Owner Conversations

Learning From Conversations Maria (Owner): Thanks for coming in. I know you’ve both reviewed the numbers, so I’m happy to address the points you flagged. The company’s stable, profitable, and we’ve built this over 22 years. We’re over 200 employees now, and the operation has strong systems in place. James (Buyer 1): The business is impressive. The margins are strong, and the retention on both customers and staff stood out. But we need to talk about concentration risk. Your top two customers represent about 45% of annual revenue. That’s a meaningful dependency from an acquisition standpoint. Maria: It’s true. Two customers make up 45%, but they’ve each been with us over a decade. One for 16 years, the other 11. Contracts renew consistently, and our service levels are one reason they stay. That kind of loyalty isn’t easy to replicate. Daniel (Buyer 2): Longevity helps, but concentration still affects valuation. We have to underwrite the downside. If one customer shifts vendors or consolidates supply chains, the revenue impact is immediate. That kind of exposure pushes risk higher than a more diversified book. Maria: I understand that. But you’re also looking at a business with extremely predictable orders. Food manufacturing isn’t a speculative market for us. These are recurring accounts, and the customer relationships are institutional, not personality-driven. James: Understood. The second issue is capacity. You’re running at roughly 95%, correct? Maria: Yes, depending on the quarter. We’ve optimized the floor as much as we can. We can squeeze some scheduling efficiency and minor throughput gains, but not a major increase. Daniel: That means the next phase of growth requires capital expenditure. Probably a facility expansion or a second site. Maria: A second site would likely be the long-term answer. Expanding here is difficult. The building already occupies nearly the full footprint of the parcel. There’s some flexibility for minor additions, but not enough for meaningful production scale. James: That’s the concern. We’re not just buying cash flow; we’re buying future return. If the company is nearly maxed out physically, then growth requires us to deploy more capital immediately. That changes our model. Maria: But you’re also acquiring a very strong platform. The workforce is exceptional. Most of our supervisors have been here 10+ years. Turnover is low. Training is strong. In this industry, operational consistency and labor reliability are major assets. Daniel: We agree. Your team is one of the strongest parts of the business. It lowers transition risk considerably. We also like that customer retention is so deep. That has real value. James: Still, our investment criteria targets a 30% annual return. To achieve that, we have to factor in the concentration risk and the limited organic expansion. The purchase price has to reflect those constraints. Maria: What kind of adjustment are you talking about? James: Based on our model, we’d discount compared to a similar company with diversified customers and room to expand on-site. The business quality is high, but the risk profile narrows our acceptable entry point. Maria: You’re discounting for future risks, but the existing earnings are proven. This company generates strong cash flow now. You’re not buying a turnaround. Daniel: Absolutely. But from our side, if we’re paying full market multiple and then also funding a relocation or second plant within a few years, our ROI falls below threshold. We have to build in that expected capital cost up front. Maria: So in your view, you’re valuing the current operation but subtracting for the expansion investment you anticipate making. James: Exactly. If the business had 20% idle capacity and land to double the footprint, that’s a different valuation. Here, expansion is possible, but it requires a larger strategic decision and more capital. Maria: I can appreciate that. But I would also argue you’re buying something hard to build: a loyal workforce, long-standing customers, and a proven operating culture. That reduces execution risk significantly. Daniel: It does, and that’s why we’re still very interested. We’re not questioning the strength of what you’ve built. We’re just saying the structure of the revenue and physical limits mean our offer will need to reflect a more conservative entry multiple. Maria: I’m open to discussing structure if price is your issue. Earn-outs tied to customer retention or expansion milestones might bridge some of that gap. James: That could help. If customer concentration remains stable and revenue expands after capex, there may be a way to align valuation expectations. Daniel: That’s worth exploring. We see a strong company here. We just need a deal that meets our return requirements while accounting for the risks we’d be taking on. Maria: Fair enough. Then let’s work through a structure that recognizes both: the risks you’re pricing and the strength that already exists. Fade Out Sellers and Buyers Often View Deals Differently A common dynamic in selling a business is how differently sellers and buyers talk about value depending on which side of the table they’re sitting on. Sellers often present their company through the lens of blue-sky potential, emphasizing untapped growth, expansion opportunities, and all the upside that a new owner could unlock. At the same time, many sellers will say, quite reasonably, that a buyer should not expect to pay today for profits that may or may not happen tomorrow. Yet buyers often reverse that logic. They may not want to pay full value for what the company is earning today because they see red-sky concerns about tomorrow, customer concentration, facility limitations, industry changes, or future capital needs. It’s a convenient shift in perspective, and many sellers accept that reasoning without fully examining it. The reality is simpler: the seller has to determine what price reflects the years of blood, sweat, and sacrifice it took to build the company. The buyer has to decide what price makes more sense than acquiring a comparable company elsewhere or building one from scratch. Somewhere between those positions lies a deal, if both sides can reach it. Negotiation is ultimately a dance. Each side studies

Tom (Seller): Alright, Steve. I think we’re close, but I want to make sure we’re on the same page with a few points before we move forward. First off, we’re talking about an inventory transfer of about $1.2 million. However, there are some items that we’ve been phasing out and may be outdated. I’m sure we can agree that the remaining inventory has some solid value—around $900K—but we’ll need to figure out a fair way to address the less valuable stock. Steve (Buyer): Right. And, look, Tom, I’m aware of the inventory, but I think we both know that a good portion of that stock is essentially dead weight. Outdated product, expired materials—things I’m not going to resell. I’m not going to pay full value for that. I’m happy to accept a reasonable write-down on the total. Maybe, we cut the valuation of the inventory down to half—call it $500K? I’m sure you can understand that I need to protect myself here. Tom (Seller): I can see your point, Steve, but we’ve been working hard to move through those outdated items. I’d say a fair reduction would be closer to 30%, and that’ll reflect the items we’ve been clearing out over the last few months. But if you want to go lower, we can work something out on the back end, maybe in future performance terms or an earnout structure. Steve (Buyer): Hmm. I’m not opposed to some flexibility, but let’s not get too far from reality here. Now, about the customers—I’ve looked over your client list. We already have over 90% of those accounts. We’re effectively competing for the same customers, and there’s no way I’ll pay anything for those accounts. No goodwill. No transfer of value. Your customers are already my customers. Tom (Seller): But, Steve, my company has a well-established brand, and I’ve spent years building those relationships. Surely that has some value? Even if you already serve many of them, the transition is going to require some level of goodwill. I’d expect something for that. Steve (Buyer): Tom, I understand where you’re coming from. But honestly, my team has been handling those customers for years as well. There’s little incremental value in those relationships for me to justify a purchase price. And frankly, many of your clients might just stick with me because we have more competitive terms. There’s no tangible transfer of goodwill here. So, I’m not paying for customers. I’ll only pay for the assets, the inventory that I can actually use, and the employees that add value. Tom (Seller): Alright, I can live with that on the customer side, but let’s talk about the employees. I’m hoping that the key personnel will stay on board. I’d expect that there’s some value in them—especially the senior team. You’ll get stability for the transition. What do you think? Steve (Buyer): Employees are definitely important, but let’s be honest: not all of them are valuable. We’ll keep the core team, for sure—your sales manager, your operations guy, the lead technician. But I’ve heard there’s some tension, especially with your key manager, Kyle. You know as well as I do that he’s not exactly a fan of mine, or of my company. I’ve dealt with him before in direct competition and it’s been rocky. That’s a concern for me. Tom (Seller): Ah, Kyle. Yeah, I can see how that might be a sticking point. He’s been a top performer for years, but he’s definitely got a chip on his shoulder when it comes to you. I’ll have to have a serious conversation with him about the future, and if we’re going to close this deal, we may need to work out some kind of incentive to keep him on board. I’ll talk to him, but I can’t guarantee he’ll play ball with you right off the bat. Steve (Buyer): Look, I’m not trying to make this personal. But we’ve been competing for these customers, and now you want me to pay for an environment where the key manager doesn’t even like me? That’s a red flag. If Kyle doesn’t want to work for me, that’s a real problem. His team follows him, and if he’s not on board, then his department could fall apart quickly. Tom (Seller): Fair point. I’ll make sure to have a conversation with him. If I can’t convince him to stay, maybe we’ll have to adjust his compensation package or negotiate his exit, but I can’t have him being a thorn in your side, either. I’ll take care of that. But the rest of the team is solid. If we’re going to move forward, I think the employees—most of them—will be happy to join your company. Stability is a big part of what they want. Steve (Buyer): Alright, Tom, I appreciate your effort on the manager situation. Let’s circle back to the inventory then. If we agree on a reduction, say down to about $500K, and we’re on the same page with the customers—essentially, no goodwill there—I think we can move on to finalizing the structure of the deal. But I’m still not seeing the full value on the table. I’d need the inventory terms adjusted, some level of flexibility on performance post-sale, and a clean handover of the employees that matter. Tom (Seller): I think we can work with that. I’m not going to leave any stone unturned here. I’ll have those conversations with Kyle and the team. And I’ll also get with my accountants to adjust the inventory numbers and work out that reduction. But we’re close, Steve. Steve (Buyer): I agree, Tom. Let’s get this done right, and we’ll both be happy in the end. Tom (Seller): Sounds fair. There are countless variations of conversations around buying and selling businesses—and many of them end with the deal quietly slipping into the trash bin. But every so often, a conversation stands out for a different reason. Based on my experience, the more optimistic outcomes tend to come from a deeper