How Much to Budget for a Self-Funded Search

March 27, 2024 | Issue #97

Big Deal Small Business: How Much to Budget for a Self-Funded Search

March 27, 2024 | Issue #97

Well, it’s been a slog recently. Lots of good, lots of bad over the past couple months, truly the SMB slog. I’m planning to provide an update on my business soon — believe it or not, I’ve now owned it for over 2 years.

But today, I want to focus on a question I’ve heard many times from early searchers — how much to budget for a self-funded search.

An important definitional note upfront if you’re new to this world. The “self-funded” part of self-funded search refers to funding the costs of finding and closing a deal. It does not mean you have to self-fund all the capital required to actually purchase the company.

If you’d like to learn about equity deal structure and search fund structures, please read these two posts:

• Equity Deal Structure

• The Math of Traditional vs Self-Funded Search

Okay - let’s dive in. I’ve divided this into three sections: Search Costs, Deal Costs, and Equity Requirements. Then there’s a table at the end that ties it all together.

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Search Costs

Generally the smallest bucket of costs, it’s still worth paying attention to some of the odds & ends that can really add up.

While not strictly necessary, you’ll likely want to do some basic entity creation — LLC creation, open a bank account, etc. This generally allows you to make your deal costs tax-deductible, as they are business expenses. But this comes with needing to do a K-1 with a CPA, etc. The creation + upkeep will likely run you ~$1,000 over 2 years.

Similarly, you’ll want to set up a basic website, domain name, email, etc. Don’t go crazy here, don’t hire a web developer, just do something simple & professional. Call it ~$20/month for 2 years, so $500.

You’ll need a limited suite of subscriptions, depending on your type of search. If you’re doing a local, broker-focused search, you’ll need far less — maybe a CRM to stay organized, but usually the free version of Hubspot or Pipedrive is good enough.

You may pay for some basic tools, but I’m estimating ~$20/month again, so $500.

The costs can add up more if you’re doing a larger scale, national proprietary search. Now you’ll be paying for datasets (lots of searchers share subscriptions to platforms like ZoomInfo to lower costs), heavier duty CRM with email automations, and more.

I estimated this at closer to $200/month across a range of products, so call it $5,000 over 2 years.

Lastly, you’ll need to travel to meet companies that are getting more serious. If you’re staying local, this is far cheaper of course, just buying folks dinner. I’d budget $1,000.

But if you’re looking nationally and need to do 5 trips over 2 years, you’re easily looking at $6K or more between ~$500 for roundtrip flights, $400 for 2-nights in a hotel, and then some rental car costs or F&B.

Bottom line on search costs (you may need to download images in your browser to see the image): $3K for a smaller local search, $12K+ for a larger national search.

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Deal Cash Costs

The next bucket is deal costs that you have to pay whether you close or not — this is different than SBA fees, sales tax, working capital, etc. that get funded at closing.

This is a mostly worst-case scenario, where the deal dies literally right before you close. But for budgeting purposes, I think this is reasonable (based on personal experience).

First, Quality of Earnings. I’ve seen this range anywhere from $5K on the very small side, with light-duty work. On the high end, I hear searchers often pay $25K or more, even in self-funded search size deals.

I recommend Mike Jerman at Hollywell Partners — you can reach him at mikejerman(at)hollywellpartners(dot)com and info(at)hollywellpartners(dot)com. Mention that you heard about him through the newsletter to get $500 off of your QoE.

Second, Legal. There are two sets of legal documents in most self-funded search deals. There’s the actual purchase documents, like the Asset Purchase Agreement, Seller Note, Transition Agreements, etc. Then there’s the equity documents that govern the deal between you and your investors.

If a deal dies, you should be able to recycle a good chunk of the equity documents on the next deal. But the M&A documents are likely a full dead cost unfortunately.

I’ve seen a wide range on the legal cost side, often depending on the complexity of your deal and your personal experience with acquisitions.

I will say — this is not an area to skimp on. It’s tempting, I know. But you’re about to make the largest financial decision of your life. Don’t shortchange yourself with your aunt’s 4th cousin who’s primarily a divorce attorney.

I recommend SMB Law Group — you can reach out using this contact form. The time to reach out is as you’re getting ready to make your first LOI submission. (Mention the newsletter to get $250 off your final closing invoice by the way.)

Third, Bank Deposit. This varies by bank, but if you’re using an SBA lender, they’ll often require you send them $5-$10K around the time you sign your commitment letter and they go into full underwriting. Technically this refundable if the deal doesn’t close, less money spent, but in practice you probably won’t get a ton back.

I recommend Live Oak Bank — you can reach them by emailing Lisa and Sarah — Lisa(dot)Forrest(at)LiveOak(dot)bank, Sarah(dot)Andrews(at)LiveOak(dot)bank. Please cc me using admin(at)guessworkinvesting(dot)com — that will allow us to track referrals. Mention the newsletter to get $250 off your business appraisal, a required part of SBA underwriting. Unlike many lenders, they’re open to meeting searchers before you have a deal under LOI, so reach out to them once you start your search in earnest.

Lastly, random other DD requirements. There’ll be a million random items that pop up. Creating yet another entity perhaps. Getting state or city licenses for your acquisition entity. Doing equipment inspections. Contract review. More travel. I called it $5K and moved on.

Bottom line on deal costs: $45K for a smaller deal, $80K for a larger deal.

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Equity Requirements

As I mentioned at the outset, equity requirements can change massively depending on size of deal, deal structure, and more. There are examples of searchers putting 0% down themselves (raising all the equity from investors).

I think a more realistic level is 10-25%, but I called it 10% in the example below. Despite having a PG, investors often like seeing the searcher have some actual capital at risk as well.

Below, I start with a $600K and $900K EBITDA deal (small local vs large national, respectively, but still within SBA range), then walk all the down to approximate searcher equity requirement.

You can see how many variables there are that can move this around, but this should help you contextualize it:

Bottom Line of Equity Requirements: A smaller deal will likely need ~$25K of equity from the searcher. A larger deal may need more like $40-$50K from the searcher.

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Putting it All Together

Here’s a highly realistic scenario that I think self-funded searchers should be budgeting for:

• First 3 months: Getting systems set up, starting to look at deals

• 3-9 months: Full searching, get first deal under LOI

• 9-13 months: Go all-out on that deal, deal dies on 1-yard line, with tons of dead deal costs

• 13-14 months: Be sad and lick your wounds

• 14-18 months: Get back on the horse and start searching hard

• 18-19 months: Second deal under LOI

• 19-23 months: Complete diligence, finally close

Plenty of people have closed faster. But I think that’s the timeline you budget for, especially for one massive dead deal.

If you don’t have the personal financial runway to sustain that, you’ll get deal hungry to the point of doing a bad deal — that’s far worse of an outcome than never finding a business to buy.

Before adding it all up, please note — this is a fully-baked budget, with margin for error. Tons of self-funded searchers have closed deals for a fraction of these amounts.

But I want to mentally prepare you for a “worst-case scenario”, even though you do actually get a deal done here. (And there are worse cases…what happens if you have two deals die at the last minute?)

Bottom Line: A local searcher should have ~$100-$125K of liquidity to fund their search. A larger national searcher should have more like $200-$225K of liquidity.

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Closing

A crucial note: all of the above does not include your costs to just live your life!

Unless you have a life partner that is covering the home budget while you embark on this journey, don’t forget to bake in the cost of your rent, food, car, etc. Those bills don’t turn off during the search.

To that end, I always recommend searchers start by searching on the side — get your feet wet to make sure you really want to do this, before taking the leap to actually quit your job.

Lastly, I firmly recommend the SMBootcamp as a training ground — costs money upfront, but should help your shorten your search and give you access to the right mentors/advisors to limit deal costs in the long run too. You can learn more about the Bootcamp here, and you can apply using this link to receive get the $350 newsletter discount.

I hope this has been useful! Feel free to reply with where my assumptions may be wrong or not reflective of your experience.

For thoughts or feedback, just hit reply to this email or post/DM me on Twitter. 

Thanks, 

Guesswork Investing