age groups.

And some highly successful business owners may never need to sell.

Imagine someone who has built a profitable company with strong management systems and capable employees.

They may be able to retire from daily operations while continuing to own the business.

Why would they necessarily sell an asset that produces attractive cash flow?

The assumption that every baby boomer business owner will eventually put their company on the market simply doesn't reflect how all privately owned businesses operate.

Where the Real Silver Tsunami Opportunity Exists

So if the silver tsunami doesn't guarantee a flood of cheap, profitable businesses, where is the opportunity?

I believe it's with prepared buyers who know exactly what they're looking for.

Not people who want to buy any business they happen to find.

Not people who believe they can purchase an unfamiliar company and immediately hire someone else to run it.

I'm talking about buyers who understand a particular industry, know how to evaluate businesses, and have the resources needed to complete an acquisition.

Know Exactly What Kind of Business You Want

I regularly encourage buyers to develop clear acquisition criteria.

What industry do you understand?

What size of business can you afford?

What kind of operating experience do you have?

What level of cash flow do you need?

What capital expenditure requirements can you manage?

What risks are you prepared to accept?

If you can't answer those questions, you're probably not ready to start making offers.

Prepare Your Financing and Advisory Team

A serious buyer should understand their available financing before pursuing a transaction.

You also need appropriate professional advisors.

That may include an accountant, lawyer, lender, and experienced acquisition consultant.

When you identify a business that meets your criteria, you should be able to evaluate it efficiently and decide whether further investigation makes sense.

Be Ready to Act on the Right Opportunity

One of the members of my Business Buyer Advantage group coaching program has completed multiple acquisitions across different countries.

He's able to pursue opportunities because he knows what he wants, understands the economics, and has developed a repeatable acquisition process.

He doesn't need to spend months trying to decide whether a business fits his objectives.

He can evaluate an opportunity, make a decision, and move forward when the numbers work.

That's the kind of buyer who can benefit from ownership transitions.

And those are the buyers you'll be competing against.

Buying a Business Isn't a Passive Investment

I want to address one final part of the silver tsunami hype.

There's a growing narrative that you can buy a boring business, install a manager, and collect the profits while someone else does the work.

I think this is dangerous advice for inexperienced buyers.

Small businesses are risky.

Customers can leave.

Key employees can resign.

Equipment can fail.

Competitors can change their strategies.

And the new owner may discover that the seller performed important tasks that weren't properly documented.

If you buy a business in an industry you don't understand, you're going to have to learn.

The question is whether you can afford the mistakes you'll make during that learning process.

As I warned in the original discussion:

“The question is, can you afford to survive long enough until you learn?” —David C. Barnett

That's especially important when you're financing the acquisition with substantial debt.

If you invest nearly all your available cash into the down payment, you may not have enough money left to handle unexpected problems.

Keep Financial Reserves After Closing

One of the most important recommendations I make to buyers is to maintain financial resources outside the money they're investing in the transaction.

You may need additional cash during the transition.

Perhaps you lose a major customer.

Maybe a key employee leaves.

Or an unexpected equipment problem creates a large expense.

These things happen.

And the first few years after an acquisition can be particularly challenging.

You need enough financial flexibility to manage those problems without immediately putting the business at risk.

What the Silver Tsunami Means for Business Owners Planning to Retire

If you're a baby boomer business owner, I think the silver tsunami discussion should motivate you to prepare rather than assume buyers will be lining up.

Start by understanding what your business is actually worth.

Then examine whether the company is transferable.

Are your financial records reliable?

Can someone else manage the operation?

Are important processes documented?

Would a buyer be able to finance the acquisition?

And how long would it take to correct the problems you discover?

Some improvements may require several years.

That's why waiting until you're ready to retire can be a costly mistake.

The earlier you understand your business's likely selling price and the obstacles to a successful transaction, the more options you'll have.

The Bottom Line: Is the Silver Tsunami Real or Just Hype?

The demographic shift is real.

Millions of baby boomer business owners will eventually step away from their companies.

But that doesn't mean millions of attractive businesses will become available at bargain prices.

Some businesses will be sold.

Others will be transferred within families or to employees.

Some owners will retain ownership while professional managers operate their companies.

And many businesses may simply close.

Meanwhile, strong businesses with sustainable cash flow will continue attracting serious buyers.

That's why I don't believe the silver tsunami is a shortcut to easy business ownership.

The real opportunity isn't waiting for millions of cheap businesses to appear. It's becoming the kind of prepared, knowledgeable buyer who can recognize and successfully acquire a good business when one becomes available.

And if you're a business owner approaching retirement, the opportunity is to start preparing now so your company has a realistic chance of being sold rather than shut down.

Get Help Buying or Selling a Small Business

If you're serious about buying a business, my Business Buyer Advantage program provides online training, group coaching, and consulting services to help you evaluate opportunities, understand financing, negotiate transactions, and manage acquisition risks.

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