Before you agree to the PRICE, know the COST. 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 find one who knows the model. 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. That’s the gap between the PRICE of a business and the COST inside it. PRICE is what you and the seller agree to. COST is what you inherit: Continuity: what has to keep working when ownership changes. Optionality: where the business has alternatives, and where it leans on one customer, supplier or channel. Single points of failure: where too much depends on too little. Transferability: what stays when the seller leaves. Before the LOI, the seller’s SDE or EBITDA is the only valuation input on the table, and nobody has tested it. QoE confirms the numbers after you’ve signed. Even confirmed numbers only tell you how the business ran under its current owner. Here’s what that can cost you. 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 it’s 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 $1.50 is a 3X return. The other way the bill arrives is after the LOI. Months of exclusivity and five to six figures in QoE, legal and lender work, just to learn what you could have checked before you signed. Then you walk away and absorb it, go back to reprice, or close anyway. This isn’t only a small-buyer problem. Bain looked at 65 private equity deals and found 71% fell short of projected margins, by 330 basis points on average. Rising asset prices hid it in the returns. If you’ve closed a few deals in an industry you know, you bring your own mechanic. If this is your first or second, you don’t have that bench yet. That isn’t a mark against you. It means the inspection matters more. Finding a problem before you sign can change the bet. Finding it after close only changes how you manage the bet you already made. Full article: The COST to Be the Boss → redactedredacted