Tips for Evaluating Business Acquisition Financing

I'm probably stupid to give away this much free game, but most founders won’t take this advice anyway. The ones who do will happily pay for it because it’s worth every penny. LOIs are where most sellers lose leverage without even realizing it. Two key points: 1/ An LOI is NOT a deal. It’s a roadmap to a deal. If you don’t set the right terms up front, you’ll have no leverage when the real negotiations begin. 2/ Buyers aren't ONLY negotiating price. If you think that's all they care about you're already on the back foot. They're negotiating structure, timing, and risk allocation. Sellers typically only focus on headline number. Because they do, they not only leave value on the table, they also tee themselves up for a world of hurt AFTER the deal closes. You want to avoid that. So, here’s my process for evaluating an LOI: 1/ Headline price means nothing without structure. A $100M offer <> $100M in cash at close. Watch for: - Seller financing that leaves you exposed - Rollover equity in a business you won’t control - Earnouts tied to unrealistic performance targets 2/ Beware of vague language. If a term is “to be determined,” assume it won't be determined in your favor later. Push for clarity on working capital adjustments, indemnity caps, and reps & warranties before signing. 3/ Exclusivity is your biggest give. You need to use it wisely. Buyers often push for 60-90 days of exclusivity, but that’s too much, especially if you want to maintain competitive tension. Tie exclusivity to clear milestones (e.g., completed diligence, draft purchase agreement within 30 days) and manage process against other horses. If a buyer is dragging their feet, move on. 4/ Diligence shouldn’t be a fishing expedition. Set limits on what buyers revisit. If a term is agreed upon in the LOI, don’t let them re-trade it later. That’s how valuation creep happens. 5/ Understand how the buyer is financing the deal. If they’re relying on debt or fundraising, you’re taking on both counterparty AND execution risk. If they can’t close, your business gets disrupted + you lose momentum. 6/ Lock in key deal terms up front. Post-LOI is when leverage shifts to the buyer. If something matters, like your post-close role, employee retention plans, or deferred payments, negotiate up front, not post facto. Get it in writing now, not later. An LOI is where leverage is won or lost. Sellers who assume it’s “just a formality” are the ones who end up renegotiating their deal from a position of weakness when it’s too late to walk away.

Everyone says business acquisitions require a massive war chest. While I've found you can buy companies with almost no money down. Conventional wisdom teaches you to raise capital, secure financing, and bring cash to the table. But what if I told you the best deals happen when you get the seller to finance the purchase? Seller financing isn't just possible, it's often preferable for both parties. So why do traditional approaches fail? Well, they create pressure to cut corners on due diligence because you're spending raised capital that costs you money every day it sits idle. My alternative approach? Structure deals where the seller acts as the bank. In one recent acquisition, I paid just $100,000 down on a $6.2M purchase. The seller financed the rest because I showed how my ownership would preserve their legacy while reducing their risk through performance-based payments. They got more total value, and I conserved cash for growth investments. The seller's confidence in financing their own sale is the ultimate validation of the business's health. And when they have skin in the game post-transaction, their incentives align with yours. I predict...within five years, seller financing will become the dominant model for mid-market acquisitions. #acquisitionstrategy #businessgrowth #dealmaking

📈 6 step system to master mezzanine debt financing for M&A without getting over-leveraged... **#5 is a gold nugget 1. Right Lender One day you might get a call from your biggest customer telling you that they're leaving. When you call your lender to tell them you can't pay their note, you want someone who'll say "How can we help?" Guys like William Elchik at PNC Mezzanine are style of person you want on your team. 2. Good Business Of course you want to buy a good business, but I'm convinced most people don't know the difference between good and bad companies. Businesses whose cash flow fluctuates a lot year over year should be avoided. They don't mix well with debt. Look for something that has a 5+ year history of stable, growing earnings as your #1 signal of this. Also see my post about Porter's Forces for more on this. 3. Right Business For You (aka Circle of Competence) I see a lot of apartment builders & developers get interested in buying building materials manufacturers thinking that they're going to "vertically integrate". In theory, this sounds great. The problem is, if you don't have an expert in building materials manufacturing on your team, you are going to screw up... guaranteed. Don't use mezz debt on business and in industries you don't understand deeply. 4. Right Price You may have to hit the ejector button and exit your acquisition if things get rough. Consider what price you might get if that happens. Price is your #2 tool to preserve capital (#1 is below) 4-4.5x Adjusted EBITDA is about the range most newer buyers should stay within in the lower middle market. 5. Right DSCR** Never do a deal with less than 1.5x debt service coverage ratio (DSCR) and, preferably, target >=1.75x. 1.5x equates to about a 30% margin of safety in your cash flow (Remember Ben Graham?), which is one of the risk management tools you need to constantly monitor. Maintaining a strong debt service coverage ratio is THE #1 tool for managing risk in private market transactions because - even if you can sell your business for 2x what you paid -- if you run out of cash before the transaction date, the price doesn't matter. You're still toast. 6. Pay It Down You'll be tempted to use your cash to grow. Pump the breaks a little. Allocate at least some of your cash flow to reducing debt down to at least 3x EBITDA before you go spending lots of money on growth. You'll feel better, bankers & your CFO will think you're smart, and you'll have a lower probability of blowing up everything you've worked so hard to create. #CEO #SMB

Hot take: SBA 7(a) business acquisition loans are not underwritten on a projected basis. Yes—lenders ask for projections. No—that’s not what drives approval. What actually matters most in the target company? Historical returns and interim financials that support the debt—on both valuation and DSCR. If the business’s actual EBITDA or SDE (with legitimate addbacks) can’t carry the loan, the deal’s not getting done. Even if you see all the upside in the world… Even if you think the company will be the next unicorn. SBA lenders don’t fund potential. They fund performance. So if you’re eyeing an SBA 7(a) loan, remember: to lenders, the past must carry the debt, not just the future you hope to build.

➡️ If you’re looking to buy a business, taking a hard look at the financials is a must. One of the biggest red flags to watch for? Personal expenses that sellers run through the business. ➡️ I’ve seen some surprising examples—from New York Jets season tickets to charges at Victoria’s Secret—all categorized as “business expenses.” While some sellers insist these are valid add-backs to increase EBITDA, it’s not always that simple, and conservative SBA banks often see it as a red flag. ➡️ These personal expenses can cause real problems when securing financing. SBA lenders and banks look at cash flow to assess a business’s strength. ➡️ When they see personal expenses embedded in the business financials, it raises doubts about the quality of earnings. Some banks, especially those more risk-averse, are less willing to work with these types of deals. ➡️ This can lead to higher interest rates, additional scrutiny, or in some cases, a straight decline of the loan. Essentially, banks may feel that these businesses don’t offer reliable, predictable cash flow, which impacts your borrowing terms and can even affect the overall feasibility of the acquisition. ➡️ Another consideration is that if the seller is comfortable blurring the lines between personal and business expenses, it can be a sign of broader issues. ➡️ Sellers who run extensive personal expenses through their business may also be less forthcoming about other aspects of the business, from revenue stability to customer retention. ➡️ A few red flags here can mean that you’re dealing with a seller who’s been less than transparent about the overall financial health of the company. ➡️ When assessing a deal, be sure to ask detailed questions about any “add-backs” and consider how comfortable you are with a business where this has been standard practice. ➡️ Remember, while a quality of earnings report can validate these expenses, it doesn’t necessarily make the deal a safe bet. Consider the risks carefully, dig deeper into the financials, and always weigh the impact on financing options and potential rate increases. ➡️ As a buyer, your best approach is to stay cautious and recognize that, with some sellers, what’s in the books may only be part of the story.