Search Update (11/21)
Big Deal Small Business: Search Update (11/2021)
Today’s post is a monthly ride-along update on my self-funded search.
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Rocks Tracker
Same trend as last month - deal volume is low, but LOI submissions are high, reflecting ongoing deal quality. I also had a great time meeting more M&A professionals and business owners in Seattle & Bay Area.
The internal debate I'm having right now is what to do with multiple LOIs outstanding and potentially signable (high class problem, I know).
Multiple LOIs
Clearly, the story so far is the # of LOIs submitted is WAY higher than I expected. Not only that, but at least 2 LOIs have gotten closer and closer to signing over the past few weeks.
I know that it's common in traditional search to take multiple deals under LOI and just run hard at both until one dies or one gets to the finish line.
This is also common in private equity, but in PE we can actually close multiple deals of course.
I'm feeling uncertain about how to handle this issue as a self-funded searcher. I expect to sign one LOI this weekend - my gut is telling me to drop out of the other LOIs/deal processes once that LOI gets signed.
There are two reasons underlying this issue:
Resources: My deal resources are fundamentally more constrained than a traditional searcher. Burning $50K on a deal is tough to stomach, let alone doing it on two deals at the same time.
Fairness: Is it fair that sellers give buyers exclusivity while buyers go work on multiple deals at the same time?
The fairness point is very debatable - clearly, sellers can pull out of deals at any moment and leave the buyer holding a big dead deal bag and a LOT of time wasted. This has happened to me early in my search, so I can definitely feel justified in running multiple processes.
On the other hand, an LOI signifies a good faith (though non-binding) agreement that if all diligence checks out, you're going to do the deal on the proposed terms. There's nothing legally or technically binding here, but it strikes me as not being in good faith to run DD on multiple LOIs.
It's also common for searchers to pass off fully-signed LOIs to other searchers in exchange for a finders' fee. In that scenario, you can argue the seller should be indifferent so long as the new searcher abides by the existing LOI.
That said, sellers are often "picking" buyers not just based on purchase price/terms, but also on how comfortable they feel passing on their legacy to that person. That obviously goes out the window when the LOI gets handed off to another searcher.
In practice, I think there is a material difference between larger deals (where traditional search lives) and smaller deals (where self-funded search lives). I tick through those differences below.
Pre-LOI DD
In larger deals with tightly-run banker processes, you can't do as much DD upfront as far as I've seen. A lot of the "preliminary DD" gets done in the few weeks after LOI.
In smaller deals with poorly-run broker processes, you can often get a lot more of that basic DD done pre-LOI, allowing you to go into post-LOI with a lot more confidence the deal will get done.
Seller Sophistication
On bigger deals, sellers tend to be more sophisticated in terms of deal processes and "how transactions work". They understand more clearly that an LOI is non-binding and not a promise.
In smaller deals, sellers have an emotional moment once they sign the LOI. At that point, they tend to get a lot more invested in the process and walk you to the finish line.
Seller Relationships
Your relationship with your seller is crucial in any size deal. But the larger deals tend to have more people infrastructure in place. The business has real operations and the organization has a standalone culture & life.
In smaller businesses, the business is often an extension of the seller themselves. It doesn't feel like a standalone entity, it feels like an entity built around the seller.
As a result, when you buy that business, you're effectively ripping out the company's spine and jamming yourself into the resulting void.
This is a massive shock to the system, and the best way to manage through it is a strong partnership with the seller.
As a result, I plan to spend real time (ideally 2x/week during diligence) with the seller just chatting about the business and the future. Building that bond is crucial to post-closing success.
I think I would struggle to build that bond with multiple sellers at the same time, and then back out of one deal unexpectedly or try to replace myself with another searcher.
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Conclusion
I'm shaking out at killing other deals if I get this first LOI signed this weekend. I've seen the advice to keep the deal funnel going, but I'm not sure how to do that while being fully committed to getting this deal closed.
Would love to hear your thoughts on this one, as I know many take a different approach. You can hit reply to this email or find me on Twitter.
Thanks,
Guesswork Investing