In the last piece we said that two businesses with the same earnings can fetch very different multiples, and that the difference comes down to risk. This piece is about the specific risks that cost owners the most. The reason they are worth knowing is simple: most of them are fixable, and most owners get to them a year too late.
Here is the mindset to start with. A buyer is not inventing reasons to pay you less. When they knock a discount off your price, they are pricing the odds that your earnings survive the handoff. Close the risk, and the discount goes with it. These are the four that move the number most.
This is the single biggest discount in the lower middle market. If the company runs on your relationships, your bids, and your head for the schedule, then a buyer is not really buying a business. They are buying a job that only you know how to do.
Buyers have a blunt way of testing this. They ask a version of one question: if the owner vanished for 60 days with no phone and no email, would the business keep running and would revenue hold? If the honest answer is no, expect a real haircut, or an offer loaded with earnouts and holdbacks designed to keep you tied to the business long after you wanted out.
The fix is not fast, which is exactly why it pays to start early. A tenured general manager, department heads who own their lanes, and technicians who stay for years are worth real money at sale. A business that clearly runs without its founder can trade a full step above one that does not.
Not all revenue is valued the same. A dollar from a repeat service call is worth more than a dollar from a one-off new-construction bid, even though they land in the bank the same way. New-construction and project work tends to come with thin margins, slow collections, lumpy cash flow, and heavy exposure to the housing cycle. Service, repair, and replacement work is steadier, higher-margin, and holds up when the economy softens.
Buyers in the trades often look for something close to a 70/30 split favoring service and replacement over installation and new construction. A company weighted toward service can command a clear premium over a new-construction-heavy competitor of the exact same size.
This is the one that moves the needle hardest in home services. Maintenance memberships, service agreements, and recurring plans get valued almost like subscriptions, because they are predictable, they lock out competitors, and they quietly tee up future repair and replacement work.
Here is the rough map buyers use. If recurring plans are under 15 percent of revenue, you are seen as volatile and priced near the bottom of your range. Push past 30 percent and you move into the upper tier. Get past 50 percent and even a modest business can start attracting the kind of multiples usually reserved for much larger platforms. If you do one thing to your business before a sale, building a real recurring base is often it.
If a single customer is more than about 20 percent of your revenue, or your top five are more than half of it, buyers get nervous, and the banks financing them get more nervous still. The worry is straightforward: lose that account after closing and the earnings they just paid for walk out the door. Expect a discount, or deal terms that push part of that risk back onto you.
The fix is to broaden the base well before you sell, so that no single logo can sink the ship.
None of these is a trick, and none of them is personal. Each one is a real question about whether your earnings will still be there a year after you hand over the keys. The good news is that every item on this list is within your control, given enough runway.
Owners who spend two or three years turning themselves into the least important person in the building, growing a recurring base, and spreading their customer risk do not just sell for more. They sleep better while they still own the place.
In the next piece we will look at the flip side. Even after you have cleaned up the risks, a buyer still has to be able to see your true earnings in the first place. That is where add-backs come in, and it is where a surprising amount of value is either captured or quietly left on the table.
Next, the flip side: the earnings hiding in your P&L.