Seeking advice - search fund deal falling through due to pushy seller
I’ve been doing a search for the past half year and tonight a deal I thought I would end up doing fell through. I’m feeling pretty disappointed still so I wanted to post about it and get some more perspectives.
Long story short I ended up putting in a $3.6M bid 2 weeks ago, which is what the brokers asked for. It’s for an asset light services biz in NYC and apparently there were ~15 offers.
Seller let me know I was one of two offers he was considering, but wanted to stay on for 2 years and collect a $150k annual salary. He’s located down in Florida so really I think he just wants to play golf and bump the purchase price up $300k. Also there were some red flags with how he talked about the sale - he said he wasn’t sure he wanted to sell and felt the biz could grow a lot more, and that he wanted to stick around and could add value because of his relationships with customers (I think there are some real risks that he would try to get paid more if the business does well following the sale).
Ended up coming back with $3.6M and $100K for 1 year.
Brokers go silent for a few days. I speak with the seller over weekend and he says another party came up with $3.7M and $100K for 1 year, plus they’re worried about my ability to get financing.
End up securing a guarantee for the loan from a family member (so negates their worry about financing risk) and offering to pay the $100K at close (so $3.7M).
Seller comes back and says he likes it but is stuck on my deal being $100K lower. I ask if we sign the deal tonight if we match their offer and he says yes.
I say let’s do it and that I’ll send revised LOI. Then seller immediately sends text that he wants to keep all the receivables at close and we should talk in the morning. My LOI said there would be normal working capital left in the biz - I know that often times for these deals the seller will keep receivables but it really rubbed me the wrong way that this wasn’t brought up at all prior, and that the seller tried to slide it in after we reached a verbal agreement and I met literally every other condition he asked for.
It feels so stupid to lose the deal over $50K - I think the company is quite good and would be a good match for my search, but I really started feeling like the seller was just going to continue pushing to take everything he could and questioning whether he could be trusted. Ultimately I ended up expressing that I had stretched to meet his every demand and at this point the deal is too expensive and withdrew my offer.
I do think that the other offer was real so ultimately he had a position of power in the negotiation, and the chances he comes back to the table are slim. But I think the way he went about it was poor and made me feel like he wasn’t someone I could trust/would be good to work with. The brokers also did a poor job of managing the process/negotiation - they were completely removed and I think they should have been managing the back and forth to prevent a situation like this where the demands are drip fed one by one.
Would love to hear some thoughts on this from people who have been doing deals their whole career. I’m not sure if walking away was shortsighted or that it was good to draw the line somewhere with a seller like this.
Based on the most helpful WSO content, your experience highlights several key lessons and considerations when dealing with challenging sellers in a search fund or M&A process:
1. Trust and Seller Behavior
2. Managing Expectations and Negotiation Tactics
3. Role of Brokers
4. Valuation and Deal Structure
5. Walking Away
6. Lessons for Future Deals
Ultimately, while this deal may not have worked out, the experience will make you a stronger negotiator and better prepared for future opportunities. Keep pushing forward—there are plenty of great deals out there!
Sources: Q&A: Home Run Deal/Project - ~$3mm Profit, ~6.42x EM, ~18 Month Investment Horizon, Overview of Sell-Side M&A, Walking away from buyside after associate years, What's happening during live deals?
Shitty situation, but if your gut is telling you the seller isn't trustworthy, then I wouldn't fret. And based on the context provided in your post, I'd agree the seller seems shady, or very painful to work with at best.
I recognize you already know this, but it's worth highlighting given you're seemingly so deep in the weeds: having a trustworthy seller at this end of the market, particularly when these businesses are so small/fragile, is absolutely critical. That seller is going to be your key asset for a while.
I'd reframe - you didn't "lose the deal over $50k," rather you saved yourself a ton of time, capital, and mental capacity.
Personally, when it comes to small business acquisition, I'd rather a relatively lower quality business with a high integrity seller/mentor, rather than a seemingly high quality business paired with a shady seller.
Would agree - have never pursued my own deals but keep your head up man. Control what you can control. I feel like I'm at a point in my career/journey where all I seem to hear is people people people. As someone that believes in personal accountability & responsibility, it took me a while to come around to the idea that people are that important. But every smart/successful person emphasizes it. From an outsiders perspective, I think you made the right decision.
Thanks for your input - I replied to another comment but I ended up going back and we reached a tentative deal with a more creative structure that aligns our incentives better (contingent payment and seller debt). I had connected with two of my old VPs to get more outsider perspective and they said that the NWC point can also be confusing for sellers. I don’t necessarily think the seller has bad intentions but he views it as him selling a very easy to run, cash flowing, growing business and wants to get paid well for it. It will be interesting to see how things go if/when we enter exclusivity.
Only 60% of search fund deals under LOI go through. Disappoint is part of the gig. You may spend another year or longer but hopefully you will find something better. It hurts but I hope the reality of the situation helps ease things for you.
Welcome to private equity…for every deal there is only one winner and sometimes they’re afflicted with the winner’s curse. Need to have a differentiated strategy - sourcing where others are not, being more charismatic and flexible, articulating how you protect and expand their legacy, or better value creation.
Don’t source via brokers. This time you were second place out of 15. Next time you are 12. What does a broker do that you can’t do? Some are inbounds given their brand but much is cold calling…
Next time perhaps instead of negotiating over such small amounts (1% of your purchase isn’t worth walking over) - agree but add your own condition. $150k / year is no problem but you need to ensure business stays at least flat, or has 5% growth. In a competitive multi party negotiation always find another dimension others are missing to negotiate over. Ideally a dimension others are unwilling or unable or too clueless to negotiate
Thanks - this is really helpful perspective. The day after we walked away I was questioning if it was the right choice. I ended up also speaking with two of my old VPs whose judgement I trust and they both made similar points: 1) NWC can be confusing for sellers 2) don’t get bogged down over small things and 3) ultimately it is all about people so trust your gut.
I still think the company is good and the purchase price was reasonable so I reached out to the seller and spoke with him 2 days later. Seems like the other party had pushed back on the NWC point and they hadn’t signed. I did what you suggested - ultimately we got more creative with deal structure and made the $100K salary contingent on EBTIDA staying flat, and then we also agreed to a 3 year line of credit where the seller funds up to $200K the first month and then gets paid back at the end of the 2nd year and 3rd year. That way we spread out the payments a bit and protect from a downside scenario, while keeping our incentives aligned with the seller.
Ultimately the NWC point wasn’t as small as I thought because due to seasonality we expect it to be could be $200-$300K in receivables, but I think we found a solution that worked for both parties.
Its pretty true that if your gut tells you someone will be difficult to work with, that isn't going to change anytime soon.
If you want to do it still, you could de-risk by making him sign a dead deal fee-reimbursement letter where he will have to reimburse your post-LOI expenses if he walks / won't accept LOI terms at a later date. If you chose to walk from the deal later, you don't get the fees reimbursed, but it gives him an incentive to stay the course.
All that said though, this type of founder DNA will be difficult post-close. Whether you pay him or not, sometimes it is best for them to stay as far away from day-to-day operations / employees / customers as can be (will help you avoid a situation where they have leverage over you or try to use it).
Lastly, one other key personality trait to PE is telling someone no and being comfortable with that. If you don't do that at the right time often enough, you will always have people trying to walk over you / trying to hold you up for stuff.
Good luck.
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