FROM MIKE'S DESK
Last year, a buyer came to me three days before closing. He was grinning. Said he found a deal on his own - a small manufacturing company in the Midwest, $1.2 million asking price, $310K in SDE. On paper, it looked clean.
I asked him one question: "What happens to your debt service coverage if revenue dips 15%?"
He went quiet.
Here is what he had missed. The seller had padded the add-backs with roughly $85K in "owner perks" that no bank would accept. The real SDE was closer to $225K. At that number, his DSCR dropped to 1.1x - barely enough to keep the lights on, let alone survive a slow quarter.
Worse, the seller had refused a 10% seller note. Wanted all cash at close. That is always a red flag. When a seller will not keep skin in the game, it tells you they do not believe in the business they are selling. They want to disappear.
We ran the stress test. A 20% revenue decline - which happens more often than people think in the first 18 months of ownership - would have pushed his DSCR below 1.0. That means the business cannot service its own debt. That means he is writing personal checks to keep it alive.
He walked away from that deal. It was the hardest decision he made that year and the best one.
Here is the lesson: the math that matters is not the math on the listing. It is the math that survives a bad quarter. Every deal looks good at full revenue. Smart buyers ask what happens when things slow down - because they always do, at least once, in the first two years.
That buyer went on to close a different deal three months later. A commercial cleaning operation, smaller price tag, but a DSCR of 2.3x and a seller who was happy to carry 10%. He paid himself from day one. He still does.
I built the Bulletproof method around exactly this kind of moment - the moment where the math either protects you or buries you. If you want to see how the whole system works, from the five criteria to the 80/10/10 structure, I walk through it in a free 28-minute masterclass.
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