The $10M Exit Mistake Most Founders Make

Welcome to a snackable episode of the Business Lunch podcast. Normally it's me, Roland Frasier, and my business partner Ryan Deiss. But these snackable episodes let me share research I've been doing in a format you can actually listen to with the help of AI. So here's today's episode on the $10 million mistake 90% of founders make right before selling their business. Let's get into it.

Yeah, 90% of founders, they make a $10 million mistake right before they sell their business.

Yeah, it's, it's a staggering number.

Right. And the craziest part to me is that they make that mistake because they were doing exactly what every single business textbook tells them to do. Like, they try to grow.

It is the ultimate trap. I mean, it's the paradox of the final push. Most founders, you know, they firmly believe that exit value is built by adding something to the company in those final, say, 6 to 12 months.

Because that's what you do the whole time you're running it, right?

Exactly. So they push for more growth. More customers, a better, shinier narrative.

Which brings us perfectly to the mission of today's deep dive. We are unpacking the mind of Roland Frasier, looking at his playbook for high-stakes business acquisitions. And, you know, whether you are actively building a company to sell right now or maybe hoping to launch a startup one day, or you're just someone who wants an absolute masterclass in high-stakes negotiation and human psychology, this completely flips standard business logic on its head.

It really does. Yeah, because it turns out the way most founders approach that finish line is the exact thing that costs them the race.

Yeah. Let me see if I can frame this for everyone, because I get the instinct to want everything looking perfect, but it's kind of like selling a used car.

Oh, I love this analogy.

Right. So you don't spend $5,000 putting a custom racing stripe on a car right before selling it if the if the check engine light is still flashing on the dashboard, like you fix the check engine light.

That is a phenomenal way to visualize it. I mean, at the exit stage, buyers are not paying for your racing stripe, right? They are not paying for your grand upside story about what the business, you know, could be in 5 years. They are actively looking for those flashing lights on the dashboard.

Red flags.

Exactly. They are hunting for risks that they cannot mathematically explain away.

Yeah.

So the core thesis here, the absolute truth of these deals is that exit value isn't created by growth. It is created by removing buyer fear.

Removing fear. Okay. That is a wildly counterintuitive way to think about a transaction because usually we think of value as this additive process, you know?

Well, in the operational stage of a business, sure, value is additive. You add revenue, you add value. But in the exit stage, value is really about preservation.

Hmm. Preservation.

Yeah, because every single unexplained risk in your business just becomes a discount. Or, you know, it becomes a massive delay or a retrade.

Right. The sources mention retrades a lot.

Oh, worst of all is a retrade. That's when the buyer dramatically lowers their offer at the 11th hour. And taking away a buyer's fear is often worth like millions of dollars more than adding a few points of revenue growth at the end.

Which presents a really fascinating operational problem for a founder, because if removing fear is the ultimate goal, how do we actually figure out what buyers are afraid of?

Right. Because they don't exactly tell you.

Exactly. And the corporate In the corporate M&A world, nobody sits across the boardroom table and says, hey, I'm feeling really anxious and scared about this spreadsheet.

No, they would never ever admit that. They use a very specific coded language.

Like Wall Street speak.

Yeah. Wall Street analysts and strategic buyers have this entire vocabulary designed to quietly apply financial discounts without ever admitting they're spooked. They'll say things like, well, we need to normalize this metric.

Oh, man.

Or let's talk about structure instead of price. Or my personal favorite, we'll address that confirmatory diligence.

Wow. It sounds so professional, like so clinical and calm. What is the actual translation of those phrases?

The literal translation for every single one of those phrases is there is something here we don't fully trust.

Oh, wow.

Yeah. The buyer is pricing in a risk they can't logically explain, so they throw this blanket of diligence over it just to protect themselves.

Okay. Gimme a concrete example. What actually sets off those alarm bells for a buyer?

Well, customer concentration is one of the fastest triggers. So let's say your top 3 or 4 customers represent an outsized, massive share of your overall revenue.

Okay, wait, I have to challenge that premise because if a business has a few massive, fiercely loyal customers who spend a ton of money year over year, isn't that a huge sign of success? Like you've landed the whales, right?

You'd think so.

Why is that suddenly a liability?

It is a massive win when you are operating the business You pop the champagne. But when you are selling the business, the buyer is looking at it entirely through the lens of catastrophic risk.

Ah, I see.

Buyers don't need actual churn. They don't need those big customers to actually leave to penalize you financially.

Wait, really? Just the possibility is enough?

Yes. Just the risk of your top clients leaving and taking, say, 50% of your revenue with them is enough to completely tank the valuation.

Because if the buyer takes over and they lose just one of those whales on day 2, the entire financial model collapses. Like, they can't cover the debt they used to buy you in the first place.

Precisely. And you cannot talk your way out of that penalty.

You can't just be like, oh, but they love us.

Exactly. You can't explain, oh, they've been with us for 10 years. The CEO is my golfing buddy.

Yeah.

The buyer's fear does not disappear with a good story.

Right.

It only disappears when that exposure is mathematically diluted. Even modestly, you have to actively spread that revenue out among smaller clients before you go to market.

It's all about structural stability over just raw numbers. And the sources from Roland Frazier mentioned this also happens with something called carve-out risks. Can you break down what a carve-out actually means practically?

Sure. So a carve-out usually refers to selling a specific division or like part of a larger company.

Okay.

But even in businesses that aren't intended to be carved out, buyers look at what isn't clean. They look at shared assets, undocumented processes, or, you know, messy intellectual property ownership.

Like who actually owns the code.

Exactly. Does the founder personally own the patent or does the company? Or if the company uses proprietary software, is the original developer still around or did they leave without ever signing an assignment agreement?

So they are worrying about what would be painful to unwind or verify later.

Yes, precisely. If the answers to those questions aren't cleanly documented, the fear becomes structural to the deal. Value erodes, not because the underlying business is weak, but simply because the buyer cannot mathematically prove to their investment committee that the foundation is strong.

Got it. So we know they speak in code and we know they're looking for structural cracks like customer concentration or messy IP, but let's, um, Let's escalate the timeline here.

Okay, let's do it.

Once you actually get into the weeds of the deal, it seems like the real bloodbath always happens around the financials.

Oh, always.

But Roland Frasier points out the fight isn't where founders expect it to be, right?

Yeah. When a deal gets retraded, when that buyer lowers their offer late in the game, it's rarely because the math was literally wrong.

Really?

Yeah. It's almost never a typo on a spreadsheet or a missed decimal point. It happens because the interpretation of those numbers changed.

I'm trying to wrap my head around that. How can numbers be up for interpretation? Like, isn't a dollar just a dollar?

You would think so, right? But in the diligence phase, there is this battleground called quality of earnings. And in that arena, a dollar is never just a dollar.

Okay, explain that.

It's about the story the dollar tells about the future. Take revenue timing, for example. If your bookings, your billings, and the moment you actually recognize that revenue don't reconcile perfectly, buyers immediately assume the worst.

Like you're cooking the books?

Kind of. They assume you are artificially pulling future sales forward just to make the current quarter look better for the sale.

Ah, so even if the money is real, the ambiguity gives the buyer leverage to say, hey, we don't trust this growth trajectory, so we are discounting your valuation.

That is the exact play. Another massive battleground here is support costs.

Support costs? Like customer service.

Yep. Founders think buyers just look at the raw dollar amount spent on customer support, but buyers are actually looking at the nature of those costs.

Meaning what exactly? How do I actually spot the difference between, say, chaotic support and systematized support if I'm a buyer just staring at a spreadsheet? Is it just looking at headcounts?

Well, it's looking at the ratio of headcount to revenue growth.

Okay.

If your revenue grew by 20%, but your support costs grew by 50% because you had to hire 20 new reps just to handle complaints.

Oh, yikes.

Right. That is reactive and chaotic. You are throwing bodies at a broken product. Alternatively, if you have a business with flat revenue but incredibly efficient stabilizing support costs, maybe you implemented AI or better documentation, that feels much safer to a buyer.

That makes total sense. So a flat business with a system is worth more than a growing business that is essentially on fire.

Exactly.

And speaking of things that feel safe but are actually traps, there's this concept in The Sources of over-reserving, because as a founder, you know, you might hoard cash reserves for bad debt or inventory issues because you think it makes you look responsible. Like, look how conservative I am.

But the buyer sees something completely different. When you hold massive reserves, those reserves are treated as expenses on your books.

Oh, I see where this is going.

Yeah, that quietly depresses your net income. Which depresses your EBITDA.

Let's actually define EBITDA really quickly for anyone who doesn't live in spreadsheets all day.

Absolutely. So EBITDA stands for earnings before interest, taxes, depreciation, and amortization.

Which basically means the raw cash-generating power of the business before the accountants get clever with it, right?

That's a great way to put it. And in the M&A world, businesses are almost always valued as a multiple of their EBITDA. So let's say your company is valued at 10 times EBITDA. Every single dollar you unnecessarily hide in a reserve fund lowers your valuation by $10.

That is brutal. You thought you were being financially safe, and instead you've literally negotiated against yourself by shrinking your own valuation metric.

It happens all the time.

And nothing seems to generate more ammunition for the buyer and more emotion from the seller than working capital. Like, the sources explicitly highlight that few things sour a deal faster than a dispute over working capital.

Yeah, because founders assume working working capital calculations are purely mechanical, like it's just math.

But they're not.

No, they are deeply inherently psychological.

Okay, I need an analogy here. How does a spreadsheet about working capital become emotional?

Think of working capital like the plumbing of your business. Buyers want to know exactly how much water needs to be sitting in the pipes just to keep the water pressure up and the business functioning on a day-to-day basis.

Okay, I'm with you.

If you start arguing about how much water is required, the buyer immediately assumes the pipes are leaking.

Uh, so if you use a trailing month peg, meaning you just look at the average working capital over, say, the last 3 or 4 months, that might seem super straightforward to the seller.

It does, but to the buyer, it feels opportunistic.

Mm-hmm.

If you're listening to this and you run a seasonal business, maybe you sell snowboards or run a summer landscaping company.

Mm-hmm.

Your last 3 months do not represent your baseline, right?

Obviously.

So the buyer thinks you are cherry-picking data. To leave less cash in the business when you hand over the keys. However, if you use a median-based peg that looks at the last 12 months and is actually grounded in historical seasonality, suddenly it feels defensible.

The difference between the two is literally just a mathematical formula, but the outcome is trust. Because if you argue over the water in the pipes or if you have stale accruals on the books like old liabilities from 3 years ago that you just haven't cleaned up, It signals sloppiness.

Yes. And sloppiness triggers fear.

And fear triggers a discount.

Exactly. When the working capital math is clean, logical, and mapped to a 12-month median, the buyer stops negotiating with emotion. They shift into negotiating with logic. And shifting a buyer from emotion to logic can literally preserve millions in your exit value.

Wow. Okay, so let's say you've done all that. You've cleaned up the quality of earnings. The working capital is perfectly logical. The house is totally in order.

Good. You're in a strong position.

But motivation on paper isn't enough to get someone to write a $50 million check. Now we have to talk about finding the right buyer. Because not all buyers are created equal.

No, they are not. You're looking for a very specific type of buyer. You're looking for the stretching buyer.

The stretching buyer.

The one willing to pay a premium. But they don't stretch because your business is just so incredibly shiny. They stretch because your business solves a near-term problem that they already have.

So it's about their pain, not your perfection.

Precisely. Maybe they're a public company with a revenue mix they desperately need to rebalance before their next earnings call. Or maybe there's a new geography they need to enter immediately just to appease their shareholders.

Or maybe your business provides a regulatory license that would take them like 3 years and $10 million to acquire themselves.

Yes. Timing is everything here. It's the ultimate lever. Strategic buyers are the most flexible when they are facing real immediate guidance pressure from Wall Street.

So if you approach them when they're about to revise their quarterly expectations, the entire conversation changes completely.

It's not about manipulating them. It is simply understanding who has urgency and why.

So you leverage that urgency, bring them to the table, and then they have to send in their auditors to tear your business apart.

The fun part.

Which brings us to the most dangerous psychological battleground of all: the data room.

Oh, the infamous data room.

Most people think a data room, which, just to clarify, is the secure digital space where all your company's sensitive documents live for the buyer to review. They think it's just a giant digital filing cabinet.

Right. Like, here are my 10,000 PDFs. Go crazy.

Cue incompleteness.

Which is a terrible way to utilize it.

Why?

The true purpose of a data room is not completeness. It is a tool to actively shift the buyer's psychological state. You want to shift them out of detective mode and into confirmation mode.

That's fascinating. If you've ever been cross-examined or had someone constantly looking for holes in your story, you know how exhausting that vibe is. The buyer's sitting there digging, trying to find the catch.

Exactly.

How do you actually snap them out of detective mode?

By anticipating their anxieties and answering them before the anxiety even forms. You don't just dump raw contracts in there. You provide summaries, make it easy for them. Yeah. You lay out historical pricing trends. You show the data on customer acceptance of price increases. You detail pipeline quality. You even lay out minor security incidents or operational failures up front before they find them.

Oh, so you hand them the flashlight, and when they can't find the hidden trapdoors they expected, they just relax, right?

They shift into confirmation mode. They just want to confirm that what you said is true. Rather than hunting for what you lied about.

And keeping them in confirmation mode maintains the momentum of the deal.

Because momentum is incredibly fragile.

Mm-hmm.

Fear kills momentum infinitely faster than bad numbers ever will.

Which brings us to the final hurdle. You've maintained momentum. The buyer is comfortable. You are standing at the finish line with the term sheet in hand.

The dream.

Why do so many founders still lose out at the very last second?

The ego of the headline price.

Really?

It is the number one structure trap in M&A. So many founders obsess over that big flashy top line number on the press release. Like, I sold my company for $30 million.

It's the number you tell your friends at the country club, right?

Exactly. But Roland Frasier argues that is rarely the reality of what actually goes into your bank account. The real money is made or lost in the structural decisions.

Break down what kind of structural decisions we were talking about here.

Well, let's start with seller notes versus earnouts. When there is gap between what you want and what the buyer wants to pay, founders often accept an earnout.

Okay, so this means you only get that extra money if the company hits certain future growth metrics after you sell it.

Right. And it is incredibly risky because you no longer control the company.

Yeah, the new owner could completely mismanage it, miss the targets, and you lose millions.

Exactly. So a smarter structure is a seller note.

What's that?

A seller note is essentially a loan you, the seller, give to the buyer. It guarantees you a fixed return with interest over a set period of time, regardless of whether the company grows or shrinks.

Oh, I like that.

It bridges the valuation gap without taking on operational risk. But then you also have to look at indemnity baskets and survival periods.

Wait, hold on. Survival period? That sounds so ominous. Are we talking about the literal survival of the company?

No, we are talking about the survival of the buyer's right to sue you.

Oh, wow.

Yeah. A survival period dictates how long after the deal closes the buyer can come after you for a breach of representations or warranties. If you agree to a 5-year survival period, you are basically looking over your shoulder for 5 years.

That sounds like a nightmare.

And an indemnity basket dictates how much of your actual cash payout is held back in an escrow account during that time just to cover those potential lawsuits.

Let's make this incredibly concrete. Paint a picture of two different exits to show how structure changes reality. Let's say we have two deals, both with the exact same headline price of $30 million.

Okay, $30 million. So DLA closes cleanly. The founder negotiated tight structural terms. They take $28 million in cash on day one, maybe a $2 million seller note paying 8% interest and a tiny escrow holdback with just a 12-month survival period.

Okay, so the founder walks away incredibly wealthy, clear of the business, and sleeps soundly. That is the dream. Now, what does Deal B look like?

Deal B has the exact same $30 million headline, but the structure is a mess. Uh-oh. The founder only gets $15 million in cash up front. $10 million is tied up in an aggressive earnout based on completely unrealistic future growth, which they will likely never see.

Ouch.

And the remaining $5 million is sitting in an indemnity basket tied up in a 3-year survival period. And during those 3 years, the buyer's lawyers are draining that escrow account to cover every minor customer refund or operational hiccup.

So the founder in Deal B might not see half of that $30 million for half a decade, if ever. Yep. And the only difference between Deal A and Deal B wasn't the business itself. It wasn't the revenue or the product. It was entirely the structure of the deal.

Structure dictates which reality you get to live in. Yeah, it dictates everything. The headline price is vanity. The structure is sanity.

I love that. Well, we have covered a massive amount of ground here today. Let's try to synthesize this. Roland Frasier has this ultimate throughline for the 60 to 180 day playbook, right? If you are listening to this and you are within a year of a potential transaction, your mandate's clear. Stop chasing growth.

Stop adding racing stripes to the car.

Exactly. Start systematically removing the reasons buyers hesitate. Dilute your concentration risk so no single client holds your valuation hostage. Normalize your working capital with defensible median-based math so the plumbing isn't up for debate.

Find the stretching buyers.

Map out those buyers who have genuine near-term urgency. And finally, clean up your deal structure. Swap those risky earnouts for seller notes and tighten your survival periods so you actually get to keep the money you earn.

You know, you don't need to do absolutely everything perfectly. You just need to remove enough fear that the buyer stops negotiating defensively.

So what does this all mean for you listening? If we boil it all down and the exit stage, growth is really just a bonus. Certainty is the actual product you are selling.

And the incredible irony of all of this is that comfort, pure, unadulterated certainty is exactly what ruthless Wall Street buyers will happily pay a massive premium for.

They will pay millions just to sleep well at night.

They really will.

Which leaves us with a really fascinating thought to mull over, even if you aren't selling a business anytime soon.

Oh yeah.

Think about your own life, you know, your own career. If certainty is the product and comfort commands a premium in a multimillion-dollar business exit, how much value are we bleeding in our everyday professional negotiations?

That's a great point.

When you are asking for a raise or pitching a new client, are you desperately pitching your grand upside? And totally failing to calm the other person's hidden unspoken fears. Next time you're trying to sell someone on your value, before you start polishing the paint, make sure you've turned off the check engine light.