🧐 What I Learned Last Week 3.24.23
Curated M&A, SMB, and EtA-related content for this week.
This issue is brought to you by PrivSource.
PrivSource is a private, deal-sourcing network for experienced lower and middle-market M&A professionals.
The platform helps professionals source buyout/capital raise opportunities, connect with transaction partners, and keep up with lower and middle-market M&A news/activity.
Thousands of firms and intermediaries across the lower middle market M&A ecosystem use PrivSource to source and list buyout opportunities.
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What I Learned Representing Large Private Equity Acquisitions You Can Apply to Your Search
This is a post I found interesting from attorney Eli Albrecht on Searchfunder.
Since law school, I have been representing bulge-bracket private equity funds making splashy acquisitions. These acquisitions are intense, and aggressive, and often covered by major newspapers. I have worked with and against some of the best M&A lawyers in the world, representing seasoned and sophisticated fund MDs. I am now dedicating myself to representing searchers and SMB buyers (reasons I'll share in another post).
Here are things I learned from the big deals that you can apply to your deals:
1) Lead with values and create a feeling of partnership with seller - this may be obvious and many SMB buyers do this, but my most common comment on a Searcher's LOI is, "add a reason that the seller will be proud knowing he sold to you; find values that align with the seller." I represented a PE buyer in a majority acquisition of a householder lifestyle/fitness brand. The brand decided to take my client's lower offer (millions lower) simply because the PE buyer fit into their gym-bro culture.
2) Move quickly and aggressively, create a sense of urgency, and sprint until the deal is signed - the faster you move the more likely you are to win a deal. It is an easy way to show your seriousness. Impress this on your lawyer by responding to him/her quickly and giving them clear deadlines. This is especially true I represented Platinum Equity acquiring McGraw-Hill for $4.4 billion. It was one of the fastest deals we did, we barely slept for a week, but Platinum eventually won the deal. If you find your team moving too slowly, set up standing, daily check-in calls.
3) Don't be afraid to increase your purchase price (within reason) - I have seen clients lose great deals over immaterial amounts, but big PE guys were not afraid to increase purchase price above where they were comfortable. In the long run, if it is a good business it will be good whether your IRR is projected to move up or down by a couple of percentage points. You will lose sleep over losing a good deal, but you will never lose sleep feeling that you over-payed for a business you believe in.
4) Surround yourself with the right people, even if it costs more - your local guy may be your friend, but you want teammates who have seen hundreds of these deals and can draw on past successes, failures, and experiences to save you time and money. The professional PE guys know that going cheap is expensive.
5) Don't get caught in the weeds on diligence and don't let your lawyer - I've seen lawyers kill good deals over diligence. I've seen clients lose sight of the deal because they want to investigate each diligence issue. The big PE guys know that no business is perfect and that is an opportunity for the buyer. Protect yourself sufficiently through indemnifications, escrows, and setoffs, and don't let immaterial diligence issues kill a good deal. I will dedicate another post to how to talk about diligence with your lawyer, but the most important thing is to set a clear scope for your lawyer and ensure they are only looking for high-level red flags (especially if billing by the hour).
🧵 Best of Twitter
This has been my most popular Twitter thread. I share real-life anecdotes from business owners on the state of the economy…
Huge congrats to @AndyHVandenBerg on selling the business. Here are some insights on the sale process…
Not all clients or revenue are created equal. A reminder to focus on the good ones…
AI can be a great tool in your business acquisition journey…
Yes, broken deal costs are real but many ways to limit them. Important to note that these are costs incurred but not actually paid. .…
Ability to quickly evaluate a deal is a superpower. Here’s a helpful framework…
How to approach an unmotivated seller…
Great HoldCo case study…
🤔 Commentary, Events, Other
Recent feedback from a reader…
I thoroughly enjoy your newsletters, but my one quibble is that all of the businesses you profile require a ton of money and the ability to run these businesses. If someone only has $5,000 to $12,000 Canadian currency and needs to learn the business "on the fly" it's impossible to make any money. Would it be possible to have more SMALL businesses, businesses that can be bought for less than $20,000 and with a minimum of skill? Then the business will grow as the business owner learns how to manage things and develops deeper skills? Thanks!
Great question and I’d like to offer some quick thoughts…
Sometimes I do highlight < $20k projects. It’s just not a focus of this newsletter. Broadly, I like to highlight businesses that have at least $250k in SDE, profit, or cash flow. Not a rule but a preference.
Can you replicate something for less than it costs to buy? For projects < $20k, a lot of the time the answer will be “yes”. A project will be for sale for $5k but it would only cost you $600 if you were to replicate it.
If you have $5k - $10k and want to learn, I think you’re better off just starting a business and learning along the way. It’s a better ROI. For example, start a dropshipping store using Shopify. You’ll learn the basics of product sourcing, finance, marketing, and some tech. It’ll be a pretty cheap education.
Also, check out these free courses from YC Startup School.
Those are just some quick thoughts.
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Back to a W-2
There’s plenty of “Business Ownership Porn” out there but the reality is that for 90% of people, it’s simply not the best path. On the latest episode of Acquiring Minds, we hear from Damon Chlarson who acquired a business but ultimately went back to a W-2 job.
Damon Chlarson acquired an insulation wholesale business in late 2021. Then in late 2022 Damon decided to return to traditional W-2 employment. This decision was partly driven by his sales tanking in Q3 and Damon needing to ensure he could continue servicing his SBA loan (scary). But another part of it was what he had learned about himself. Over the course of 2022, he realized that he just didn't enjoy the lifestyle of the business he'd acquired. This is one of the hazards of buying a business that hasn't been covered enough. Put aside fundamentals & financials of the business for a second — you also have to LIKE it.
Listen here 👉 Back to a W-2: When Business Ownership Isn't the Way
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Quality of Earnings Report
As the founder of DueDilio, I speak to dozens of business buyers on a weekly basis about their due diligence needs. One of the most popular questions I get is “Why do I need a QofE? It sounds expensive”. Here’s a great client story from attorney Felix Kushnir as told on Searchfunder…
I'd like to share a story about a searcher who decided to forgo the QofE when he acquired a $4 million business (his CPA told him that the tax returns were pretty close to the compiled financials, so it wasn't necessary to spend the money on the QofE).
After 4 months of running the business, the new business owner discovered bogus journal entries which inflated the EBITDA by $300k in one year and $200k in another year. These journal entries would have been easily discovered if the business owner spent $6k (at the time) on a QofE.
Instead, the business owner subsequently spent $200k in legal fees suing the seller. Although the business owner didn't have to pay anything further to the seller on the seller note, his 7a acquisition loan was based on the higher EBITDA number and his business couldn't support the debt load.
The business owner no longer has the business, but he cringes in pain when he hears people wrestling about whether they should do a QofE. All of this misfortune could have been avoided by spending around $6k on a QofE. On the other hand, if you'd rather pay $200k after the fact to litigate, I guess I shouldn't complain... after all, I am a lawyer and its good for business :(
A quick reminder - you don’t need to spend $15k to $25k on a QofE. At DueDilio, we have 50+ service providers who specialize in QofE and offer their services at various price points.
⚒️ Tools & Resources
I want to share some tools & resources that I have found helpful. Please note that some of these may contain affiliate links. This means that I may receive compensation if you sign-up and use them.
PrivSource - PrivSource helps you source deals and connect with transaction partners without ever paying a success fee.
BizNexus - Marketplace + off-market origination in one platform. The marketplace averages about 10k active listings & pre-CIM opportunities, and the off-market origination focuses on data & multi-channel. Local Boston company and I consider the founder (Adam Ray) a friend.
Import Dojo - a newsletter that sends eCommerce and Amazon FBA businesses for sale to your email inbox. They send deals each Wednesday at 9:00 AM CST.
Deal Flow Scout - Peer-to-peer deal flow exchange. Free, open, transparent.
Deal Sourcing Guide - A directory I put together of online marketplaces, brokers, DFY deal flow, and more.
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