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5 telltale signs you are wasting time on a “traditional” business
Please stop sending LOIs with [ ]s for Net Working Capital!
Alex Prokofjev
June 19, 2025
Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.
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You are looking to acquire a brick-and-mortar business.
You have sifted through thousands of leads. Completed hundreds of calls and meetings (and by the way - I feel your pain. I'm in the thick of it with Baltic Family Capital!).
Finally, you have found the one (or the first one). The financials look good. The price is right. The DD is proceeding apace.
Still, a small, sharp doubt keeps jabbing at you. Something about the deal feels off - but you cannot put a finger on it.
Worry not: we have got you covered. Below, we break down 5 telltale signs you are wasting your time on a deal. The signs are:
Needs advice, won't take it
Not ready to transact
Capital sink
Non-core junk
A business or a lifestyle trap?
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Sign #1: Needs advice, won't take it
Proprietary leads are overrated.
There is a reason why Teamshares, the VC-backed US HoldCo, won't touch non-brokered processes. Teamshares is a highly disciplined M&A machine with 100+ completed transactions under its belt. To keep up that kind of pace, it aims to close deals within 90 days of signing an LOI. For their part, brokers are keen to work opposite Teamshares because of the high success rate and the compressed timeline. Who doesn’t like getting paid quickly?
Teamshares deal team hard at work. Credit: Teamshares
Conversely, beware owners who intentionally do not use brokers, or use advisors who are ill-equipped for the role. Divorce lawyers (true story!). Family members with tangentially relevant backgrounds (e.g. a VC involved in a carwash transaction).
Don’t get me wrong: I have nothing against the lawyers running M&A processes. I am only suspicious of their incentives. If you get paid irrespective of the outcome, are you genuinely motivated to do a deal - and to lose a longtime client?
Brokers are your best friends. They are laser focused on the success fee. Don’t act like a jerk: serial ghosters and bottom fishers don’t get shown deals. What you really want is the access to not just the current deal flow, but the back book too. A broker’s back book is a treasury chest of unsold inventory!
Sign #2: Not ready to transact
“The owner just wants to sell to the highest bidder, but she is in no rush… She will decide on the process after seeing the bids”.
Sounds familiar? Uncommitted sellers are the bane of my life!
I can tell a motivated seller from a mile away! Here are 3 common types:
An elderly owner who’s physically and mentally prepared to pass the baton
A much owner, but with a burning desired to do a rollup - with you
A forced seller - of any age - who urgently needs the cash to settle a hopefully unconnected claim (tax, divorce, political donation etc.)
Type 1 folks often don’t care about the highest price. With several decades of dividend distributions behind them, they have reached a point where words “legacy” and “trust” carry real meaning.
As Bryan Rand, the US entrepreneur who bootstrapped a $400M revenue HoldCo, put it to me: “None of mid market buyers lose on price. Most sellers choose the safest exit - and not the highest offer” (click here for the full writeup from the US HoldCo Conf).
On the other hand, Type 2 folks are brimming with bolt-on ideas. They would have done the rollup themselves if it wasn't for the funding or the M&A skills or courage. They really don't mind sharing the upside with you, even if that means ceding control.
If your seller doesn't look like 1, 2 or 3, you might have a problem.
What can you do?
Politely bow out of the process. From a safe distance, observe it unravel. Re-approach in 12-24 month - if you believe that the propensity to transact has increased.
Sign #3: Capital sink
Last month, I met the owner of a €700K EBITDA industrial plumbing distributor. Guess how much inventory he was carrying? €3M. Guess how much I was willing to pay for that business including the inventory? €3M. Guess what the owner said to that…
You too will encounter “capital sink” type businesses: firms that churn out artificially high profits. Why artificially? Because these profits are sustained by:
Carrying too much stock - think distributors that offer shorter delivery times vs. online-only competitors; and/or
Overly generous receivable terms - think contract manufacturers wanting to appease concentrated buyers.
Now, why is this a problem? Doesn’t it all cancel out in the end?
No!
Using boilerplate LOI language like “target working capital to be determined at closing” only perpetuates confusion:
The buyer assumes the business is under-capitalized and plans to hold back “excess” cash or reduce the purchase price
The seller sees receivables, inventory, and supplier advances as near-cash items - and expects actual cash to be added to the purchase price.
Defuse the ticking-time bomb: state your assumptions clearly and early on.
To assess working capital efficiency, I use ratios like EBITA divided by Net Working Capital (I take off depreciation as a proxy for maintenance capex). I didn’t invent the formula - I borrowed it from Swedish serial acquirers.
Momentum Group, a $300M revenue HoldCo of industrial companies (think valve services, sealing solutions and rotating equipment manufacturers), has developed a nifty diagnostic tool:
EBITA/NWC below 25%? Your margins are too low. Raise prices!
>45%? Congratulations: you are producing excess cash flows. Let’s reinvest that into business development and M&A
Heading towards 45%? Keep playing with margins and working until you hit the magic number!
Source: Momentum Group
Sign #4: Non-core junk
“I understand you are a hands-off owner. I have a great CEO candidate: my son. He’s practically grown up in the company” (the son is 24, is a college dropout - and has no accomplishments he can point to).
“Included in the deal is an undeveloped land plot where I was planning to build a new office. The value has been assessed at $2 million”.
“One of the shareholders has a side hustle: a software startup. Our company owns a minority stake, which has been written down to 0. Regardless, since that shareholder is key to our company’s continued success, the buyer will have to help him with the startup”
You are probably rolling your eyes, but I can assure you these are real conversations I have had in the past 6 months.
What can you do? Determine transaction perimeter early on. Be clear on what is / isn’t core.
Don’t be afraid of taking on real estate. For one, real estate can be sold in sale-and-leaseback transactions. It’s magic: you get to release precious capital while unlocking instant multiple arbitrage.
Need inspiration? How about Mister Car Wash - a $1B+ revenue car wash rollup:
Main Street Auto deployed a similar playbook for the first few dozen deals, selling Southern auto repair shops to the yield-hungry retail investors in the Northeast.
Sign #5: A business or a lifestyle trap?
Many installation and distribution businesses are “lifestyle traps”. They generate mid-6 to low-7 figure profits for one or two shareholders, but offer little else.
Telltale signs of a lifestyle trap:
The owner personally manages all key client and supplier relationships.
There’s no clear successor - and you keep hearing stories about capable lieutenants being pushed out or leaving in frustration.
There’s no roll-up play: the company is a top-1 or top-2 player in a small, niche market.
Revenue is heavily project-based - even if projects are long-dated or reoccurring (e.g., municipal landscaping tenders).
I’m not saying these businesses are uninvestible.
But if you're a non-industry buyer, why pay a “market multiple”?
The base case is that the business will eventually pass to internal management—usually for a nominal, or heavily deferred (self-financed) consideration.
If the owner knows that you know this, you can strike a good deal.
Good luck!