CONTINUO ADVISORY - FOR STRATEGIC PARTNERS ONLY
The Conductor's Score
NOVEMBER 1ST, 2026
ISSUE NO. 2
The View From The Conductor's Stand
OPENING NOTE
Despite the chill in the air, the year is not starting to wind down. It is a sprint to the finish, and, more importantly, now is when we all set up the start of 2027. Deals in the market are attempting to close before year end. That leaves about five working weeks in the operating year. Despite all the bravado and anecdotes to the contrary, Thanksgiving week is a mess, and after December 18th, good luck getting a phone call returned. Not negativity – operational reality. But companies are starting to think about 2027 and the right conversation at the right time can still mean something.
Market Executive Overview
MARKET INTELLIGENCE
New SBA SOP Is Confusing. We legitimately love our banking partners. Seriously. We work with them for a reason. The SBA, however, has made a mess of the most recent SOP. Here is what we know. Under SOP 50 10 8.1, effective October 1, 2026, an SBA-financed acquisition with a business purchase price of $3MM or more needs an independent Quality of Earnings. The lender engages it, for the lender’s benefit. Owner buyouts and ESOPs are exempt. Here is what we don’t know: what the final report needs to look like, and whether the firm doing the valuation can also do the QofE. Like all government regulations, it will sort itself out. Until it does, plan for it on every deal near the line.
Interest Rates are blowing up real estate, not M&A. Take a breath. Unless you are in real estate, then panic. But Main Street M&A is feeling it much less. Yes, September’s 25 bps increase will influence larger deals and will lead to some form of multiple compression. Below $15MM, most buyers finance with SBA 7(a) loans that float with prime, so the hit shows up in debt service, not the multiple. On a $2.5MM loan, 25 bps is about $6,250 a year in added interest. Real, but not deal-breaking. As you will hear us say often, we expect the impact on the sub-$15MM EV market to be minimal. Remember, the owners coming to market in that range are likely not doing so because of a well-timed exit strategy. They are doing so because a life event put it front and center. Those deals will not stop, and as baby boomers continue to age, they will increase. They call it a tsunami for a reason.
No one is talking to their accountant or wealth advisor…yet. By this stage of the year, even the most haphazardly run business has a good idea of how 2026 is shaping up. Tax planning, estate updates, and financial cleanup need to start now. Our friends in the wealth management and accounting fields started reaching out to clients in September, but traction has been slow. 11:59:59 pm on December 31st feels far away, but if changes need to be made, they need to happen now. If you are in this ecosystem, encourage your clients to make that call now. For owners who may sell in the next few years, the moves that matter most happen long before an LOI is signed: gifting shares while value is still a valuation and not a purchase price, funding charitable vehicles before a deal is effectively agreed, and modeling stock versus asset sale outcomes. In Ohio, add a look at the pass-through entity tax election.
2027 Starts NOW! Buyers, especially strategics, are starting the capital allocation process now. Companies with a serious strategic intent to sell have their data rooms already built. Wait until January to build momentum and you won’t actually start until March at best. Too much friction at the start of the year. The New Year’s hangover isn’t just physical. It feels counterintuitive but the urgency for 2027 needs to be instilled in November. Pushing a client is much easier said than done, but if you are going to spend relationship capital, this is a good place to do it.
The QofE before the QofE
INDUSTRY COMMENTARY
Do you want to spend $10K to $25K to get punched in the face after the LOI is already signed?
That's the new math. As mentioned above, the SBA now requires a Quality of Earnings (QofE) on SBA-financed acquisitions with a purchase price of $3MM or more. The lender orders it. Nobody orders it until a signed LOI says the deal is real. Fair enough. But look at where that leaves the seller.
By the time the QofE comes back, the owner has agreed to a price, told the family, and maybe started pricing the lake house. Exclusivity is signed and the other buyers have gone home. Then an accountant on the other side of the table starts pulling threads. Add-backs that don't hold up. Revenue that looked fine on a tax return and doesn't on an accrual basis. A customer concentration problem nobody wanted to say out loud. Each one becomes a re-trade, and the seller has no leverage left to push back.
A sell-side QofE flips the order. It's the same scrutiny, but it happens before the business goes to market, on the seller's timeline, with room to fix what can be fixed and explain what can't. The number in the CIM is a number that survives diligence. The benefit? The lender’s QofE confirms what’s already known instead of discovering something new. One caution: a seller’s QofE does not replace the one the SBA requires. It makes that one boring. Deals close faster and the price holds.
The number in the CIM is a number that survives diligence.
The seller pays about the same for an early look, often much less when it is scoped as a readiness review. What changes is who hears the bad news first, and whether there's still time to do anything about it. Here's the question for your client: Would you rather find the problems yourself, or give a buyer the privilege of finding them for you? For our CPA partners, this is your work. If you have a client a year or two from going to market, let’s talk about the readiness review.
The Value of Leadership
RECENT MARKET DISSONANCE
The most expensive salary in a small business is the one nobody's paying.
Here's what we keep seeing. The owner runs sales. The owner closes the books. The owner is the plan. Every year, that's a controller and a sales manager they didn't hire. Call it $250K a year saved. It felt smart, lean, and disciplined. The owner likes that cash flowing into their pocket via distributions. One more thing a CPA will flag: an owner doing three jobs while taking most of their pay as S-Corp distributions is a reasonable compensation question waiting to be asked.
Then the business goes to market, and the bill shows up all at once. Right now, buyers are taking a full turn to a turn and a half off the multiple when the owner is doing these jobs. On a business with $2MM of EBITDA at 4x, that's $2MM to $3MM gone. A decade of "savings" wiped out in one short conversation.
Arguments don’t move fear. Evidence does.
Buyers don't price the replacement at what it actually costs. They price it at what they're afraid it costs. An engaged owner works sixty hours and does three jobs without a title. The buyer sees three senior hires, a recruiter, and a year of lost momentum. So the $250K becomes $400K in their model, and EBITDA drops from $2MM to $1.85MM before the multiple is even applied. At 2.5x to 3x, the business is worth roughly $4.6MM to $5.6MM. At 4x on the full $2MM, it was $8MM. All in, $2.4MM to $3.4MM walk out the door. The windows are just that small.
The buyer cannot be talked out of it. Arguments don’t move fear. Evidence does. The fix isn't complicated. Make the hires two years before the sale and let a full year of results prove the business runs without the owner. Two years of salary is about $500K. It protects $2.4MM to $3.4MM of price.
Here's the question for your client: What is saving that salary actually costing you?
Most Strategy Work Is Useless
S.E.T. FOCUS
Most strategy work in a small business is a very expensive way to say nothing.
An owner gets ready to sell. Someone tells them buyers want to see a strategy. They hire a consultant and spend $40K and four months. They come out with a deck: vision statement, mission, three strategic pillars with icons. It looks fantastic in a binder. The buyer flips right past it.
Under $15MM in enterprise value, buyers aren't purchasing a vision. They're high-net-worth individuals or strategic operators about to put their name on a lot of debt. They want a clear, simple answer to how this company wins. Who buys from you, why they keep buying, and why a competitor can't just take them. If it takes a slide deck to explain, the buyer assumes it isn't true.
The single best question to get there is an uncomfortable one: what is this company saying no to?
Companies say yes to the odd job, the low-margin customer, the product line the owner's brother-in-law likes. Strategy lives in what you turn down. A company that won't take work outside a 90-mile radius, won't bid government jobs, and walks away from customers who want it cheaper has a strategy, even if no one wrote it down. A buyer hears that in thirty seconds and believes it, because the P&L backs it up.
A company that can't name a single no doesn't have a strategy. Here's the question for your client: What did you turn down last year, and why? Answer the question well and you can save a lot of money. Spend it on the pre-QofE instead.
AI Is Reviewing Your Data Room
PROCESS POINT
We sent out a few CIMs recently. Signed NDA, full financials, the usual. Without exaggeration, inside an hour, fifteen questions came back.
These weren't "can you send the tax returns" questions. They were the kind that normally show up three weeks into diligence. Margin trends broken out by line. Add-backs pulled apart one at a time. A seller’s explanation in one section tested against the numbers in another.
In our corner of the market, nobody is that good THAT fast. Not the sharpest buyers we know. Not us.
Our NDA specifically prohibits running confidential materials through unsecured AI tools. How buyers are getting there is a question for the lawyers, and we are watching how NDAs need to evolve. The bigger lesson is for the seller. The buyer across the table now has an analyst that reads every footnote and compares every number against every other number in seconds. The soft add-back. The customer concentration problem explained away in a paragraph. The growth story that only holds up if nobody checks the receivables against cash flow. Those used to last until diligence. Now we are seeing them before our second cup of coffee.
Every number in the CIM has to tie.
That changes what it means to be ready. Every number in the CIM has to tie. Every add-back needs a document behind it. Every perceived weakness needs an answer written down before the question is asked. The buyer is going to ask, and now they ask first, in writing, and the seller's credibility rides on the first reply.
The owners who come through this well are the ones who already asked themselves the uncomfortable questions. They found their own problems and decided what to say about them before a stranger with the smartest tools ever created found them instead.
Here's the question for your client: If a buyer read your financials tonight, what fifteen questions would be in your inbox by morning? And count yourself lucky if it even takes that long.
CONDUCTOR’S
Links & References
Our friend Mark Sancrant posted this on Substack. It dovetails well with what we shared above.
If you are the podcast sort, M&A Talk is a good listen:
We hear about the Dunning-Kruger effect a lot. This is what it actually is. Once you read this, you can’t unsee it in deals:
This is long and full of math. It is also the best thing we have read in a long time regarding valuation: