The Re-Trade Usually Starts in the Seller's Own Calendar

The call nobody wants to make comes about two weeks before funding. The quality of earnings is back, the trailing twelve has been re-cut through the most recent closed month, and the number is softer than the one everybody signed against. Somebody has to say out loud that the price has to move.

I have been on both ends of that conversation, and the part sellers almost never see coming is where the softness came from. It usually has nothing to do with the market, a lost customer, or anything a competitor did. It traces back to the seller's own calendar.

Diligence in the lower middle market runs ninety to a hundred and twenty days from signed letter of intent to funding. For the owner of a company doing eight to forty million in revenue, that period lands on top of a job that was already running at full capacity. There is no corporate development team to absorb it. There is no CFO with forty percent of their week free. There is the owner, a controller who has never seen a data request list, and whatever hours are left.

Where the Hours Actually Go

None of it looks like much on its own. A request list that takes an afternoon. A management presentation that takes two evenings and a rehearsal. Calls with the lender, then the lender's field exam. Insurance, legal, environmental, an IT review, a benefits review, a customer reference call the owner has to set up personally because nobody else has the relationship.

Stacked together, they take the top off every week for three months. And the work that gets displaced is never the work that has to happen today. Payroll still runs. Orders still ship. What falls off is the discretionary work, which in a founder-led business is almost entirely the growth work: the customer visit that was not urgent, the price conversation that has been deferred twice already, the second interview for the sales hire, the follow-up on the big quote that went quiet.

It is not only the owner, either. The controller who spent last quarter chasing receivables is now rebuilding three years of monthly financials into a format the buyer's accountants will accept. The operations lead who ran the production schedule is assembling headcount files and pulling safety records. In a company of sixty people, the four or five who carry the most institutional weight are the same four or five the process consumes. Their regular work does not stop being necessary. It stops being done.

Every hour in the data room comes out of the same day that used to hold your customer calls. The trailing twelve keeps a record of that trade.

Paul W. Swaney III

The Lag Is What Kills You

If that work disappeared and the revenue dropped the same week, everyone would see the trade clearly and price it honestly. It does not work that way. A customer visit skipped in month one is a proposal that does not go out in month two and revenue that does not book in month three or four.

So the owner spends ninety days feeling productive, because the days are full and the deal is progressing, and the P&L reports the cost of those days a quarter later. Which is precisely the quarter the buyer is re-cutting the trailing twelve against.

The pipeline shows it long before the income statement does, and almost nobody looks. Most lower middle market companies cannot produce a clean weekly bookings number on demand, which is why the softening stays invisible until it is sitting in a stub period.

Put a number on it. Take a business at 4m USD EBITDA trading at 5.5x. Two soft months that pull 250k USD TTM EBITDA move the purchase price by roughly 1.4m USD before anyone argues about a single adjustment. That money went away while the owner was doing exactly what the transaction required of them, which is what makes it so difficult to argue about at the table.

Why the Buyer Sees It Before You Do

Every LOI I have signed requires monthly financials through the exclusivity period. That is standard, and it is not a trap. It exists because the buyer is underwriting a forward number and needs to know the business is still the business.

Most buyers are watching for a trend break. I understand it never feels that way from the other side of the table. But the mechanic worth understanding is that a buyer models forward off the last few months, not off a three year average, and the lender does the same thing with less patience. Two soft months change the run rate the debt gets sized against, and the credit committee re-sizes before the equity says a word. A meaningful share of re-trades in this market are the lender repricing the deal and the buyer delivering the news.

What Actually Prevents It

The fix is unglamorous and it has to be in place before the letter of intent is signed, because after that the clock belongs to somebody else.

Name a deal quarterback who is not the owner. A controller, a fractional CFO, the banker's associate, anyone whose full time job for a quarter is absorbing requests and routing only genuine decisions to the owner. This one change does more than the other three combined.

We have started paying for that ourselves. On a mechanical fabrication, installation and maintenance business we had under LOI last year, we placed an interim financial analyst inside the company on our own nickel, before we owned any of it. The CFO was underwater in the request list. The CEO personally held the top customer relationships and sat on every large bid, so every hour he handed the transaction was an hour the top line was going to feel two quarters later. The analyst took the diligence workstream off both of them. We also backed the team in recruiting a controller, which moved the recurring accounting off the CFO's desk permanently and gave him room to run the process properly.

That deal did not close. The business trended down for reasons that had nothing to do with anybody's calendar, and we walked. I would spend the money again. The controller they hired is still in the seat as far as I know, so the finance function outlasted the transaction, which is more than most sellers walk away with when a process ends this way.

Build the data room before going to market rather than during diligence, because assembling it under a deadline is where the largest single block of owner hours goes. Protect one full day a week that the deal cannot touch, and put customer work in it. And negotiate, in the LOI, which period the purchase price is measured against, so a stub month that everyone knows was consumed by the process does not silently become the run rate.

A seller who does all four still has a hard quarter. They just do not hand the buyer a reason to reopen the number.

The Part That Is Ours

The fundless structure cuts the exposure from the other direction, because the diligence window is a function of how fast decisions get made. There is no investment committee to schedule around, no partner who has to be brought current before anything moves, no memo that has to survive three edits before a question gets answered. Fewer weeks in the data room is fewer weeks of the owner's attention spent somewhere other than the company.

It also means I am the one who has to make the re-trade call, and I am the one sitting across from the seller when I make it. There is nobody to hand that to. That is a good reason to be honest about the measurement period at the front of the process, when it costs nothing, instead of discovering the disagreement two weeks before funding.

Sellers spend enormous energy preparing the business for diligence. Almost none of them prepare the business for the 90 days they will be too busy to run it. That gap is where the price goes.

Paul Swaney is the founder of Swaney Group Capital, a fundless sponsor focused in the lower middle market. LeverUp® is published weekly. More if I have something else to say.