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Episode Summary
You get the unsolicited call. A buyer wants your company, the number sounds reasonable, and you tell yourself you can handle this one without bringing in an investment banker because the offer is already on the table. That’s the moment Dave Kauppi has watched go sideways for almost two decades. Dave runs Midmarket Capital and has spent 18 years doing tech and software M&A, and he came on to walk through how buyers actually price your business: by risk, not by promise. We got into why $1 of recurring revenue is worth $1.27 to a buyer while $1 of hardware sales is worth 10 cents, why your earnout length is dictated by how much of your revenue is contractually locked in, and why the Milestone 6 — Transaction Value is the only place you actually have leverage. Once you sign, you’re off the market for 90 days while a quality of earnings team picks apart everything you claimed the business was worth. Real example: a working capital surplus clause buried in an LOI that costs sellers a $200K haircut because nobody defined it up front.
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## Top 10 Takeaways- Buyers price risk, not promise. Contractually recurring revenue lowers their risk and raises both your multiple and your cash at close.
- The same revenue dollar is worth 10 cents as hardware, 63 cents as break-fix, and $1.27 as a managed services contract.
- Transitioning to recurring revenue blows up cash flow for two years before it turns. Plan the runway, don’t get surprised.
- If you have no recurring revenue, expect a four-to-six-year earnout. Recurring revenue buys you a shorter lockup.
- An unsolicited LOI with no competition is a lowball with three months of value attacks waiting for you.
- The LOI is where you negotiate. After you sign, you’ve taken yourself off the market and lost your leverage.
- Define net working capital, earnout formulas, and overhead allocation inside the LOI. Vague terms always get interpreted against you.
- Tie earnouts to a percentage of revenue, not all-or-nothing thresholds. The buyer holds the keys after closing.
- Strategic value isn’t just technology. A sales process, blue chip accounts, or a unique business model can be the lever.
- The most important sale you’ll ever make is the sale of your company. Sell it with competition or get bare-knuckled.
Sound Bites
“In terms of a business buyer, it’s all about risk reduction. So the number one fear is I buy your company and the day I take over, your customers start walking out the door.” (@TBD) — Dave Kauppi
“Your hardware and software VAR type sales are worth 10 cents on the dollar. Your break fix is worth 63 cents on the dollar and your managed services contracts are worth $1.27 on the dollar.” (@TBD) — Dave Kauppi
“If you’re going against a private equity group that has bought 200 companies over their lifetime, it’s like facing Nolan Ryan with a wiffle ball bat.” (@TBD) — Dave Kauppi
“Getting that value at the beginning of the letter of intent process is one thing, but really a lot of the hard work is during that three months of your value being under attack.” (@TBD) — Dave Kauppi
“If a listener does these things, you will literally be the Peyton Mannings, because no one else is doing the hard work, and there’s that many people out there that want these kinds of companies.” (@TBD) — Ryan Tansom
About This Episode
Dave Kauppi is the founder of Midmarket Capital, an M&A advisory firm specializing in technology, software, and healthcare IT companies. Dave started his career in tech sales at IBM before pivoting into M&A advisory 18 years ago, and his firm has built a reputation in the lower middle market for the discipline of selling intellectual property and recurring revenue businesses for strategic, not just cash flow, multiples. He’s also the author of Selling Your Software Company: An Insider’s Guide to Achieving Strategic Value. This episode sits alongside the early Life After Business conversations on what buyers actually want and how owners get bare-knuckled in negotiation when they walk in alone.
Resources Mentioned
- Midmarket Capital — Dave’s M&A firm. — midmarkcap.com
- Selling Your Software Company: An Insider’s Guide to Achieving Strategic Value by Dave Kauppi — Available on Amazon Kindle and paperback.
- Blue Ocean Strategy — Referenced for the Cirque du Soleil example of reinventing a business model instead of competing on price.
- Upwork — Referenced both as a freelance network used by one of Dave’s clients for appointment booking and as how Dave hired his book editor and illustrator.
- John Warrillow’s Value Builder System — Briefly referenced as a framework for building repeatable value across industries.
- GEXP Collaborative Ultimate Guides — Ryan’s free guides on how to value your business and the pros and cons of internal vs. external exit options.
Connections
Phase + Module:
- Module 5 — Predictable Revenue — Recurring revenue as the risk-reduction system buyers actually pay for
- Module 6 — Transferable Margins — Margin discipline and contract structure as the operational accountability surface
- Module 9 — Operator Transition — The mechanics of exit, LOI, and due diligence
Milestones:
- Milestone 5 — Market Value — How strategic buyers price your business above the cash flow multiple
- Milestone 6 — Transaction Value — Working capital, earnout structure, and what gets negotiated inside the LOI
- Milestone 15 — Revenue Systems & Forecasting — Building contractually recurring revenue as a system, not a one-off contract
Concepts referenced:
- Normalized EBITDA — The cash flow multiple floor before any strategic premium gets added
- The Multiple & WACC — Why software multiples diverge from main street multiples
- The Four Value Levers — Recurring revenue, blue chip accounts, sales process, and business model as strategic levers
- Value Gap — The space between a cash flow buyer and a strategic buyer at the table