You Can't Hold The Business Flat
Big Deal Small Business, Issue #122
Big Deal Small Business: You Can’t Hold The Business Flat
July 16, 2025 | Issue #122
This is a blog written by Kaustubh Deo // Guesswork Investing about acquiring & operating small businesses. If you are a new reader / new searcher, please start here.
I also co-host a podcast with Sam Rosati called The Intentional Owner — check out our latest episode about revenue quality due diligence on Spotify, Apple, Youtube, or any other platform!
Side note — I’m planning an SMB/ETA golf retreat this November in San Antonio! In partnership with Bird Golf Academy, a searcher-owned business. If you’d like to join, check out the details here.
The Most Common Self-Funded Searcher Refrain
Every self-funded searcher has, at one point, said the following: “If I buy at less than 5x and use 90% leverage, all I have to do is keep the business flat and the deal will work.”
There’s many iterations of the same sentiment:
“Oh, I don’t have to grow it at all, that’s all upside.”
“I modeled a base case at 0% growth, just holding the business steady for 10 years.”
“I really just have to keep the business flat, anything else is gravy.”
The math is simple — say you use 10% equity and 90% debt to buy a $1 million valuation business ($100K equity and $900K) debt, and do nothing but pay down your debt for 10 years. Earnings per year are flat the whole way, and let’s just say all cash flow along the way goes to make debt payments, tax payments, replacement capex, etc.
At the end of the 10 years, you have a business that is worth the same as when you bought it, but now it has zero debt. So your equity is now worth $1 million, representing a 10x return. Pretty cool.
I’m guilty of it too — coming from a private equity background, it’s hard not to think that way.
There’s one glaring issue — you can’t hold the business flat. Let’s talk about why.
Sponsor Information
Big Deal Small Business is sponsored by Live Oak Bank, a leading self-funded search fund lender.
To learn more, reach out to Lisa Forrest and Sarah Andrews at Lisa(dot)Forrest(at)LiveOak(dot)Bank and Sarah(dot)Andrews(at)LiveOak(dot)bank.
Please mention that Kaustubh from Big Deal Small Business sent you!
Spinal Cord Transplant
A small business acquisition requires a seller transition — in any small business, the seller is effectively the nervous system. The business revolves around the seller’s instincts and ability to take in information & react accordingly.
When you buy a business, you’re effectively ripping out the company’s spinal cord, and jamming yourself into the resulting void.
Even if you’re a small business operating savant, that represents significant change on the day the acquisition closes. It’s immediately impossible for the business to hold flat, even if it has been historically steady.
A large part of being an effective business owner is problem-solving with limited information. You receive a constant barrage of inputs — employee callouts, client complaints, vendor price increases, truck breakdowns, the list goes on endlessly — your role is to parse signal from noise, and then react accordingly.
The seller spent 20+ years developing the skillset of being a small business problem solver. They also spent 20+ years developing the gut instinct & heuristics specific to the given industry — crucial filters to be able to react quickly, decisively, and accurately.
You have very few of these. You will rely on the seller in the initial months to help you problem solve, but your problem solving muscle will be weak & slow. You can use a combination of KPI tracking, external support, and technology to speed up the learning curve and tighten feedback loops, but you’re starting at 20+ year disadvantage.
Then, consider the fact that you will face a number of challenges that the seller has likely never faced — challenges related to ownership transition.
Suppose a key employee comes to you asking for a raise the day after closing, or they’ll leave. While the seller obviously knows how to manage raise requests, they may never have dealt with a situation where an employee has as much leverage as in that transition moment.
This is particularly true in situations where the sellers are subject-matter or service-level experts. They know they can fill in the gap for a bit while finding a replacement, or they can leverage their industry network to find a new hire.
So not only is the flavor of the challenge relatively novel, but the seller’s go-to solutions aren’t available to you either.
Credibility Loss
The day after closing, you are operating from a significant credibility deficit.
The seller has spent years earning credibility with employees, vendors, and clients. You have none — just some borrowed credibility in the form of the seller’s approval of you as the business buyer.
The first time you need to ask an employee to work late, or ask a vendor to rush ship a product, or ask a client to reschedule a last-minute job…you’re not going to receive the same grace the seller used to.
In fact, quite the opposite — you need to overserve your employees. You need to be a great client to your vendors. You need to overserve clients — you’re trying to prove to each stakeholder that 20+ years of relationship building can still be relied upon.
Eventually, you can settle back into the history & credibility of the brand. But the first several months, or even first couple years, will require excess effort on your part. You’re making a first impression, and then reinforcing that impression with consistency.
Again — none of that aligns with the idea of “just” keeping the business flat.
No One Else Wants Flat
Setting aside the challenges specific to buying & selling a small business, the reality is that no other stakeholder particularly wants the business to stay flat.
Employees want to grow in both position & compensation. If the company isn’t growing, they can’t grow. Not to mention the fact that employees leave, move away, quit with no notice, and more.
Clients want services to improve, but may not be willing to stomach price increases. They’re constantly shopping around for better services at better prices.
Vendors want to increase prices.
Competitors want to take your market share.
New entrants or substitutes want to eat into your margin profile.
Politicians want to create new laws that may impact your P&L or ability to operate (tariffs, anyone?).
Literally no one — other than you and perhaps your lender — want your business to remain flat. Even the economy has no central command to hold it flat.
So let’s take for a given the fact that the first 6-24 months are transition chaos. But hey, maybe after that you can hold it flat?
Well, if you’re actually able to predict macro conditions more than 24 months out, you’d make a lot more money as a trader than as a business owner. All I can predict is that it’ll be different than it is today.
Conclusion
Okay, I may have gotten on a soapbox there, so I’ll stop writing now — the fact of the matter is that there is an infinite number of paths your business could meander down, but “hold the business flat” is the ONLY outcome I know will not happen.
So — don’t go into underwriting your deal thinking about how to hold the business flat. Go in with the mental attitude of how you’ll run this business, how you’ll learn to cope with change, how you’ll manage adversity. Change & adversity are a given, so you can either prepare for them or be caught off-guard. Underwrite accordingly.
Best,
Kaustubh Deo // Guesswork Investing
Totally agree. I’ve always felt that a business is like a plant, it’s either growing or dying, but it never really stays still. The idea of keeping it “flat” just doesn’t exist in reality. Thanks for your sharings!
Fire post 🔥