Structuring deals for "Sub-Scale" Businesses

July 07, 2025

by a searcher from University of Illinois at Urbana-Champaign in Dallas, TX, USA

We currently own a service business and are growing organically and inorganically. In the M&A outreach process, we have had multiple conversations with owners who have similar characteristics: -The owners are ready to retire -The business has declined/underwhelmed in recent years and was once worth more than it is now -Revenues are now under $1M -A couple are relatively asset-heavy (trucks and equipment/CapEx), some aren't -There is a strategic fit with our existing business but DEFINITELY when put together (similar customer base, ability to staff people in different businesses, complementary services) Primary issue: There is a gap between what they perceive their business to be worth (often a benchmark or success from the past) and what the market would value it today. My question is how can we help bridge the gap? I've considered a small injection at the current value, with a "call option" to buy the rest of the business using a predetermined method in the future, if milestones are hit. This would allow me to earn the trust of the owner, team and clients, while building the infrastructure and perhaps a shared service team (HR, Finance/Accounting, etc.) in the backend. Again, we have an existing business so we can reinvest in growth at a higher rate and these businesses are relatively small. Open to hearing thoughts from people who have worked with founder-led businesses and transacted on small deals. Why did the seller ultimately decide to sell to you? Is it because they had made provisions for retirement independent of their business, they thought you were their best option, you were creative, or other?

Reply by a professional-advisory
from Boston College in New York, NY, USA

I bought two tiny add-on businesses for my exterior cleaning company in LA, each doing around $70K-$100k in revenue. I used earnouts to structure both deals, which kept my risk low. At the micro level (under $500K revenue), most sellers wildly overvalue their businesses. I spoke with about 10 owners in my market. Many were eager to sell but wanted insane valuations (e.g., $400K cash for a $90K solo cleaning biz). I have found that realistic offers tend to offend people at this level; they think you're an asshole for offering 1/4 of their asking price, and decide they'll never speak to you again. They don't care about market multiples or realistic valuations, they just want to get paid for their 20 years of running a "business". The two businesses I did buy had urgent reasons to exit (both had to leave LA fast), which gave me leverage. I structured earnouts for both, which drastically decreased my risk. One deal turned out to be a total dud (the earnout saved us here), but the other we tripled revenue on (massive win for us). That seller in that deal ended up making more on the earnout than running the business. TL;DR: At this level, always structure deals to protect your downside. As attractive as inorganic growth can be, its just not worth the hassle if the deal isn't de-risked.

Reply by a searcher
from Georgia Institute of Technology in San Francisco, CA, USA

I haven’t encountered this myself but it sounds like only a matter of time before they'll have to face reality. If you can afford to wait, I’d consider making a fair offer, walk away, and check back in every ~6 months. I'd expect they eventually acquiesce. Alternatively, since you’re open to a longer term working relationship with them, maybe skip the call option and instead structure a simple earnout that *nominally* meets their valuation. If they help return the business to its former peak, they get paid. If not, they land at your number.

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