What the Payroll Tells You

I look at a lot of small businesses for sale. Some are listed publicly. Some aren’t listed anywhere — just an owner quietly thinking about it who hasn’t told anyone yet.

And one thing I hear from owners all the time is:

“I want someone who will take care of my people.”

I believe most of them mean it.

They tell me about employees who have been there for years. People who helped them build the company. People they genuinely care about.

Then I look at the payroll.

And sometimes the numbers tell a different story.

Because a business can look very profitable when the people doing the work are paid less than it would cost to replace them.

Sometimes that person is the owner

Maybe the owner pays themselves $50,000 a year, but replacing everything they do would cost $150,000.

That extra $100,000 shows up as cash flow.

And if the business sells for three times cash flow, that could make the business look $300,000 more valuable.

The same thing can happen with the team

If wages have been kept low for years, the business may look extremely profitable.

Suddenly some of that profit disappears.

So I’ve started asking a different question

Not just: how much cash flow does this business produce?

But: what would it cost to run this business well after the seller is gone?

Because sometimes a great cash flow number means you found a great business.

And sometimes it means the real expenses just haven’t shown up yet.

That’s a pretty important difference when you’re about to pay a multiple of that number.

— Tony