When the owner's price is too high

You've found a good company, the owner is willing to talk, and then they name a price you can't make work. It happens, and it doesn't have to end the conversation.

The goal isn't to win an argument about the number. It's to understand how the owner got there, show them honestly how you got to yours, and find out whether some structure works for both of you. Sometimes it does. Sometimes the kindest thing is to say no clearly and leave the door open.

Why owners' prices run high

A price that's too high usually has an understandable reason behind it. Often it's one of these:

• A lifetime of work. The owner knows what the company cost them in years, risk and missed weekends. That's real, but it isn't what a buyer can pay for.
• Retirement math. Some owners start from what they need to retire and work backward, rather than from what the company earns.
• Stories about other sales. A friend's company or a deal in the news may have been much bigger, included real estate, or been paid over many years.
• Rules of thumb. A number based on revenue, rather than on what the company earns, can be far off.
• Generous adjustments. Personal costs, "one-time" costs that recur, or the profit the company could make under a new owner, all added to earnings.
• Things that aren't the business. The building, the cash in the account or a vehicle the family uses, all rolled into one number.

Knowing which of these is behind the price tells you what kind of conversation you need to have.

First, check your own numbers

Before you push back, make sure you're right. Build owner earnings (profit plus what the owner pays themselves, before loan payments and taxes) from the tax returns, not from a summary, after checking that the returns and the books agree; our post on tying the tax returns to the books shows how. Look at the range companies in the industry typically sell for.

If your number is low because you missed a legitimate adjustment, you want to know that now. Correcting your own math in front of an owner builds trust.

The math a lender will do

Here's a hypothetical. A company has owner earnings of $300,000. You need a $100,000 salary. The owner asks $1.4 million, about 4.7 times a year's owner earnings.

We'll use our usual assumptions: about 10% down, about 4% in closing costs, and an SBA loan at about 10.25% over 10 years, where every dollar borrowed costs about 16 cents a year. A lender will want earnings after your salary to be at least 1.25 times the loan payment.

	Asking price	Price that works
Price	$1.4 million	about $1.1 million
Loan (90% of price)	$1.26 million	about $1 million
Yearly loan payment	about $202,000	about $160,000
Left after your salary	$200,000	$200,000
Times the loan payment	about 0.99	about 1.25

At the asking price, the company can't even cover its loan payment after paying you, let alone leave room for a bad year. The highest price this company can support is about $1.1 million, about 3.7 times its owner earnings.

There's an outside check too. With an SBA loan, the lender gets its own valuation of the business; it can't use one prepared for you or the seller. Under the SBA's lending rules, the loan for the purchase can't be more than that valuation supports. So this isn't just your opinion. Any buyer who finances with an SBA loan runs into the same arithmetic.

How to explain your number without insulting anyone

How you say it matters as much as what you say.

• Ask first. "How did you arrive at that number?" Then listen. You may learn about an add-back you missed, or that the price includes the building.
• Start with what's good. Tell the owner what you admire about the company, and mean it.
• Show your work, on one page. Owner earnings from their own tax returns, the industry's typical range, and the loan math above. Documents are easier to accept than opinions.
• Talk about the company, not the person. "The company's earnings can support a loan of about $1 million" lands very differently from "your business isn't worth that."
• Don't list every flaw. Name the two or three things that actually move the price, and leave the rest.
• Don't lowball to test them. An offer far below your own math damages trust you'll need later.
• Put it in writing afterward. A short, friendly summary lets the owner share it with a spouse or accountant, and they'll likely want to.
• Give it time. Many owners need a while to adjust their expectations. Our post on building trust with an owner covers how to stay in touch without pressure.

Something like this can help: "Here's how the numbers look from your tax returns. If something's missing, please show me. Getting this right matters to both of us."

Structures that can close a gap

When the two numbers aren't too far apart, how the price is paid can matter more than the price itself. Our post on price versus terms goes through these in depth. In short:

• Seller financing. The owner receives part of the price over time, through a note you pay. They get closer to their number; you get a price the company can carry. With an SBA loan, a seller note has to fit the lender's rules, which limit how much total debt the valuation supports and when the seller can be paid. Ask your lender before you propose one.
• The owner keeps the building. If the price includes real estate, the owner can keep it and lease it to you at a fair rent. The price drops, and the owner keeps an income.
• Leave out what you don't need. A vehicle, a piece of equipment, the cash in the bank.
• Pay for real transition work. If the owner will spend months introducing you to customers and training you, fair pay for that time can be part of the deal. SBA rules limit how long a seller can stay on, so check with your lender.
• Wait. If the owner believes this year will be much better, offer to look again when the year's results are in. If they're right, the price rises with the earnings.

One structure to be careful with: an earnout, where part of the price depends on future results. SBA rules don't allow seller earnouts in a purchase financed with an SBA 7(a) loan, so it's an option only for deals financed another way.

When to walk away kindly

If the gap is wide and the owner won't move, say so plainly and kindly. Thank them for their time, leave your one-page summary, and tell them you'd be glad to talk again if anything changes.

Owners' plans do change. Health, family and a tough year can all make a fair offer look better than it did. A buyer who was honest and respectful is the one they'll remember.

What to do this week

• Write your one-page price math for the company you're considering.
• List three questions about how the owner reached their number.
• Run two or three different structures through the 1.25 test with the salary you need.
• Ask your lender how it would treat a seller note and what a valuation might cost.