Take Five #217: How contingent notes solve post-QoE valuation and financing gaps, and more
Top five must-reads this week in the world of SMB acquisitions and operations
Subscribe to Take Five to get our top 5 quick weekly reads on the world of SMB, M&A, and EtA from the team at Kumo. Kumo aggregates hundreds of thousands of deals into one easy-to-use platform so that you can spend less time sourcing, and more time closing deals.
Take Five is created and sponsored by Kumo, a powerful deal aggregator to help supercharge your deal sourcing at withkumo.com.
What can you do with Kumo?
Browse 120,000+ deals from hundreds of brokers and every major marketplace, with 700+ unique deals added daily.
Save time and stop reviewing duplicate deals. Kumo matches identical deals across hundreds of sources so you can view unique business opportunities, even if they’re slightly different across different websites.
Get a daily email for deals that match your search criteria.
Take Five #217: How contingent notes solve post-QoE valuation and financing gaps, and more
1. HVAC team rebuild drove growth more than lead generation post-acquisition
2. Asking price tells you how the seller thinks, valuation tells what the business is worth
The Asking Price Trap
Imagine a seller is asking $5M for their business.
Before you’ve even spent much time with the financials, it’s easy to start thinking about whether they’d take $4.5M instead. I catch myself doing this all the time. By default, the seller’s number becomes the starting point. You’re thinking about if they’d come down, what they’d realistically accept, and how much room there is to negotiate.
The problem is that none of those thoughts provide any insight into what the business is actually worth. You can spend weeks trying to negotiate a seller from $5M to $4.5M without ever stopping to ask whether the business was worth $3M or $6M in the first place.
Over the years, I’ve found that asking prices are most useful when I stop treating them as valuations and start treating them simply as information. The number matters, but not as an objective anchor.
What an asking price actually tells you
When I see an asking price, I’m generally less interested in the number itself than I am in how the seller arrived at it. Did the seller come up with it on their own? Did the broker suggest it? Did they have a valuation done? Are they basing it on another transaction they heard about (i.e. comps)?
Then I’ll try to understand how they actually got to the number. The asking price can be vastly different depending on which method is used. Is it based on TTM earnings? A three-year average? Future projections (hopefully not)? The answer to these questions often tells me more than the asking price itself.
I’ve seen sellers ask very reasonable prices for their businesses. I’ve also seen sellers ask for numbers that were completely disconnected from what the market would support. The asking price alone doesn’t tell you which situation you’re dealing with, but it does give you a starting point for understanding the seller’s mindset.
At the end of the day, the asking price is just another data point. It belongs in the same bucket as reason for selling, financial volatility, growth trends, owner involvement, and everything else that goes into valuing a business. It’s worth paying attention to, but I don’t want it driving my conclusion before I’ve done my own work.
Sometimes the asking price is fair
One thing I’ve come to appreciate more over time is that a decent amount of asking prices are actually reasonable. Good brokers tend to understand this better than they’re given credit for (look at me giving brokers credit).
Read the rest of Inside the Deal Room’s post here.
3. Recurring revenue quality depends as much on retention as on growth
Customer churn doesn’t just nibble away at a company’s revenue - it can take a sledgehammer to its overall value, both immediately and in the long term. This is especially true when you factor in the rising costs of replacing lost customers, which can strain financial resources and impact acquisition decisions.
Direct Revenue Loss and Rising Costs
Churn has a direct and immediate impact on revenue. For many businesses, 65% of revenue comes from existing customers. When a customer leaves, it’s not just the current revenue that’s lost - it’s the predictable, recurring income that business was counting on.
On top of that, replacing those customers isn’t cheap. Studies show that acquiring a new customer costs 5 to 25 times more than retaining an existing one. This forces companies to spend heavily on marketing and sales just to fill the gap, while simultaneously watching revenue slip away. In fact, 70% of companies agree that winning new customers is more expensive than keeping the ones they already have.
“Minimizing customer churn is one of the most impactful ways a contact center can contribute to their organization’s bottom line.” - John Ortiz
The Ripple Effect on Customer Lifetime Value
Churn doesn’t just hurt today’s revenue; it chips away at Customer Lifetime Value (CLV), a key metric that underpins how businesses are valued. In subscription-based models, CLV is calculated as (ARPA × Gross Margin) ÷ Churn Rate. Even a small uptick in churn can cause a noticeable dip in the lifetime value of each customer.
This is where the LTV/CAC ratio (Lifetime Value to Customer Acquisition Cost) becomes critical. For SaaS companies, the sweet spot is around 3.0x, meaning every dollar spent acquiring a customer should generate three dollars in lifetime value. When churn rises, this ratio drops, making the business less appealing to potential buyers.
Competitors and Reputation: The Double Threat
Churn doesn’t just hurt your bottom line - it can hand your competitors an advantage. High churn rates often signal weaknesses in areas like product-market fit, pricing, or service quality, making it easier for competitors to swoop in and capture your lost market share.
Worse still, unhappy customers don’t just leave quietly. Negative reviews and word-of-mouth can tarnish a brand’s reputation, with research showing that one bad review can cost a business as many as 30 potential customers. This creates a vicious cycle: churn damages your reputation, which drives even more churn.
Churn as a Red Flag for Buyers
When it comes to acquisitions, churn is more than just a metric - it’s a warning sign. High churn rates make buyers question the sustainability of the business model. Persistent churn suggests deeper issues that could be costly - or even impossible - to resolve.
A prime example of this is Netflix. In 2019, the company’s stock dropped 10% after reporting higher churn rates during the second quarter. This kind of market reaction underscores how closely investors and acquirers monitor churn as an indicator of future performance.
4. How contingent notes solve post-QoE valuation and financing gaps
5. “What Your W-2 Paycheck Is Actually Costing You”
Here’s what people get wrong about ambitious employees: they assume the problem is effort.
The people I’ve watched struggle for years in jobs they can’t quite leave are almost never lazy. They’re often the opposite. They’re the ones still in the building when the lights are off. They hit every metric, win every award, and still feel vaguely dissatisfied in a way they can’t explain to their spouses or their friends.
Effort is not the scarce resource. Ownership is.
I want to be clear about something, because it separates what I learned from most entrepreneurship origin stories: I didn’t hate my job. I wasn’t miserable. I liked competing. I liked the challenge of being the best in the country at what I did, and I liked knowing the outcome depended entirely on what I chose to do with my time. No one was watching. No one was going to know if I skipped that last call.
I didn’t skip it.
What I realized, sitting in that car, wasn’t that I hated working hard. It was that I was working hard in a way that compounded someone else’s equity.
The company was publicly traded. The people at the top had real stakes in its performance. My performance, specifically. I owned a trivial amount of stock and earned a salary that, however good, was a fixed claim on the value I was creating. Every call I made after hours, every sale I closed, every relationship I built went into an asset I didn’t own.
The False Choice
When I started thinking about alternatives, I fell into the same trap most people do. I assumed the only path out of employment was to start something from scratch.
So I tried. Content sites. E-commerce plays. We licensed technology, tried to raise capital around a point-of-purchase advertising concept, made it to the finals of a business plan competition. I was working just as hard as I had in my sales career. Harder, in some ways. And all of it failed. Which isn’t remarkable. That’s what startups do.
The startup path asks you to trade one form of uncertainty, a salary that might not grow fast enough, for a much larger one, the kind where income drops to zero and stays there for years while you build from nothing.
Most ambitious people eventually figure out that path isn’t built for them. What most of them never figure out is what comes next.
There’s a third option entrepreneurs don’t often talk about.
Read the rest of Buy Then Build’s post here.
Loved what you read? Subscribe to Take Five to get our top quick reads every week from the team at Kumo. Kumo aggregates thousands of sources into one easy-to-use platform so that you can spend less time sourcing, and more time closing deals.