The Buy Box I Part 2

**Jon:** We're not that close.

**Ryan:** Yeah. And we're separated by about 4,000 miles, so thank God for airline trackers.

**Jon:** I think it'd be dangerous if we were closer.

**Ryan:** Probably, yeah.

**Jon:** All right. So back on track. The Buy Box sounds like really it's only for big business. It's not. We know that. But does any of this apply to the $2 million owner sitting and listening right now?

**Ryan:** So let's talk about who your buyers are, right? There is not one buyer. There are four or five, depending. And so the biggest mistake owners make is that they're assuming there's one type of buyer out there, but there are more...

**Ryan:** Right. They're the same thing. It's just a different way of saying things.

**Jon:** Just trying to be funny.

**Ryan:** Ah, I doubt it. Why the long face?

So the first confession here is that there isn't one number called EBITDA. Right? I just named them all.

EBITDA, though, stands for earnings before interest, taxes, depreciation, and amortization. And I just bored myself saying that. Oh my God, I'm so glad I'm not an accountant anymore.

What it does is your P&L—

**Jon:** What's that? The title doesn't make a difference, Ryan. It really doesn't. CFO, accountant, nerd, numbers nerd. No, it's all the same thing.

**Ryan:** That's all the same. Green shirt.

**Jon:** That's right. That's absolutely right. What has my life become?

**Ryan:** Well, sorry to all the 15 listeners now.

So what your P&L spits out before anybody normalizes it is what it costs. What's normalization? Essentially, they're making a clean playing field for everybody. Some companies have a lot of depreciation, others don't. So they normalize it so they can compare businesses consistently. It's a raw number.

And almost nobody buys on this, by the way, on your EBITDA because there are other things at stake.

So what we do is call that adjusted EBITDA, recast EBITDA, or SDE. It's the same thing, different name. Your accountant strips out all the add-backs—owner perks, one-time costs, non-recurring expenses.

So, hey, we built a building and paid $150,000 for it. They take that out.

I bought a truck for my personal use. They take that out.

So this is the number you bring to the table. And if a buyer asks for your EBITDA, they almost always mean your adjusted EBITDA.

And then there's quality of earnings adjusted EBITDA. That's what the buyer decides is real after their QofE firm has gone through every add-back you submitted. This is the number you actually get paid on.

If you haven't gone through a quality of earnings review before, it is a lot of fun. It costs a lot of money just to arrive at a number that I could probably get within about 5%.

It's silly, but they want to make sure there's no funny business going on—that you don't have a rental property being deposited into your business account.

So it is necessary because we can't just take the numbers at face value. There are different accountants and different interpretations.

Then SDE—Seller's Discretionary Earnings—is a little different. I call them the same because they're roughly the same. It's the same concept, but it's for smaller deals, roughly below $1 million in cash flow.

It includes the owner's salary as part of the cash flow because we want to understand what it would cost to replace you.

If you're paying yourself $600,000 a year, but we could hire someone for $150,000, we take that difference out.

Or if you're paying yourself only $60,000 a year, we want to put it back in at a market rate of $150,000 because you're taking a haircut.

For a $500,000 cash-flow business, the owner's paycheck is most of the cash flow. So we're just trying to measure it honestly.

If the owner says, "I'm at $1.5 million EBITDA," and the buyer's QofE comes back at $1.1 million adjusted, owners usually get offended. But they shouldn't. You should have run those adjustments yourself before sitting at the table.

And a lot of these broker firms, seller broker firms, they don't get it right. That's another episode in itself.

The buyer-adjusted EBITDA typically lands 15–30% below what the seller reports, in my experience. That's because there are multiple add-backs being challenged.

Some add-backs that are typically accepted:

* One-time legal fees with documentation * One-time relocation expenses * COVID-related costs * Insurance settlements * Owner compensation above market rates

What buyers usually reject:

* A spouse on payroll who doesn't actually work * Personal vehicles and personal travel run through the business * Family members being paid significantly above market rates

Again, I'm not the IRS. You do what you have to do. We just want to get to the real number when it comes to the true value of your business.

So what we want to do is build a cushion and make sure the number is right.

**Jon:** Right. Yeah, because there's different numbers, right? And his is right, ours is wrong, or the buyer's is wrong.

**Jon:** I mean, that's convenient. It's convenient for the seller, right?

**Ryan:** Well, it's not convenient. It's math, right? So if you wrote off your truck as a business expense, Jon, the buyer's going to add it back.

**Jon:** Right. But generally the truck is a business expense. I mean, you're running a business.

**Ryan:** You drove it to your kid's hockey game on Saturday. It's not a business expense at that point.

**Jon:** I guess so. I guess it's also a limited truck as well versus just the lower-end model, right?

**Ryan:** That's right. All depends on the hubs.

**Jon:** I put a logo on it, so therefore it's a business truck.

**Ryan:** Yeah, exactly. It's one inch by one inch.

**Jon:** It's in the top left corner of the window.

**Ryan:** That's right. Right next to Denali.

**Jon:** Yeah. Yeah, exactly.

Customer concentration. You mentioned this before. You said 15 to 20% is generally the standard line. What happens if an owner is way past that?

**Ryan:** So the honest answer is that they pay for it. And sometimes the buyer will walk, right?

Let's say, here's a true story. Again, composite industries, everything's changed—names and all that kind of stuff.

A $6 million service company. Solid revenue. Nice margins.

Buyer asks for a customer concentration report.

Owner says, "Well, I'll get it to you."

Three days later, the report comes up. Top client is 43% of the revenue.

All right. We'll call him my cousin Vinny.

I used to live in Brooklyn, so I can say that.

Now picture the conversation.

The buyer asks, "What happens to revenue if my cousin Vinny leaves?"

Owner says, "He won't leave. He's my cousin Vinny."

Buyer says, "That is exactly the problem."

The relationship may die when the deal is done.

On that deal, the cousin cost the owner about $900,000 because they had to take a haircut.

One client representing 43% of revenue cost almost a million dollars.

The deal got done, but that's what customer concentration costs.

What a buyer looks at when concentration exceeds 30% is binary risk.

If that client leaves in year one, half the cash flow disappears.

That's a real risk to the buyer.

From the seller's perspective, the relationship is with you, not with the new owner.

They can't assume that relationship transfers automatically.

If it's personal—a college buddy, a longtime friend—they can't replace you in that relationship.

So seller beware: anything above 20% on a single client becomes a value-creation project.

You need to diversify.

The good news is that with a disciplined approach over 12 to 24 months, you can usually get that concentration below 20%.

And the other half of this, Jon, that people don't talk about—and here's a bonus for this segment—is vendor concentration.

COVID was a perfect example.

If all your vendors are coming from one source and that source shuts down, you can't produce goods anymore.

Making sure you're not overly reliant on a single vendor is just as important.

Even if some vendors cost a little more, diversification reduces risk.

I think the takeaway here is to start now.

Over the next 12 to 24 months, if you're thinking about selling, reducing owner dependence, or increasing business value, you need to diversify your revenue sources and relationships.

That way you're not relying on one giant contract, one giant customer, or one key relationship.

And maybe, just maybe, you can finally take a two-week vacation without your phone blowing up.

**Jon:** And it's one of the first questions a buyer asks. When the SIM or seller package comes through—

**Ryan:** Buyer asks, yep.

**Jon:** Yeah, buyer. When that package comes through, we see it every time. We open up that package and look at customer concentration.

People who know and are aware, you see it in the customer breakout. There's some sort of report that breaks out customer levels and revenue spread.

That immediately tells you they're aware of how they should be running their business and arranging their customer base so it makes maximum sense for someone coming in to buy it.

You can't hide this stuff, right?

It's going to come up in one of the first conversations because it's one of the first things buyers look at.

**Ryan:** Yeah, absolutely right. And it will definitely come out during due diligence.

**Jon:** Right, exactly.

So get ahead of it. Plan it out. If you're winning based on projects as well, and all your work comes from annual bids, that's also a risk.

A buyer looks at that and says, "Okay, hang on. What if this business is really built on handshakes, owner relationships, and reputation?"

Then I step in, and suddenly we don't win all those projects and bids anymore. Revenue drops 25%, 30%, maybe 40%.

And you mentioned $900,000 lost. That's not a rounding error, right? That's a lake house.

**Ryan:** Well, it's two lake houses if you don't put in the dock.

**Jon:** Cousin Vinny didn't even know.

**Ryan:** Cousin Vinny never knows. That's why he ended up in jail and had to get bailed out.

**Jon:** Right. Hey, Vinny. I thought he was from Jersey.

**Ryan:** Vinny was from Jersey.

**Jon:** Quick break. And this one is a company that pays Ryan's mortgage and, based on his shirt today, apparently dresses him.

**Ryan:** Wow.

**Jon:** Half the people listening just heard us describe the Buy Box and went, "Cool. I have no idea where I fit into any of that."

That's the call.

Synergy does CEPA-certified exit planning, fractional CFO, CMO, COO, M&A advisory services, and integrated financial management.

Basically every acronym Ryan has ever made me look up mid-conversation.

**Ryan:** They're real things, Jon.

**Jon:** I know that. I Googled them.

If you're a $2 million to $20 million business owner and you have no clue whose Buy Box you're in or what your numbers actually look like to a buyer, that's the call.

WeAreSynergySolutions.com.

Ryan and his team, including myself, work across North America and Latin America, which means his calendar is genuinely a war crime.

**Ryan:** It's fine.

**Jon:** It is not fine. You took a call at 4 a.m. last week.

**Ryan:** It was 5. Central.

**Jon:** Yeah. And the time zone.

WeAreSynergySolutions.com. Tell them Jon sent you.

Recurring revenue keeps coming up, and I think it relates very closely to what we've just been talking about—project-based work, bid-based work.

These aren't red flags, but they are warning signs that cause buyers to dig deeper and verify where future revenue is coming from.

Why does recurring revenue matter so much, and how does it change the picture?

**Ryan:** Well, buyers are paying for predictability in this chaotic world, Jon.

Recurring revenue is the closest thing in business to a written guarantee.

If I have two companies that both generate $5 million in revenue, but one is built entirely on one-time product sales, there are a lot of questions.

Will the projects repeat?

Did the owner personally sell them?

Will customers come back?

Do we need to constantly find new projects to replace the old ones?

Those businesses are relationship-based, bid-based, and estimate-based.

Now compare that to a company with $5 million in contracted recurring revenue for the next two years.

Whether it's subscriptions, service contracts, maintenance agreements, or recurring retainers, there is a contractual commitment I can rely on.

From a buyer's perspective, that's incredibly valuable.

I can literally walk into a bank and say, "I have $5 million of recurring revenue under contract."

That makes it easier to borrow money, secure a line of credit, finance equipment, buy a crane, or invest in growth.

Transactional service businesses typically trade at three to four times EBITDA—and that's assuming they're already well-run organizations.

**Ryan:** Same business with 50%+ recurring revenue can get between six and eight times EBITDA.

That's double.

Same EBITDA, double the multiple.

Let's make a critical distinction.

Recurring revenue is not the same as repeating revenue.

Recurring revenue is contracted. Signed paper. Subscription. Retainer.

Repeating revenue is when customers keep coming back, but there's no contract.

Buyers will often pay double the multiple for recurring revenue, not repeating revenue.

One of the highest ROI value-creation projects you can do in your business is build recurring revenue.

**Jon:** And there's an upside with recurring revenue because you can upsell and evolve the program over time to increase what you're charging and billing.

**Ryan:** Sure. Look at your Amazon Prime account.

For $14.99, you can watch videos and TV shows with ads.

For $18.99, you can watch without ads.

And I remember when Prime didn't have ads at all.

They simply changed the recurring revenue model.

What they did was increase the price just a little bit.

Who's going to miss fifty bucks a year if it means avoiding a minute and a half of ads every time?

**Jon:** Yeah, or you can listen to us for free.

**Ryan:** That's right.

We plan to increase our fees by 15% next year.

**Jon:** Yes. So zero times 15%, folks, is still zero.

**Ryan:** Still zero.

**Jon:** The value people get from our conversations.

**Ryan:** That's right.

One more tip, because this matters.

Transferable contracts.

If you're going to build project-based or recurring revenue, buyers want to know whether those contracts can transfer to a new owner.

Buyers generally prefer asset purchases.

If you do a share purchase, you're often buying potential litigation, existing liabilities, debt, and other baggage attached to the company.

An asset purchase is usually much cleaner.

However, if you structure the deal as an asset purchase, those contracts need to be transferable to the new organization.

Often it's as simple as adding a single sentence to the contract stating that the agreement is transferable.

Most customers don't have an issue with it.

But it can make the future sale process dramatically smoother.

**Jon:** Well, I think we have a couple of future episode ideas here.

Ryan is walking people through the sale process—from listings, broker relationships, letters of intent, due diligence, asset versus equity sales, and everything in between.

I think he just gave us content for future episodes.

**Ryan:** Did I sound smart for once?

**Jon:** Yeah, at the surface.

**Ryan:** Borderline.

**Jon:** And then you kept talking.

**Ryan:** Hey, marketing.

**Jon:** When I go like this, I mean stop talking.

You sounded great there, Ryan. Just be quiet now.

No, but seriously, we do this all the time.

Let's move on.

How does an owner figure out which buyer's box they're actually in?

**Ryan:** I think there are three ways to do it.

And there's one trap.

But you have to be honest with yourself.

So let's start with the trap first...

**Ryan:** Right? Do not make a sell-side M&A advisor your diagnostic.

Okay, this is going to be an episode all by itself, but here's the reality.

When you go to a sell-side broker, they're often going to give you a very optimistic valuation.

Why?

Because their fee is tied to selling your business.

The higher the valuation, the more excited you become about hiring them.

Don't get me wrong—sell-side advisors are fantastic. We are a sell-side advisor. We're not a broker, and there's a difference there that we should probably discuss in a future episode.

But the higher the number they can convince you your business is worth, the more likely you are to engage them.

It's a lot like a real estate agent. The more they can sell your house for, the higher their commission.

So yes, they're on your side. But they also have an incentive.

The challenge is that the valuation they provide is often optimistic rather than objective.

We review a lot of CIMs and SIMs on both the buy side and sell side.

When we diagnose and dissect those deals, I'd say 90% of the time the numbers aren't even in the ballpark.

The trap is being told your business is worth $2 million, only to discover that real buyers are willing to pay $1.5 million.

That's a big emotional hit.

Nobody likes hearing their baby isn't worth as much as they thought.

That's an entire episode by itself.

**Jon:** The timing is important too.

If you've developed an inflated sense of value and then real offers come in, your first reaction may be disappointment.

You might immediately dismiss a legitimate buyer because the number doesn't match what you expected.

And that's dangerous.

People spend a long time searching before they reach out to make an acquisition.

You may miss a real opportunity because your expectations were set too high from the beginning.

So this isn't about being negative toward brokers.

It's about creating the right opportunity at the right moment and making sure you're level-set from the start.

**Ryan:** Yes, absolutely.

Good point.

Wait, that's one for Jon this week.

**Jon:** That's two. I made one earlier.

**Ryan:** Half a point on that one.

**Jon:** Like brownie points with your wife. It takes forever to earn them, and then you forget to close a door and they're all gone.

It's the same system with you.

**Ryan:** Yeah, well, what have you done for me lately?

All right, let's get back into this.

**Jon:** I'll be quiet. That's what I'll do for you.

**Ryan:** Thank you. Go.

Let's talk about diagnostics.

Number one: talk to a Certified Exit Planning Advisor.

I'm a CEPA.

That's considered the gold standard.

Many of us are trained in value acceleration methodology.

Some are fractional CFOs with CEPA designations.

Others are wealth advisors, estate planners, attorneys, and similar professionals.

The point is they help you understand where you fit in the exit planning ecosystem.

If you're trying to turn a $1.5 million valuation into a $2 million valuation, talk to someone who specializes in value acceleration and exit planning.

Many CEPAs aren't compensated based on sale price, which removes some of the bias.

They can help determine which Buy Box you're in based on the factors we've discussed.

And even if you're five, ten, or fifteen years away from selling, it's worth having the conversation.

Getting into the right Buy Box is simply good business planning.

Second, look at recent transactions in your specific sub-vertical.

There are resources like BizBuySell, Axial, PitchBook, trade publications, and industry contacts.

Talk to people in your industry who have recently sold.

But be careful.

Just because someone sold for six times EBITDA doesn't mean that's your reality.

Pay attention to:

* Revenue * EBITDA * Who acquired them * Their approximate multiple * Why the buyer was interested

Buy them a beer and have an honest conversation.

Reality is far more valuable than rumors.

Third, perform an honest assessment of your own business.

And I mean brutally honest.

Ask yourself:

* What's your revenue? * What's your adjusted EBITDA? * What's your gross margin? * What's your customer concentration? * Do you have recurring revenue? * If so, what percentage? * How dependent is the business on you?

Can your leadership team run the company for two or three weeks without you?

Or can you not even leave for an afternoon?

Be honest.

That's where the truth lives.

And then there's a bonus option.

A fractional CFO with M&A experience can perform this diagnostic for you.

If they're also a CEPA, even better.

You'll get objective feedback without sale-price bias.

They can tell you where you are today and what you need to improve to move into a better Buy Box tomorrow.

**Ryan:** So, you know, I think the worst thing you can do is assume there's going to be a bidding war when your numbers are saying otherwise.

Let's make sure you're not thinking about the wrong buyer.

Focus on the buyer you actually have and make your business attractive to that person.

**Jon:** And start the process, even if you're doing some of these things yourself.

It's not that hard to gather data on many of these points.

But eventually, reach out to professionals.

For someone who isn't thinking about Buy Boxes yet, what's a realistic timeline to get into the right Buy Box and get in front of the right buyers?

**Ryan:** This might sound shocking, but it typically takes three to seven years.

That's kind of the standard exit planning timeline.

Let's take customer concentration as an example.

If Cousin Vinny represents 40% of your revenue and you want to get him down to 20%, that's probably a one- to two-year project.

If you have very little recurring revenue and want to grow it to 40% of total revenue, that's likely a two- to three-year process.

Owner dependency can absolutely be reduced, but that's also about trust, systems, and giving people the tools to make decisions without you.

That's usually an 18- to 24-month process.

Then we look at margins.

Where are you relative to your industry?

It's not like you can raise prices 25% overnight and magically fix profitability.

You'd probably put yourself out of business.

Improving margins in a sustainable way often takes one to two years.

Then we have financial reporting.

We want books that are clean, consistent, and potentially audit-ready.

That takes time.

You need reliable monthly closes, documented processes, and accurate reporting.

Then there's leadership.

You need a management team that can actually run the business.

Good operations leadership.

Good finance leadership.

Good marketing leadership.

That talent takes time to find, develop, and retain.

And while all of this is happening, one very important thing usually occurs:

Your EBITDA grows.

Sometimes significantly.

If you execute well over three to seven years, EBITDA can double or even triple.

Now we're not talking about a company generating $1 million in EBITDA.

We're talking about $3 million.

And suddenly you've moved from attracting Main Street buyers to attracting strategic buyers, private equity firms, and institutional investors.

That's a completely different Buy Box.

A completely different buyer pool.

And often a completely different valuation multiple.

And by the way, when you've reduced owner dependency, built a management team, improved margins, and strengthened recurring revenue—

You also get your life back.

You can spend three weeks in the Bahamas with your family.

And now selling becomes an option, not a necessity.

If you stack three or four of these improvements together, your multiple can go through the roof.

That's when buyers start beating down your door.

**Jon:** Yeah, it turns into a competition.

That's what every seller wants.

**Ryan:** Is it easy?

No.

Is it worth it?

Absolutely.

**Jon:** Yeah. An extra $900,000 would be pretty great.

**Ryan:** That's your lake house with a dock.

**Jon:** That's right.

**Ryan:** Well, think about it.

If I get an extra couple million dollars, I can have two lake houses with docks.

**Jon:** Side by side.

So your in-laws can stay next to you all the time.

Everybody's dream.

**Ryan:** Actually, our in-laws are on the same lake.

**Jon:** At a suitable distance away.

**Ryan:** Yes.

That's the key.

Suitable distance away.

**Jon:** What's the biggest mistake owners make around all of this?

**Ryan:** Waiting.

**Jon:** Yeah. I knew you were going to say that.

**Ryan:** Waiting until they want to sell.

Then they discover what the business is actually worth.

You need time.

You need to do a self-evaluation now and start planning.

A lot of owners say:

"I'm tired."

"I want out."

"Two years max."

Great.

Then start today.

Because you'll be in a much better position two years from now than you are today.

Every year you invest in value creation can add high six figures—or even seven figures—to the value of the business, depending on its size.

So ask yourself:

Is waiting a couple of years worth bringing home millions of dollars more?

Daily decisions become weekly actions.

Weekly actions become quarterly goals.

Quarterly goals become annual progress.

Annual progress becomes your three-, five-, and seven-year plan.

It all connects.

The biggest mistake is not giving yourself enough time and not making value creation a focused effort.

Because when you do make it a priority, your business runs better.

You're more profitable.

You're happier.

Your life improves.

And your wife can drop off tea in the middle of a podcast episode and you don't even care.

**Jon:** No, you just roll with it.

That's great.

Last question.

What should owners do this week?

What's the first step?

**Ryan:** Three moves.

About an hour each.

A little homework, but time very well spent.

First, write down your actual numbers on one page.

What's your trailing 12-month revenue?

What's your adjusted EBITDA?

Start with EBITDA or net income and normalize it.

And come on—we're not the IRS.

Take out the personal stuff.

The golf club membership.

The fishing boat.

Anything that's not truly part of running the business.

Get to the real number.

**Ryan:** And that's all we really care about, right?

What's your gross margin?

Who's your top customer as a percentage of revenue?

What's your recurring revenue as a percentage of total revenue?

What's your owner dependency score?

Get those six numbers onto one page.

You can do it in an hour.

Second, Google three recent transactions in your industry.

Look at the revenue range.

Look at the buyer type.

That's your comp set.

That's where you live—or where you want to live.

Third, book a 30-minute call with a CEPA, a fractional CFO, or someone with M&A experience who doesn't have a vested interest in selling your business.

Don't go straight to a sell-side broker.

Go to someone objective.

Show them your numbers and ask:

"Which Buy Box am I in?"

"Which Buy Box am I close to?"

"What do I need to improve to become more attractive to buyers?"

Because more demand creates a higher price.

When you have multiple buyers competing, you have leverage.

When you have one buyer, you're usually taking their offer.

Without doing this work, you're building in the dark and hoping somebody notices you.

So go do these three things.

I promise it'll be worth it.

And let us know how it goes.

Leave a comment or send us an email.

We'd love to hear about it.

**Jon:** Yeah, I mean, clearly we love this stuff.

This almost turned into a double-length episode because we really enjoy getting into the details.

We genuinely want to know how it goes.

So basically:

Six numbers.

Three Google searches.

One phone call.

A cup of tea.

And that's the whole show.

**Ryan:** That's it.

It only took us 40 to 50 minutes to say it.

**Jon:** All right.

So what's the takeaway?

**Ryan:** Just like when you opened your business, buyers don't accidentally find you.

They filter you.

They're looking at revenue range.

EBITDA.

Margins.

Customer concentration.

Recurring revenue.

Industry fit.

Those six numbers determine whether your business even makes it onto the first review list.

Some analyst somewhere is going through a stack of opportunities, deciding which companies deserve a closer look.

What we want to do is intentionally build toward someone's Buy Box.

That takes three to seven years of focused, smart work before you ever plan to sell.

But when you do that, you'll likely sell for substantially more than you would today.

And stop being the seller who's sitting around waiting for a phone call.

Build a business buyers actively want.

If you build it, they will come.

**Jon:** Awesome.

That's a wrap.

**Ryan:** Excellent.

**Jon:** 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 and share this episode with another business 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 today 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 on the treadmill and start building something you can actually sell.