2. Buying without getting fleeced.

Most people think you get fleeced buying a business by overpaying, but the worse traps are paying asset money for a job, or paying for earnings that were never real. 

Host John Lay, founder of Three Circles Agency, turns the season’s risk pendulum to the buyer’s chair: your job is to read which way it truly hangs before you wire the money, and to use structure to push it back toward the seller when it’s leaning the wrong way. 

Sources:

Academic:

• Akerlof (1970), QJE, lemons and information asymmetry. 
• Sloan (1996), The Accounting Review, accruals less persistent than cash earnings. 
• Beneish (1999), Financial Analysts Journal, earnings-to-cash gap the top manipulation predictor. 
• Minnis (2011), Journal of Accounting Research, verified books lower cost of debt. 
• Bennedsen, Perez-Gonzalez, and Wolfenzon (2020), Journal of Finance, CEO hospitalization events; operator absence measurably drops profitability. 
• Patatoukas (2012), The Accounting Review, concentration looks efficient but concentrates risk. 
• Dhaliwal et al. (2016), Journal of Accounting and Economics, major-customer dependency raises bank-debt costs roughly 5-6%. 
• Campello and Gao (2017), Journal of Financial Economics, concentration tightens loan spreads, covenants, and maturities. 
• Bloom and Van Reenen (2007), QJE, structured management practices causally raise productivity and survival. 
• Luca (2011/2016), HBS working paper, one-star rating lifts revenue 5-9%; effect concentrated in independent businesses. 
• Thaler (1988), Journal of Economic Perspectives, winner’s curse. 
• Kohers and Ang (2000), The Journal of Business, earnouts hedge misvaluation and align seller incentives.

Practitioner: 

• BizBuySell (median sale price ~$350K; average cash-flow multiple under 3x). 
• IBBA and Pepperdine (Main Street ~2-3x SDE; lower middle market ~4-6x EBITDA). 
• Quality-of-earnings practitioner finding (~20% haircut common). 
• SBA SOP 50 10 8 effective June 1, 2025 (10% injection, 5% borrower cash, seller note full standby, seller note covers at most 50% of injection). 
• Stanford Search Fund Study 2024 (681 funds since 1984; ~35% aggregate IRR, ~4.5x ROI through 12/31/2023; skewed by top performers; median operating-company purchase ~$14.4M).

Disclaimer. Job or Asset is produced by Three Circles Agency (TCA) and is provided for general informational and educational purposes only. It does not constitute, and should not be relied upon as, legal, tax, accounting, financial, investment, valuation, or medical advice, and it is not a solicitation or offer to buy or sell any business, security, or financial product. Listening to this podcast, contacting TCA, or downloading any TCA material does not create an attorney-client, accountant-client, fiduciary, broker, or advisory relationship of any kind. TCA is a business-consulting firm. It is not a law firm, accounting firm, registered investment adviser, broker-dealer, or licensed business broker, and it does not provide legal, tax, or investment advice. Always consult your own qualified, licensed professionals before making any decision regarding the purchase, sale, financing, structuring, taxation, or operation of a business or practice. Statistics, multiples, interest rates, and figures mentioned are believed accurate as of the recording date but are general in nature and subject to change; they may not apply to your situation. Academic research is cited to illustrate ideas and mechanisms; practitioner and industry figures are estimates that vary by business, market, and time. Any client examples are illustrative composites and do not depict real, identifiable clients. The views expressed are those of the host. TCA makes no warranty as to the a...