A Good Business That Wasn't Built to Be Sold

A wood pallet manufacturer came across my desk earlier this year. This was not the type of deal I typically look at, but the financials were strong enough that I took the broker call and worked through a full assessment.

The business had been operating for decades. Around $5M in revenue. Adjusted EBITDA just north of $1M. Margins in the low-to-mid twenties. A 58-acre facility the owner had built up over the years. A fleet of trucks and trailers. Long-tenured customers, some going back 17 years. No debt.

I passed.

But I want to be clear about something before I explain why: this is a genuinely good business. The owner built something real. Strong customer relationships, stable earnings, a real operational footprint. There is a buyer for this deal. That buyer just isn’t me. Understanding the difference matters.

What the business looked like

The revenue profile was as stable as I see anywhere. Three consecutive years hovering between $4.6M and $5M. Repeat purchase-order volume from a base of customers that had been buying from the same owner for a long time. No contracts, all purchase-order driven, but the stickiness was real. Average customer tenure for the top accounts was around 17 years.

The margins were honest. Gross margin around 44%, EBITDA around 21% after normalizations. The seller had not cleaned up the books beyond what was reasonable and the add-backs were well-documented.

The real estate, a 58-acre facility with a third-party appraisal at around $2.4M, was actually a positive. Real property in the deal opens financing structures that a business-only acquisition does not. SBA, conventional commercial real estate financing, and asset-based lending all become available when there is hard collateral behind the transaction. For the right buyer, that is a meaningful advantage.

On a pure financial basis, this is a business that works.

What the issues were

Every deal has a list. This one had several worth naming, because different buyers will weigh them differently.

• No capable #2. The owner was explicit about it. No one on the team could step into the president role. All commercial functions sat with him: quoting, customer relationships, scheduling, purchasing. A buyer would need to recruit, hire, and onboard a full-time operator from scratch, with no bench and no transition overlap beyond 6 to 12 months. This is the hardest flag for any buyer who is not planning to run the business themselves.
• The owner was the only person who could diagnose equipment failures. He was a mechanical engineer by training and the sole person at the company capable of troubleshooting issues with the manufacturing equipment. In a capital-intensive production environment, that is not a minor dependency. When something breaks, and in manufacturing something always eventually breaks, the entire operation waits on one person. A buyer inherits that single point of failure with no obvious path to replace it quickly.
• Heavy fixed assets. A 58-acre facility. Over $3.5M in machinery and equipment at book value. A 16-unit fleet including tractor-trailers. Significant spare parts inventory kept off-balance-sheet. This is capital-intensive by definition, and ongoing maintenance capex is part of the operating reality. That is not inherently bad, but it is the opposite of asset-lite, which is what I look for.
• Single customer concentration. One customer represented about 26% of revenue. No contract governed that relationship. A PO-driven 26% concentration is a real risk, even with a 17-year history behind it. POs can stop without notice.
• Owner-dependent quoting and pricing. The owner prepared all quotes using a proprietary template with judgment factors that were not formally documented. Pricing knowledge lived in his head. A buyer inherits that gap alongside the equipment diagnostic gap, and together they paint a picture of a business that runs because of one person’s expertise, not because of systems.
• Verbal supply arrangement for outsourced milling. About 22% of board feet were processed through a related mill on a verbal, undocumented basis. No service level agreement, no contract, no documented terms. That is a key input supply risk with no paper behind it.

Why I passed

Most of the issues above are not disqualifying for every buyer. Long customer tenure mitigates the concentration risk. The real estate is collateral, not a liability. The financials are stable and the earnings are real.

But the combination of no capable #2, no documented systems, and an owner who was also the sole equipment diagnostician painted a picture I could not get comfortable with. These were not three separate problems. They were one problem wearing three faces: this business runs because of a specific person, and when that person leaves, a meaningful part of what makes it work leaves with him.

I look for businesses where a capable management layer already exists and where I am not the operator from day one. This deal failed that criteria clearly. For an operator-owner with a manufacturing or engineering background who wants to work in the business, build the systems, and grow something with genuine financial upside, this is worth a serious look. That is just not the kind of acquisition I make.

If you didn’t know, now you know.

* Every deal I look at is under NDA. The story below is real. Some identifying details — company name, specific geography, exact numbers — may have been changed to protect the seller. The lessons haven’t.