Searcher Needed for $1.6m SDE Deal Under LOI (1x multiple)

This Week in ETA:

Searchers: We are under LOI on a $1.6M SDE company that teaches people how to buy small businesses and are looking for a searcher to own/operate. The purchase price is at a 1X multiple, and the searcher can be based anywhere in the world - but needs to be fluent in French. The ideal owner/operator needs small business acquisition experience and good public speaking and sales ability. We are planning to invest all equity except the amount that the searcher would like to contribute. Interested? Let us know here.

Investors: We saw 119 ETA deals in the second half of last year and passed on 114. The biggest culprit? Deal terms—too often, businesses were overvalued or structured in ways that left investors with little downside protection. (We follow these standard self-funded search investment terms). After that, our reason for passing was basically a three-way tie between deal size, searcher risk, and business risk. Either the deal didn’t fit our fund, the searcher wasn’t the right operator for the business, or the business itself had risks we couldn’t get comfortable with. Few deals made the cut—but avoiding the wrong ones is how we protect and grow capital. Any reasons you passed on deals that I missed?

Partner Perspective:

Eli Albrecht, Albrecht Law - Using Indemnifications as a Back Door Purchase Price Forgiveness

I see it all the time: buyers identify real risk, but the deal process (or SBA regulations) won’t tolerate an escrow, earnout, or holdback. In competitive situations, anything not paid at closing can kill an offer. When that happens, we cannot ignore the risk, but as a backup solution, we can use a different technique: back door purchase price forgiveness.

Almost every acquisition has risk (customer concentration, key employees, financial reliability, pre-closing tax issues), and while escrows and post-closing consideration are the best and cleanest tools for a buyer, they are hard to negotiate later in the process (although not impossible if tied to an actual diligence issue), but make bids less competitive.

When those tools are off the table, buyers can protect themselves through reps and warranties, and post-closing covenants backed by strong indemnification. If those covenants are breached, the buyer has recourse that effectively reduces the purchase price after closing and can be offset against a note or other post-closing consideration.

This “backdoor purchase price forgiveness” is negotiated later, when leverage looks different, and, if drafted correctly, can be a backup plan to protect value without derailing the deal.

This needs to be drafted precisely in the purchase agreement by a very competent M&A lawyer. Of course, if you need help navigating this process, you can always reach out to Albrecht Law: reach out. 

Plus:

• Deal Prospectors authored a great article for us on how to optimize your LinkedIn profile to support your search. Look through all their tips - when my wife and I acquired our business, the seller reviewed our LinkedIn profiles and told us it was a credentialing factor in why they chose us!

• Great callouts from Matthias at Pioneer Capital Advisory on negotiating the seller note to work for you, not against you.

Question:

Hit reply and tell us - If you reviewed search deals and passed on them last year, what was the primary reason you did so?

P.S. - Share Your Buy Box:

If you’re a searcher, let us know your buy box! We see a lot of proprietary deals and love to bring right-fit searchers in on them.