The COST to Be the Boss

Know the COST in the business before you agree to the Price of the business.

by Kevin Goodwin | Scaling Business Architects

If you were buying a used Mustang, you'd have a mechanic look at it before you agreed on a price. If you knew Mustangs well enough to be dangerous, you'd go a step further and find one who knows the model: where the problems hide, which changes should worry you, and which ones look bad but are cheap to fix.

The inspection doesn't make the decision for you. It tells you what you're buying. A worn clutch matters at one price and hardly at all at another. Some findings send you home, and you're glad you found them first.

Buying a business, most of us do it in the wrong order. We read the financials, talk with the seller, build the model, line up the money, and sign the LOI. By then the price is set for a business we haven't tested under new ownership. I'd rather you find out what you're buying while you can still change what you pay for it.

That's the difference between the Price of a business and the COST inside it.

Price is what you and the seller agree to, in dollars and terms. COST is what you inherit along with the assets, customers, people and cash flow. It's the set of conditions that decide whether the business keeps working once it's yours. Those conditions don't make a business bad. They tell you what you're actually buying.

There are four parts to COST:

• Continuity: what has to keep working when ownership changes.
• Optionality: where the business has alternatives, and where it leans hard on one customer, supplier, distributor, employee or channel.
• Single points of failure: the people, relationships, processes or systems whose loss would stop the business in its tracks.
• Transferability: what belongs to the business, and what still belongs to the seller or a few key people.

Every business carries COST. A big customer, a supplier that would be hard to replace, an employee who knows a critical process better than anyone, a founder who still makes the calls the org chart says belong to someone else. None of that makes a business a bad buy. What matters is whether you understand it early enough to do something about it.

Experience changes what you know to ask

If you've closed a few deals in an industry you know, you already bring your own mechanic. You've learned which small facts deserve a second look, and you have operators who've seen this kind of business before. Bain found that 75% of frequent acquirers met or exceeded their synergy targets. There's no matching number for first-time buyers, but the experience gap is real.

If this is your first or second deal, you don't have that bench yet. BDC found that among Canadian small and mid-sized acquirers, 55% had no dedicated acquisition team and 41% had no plan defining what the acquisition was for. That isn't a mark against anyone. It means the inspection matters more.

The research gets thin as deals get smaller. The firms that publish it work above this market, so the buyers with the least experience are the ones nobody studies. That doesn't prove those buyers skip the work. It does mean nobody's data is going to warn you about what you're walking into.

Nobody in the deal is failing you, either. The seller knows the business as it runs today. Your accountant, attorney, lender and broker each do their jobs well. None of those jobs is answering the question only you can ask: what has to stay true for this business to work when I own it?

What the numbers can't tell you

Before the LOI, the seller's SDE or EBITDA is the only valuation input on the table, and nobody has tested it yet. QoE confirms the numbers, after the LOI. Even confirmed numbers only tell you how the business ran under its current owner.

That gap shows up in the results. Bain looked at 65 private equity deals and found that 71% fell short of their projected margins, by 330 basis points on average. Rising asset prices covered the shortfall in the returns. The operation didn't deliver what the model expected, and the market hid it. Bain doesn't say why the operations fell short, and I won't pretend it does. It does tell you that a deal can look fine on paper while the business underneath it underperforms.

When Deloitte asked dealmakers why deals fell short, 30% pointed to sales that didn't materialize, 28% to talent issues and 24% to inadequate diligence. Sales and talent come down to people, relationships and what the company knows how to do.

Grant Thornton found that 57% of deals delivered less than 75% of what was expected. Only 52% of respondents tracked results after close, and only 33% used an acquisition scorecard. You can't test an expectation you never wrote down.

A company can show years of steady sales while the seller personally owns the biggest customer relationships. It can show low turnover while one employee holds knowledge nobody else has. It can have a supplier relationship that has worked for decades and no real alternative if that supplier changes terms. None of that contradicts the financials. These are facts about the business that produces them.

The bill comes one of two ways

The first way is overpaying.

Say you put $1 on a business you expect to be worth $5 in five years. The $1 was borrowed. The business, as it actually runs, was worth $0.50, and realistic growth was 3X, not 5X. Five years later the business is worth $1.50. You still owe the $1 plus interest, and you keep a fraction of what you planned on. Buy the same business at $0.50 and that same $1.50 is a 3X return.

The second way is finding out after the LOI. You spend months of exclusivity and five to six figures on QoE, legal and lender work to learn what you could have checked before you signed. Some of what you find tells you the business isn't viable on the terms you agreed to. From there you have three choices:

• walk away and absorb the cost,
• go back to the seller to reprice, which costs both of you time and trust,
• or close anyway, carrying what you found.

This isn't a claim that most deals fail. Pitcher Partners found that 85% of the Australian dealmakers it surveyed said their deals met or exceeded expectations. The point is narrower than that. When a deal goes wrong over something you could have seen, what decides your options is when you saw it.

Timing decides your options

Take a company with three large customers. The seller has managed those relationships personally for fifteen years, the customers are happy, and the purchase history is strong. All of that is good news. None of it tells you whether those customers are loyal to the company or to the owner.

Sometimes it's the company, and the relationships carry over with a good handoff. Sometimes it's the owner, and the loyalty leaves when they do.

What you can do about it depends on when you learn it:

• Before the LOI, it shapes whether you pursue the deal and on what terms. You can ask for more evidence, plan for the seller transition you'd need, set conditions that matter to you, or decide it's more dependency than you want to take on.
• After the LOI, that early work gives the rest of your diligence a head start. Your QoE, legal and lender teams know where to dig. Pre-LOI work feeds that diligence. It doesn't replace it.
• Before close, it shapes the handoff: a longer seller transition, a retention plan for a key employee, a deliberate transfer of customer relationships.
• After close, you can still respond, but you already own the problem.

The fact didn't change. Your options did.

COST informs Price. It doesn't set it.

Suppose most of a company's sales go through one distributor. The relationship has lasted twenty years and both sides are happy. That history is a strength. It's also a dependency. One buyer already has other channels and barely notices it. Another buyer depends entirely on this one relationship and sees the same fact very differently. The fact is the same either way. What it means depends on you.

The same is true of a whale customer, a sole-source supplier, a key employee, or a seller who still sits in the middle of every important decision. Concentration isn't automatically a defect. Long tenure isn't automatically proof that it transfers.

Protective Ascent identifies and tests those continuity and transferability conditions before the LOI. It shows you the evidence where the earnings may not carry over at the stated figure. You and your advisors decide what that means for price and terms. Not every weakness is a discount. Some lead to a longer transition or a retention deal, and some change nothing. What matters is that you don't set the Price without knowing the COST.

The COST to Be the Boss

Finding a problem before you sign can change the bet. Finding it after close only changes how you manage the bet you already made. And the cheapest bad deal is the one you never close, which no study of closed deals will ever count.

Continuity: what will keep working. Optionality: where the business has alternatives. Single points of failure: where too much depends on too little. Transferability: what stays when the owner leaves.

Every business will have answers you like and answers you wish were different. You're not looking for a business without COST. You're looking for the COST while you still have time to decide what it means.

Before you agree to the Price, know the COST.

Talk to us before you sign the LOI.

Source List

Source Notes

Bain & Company: “Integrating Due Diligence to Build Lasting Value” (2019). bain.com/insights/integrating-due-diligence-to-build-lasting-value/

Bain & Company: M&A Report 2026, frequent-acquirer synergy findings. URL to confirm.

BDC (Business Development Bank of Canada): “Buying a Business: A Winning Strategy for Purchasing Another Company in Canada” (April 2019). bdc.ca/en/about/analysis-research/buying-business-winning-strategy-for-purchasing-another-company-in-canada

Deloitte: “The State of the Deal: M&A Trends 2020.” mkto.deloitte.com/rs/712-CNF-326/images/mna-trends-2020.pdf

Grant Thornton: Deal Value Curve Survey (2019). URL to confirm.

Pitcher Partners and Mergermarket: Dealmakers report (2022). pitcher.com.au/insights/media-release/mid-market-ma-levels-to-boom-in-2022/