The Buy Box: What Buyers Look For Before They Make an Offer

Most owners think that selling works like this. A buyer shows up, they make you an offer, you negotiate like the old days, a little horse trade in here and there, bada-boom bada-bing, you got a deal. And that is not how it works. It only works in Hollywood. They sound Italian there. Hey, let's forget about it. That's your mafioso restaurant there. That's right. Buying and selling. That's right. Today's episode is brought to you by Napco Painting Inc., based out of Napa, California area. Full-service commercial and residential painting in the kind of place where the houses cost more than your business, and the paint had better be perfect.

Napa is a real place where real people live, Jon. Right. And most of these people, real people, own wineries. That's exactly why Napco fits this episode perfectly, though. They're the professionals you call when you actually want the job done right the first time, not the third time after you tried it yourself on a Saturday because YouTube told you it would be easy. I've done that. Of course you have.

I think we all have. The shirt told me. Here's why Napco fits the buyer side of this episode too. We're about to spend the next 40 minutes talking about what buyers actually want when they shop for a business. Recurring commercial contracts, repeatable crews, predictable margin, real equipment, and a customer list that doesn't all live or die on one giant account. That's exactly the profile a strategic acquirer or roll-up sponsor circles on a list.

Genuinely, yes. Skilled trades have been one of the hottest M&A categories the last five years. But you shouldn't call them because of any of that. You should call Napco because your office looks like it was painted in 2004 in the meeting with your investors on Tuesday. napcopaintinginc.com, tell them from bought out to burnt out, all the way around, from Burnt Out to Bought Out, sent you. Buyers are going to shop, right?

They have analysts whose entire job is filtering out companies through that checklist before anyone, a senior, sees the deal. If you don't fit in the box, some unknown random person kills it before you even know the deal was dead. You'll never get the call and you'll never know why. It's kind of like when you open up your business the first time, you open up, open sign, and there wasn't a flood of customers that came in, right? That's the same thing with selling your business, that you're just going to sit there wondering when the offers are going to start showing up, and you won't know why they aren't, right? So by knowing the box, it's the difference between building a business and building an investment, right? Same thing when you renovate a house, you buy a house, you renovate it, it can be a home, but it can also be an investment, right? You can sell it for more money than you paid for it. So that's

that's the thing that we're going to be discussing today, is making you aware of the box and where you fit in and how you can do something about it. Awesome. Yeah, and we can shed more light, being buyers of businesses, we know exactly the numbers we're looking at. Like if there are numbers that ping in a certain column, you know, the multiple, the purchase multiple, it would be one that we look at on a regular basis. I think you mentioned that.

You know, EBITDA and the price of the business. Understanding how much, how quickly you get your cash in and out of the business as well are the things that buyers are wired into. And those things, we put it into our buy box and I can run through some of the columns. I've got it up here on another screen. I can run through some of the columns that flesh out some of the metrics that you just mentioned, but when we see those numbers, we go, oh, okay, this looks like a really good opportunity.

So yeah, shed a bit more light on the multiple, because people, and we've mentioned this before in previous podcasts, while I pull this up and pull up a couple of other different columns, the multiple's the number one, right? Well, Jon, there's six filters that they go through, and the multiple is a derivative of all those six filters. The multiple is the end product. Okay, so what typically happens is buyers are looking for a revenue range, right?

Is your revenue going up? Those kind of things? No. What they're looking for is each specific buyer has their own range that they're looking for. So institutional PEs who are lower middle market want something between $10 and $100 million in revenue, right? Most funds won't even look at you if you're less than $25 million, right? If you're below $10 million revenue, you're not on most radars at all.

Strategic acquirers, though, can flex in that lower range if there's a synergy story and it's strong, pun intended. And then they also look at the EBITDA floor. So what you were talking about, and that's the real gate, is PE institutional companies in that lower market tend to want between $3 and $5 million, there are funds that want higher, right? And then the higher your EBITDA, the higher the multiple can be, okay?

If you're under $2 million EBITDA, you're looking at three to six X, maybe seven X, depending on what's going on here. So when you're looking at, you know, $1 or $2 million EBITDA, your buyer selection is far less, right? And then if it's below $1 million, it's more of an independent sponsor or a search fund, and it's definitely not going to be in a PE range, right?

And so diligence will cost the same on a $4 million deal as it does on a $40 million deal, right, same lawyers, same accountants, same operational partners, but the bigger deals win every time. They're the ones that get the most love because there's the more action there and the payoffs better, 1% of deal, want 2% of deal, whatever that is, $40 million versus $4 million, you do the math. Third one is margin profile, right? And they're really looking at how you compare to your peers, right? If your industry is 18%, but yours is at 8%, right? They're thinking, well, what's broken or what are you hiding, right? So even profitable businesses get penalized for being below comp margins. So again, revenue range, EBITDA floor, margin, all those play into also the, you know, the multiple. Then we get into the last three, customer concentration, right? Nobody wants the 40% customer, the client, right? Hey, my

cousin Vinny, you know, he's 40% of my revenue, don't worry, he's good for it, you know, for another couple years. That's a big risk that they're going to take. So if you have a high customer concentration where a few people make most of your sales, the buyer's either going to walk out or he's going to build a huge discount on that, and that could be a multiple or two, like you alluded to.

And then we're looking at recurring revenue. So this is the gold standard. This is where we can put it to the bank, there's contracts, there's maintenance, subscriptions, there's all kinds of things. So if it's above 40%, you're really attractive to buyers, so you're going to have a big multiple versus a transactional company where you always have to get another project, always have to get another project, those kind of things, those also get discounted. And the last one is that they're looking at your industry or subvertical. So you know, we're rolling up commercial HVAC companies in the Southeast. If you're not an HVAC company in the Southeast, you could be the bell of the ball. They're not looking for it because it doesn't match their thesis. It doesn't match their buy box. Gotcha. Awesome. That'll do it for this episode of From Burnt Out to Bought Out. If anything we talked about today hit home, do us a favor. Share this

episode with another owner who needs to hear it. And if you're sitting there thinking they're talking about me, good. That's the first step. Head to the show notes and book a free triage call with our team. No pitch, no pressure, just a real conversation about where you are and what's possible. You can also find us on LinkedIn and at wearesynergysolutions.com. New episodes drop every week. Until next time, stop running the treadmill and start building something you can actually sell.