Industry Concentration Tag

Your EBITDA Is Strong. But Is Your Business Sellable?

Strong EBITDA is necessary but not sufficient to sell a business — buyers scrutinize the quality and durability of earnings, not just the headline number.

A company with $13M in revenue and $5M in EBITDA failed to sell after a year on the market because two structural risks — 45% revenue dependence on a single distribution channel and 16% revenue from one customer — triggered valuation disputes, and the deal fell apart during due diligence.

A concentrated revenue base, even at strong margins, creates deal risk that sophisticated buyers will find and price against. Businesses where any single customer accounts for 5% or more of revenue, where revenue flows through a single channel or relationship, or where recurring revenue is minimal , face a high likelihood of a buyer wanting to renegotiate the deal during due diligence. A professional market assessment — reviewing financials, revenue composition, customer concentration, and competitive positioning — is the critical first step before going to market, and is the most reliable way to avoid surprises that kill deals.

— Rich Jackim, Jackim Woods & Co.

Your EBITDA Is Strong. But Is Your Business Sellable?

Every business owner considering selling their business deserves a clear-eyed assessment of one foundational truth: EBITDA is a critical metric, but it does not tell the complete story. Owners who discover this after months of trying to sell their business — or after a deal fails during due diligence — will have wasted a lot of time and money.

The following is a situation we have seen multiple times in our practice. The details have been modified for confidentiality, but the dynamics are real—and offer important insights for any owner thinking about an exit.

A Business That Looked Great on Paper

Last year, we spoke with the owner of a business services company who had spent twenty years building his business. Now 65, he was ready to retire and sell the company. The financial profile was attractive: approximately $13 million in revenue with $5 million in EBITDA – strong margins that would get buyers’ attention.

Early in the process, the owner’s CPA reviewed the financials and told the owner the company was probably worth $25 million – exactly what the owner wanted to hear.  The CPA explained that the EBITDA was there, and in his experience, companies like this one sold for 5x EBITDA. The owner felt confident, so he hired an M&A advisor to sell the business.  After a year on the market, two buyers had withdrawn their offers during due diligence, and the business was still not sold.

Strong EBITDA opens doors. But what buyers find when they look inside determines whether a deal actually closes.

What the Financial Analysis Revealed

When buyers started their due diligence, they discovered the company’s revenue composition contained concentration risks that ultimately derailed the deal:

Revenue channel concentration: 45% of total revenue was generated through a single distribution channel, a key salesperson, who was the same age as the business owner. While that salesperson had performed reliably for years, the fact that the company depended on someone so close to retirement age was a structural dependency that concerned sophisticated buyers.

Customer concentration: 16% of revenue was attributable to one customer, a large manufacturer with multiple locations. This indicated a customer concentration issue that affected lending eligibility and the buyer’s financing options, which in turn affected the overall risk profile of the deal.

These were not deal killing factors individually. But collectively, they represented risks that sophisticated buyers identified in due diligence, and in one case, used to try to negotiate a huge valuation adjustment (50%) — or in the other case, as grounds to exit the process entirely.

When Market Conditions Validated a Buyer’s Analysis

What ultimately killed the deal was during due diligence, an external event occurred that demonstrated precisely why concentration risk demands early attention.

The company received formal notification that its largest customer — representing 16% of annual revenue — had been acquired by a direct competitor. As part of the acquirer’s vendor consolidation strategy, they provided notice that they would be scaling back their purchase orders over the next six months, with the goal of consolidating all purchase orders with the new parent company’s vendors.

The impact was immediate and material. Sixteen percent of the company’s revenue had just disappeared and could not easily be replaced. The seller’s valuation and negotiating position was now fundamentally changed by a single event outside of their control.  This is exactly what buyers feared, and it had come true.

The Strategic Lesson for Owners Selling Their Businesses

Advisors who do not earn success fees when a transaction closes have limited incentive to tell clients the hard honest truth about their client’s business. The result is that business owners often try to sell their business without a clear understanding of how buyers will evaluate their company — and without the opportunity to fix those risk factors before they become deal killers.

As the above example demonstrates, EBITDA matters a lot. But experienced buyers will also be looking at the quality and durability of those earnings:

• Does any single customer represent more than 5% of a company’s revenue?
• Is revenue dependent on a single channel, platform, or relationship that could be disrupted?
• Is revenue generated from one product or service, or diversified over a wide range of products and services?
• Is there industry concentration risk with services or products serving only one industry?
• How much of the revenue base is genuinely recurring, contracted, or relationship-protected versus transactional?
• How is the business positioned relative to industry transformation — as an adopter or as a laggard?
• How would EBITDA be affected if the single largest customer or channel relationship were impaired?

These are the questions that determine whether reported EBITDA represents durable, transferable earnings—or a business that will be systematically discounted during the diligence and negotiation process.

The Question Every Owner Should Ask Before Selling Your Business

It is not simply “What is my EBITDA?”

The more important question is: “Do my revenue and EBITDA accurately reflect the risk-adjusted financial performance of my business?”

That is precisely what a professional market assessment and business valuation is designed to answer. Not to produce an optimistic number, but to give you the honest, complete picture that enables you to maximize transaction value and approach the market from a position of knowledge rather than a host of assumptions.

Why a Free Market Assessment Increases Your Options when Selling Your Business

At Jackim Woods & Co., our complimentary market assessments are designed to give business owners the analytical foundation they need before making one of the most consequential financial decisions of their lives.

We review of your financials, revenue composition, customer and channel concentration, competitive positioning, and provide you with the realistic range of values a qualified buyer would assign to your business. It means identifying the factors that could affect a transaction — and giving you to option to address them before you go to market.

Business owners who understand their true market value make better decisions: about timing, about preparation, about which buyer profiles to target, and how to position the company’s story. They do not spend months pursuing a process that was unlikely to succeed. And they are not surprised by what buyers find.

If you are considering a sale — even if your timeline is one to three years out — an objective assessment of where your business stands today is the most valuable step you can take.

Please note:  Because of the time and effort that goes into to preparing a market assessment, free market assessments are only available for businesses generating at least $5 million in revenue or $1 million in EBITDA.

About Jackim Woods & Co.

Rich Jackim is an investment banker, entrepreneur, and former mergers and acquisitions attorney.

For the last 25 years, Rich has been providing boutique investment banking services to small and lower middle-market companies in a wide range of industries across the United States and Canada.

Rich also founded a successful training and certification company called the Exit Planning Institute, which he sold to a private equity group in 2012.

Rich is also the author of the critically acclaimed book, The $10 Trillion Dollar Opportunity: Designing Successful Exit Strategies for Middle Market Businesses.

Jackim Woods & Co offers skilled mergers and acquisitions advisory services to privately companies in both sell-side and buy-side transactions. Jackim Woods & Co has arranged over 120 successful transactions, ranging from one million to more than eighty million dollars in value.

If you own a business and are interested in exploring your options, I would welcome an opportunity to speak with you.

Feel free to contact me at 224-513-5142 or rjackim@jackimwoods.com.