Category: Search, Fund, Operate
Clear ResultsBusiness
Why Real Estate Issues Slow ETA Deals
Most buyers expect environmental issues to be the real estate risk. In many deals, the larger risk is operational disruption. Real Estate Is Involved in Most ETA Transactions Real estate shows up in the vast majority of lower middle market transactions in some form. According to the 2025 Small Business Credit Survey published by the Federal Reserve: approximately 59% of operating businesses with employees operate from leased facilities approximately 17% operate from owned facilities approximately 17% primarily operate from a residence or without a dedicated operating facility That means roughly 83% of entrepreneurship through acquisition transactions involve some form of real estate or occupancy issue. In many deals, the primary issue is not ownership of the property itself. It is whether occupancy, control rights, lease assignment provisions, lender requirements, zoning, or permits could interfere with the business continuing to operate after closing. Those risks often become the primary real estate issues affecting the transaction. Most Buyers Initially Focus on Environmental Risk Environmental exposure absolutely matters. Particularly in: manufacturing industrial logistics automotive fuel-related operations older commercial corridors Phase I and Phase II reports remain critical diligence tools. But many search funders, independent sponsors, and ETA buyers do not place enough weight on operational interruption risk. While the business may technically exist independent of the property, operationally, it often does not. Location Becomes Part of the Business Most of these businesses are highly dependent on their physical operating environment. Examples include: machine shops with specialized electrical infrastructure distributors dependent on loading access and trucking routes contractors relying on outdoor storage rights restaurants dependent on parking and liquor licensing healthcare operators dependent on permitted use manufacturers operating under grandfathered zoning protections The issue is not simply whether the business can move. The issue is: cost of relocation operational downtime customer disruption employee retention permitting risk lender reaction transition timing Many ETA buyers do not fully appreciate this until diligence deepens. Lease Problems Often Surface After LOI One issue that repeatedly appears in ETA deals is whether the business can continue occupying the property after closing under the existing lease arrangements. Many buyers initially assume that the lease will (and can) transfer automatically at the time of closing. That is often incorrect. Most commercial leases contain assignment restrictions, consent requirements, or change-of-control provisions that must be examined carefully during diligence. Buyers need to identify: anti-assignment clauses landlord consent requirements change-of-control provisions expired lease terms undocumented extensions side agreements reflected only in emails use restrictions relocation rights held by landlords personal guarantees tied to the seller While the business operated successfully under these arrangements for years, a transaction introduces scrutiny, diligence, lender review, and operational friction. Lenders Underwrite Real Estate Issues Aggressively Occupancy stability becomes especially important in financed transactions. Particularly: SBA-backed deals owner-occupied industrial acquisitions cash flow sensitive businesses location-dependent operations Lenders often focus heavily on: remaining lease term renewal rights assignability ownership structure related-party lease economics appraised value environmental exposure zoning compliance A business with strong EBITDA but only 18 months remaining on a lease can quickly become a financing issue. Especially if the landlord has leverage during the closing process. Owned Real Estate Creates a Separate Transaction (and Separate Issues) Buyers often assume owned real estate simplifies the acquisition. In reality, it frequently creates a separate parallel transaction with its own diligence process, timeline, costs, and risks. The buyer must now perform diligence on both the operating business and the real estate itself, including: title survey and boundary issues easements zoning environmental exposure permits deferred maintenance tax exposure utility access stormwater compliance shared access arrangements The ownership structure also becomes critical, with many ETA deals using separate entities for the business and real estate. For example: one LLC owns the operating business another entity owns the real estate the operating company leases the property from the real estate holding company That structure often creates cleaner liability separation, financing flexibility, estate planning opportunities, and long-term control over the property. The larger problems often appear when the business and property were never properly separated in the first place. Many older lower middle-market businesses operate under informal ownership structures where: the seller personally owns the property family members own portions of the real estate title ownership differs from operational control there is no formal lease occupancy economics were never documented properly related-party arrangements evolved informally over decades That creates a very different set of diligence and execution risks. Buyers now need to examine: who actually owns the property whether all owners are participating in the transaction whether any family members must consent whether the operating business has formal occupancy rights whether market rent materially changes EBITDA whether lender underwriting changes once rent is normalized whether personal use or mixed-use issues exist whether title, tax, or succession issues affect the property whether post-close disputes could arise around occupancy or control Real Estate Distorts EBITDA More Than Buyers Expect Normalized occupancy costs also frequently change the underwriting. This issue regularly shows up in entrepreneurship through acquisition transactions, causing the business to appear more profitable because the seller owns the building. The company may operate with: below-market rent no formal lease favorable related-party occupancy terms deferred maintenance underreported capital needs Once the buyer normalizes rent, maintenance, taxes, insurance, market occupancy economics, and other carrying costs, the cash flow can compress quickly. That affects: leverage availability DSCR calculations valuation purchase price expectations post-close cash needs This is particularly important in manufacturing, warehouse, automotive, and hospitality acquisitions. Zoning Problems May Remain Hidden Until Diligence It can be a misconception to assume: “The business already operates there, so zoning must be fine.” Not always. A lack of zoning compliance can significantly disrupt operations. Businesses sometimes operate under: grandfathered nonconforming uses historical variances undocumented expansions expired permits improper outdoor storage occupancy inconsistencies signage violations prior approvals tied to historical ownership A transaction can trigger: new permit review lender diligence insurance underwriting review municipal scrutiny updated inspections The business may have operated without issue for years, but that does not mean the use remains protected post-closing. Real Estate Risk Can Show Up Everywhere Real estate issues quickly spread into: financing operations integration employee retention transition planning insurance working capital timing of closing The issues then become larger than the property itself. Real estate issues are most prevalent in lower middle market acquisitions where: documentation evolved informally occupancy arrangements were relationship-driven operational processes were never built for institutional diligence In these ETA deals, the answer to the real estate question ultimately controls: “Can the business continue operating the same way immediately after closing?”
June 10, 2026
Business
Post-Close Alignment in Lower Middle Market M&A: Where Deal Stress Begins to Fracture
Most sellers and buyers in lower-middle-market M&A, including search funds, entrepreneurship through acquisition (ETA), and independent-sponsor transactions, begin to suffer from deal fatigue and welcome the post-closing phase of a business acquisition or M&A transaction. No more due diligence, no more negotiations, no more redlines. However, in many cases, the post-close phase is fertile ground for additional disputes to emerge. Most post-closing friction in lower-middle-market M&A deals is not caused by something that was absent from the deal. To the contrary, it is actually related to the negotiated documents governing the relationship between seller and buyer in the post-close transition phase. Consulting agreements, employment agreements, and corporate governance documents in rollover equity transactions seek to govern the relationship, but the relationship is still new in this phase. The parties are experiencing, for the first time, what it is like to work together after the change in dynamics (seller-owner to exited owner; buyer with funding to operator managing debt service and performance expectations). In this example, the seller rolled equity in the transaction and was now an equity holder in the buyer's platform company. The post-closing issues did not stem from a missing provision, but from ambiguities that existed across multiple documents that were meant to align and work together: seller notes, management agreements, and governance documents were all in play and created more confusion than clarity. That pattern is more common than most buyers expect, particularly in search fund, entrepreneurship through acquisition (ETA), and independent sponsor deals where post-close roles and governance tend to be more fluid. The LOI to Close Gap in M&A Transactions Most of these issues are not created at closing. They are created in the window between LOI and signing. At LOI, the parties align on high-level economics and general expectations: The seller will stay involved The business will transition smoothly Equity will keep everyone aligned in the case of rolled equity, or amounts due pursuant to the seller note will incentivize cooperation But those concepts get translated into separate documents depending on the deal: Employment agreement Consulting agreement Operating agreement Purchase agreement Each document answers a different question. Very few processes force those answers to be reconciled into a single operating model. That is where the gap forms. By the time you reach closing, the documents are “complete” but not always aligned. Where Post-Closing Issues Show Up in Business Acquisitions Employment Terms in Post-Closing Transition Buyers often assume that key individuals, particularly a selling owner transitioning into an operating role, will continue “as expected.” The employment agreement is where that expectation either becomes a reality or breaks down. The most common issues include: Role definition is too broad or not tied to actual authority Termination provisions do not reflect how performance issues will be handled Compensation structures do not match the deal model Example: A seller stays on post-close in a senior operating role (e.g., general manager) under a two-year agreement while the buyer installs its own CEO or operating partner. The buyer expects to reshape reporting lines and decision-making authority over time. The agreement, however, includes strong severance protections and defines material changes to duties or authority as “good reason.” Six months in, the buyer begins shifting responsibilities to its operating partner. The seller asserts “good reason” and triggers severance or other protections, despite the buyer viewing the changes as part of the planned transition. Nothing is technically wrong in the document. It just does not reflect how the buyer intended to transition control of the business. Consulting Roles and Transition Services Agreements Consulting arrangements are often treated as secondary or low-risk. In practice, they can drive real execution outcomes. This is especially true in customer transition and institutional knowledge transfer. Where this tends to go wrong: Scope of services is loosely defined Time commitment is not specified Compensation is not tied to outputs Example: A seller agrees to a 12-month consulting arrangement to support transition. The agreement references “reasonable availability” but does not define hours, deliverables, or response expectations. Post-close, the buyer expects active involvement in customer introductions and onboarding. The seller views the role as limited advisory support that can be provided from a remote location and not on-site. The result is predictable. The buyer feels unsupported. The seller believes they are complying with the agreement. Again, nothing is broken in isolation. The expectations were never aligned. Rolled Equity and Post-Close Governance Rolled equity is typically framed as a tool to align the parties in furtherance of a more profitable enterprise. In practice, it can be alignment in concept only, not in execution. Where this tends to go wrong: Different expectations around liquidity timing Limited clarity on governance rights Misunderstanding of distribution mechanics Example: A seller rolls 20% of proceeds into the new structure. The buyer plans to reinvest cash flow into growth and limit near-term distributions. The seller expects periodic cash flow similar to how they operated pre-sale. The operating agreement permits discretion on distributions, but the practical application of that discretion was never aligned. This is not a legal defect. It is an operating mismatch that surfaces quickly once capital allocation decisions begin. Why Post-Closing Misalignment Occurs in M&A Deals During the deal process, these items are negotiated in parallel: Purchase agreement Employment agreements Consulting agreements Equity and governance documents Each document may be internally consistent, but the following question should be asked: Do these documents, taken together, reflect how this business will actually be operated on day one? More specifically: Do they clearly define what the seller is required to do, what authority they retain or lose, how they are compensated for that role, and what happens if those expectations change or break down? If the answer to those questions is unclear, the issue is already embedded in the deal. Practical Considerations Pre-Close in Lower Middle Market Transactions This is almost always easier to address before closing than after. In practice, a strong lower-middle-market post-close package tends to do six things: Define the role with objective deliverables. Move beyond titles. Specify outputs, metrics, and decision rights that tie to how the business will actually be operated. Clearly classify the relationship. State whether the seller is an employee, consultant, or board-level advisor. Blurred status tends to create both operational and legal ambiguity. Precisely frame “cause” and “good reason.” If the buyer retains flexibility to change duties, reporting lines, compensation, or authority, that flexibility should be clearly bounded. Well-defined “cause” and “good reason” concepts are what translate flexibility into enforceable expectations. Separate consulting economics from deal economics. Consulting fees should stand on their own unless the parties intentionally link them to purchase price or earnout mechanics. Unintended overlap often creates disputes about what is being paid for performance versus transition support. Build explicit consequences for disruption. If authority is stripped or termination occurs outside the expected framework, the documents should address the outcome. That can include tolling, acceleration, deemed achievement, or extension concepts tied to equity or earnouts. Preserve a practical enforcement path. Rights are only useful if they can be exercised. Escrow access, information rights, expert determination procedures, and specific performance provisions tend to make these arrangements function in practice. Closing Thought on Post-Closing Risk and Deal Execution These are not technical refinements. They determine whether the post-close relationship functions when conditions change. Most post-closing issues do not come from a single broken provision. They come from small inconsistencies across multiple documents that were never forced to align into a single operating framework. If you are under LOI or in diligence, this is typically the window to fix that alignment without disrupting the deal. After closing, you are no longer interpreting intent; you are operating within the structure you drafted. If you are working through this in a live deal, step back and ask: Do these documents, collectively, dictate how decisions get made, how the seller participates, and how economics actually flow? If not, then the risk is not theoretical. It is already built into the deal.
May 29, 2026
Business
Strategic Equity Partners: Expertise vs. Governance Friction
In many platform acquisitions (particularly in search funds, entrepreneurship through acquisition (ETA) transactions, and independent sponsor deals), adding a “strategic equity partner” is framed as a clear positive. There are real benefits like additional capital, operating experience, lender credibility, and often a higher probability of closing. The issue is less about whether to add a partner and more about when and how that partner is introduced. When a strategic partner is brought in after the LOI is already signed, the timeline to negotiate the governance framework is compressed. The narrative and excitement at that stage remain focused on upside, while the governance implications of adding another decision-maker are pushed into later negotiations. The LOI-to-close window is compressed, and incentives shift toward getting the deal done. As a result, governance is frequently finalized under pressure rather than designed deliberately. The impact is rarely economic at the outset. It shows up in execution. As additional partner approvals and consent rights are layered in, decisions that were previously within the operator’s control now require alignment across multiple stakeholders. More stakeholders mean more approvals, and more approvals tend to slow the process. That friction is not always visible during the transaction itself. It becomes more apparent in the first 100 days post-close, when the business needs to move quickly, and the governance structure does not support the pace that was underwritten. This dynamic is more pronounced in roll-ups, including those executed through search funds, ETA platforms, and independent sponsor structures, where speed and repeatability drive returns. Even modest governance drag can change outcomes. A structure that is directionally sound but operationally constrained can often underperform a simpler structure that can execute consistently. There is a counterpoint: more deliberate governance can lead to better decisions. The tradeoff between decision quality and execution speed should be explicit rather than assumed. What “Strategic” Usually Signals Introducing a strategic partner at LOI often reflects a gap in the team rather than a pure enhancement. This is especially common in search fund and independent sponsor transactions, where the operator is building infrastructure in parallel with executing the acquisition. The framing is additive, but the underlying driver is frequently a need to solve for something that is not yet fully built into the platform. This dynamic also mirrors a broader structuring question: where strategic partners sit in the equity stack—at the holdco or portfolio level—can materially impact governance and decision flow, not just economics. In many cases, the platform relies on capabilities that are still developing. Integration experience is a common example. The roll-up model assumes that acquisitions can be absorbed efficiently, but that capability is often unproven at the platform stage. Industry-specific operating knowledge may also be limited, particularly where the operator is entering a new vertical or scaling beyond prior experience. Systems and reporting infrastructure tend to lag the ambition of the strategy, creating a mismatch between what is modeled and what can be executed. The natural response is to introduce a strategic partner to bridge that gap. Lender dynamics often reinforce the decision. In leveraged transactions, the team is underwritten alongside the asset. A strategic partner can strengthen that narrative by adding perceived institutional support and a track record that lenders recognize. In some cases, this improves terms or increases certainty of a close. The partner effectively becomes part of the credit story, not just the equity stack. Integration bandwidth is another driver. Roll-ups assume the ability to absorb add-ons quickly, often without a fully built-out operating platform. A partner is expected to support that integration planning and post-close execution, thereby reducing execution risk. There is also an element of risk sharing. Particularly in first platform deals or more aggressive investment theses, bringing in a partner spreads exposure and introduces another perspective if/when performance deviates from plan. None of this is inherently problematic. In many cases, it is a rational response to real constraints. The consistent consequence, however, is that the partner brings governance, and governance changes how the business operates. The key is to enter the deal with a clear understanding of how that governance will function in practice. The below demonstrates a typical board structure in traditional search fund models. You can explore the different models and board structure further here: https://tinyurl.com/2rh74bk2 Where Friction Shows Up As briefly mentioned above, the friction impact appears in decision-making. As additional consent rights are layered in, more parties must agree before action can be taken. The underwriting model may assume speed and autonomy that no longer exists once governance is expanded. Board composition is often where this dynamic becomes real, because it determines who actually has the ability to approve or block decisions. A balanced board on paper can function as a checkpoint in practice once quorum and voting thresholds are applied. If control is not clearly aligned with the operating model, the board shifts from oversight to gatekeeping. Decisions that would otherwise be routine begin to require formal coordination, special meetings, and sometimes even input from professional advisors representing various stakeholders. Protective provisions compound the effect. In practice, these are the provisions that designate certain actions as “reserved matters” requiring supermajority or unanimous consent at the board or investor level. Common examples include: incurring or refinancing debt, approving capital expenditures above a threshold, deviating from the approved budget or business plan, issuing additional equity, or entering into material contracts or acquisitions. Each of these approvals is reasonable on its own. When each step requires a supermajority or unanimous sign-off, the process shifts from operator-led execution to coordinated approvals across multiple stakeholders, which slows the cadence of decision-making. The issue is not the existence of these rights, but how frequently they are triggered in the normal course of operating the business. Budget approvals can create the same constraint. When budgets require approval and variance thresholds are tight, routine adjustments turn into approval processes, limiting management’s ability to respond in real time. Roll-ups rely on speed, and competitive processes — particularly in lower middle market ETA and independent sponsor deals — tend to reward buyers who can move quickly with certainty. If each add-on requires layered approvals, the platform becomes less competitive. Opportunities that fit the thesis may still be identified, but the ability to act on them is constrained by structure rather than strategy. This is why the friction becomes most visible in add-on acquisitions, where speed is often the deciding factor in winning the deal. Management decisions can also migrate from operator discretion to investor approval. Hiring, compensation, and incentive alignment become slower to execute. Over time, this affects the quality and responsiveness of the team, particularly in periods where rapid adjustment is required. Deadlock and Forced Outcomes As additional stakeholders are introduced, disagreements become more likely. In many structures, those disagreements ultimately point parties toward formal deadlock mechanisms. These can include buy-sell arrangements (often structured as “Russian roulette” or “Texas shootout”), put/call rights, forced sales or buyouts, or redemption rights. These mechanisms are designed to break impasses, but they can be outcome-determinative and, in some cases, harsh to one side. A forced buyout may require a sponsor or the company to purchase an equity stake at a defined price or formula, which can create meaningful cash flow strain at the exact moment the business needs capital to execute. Alternatively, a party may be compelled to sell at a time or valuation that does not align with the original thesis. The key point is not that these provisions should be avoided. It is that once disagreements arise, the path to resolution is often binary and financially significant. If those dynamics are not considered upfront, governance can shift from a tool for alignment to a mechanism that forces outcomes under pressure. Why It Matters More in Roll-Ups Single-asset acquisitions can tolerate some governance friction because the operating model is relatively stable. Decisions are fewer in number and less time-sensitive. In that context, additional oversight may be manageable. A roll-up operates differently. The model depends on pace, repetition, and the ability to act decisively across a sequence of opportunities. Each add-on introduces new variables, and the platform must be able to respond quickly to integrate, optimize, and move forward. When governance introduces multiple layers of approval and frequent investor involvement in operational decisions, the strategy becomes harder to execute in practice. Decisions can still be made, but not at the speed required to maintain momentum. At that point, governance directly affects outcomes and is difficult to unwind without renegotiating core terms. The graphic below shows a sample board composition after numerous acquisitions. Note the increasingly limited decision-making power of the operator. Decision Rights to Resolve Early If a strategic partner is introduced around LOI, whether it be in a search fund, ETA, or independent sponsor context, decision rights should be aligned with how the business will operate in practice. Board control at closing needs to be explicit and consistent with the intended operating model. Ambiguity at this stage tends to create friction later. It is also worth recognizing why these protections exist. Investors are seeking to protect capital and, in many cases, bring real experience that can improve outcomes. A well-constructed board can provide discipline, identify risks early, and prevent decisions that would otherwise impair value. The goal is not to remove oversight, but to calibrate it to support execution rather than impede it. Management authority should allow day-to-day decisions without repeated escalation. The distinction between strategic oversight and operational control needs to be clear in both concept and documentation. Add-on acquisition parameters should be defined in advance, so execution does not depend on real-time approvals. Debt capacity should align with the expected capital strategy rather than restrict it. Budget processes should allow for adjustment as conditions change, rather than lock the business into a static plan. Management should retain sufficient control to build and adapt the team required to execute. Deadlock provisions should be evaluated based on how quickly they can resolve disagreement, not simply how balanced they appear. These are execution variables that ultimately determine whether the strategy can be implemented as underwritten or whether governance constraints begin to reshape the outcome. Structuring to Preserve Speed These dynamics point to a few practical governance principles. First, align control with the operating model. If the thesis depends on speed, decision rights should enable timely action at the management level. Second, reserve approvals for truly fundamental matters, not routine operating decisions that occur frequently. Third, define thresholds that reflect how the business will actually run, including pre-approvals for expected activities like add-ons and incremental leverage. Fourth, make approval processes workable in real time, not just balanced on paper. This is where experienced counsel matters. In this context, “sophisticated governance” means more than drafting protections; it involves translating the investment thesis into a decision-rights framework that will function under time pressure. That includes calibrating reserved matters, setting practical thresholds, designing board composition and quorum rules, and stress-testing deadlock outcomes against realistic scenarios. The goal is to preserve investor protections while ensuring the company can execute without repeated escalation. Closing Thought Strategic partners can add value, particularly where they address real capability gaps or strengthen the financing narrative. In many cases, they improve the quality of the deal and increase the probability of closing. But they also introduce a second layer of governance that must align with how the business will operate after closing. If that alignment is not addressed before close, it tends to be addressed afterward, when decisions need to be made quickly and flexibility is limited. That is where execution risk increases and the original thesis begins to drift. Not because the strategy was flawed, but because the structure does not support it. If you are navigating this dynamic in a live deal, it is worth addressing decision rights early and in practical terms — before they become constraints in the first 100 days.
April 23, 2026
Business
The Great Ownership Transfer: Why Execution Breaks Search Fund & ETA Deals
Most commentary on the “Great Ownership Transfer” or the "Silver Tsunami" focuses on sellers. It is right there in the name. Aging owners. Lack of succession planning. Uncertainty around exit. That framing is incomplete. This is not just a supply story; it is a buyer capacity problem. Particularly for search fund entrepreneurs, independent sponsors, and others pursuing entrepreneurship through acquisition McKinsey estimates that ~6 million SMBs will face ownership transitions by 2035, representing up to $5 trillion in enterprise value. Yet roughly 92% of exits are likely to occur through closure, not sale. McKinsey Report: The Great Ownership Transfer. If you are acquiring businesses in the $500K–$25M range, your primary competition is often not another buyer. It is the business quietly shutting down. This Is Not a Deal Flow Problem - It Is a Buyer Execution Problem in Search Funds and ETA There is no shortage of businesses to buy in the lower middle market. The challenge for search funds, independent sponsors, and ETA buyers is execution. It is likely that for some of these businesses, the rational step is closure, but there will remain a significant number of profitable businesses in search of a buyer during this economic event. The problem exists in the shortage of buyers who can: Source effectively Underwrite accurately Finance reliably Transition successfully The gap between going under LOI for a “viable business” and closing is where most deals fail. That gap is also where the opportunities and risks live. The Buyer Capabilities Stack In practice, buyer success in this market comes down to the four capabilities identified above. Sourcing: The Best Deals Are Not in Market Because closure dominates exit paths, many viable businesses never run a formal sell process. They speak with a CPA, a broker, or a peer about selling, and when friction appears, the process stops. Running a sell process is not without its hurdles, which is why the rewards are greater for those who do it. If your sourcing strategy depends solely on brokered deals, you are competing in the most efficient (and crowded) segment of the market. If a buyer wants to improve their odds at wining, they need to: Build referral channels with accountants, attorneys, and advisors Focus on specific industries to accelerate underwriting Embrace cold outreach Engage sellers before a formal process exists The winning edge is not price. It is access to top tier deals that are found through hard work and diligence. Seller Readiness: Most Deals Fail Before Diligence Another recurring issue in lower middle-market transactions is not business quality, but transferability. Common issues that cause buyers to avoid deals include: Incomplete or inconsistent financials Owner-dependent relationships Undocumented processes Unclear working capital needs The better initial question is not: “Is this a good business?” It is: “Can this business be transferred and financed cleanly?” Buyers can use a simple readiness screen when examining prospective companies to purchase by examining for: 24 months of monthly financials and tax returns Customer concentration and contract review Identification of key personnel dependencies Basic operational systems (billing, quoting, payroll) Working capital dynamics post-close Deals that fail this screen rarely improve during diligence. I recently posted about broken LOIs and the reasons why buyers walk away: Broken Executed LOIs By Reason. Over 45% of the reasons for failure can be categorized within the items listed above. Financing: The Constraint Most Buyers Underestimate Financing is not a closing step. It is a very serious pre-LOI workstream. That may seem like an obvious statement, but many failed deals share a common pattern: The buyer underwrites one version of EBITDA, and the lender underwrites another. That gap kills deals. Particularly in SBA-driven transactions common in search funds and small business acquisitions: Equity requirements and guarantees are real constraints Underwriting timelines introduce friction Smaller deals are treated as bespoke, not standardized Disciplined buyers: Underwrite to debt service, not seller-adjusted earnings Normalize add-backs conservatively Identify working capital needs early Seriously consider the structure pre-LOI (seller notes, holdbacks, transition-linked payments) The deal is not real until the capital stack is real. Nothing happens without financing. Post-Close Execution: The First 100 Days Decide the Outcome The most underappreciated risk in these transactions is not closing. It is transition. I believe buyers should familiarize themselves with at least some turnaround management practices during the search process because buyers inherit: Informal systems Relationship-driven revenue Limited reporting infrastructure Outdated systems Without a clear transition plan, value can erode immediately. It is not simply a digital transformation play (digital advertising, industry specific project management Saas, etc.). Effective buyers plan for: Defined transition services from the seller Retention of key employees Structured customer handoffs Weekly cash and operations cadence post-close This is not operational detail. It is downside protection and risk mitigation. It is also some of the hardest work because it cannot be brute forced - it requires soft skills, attention to detail, and time-consuming review of information. What This Means for Investors Backing Buyers For family offices, independent sponsor investors, and capital partners backing search funds and ETA buyers, the underwriting focus needs to shift. Similar to what we discussed above, the question is not: “Is this a good business?” It is: “Can this buyer execute this transition?” Key diligence questions for investors to ask should include: Does the buyer have a repeatable sourcing strategy? Is there a defined readiness filter? Is financing aligned with lender reality? Is a post-close execution plan in place? Most deals in this segment fail due to execution gaps, not thesis failures. The Structural Inefficiency Creates Opportunity The inefficiency in this market is not hidden. It is structural: fragmented deal flow, inconsistent advisor quality, limited financing standardization, and minimal post-close support. These are not isolated issues - they are systemic frictions that sit between a viable business and a closed transaction. Prepared buyers can benefit from this inefficiency because it creates: Less competition in off-market deals Pricing inefficiencies The ability to win through structure and not just valuation But those advantages are only available to buyers who can execute. This is not a market where capital alone wins. It is a market where taking a business from “viable” to “financeable” to “transferable” is necessary and may require a longer pre-LOI/pre-close relationship with the seller. If pre-screening raises concerns around financial quality, customer concentration, or post-close execution, the question is not just whether the deal is attractive. It is whether those risks can be mitigated before committing to an LOI. Most deals don’t fail because the business is bad. They fail because the buyer underestimated what it would take to close and operate it. Spending time with the seller (sometimes weeks or even months) before fully committing can be one of the most effective ways to de-risk a transaction before signing an LOI and set up a smoother, more profitable transition. The Real Takeaway The Great Ownership Transfer is often framed as a wave of supply. The data suggests the real issue is execution. This is especially true for those pursuing entrepreneurship through acquisition, where execution risk concentrates in a single asset. The challenge is not finding viable businesses. It is getting them across the finish line after turning viable businesses into successful buyer transitions, not closures. For buyers, the edge is not just identifying a good business. It is building the capability to move a deal from: possible → financeable → transferable → stable The market does not reward intent. It rewards execution. Buyers who can deliver that consistently will capture disproportionate value.
April 3, 2026
Business
Planning for a Sale: Engineering the Best Possible Outcome
Most business owners approach a potential sale by asking a single question: What is my business worth? While valuation is important, it is rarely the most important question. A more productive starting point is: What do I want the sale of my business to accomplish for my family, my legacy, and the next phase of my life? A recent series by Family Business Magazine outlines a useful framework for thinking through that question. It moves the conversation beyond price and into a broader discussion of life planning, liquidity planning, and post-sale purpose. I highly suggest taking at those articles here: Part 1: How to exit a family business with purpose, profit and peace of mind - Family Business Magazine Part 2: Planning for the best possible outcome of a business sale - Family Business Magazine The below focuses primarily on maximizing enterprise value while preparing for a sale, but the articles linked above are a must read for owners planning an exit. Many of these themes closely mirror what we see in transactions involving search funds, independent sponsors, and family office investors acquiring privately held businesses, because many of those deals pull from the same group of sellers. Sellers Should Define "Enough" Before Negotiating One of the most common mistakes founders make is negotiating a transaction before defining what success actually looks like. Owners should enter negotiations with clarity on: The lifestyle they want after the sale How much liquidity is required to support that lifestyle Legacy or philanthropic goals Whether they want to remain involved in the business Without defining what "enough" means, sellers can end up optimizing for headline price rather than overall outcome. Some reject reasonable offers while others accept deals that ultimately do not support their long‑term financial goals. From a planning perspective, this is where tax modeling, estate planning, trust structuring, and charitable planning should occur before a letter of intent is signed. Once negotiations begin, many of these planning opportunities become more limited. Transaction Structure Matters as Much as Price A higher purchase price does not always produce a better result for the seller. Owners should carefully evaluate the structure of a proposed transaction, including: Cash at closing versus rollover equity Earn‑outs and performance contingencies Seller financing Employment agreements and non‑compete obligations Indemnification exposure and escrow provisions Capital tied up behind unrealistic performance benchmarks, potential clawbacks, and unintended tax consequences can quickly change how a seller views the attractiveness of a deal. A Practical Example: How Structure Shapes the Outcome Consider a common lower‑middle‑market transaction. A founder sells a services company for $12 million to a search fund backed by several investors. The deal structure may look something like this: $8 million paid in cash at closing (often financed through SBA or senior debt) $2 million rolled over by the seller as minority equity $1 million tied to performance‑based earn‑out targets $1 million held in escrow to cover indemnification exposure On paper, the headline purchase price is $12 million. In practice, the seller only receives $8 million at closing, with the rest dependent on future performance and negotiated protections. For some sellers, this structure can be extremely attractive. Rollover equity allows them to participate in future growth, particularly if the buyer plans to pursue add‑on acquisitions or scale the platform. For others, the priority may be liquidity and simplicity. The Emotional Transition Is Real Selling a business is not purely a financial event. For many founders, the business represents years of personal effort and identity. The business may represent: A founder's reputation in the community Their daily structure and purpose Their primary social and professional network This is why many successful transitions incorporate some form of gradual change rather than an immediate exit. Options may include: A phased transition period A recapitalization instead of a full sale Minority liquidity events Installing professional management before a transaction These approaches can allow owners to preserve value while also managing the emotional realities of stepping away from the enterprise they built. Post‑Sale Wealth Requires Structure For many founders, the sale of a business represents the single largest liquidity event of their lives. The transition from operating income to investment income requires a completely different mindset and governance framework. A successful sale often creates a new set of challenges. A significant liquidity event can introduce complexity that many founders have never previously faced. Common considerations include: Investment governance Asset protection Estate and gift tax exposure (although much of this should be planned prior to the sale date) Family alignment around wealth management Many families explore options such as establishing a family office, joining a multi-family office platform, or pursuing their own investments in different asset classes (real estate, private equity, traditional stocks and bonds, etc.). The legal and governance infrastructure supporting these structures is just as important as the purchase agreement that completes the sale. Why Sellers Need to Have This Conversation Now Several market trends are increasing the number of potential transactions in the lower middle market. We are seeing: Growing number of retiring business owners Continued growth of search funds Increased independent sponsor activity Expansion of family office direct investing Strong buyer demand in certain service sectors As a result, many business owners are receiving inbound acquisition interest earlier than expected. But inbound interest does not necessarily mean a business or its owner is ready for a transaction. The most successful exits tend to occur when three elements align: The owner is personally ready The business is operationally prepared Legal, contractual, and financial structures are organized When those pieces are in place, a transaction can achieve far more than simply generating liquidity. It can provide the foundation for the next chapter of the owner's personal and financial life. Seller Readiness Checklist For founders considering a potential exit, several questions can help determine whether the business and owner are ready for a transaction: Have you defined what financial outcome is "enough" for your post‑sale goals? Are your financial statements, contracts, and corporate records organized and diligence‑ready? Do you understand how different transaction structures affect liquidity and taxes? Have you discussed succession and estate planning with your advisors? Do you know whether you want to exit completely or remain involved post‑transaction? Is your management team capable of operating the business during and after a transition? Owners who address these questions early often enter negotiations from a position of clarity and strength. Final Thoughts Selling a business is one of the most consequential financial decisions an entrepreneur will make. The best outcomes rarely result from focusing on price alone. Instead, they come from thoughtful planning that integrates transaction strategy, tax considerations, estate planning, and personal goals. For owners considering an exit, taking the time to plan intentionally, before negotiations begin, can make the difference between a good outcome and a transformative one.
March 17, 2026
Business
Investor Equity Placement: Why HoldCo vs. OpCo Matters
When a searcher or independent sponsor brings in outside capital, the conversation often centers on valuation and percentage ownership. But an equally important question is structural: Should the investor hold equity in the operating company (OpCo) or in the parent holding company (HoldCo)? This decision carries meaningful legal, economic, governance, and strategic implications. It affects dilution, future capital raises, control dynamics, exit flexibility, and long-term alignment. The analysis also becomes more nuanced depending on the investor’s role and non-monetary contributions. Consider a common scenario: a sponsor raises $2 million to acquire a $10 million HVAC company, with plans to pursue add-on acquisitions over time. In a roll-up strategy like this, what if one investor brings domain expertise, sourcing capabilities, or operational leadership that materially influences growth? That strategic contribution may justify equity at the HoldCo level, where the investor participates in platform-wide upside and profits. By contrast, a passive investor whose involvement is limited to board oversight may be more appropriately placed at the OpCo level, particularly in a single-asset acquisition. Of course, this assumes the target will operate as a subsidiary rather than being merged into an existing operating entity — which is itself a separate structural decision. An investor in this scenario will usually see investment income flow solely from OpCo (instead of the entire portfolio of companies). The structure and placement of an investor's equity is rarely mechanical. It should reflect strategy, bargaining power, long-term vision, and investor expectations. The considerations below provide a framework for both searchers/sponsors and investors to consider when evaluating this decision. The Two Primary Structures Investor Holds Equity at the Portfolio Company Level (OpCo) Under this structure, the investor owns equity directly in the acquired operating business. OpCo is typically maintained as a standalone entity or as a clearly defined subsidiary beneath a holding structure. Key Implications The investor’s economics are tied solely to the business of OpCo Governance rights are limited to decisions within OpCo Exit proceeds flow from the sale or recapitalization of OpCo The investor has no direct rights to unrelated subsidiaries or future acquisitions Common Use Cases Single-asset traditional search fund deals One-off independent sponsor acquisitions Transactions without a broader platform thesis Situations where negotiation dynamics support a narrower investment scope Advantages Structural simplicity Clear alignment around a single asset Cleaner distribution waterfall Reduced complexity in governance documents Easier return modeling tied to one business Risks and Considerations Limited investor participation in future add-on acquisitions Potential need to restructure if platform ambitions later emerge Dilution of equity will occur at the operating level if additional capital is raised, although usually unlikely unless part of a larger restructuring Misalignment if investors expect exposure to future platform growth OpCo equity works best when the investment thesis is narrowly defined and neither party anticipates a broader multi-asset strategy. Many first-time searchers/sponsors and their investors will fall into this structure. Investor Holds Equity at the Parent Holding Company (HoldCo) In this structure, a parent entity owns one or more subsidiaries, and the investor holds equity at the parent level. Key Implications The investor participates in the economics of all subsidiaries beneath HoldCo Add-on acquisitions can be completed without issuing new OpCo equity Governance is centralized at the parent level Platform value creation accrues across the entire enterprise Common Use Cases Platform or roll-up strategies Independent sponsor models contemplating multiple acquisitions Long-term scaling plans involving additional capital raises Advantages Centralized governance and decision-making Easier implementation of sponsor promote structures Ability to allocate management incentive equity across subsidiaries Greater flexibility for future capital formation Risks and Considerations Increased complexity in operating agreements and shareholder documents Need for carefully drafted distribution waterfalls Cross-subsidiary economic exposure if not properly structured Greater sensitivity to dilution stemming from future equity financing More robust negotiation of protective provisions and investor rights HoldCo structures reward forward planning but require thoughtful drafting and clear alignment among stakeholders. Legal and Governance Considerations In practice, HoldCo structures centralize power and economics at the parent level, while OpCo structures localize rights and obligations within a single operating entity. Where the investor equity sits directly impacts: Voting rights and approval thresholds Board composition and observer rights Protective provisions Information and reporting rights Drag-along and tag-along mechanics Transfer restrictions and liquidity rights Put and call rights, if negotiated If the investor sits at HoldCo, governance documents must anticipate: Future equity issuances Add-on acquisitions and layered capital structures Sponsor promote mechanics Reallocation of advisor and/or employee incentive equity pools Distribution waterfalls across multiple subsidiaries Potential conflicts between legacy investors and new investors If the investor sits at OpCo, documentation tends to focus more narrowly on: Operating distributions Exit triggers tied to a single asset Seller rollover alignment These differences materially affect control and economics. They also influence negotiations with senior lenders, particularly where covenants intersect with equity commitments. Strategic Questions Before Deciding Before finalizing entity placement, sponsors and investors should consider: Is this a single-asset investment or the foundation of a broader platform? Are add-on acquisitions part of the near-term or long-term strategy? Will additional investors likely participate in future rounds? How centralized should governance be? What is the intended exit pathway (strategic sale, recapitalization, long-term hold)? How does the structure align with sponsor promote economics and incentive equity? Does the investor bring strategic value beyond capital? Common Structural Mistakes Frequent errors to keep in mind (and avoid): Defaulting to OpCo equity without evaluating long-term platform goals Granting HoldCo equity without clearly defining dilution mechanics Misaligning promote structures with entity placement Overlooking interaction between investor rights and senior debt covenants Ignoring tax, estate, or succession planning implications Treating entity placement as a documentation detail rather than a strategic decision These choices are difficult to unwind and can create friction during future capital raises, refinancings, or exits. Final Perspective Bringing on an investor is not merely a capital event. It is a structural decision that defines governance, economics, capital formation, and exit flexibility. Whether you are a search funder acquiring your first business, an independent sponsor building a scalable platform, or a family office co-investing alongside operators, the level at which equity is issued matters. The best structures anticipate the second deal before the first one closes. Structure intentionally. Plan forward. Align incentives early.
March 3, 2026
Business
SBA Loan Performance in 2025: What the Data Says—and Why it Matters for Buyers and Investors
Recent SBA loan performance data offers an important reality check for buyers, lenders, and investors operating in the lower middle market. A 2025 analysis highlighted by Monitor Daily examines which industries are experiencing the lowest default rates across SBA-backed loans. These findings carry meaningful implications for search funders, independent sponsors, family offices, and anyone allocating capital to small businesses. This edition of Search Fund Operate takes a deeper look at what the data actually shows, why certain industries consistently outperform others from a credit-risk perspective, and how that information should inform acquisition strategy, diligence priorities, financing decisions, and legal structuring. For buyers using SBA leverage, this is forward-looking signal about operational durability and transition risk. What the SBA Loan Performance Data Reveals The SBA loan performance report identifies several industries with notably lower default rates in 2025. These sectors tend to share common structural characteristics: Predictable, recurring demand Essential or non-discretionary services Lower customer concentration risk Operational simplicity relative to revenue stability Limited exposure to volatile input costs Industries such as healthcare services, professional services, recurring service-based businesses, and essential retail continue to perform well compared to more cyclical or capital-intensive sectors. These businesses benefit from steady cash flow, contractual or repeat customer relationships, and pricing models that adjust more easily to inflation or labor pressure. By contrast, businesses tied to discretionary consumer spending, commodity-sensitive pricing, or seasonal revenue cycles show higher stress levels. Margin compression, labor shortages, and supply-chain disruptions continue to test these models—especially when layered with SBA leverage. This is unlikely to come as a surprise for anyone investing in this space. Why Default Rates Matter for Buyers (not Just Lenders) While SBA default data is often viewed through a lender’s lens, buyers should treat it as a proxy for operational resilience. Lower default rates typically correlate with: Stronger and more consistent debt service coverage More durable margins across economic cycles Better pricing power with customers Reduced reliance on a single owner, customer, or vendor For search fund entrepreneurs and first-time buyers, these factors materially affect day-to-day operating stress (and should translate to lower risk). The first 12–24 months post-close are often the most fragile period of ownership. A business that historically services SBA debt is more likely to support a new owner during the transition stage when they are still trying to absorb institutional knowledge from exiting leadership while simultaneously trying to establish their own credibility. From a legal perspective, default risk also ties directly into representations, indemnities, earn-outs, and seller financing terms. Businesses operating in higher-risk industries often require more robust contractual protections to balance uncertainty. Industry Selection Is a Risk Management Tool The data reinforces a point often overlooked in acquisition discussions: industry selection itself is a form of risk management. Buyers often focus on valuation multiples, seller notes, or headline EBITDA figures, but industry dynamics may matter more than price precision. A slightly more expensive business in a low-default, stable industry can be materially safer than a discounted deal in a volatile sector. For independent sponsors and family offices deploying patient capital, lower-default industries align well with: Moderate leverage strategies Longer hold periods Incremental operational improvements Leadership transition planning These industries tend to support governance frameworks, professionalization, and repeatable growth rather than aggressive financial engineering. SBA Financing Magnifies Both Strengths and Weaknesses SBA-backed transactions impose discipline both structurally and procedurally. While SBA loans remain attractive due to leverage and pricing, they magnify diligence failures when buyers underestimate operational weaknesses. Key diligence considerations include: Cashflow Quality: Are earnings repeatable, or dependent on one-time contracts, owner relationships, or favorable timing? Owner Reliance: Does the business function independently, or is the seller the operational bottleneck? Customer Concentration: Is revenue diversified or dependent on a small number of counterparties? Operational Controls: Are accounting systems, reporting cadence, and internal controls sufficient to support debt compliance? Legal Infrastructure: Are contracts assignable, enforceable, and properly documented for a post-close environment? Industries with lower default rates tend to score better across these dimensions—not by coincidence, but because their business models demand consistency and discipline. Legal Structuring Considerations in Lower-Default Industries From a legal standpoint, industry risk should influence deal structure. In more stable industries, buyers may have greater flexibility to: Negotiate cleaner transitions with shorter seller involvement Rely less on contingent consideration or earn-outs Use standardized employment and non-compete arrangements Implement governance documents that support scalability In higher-risk industries, buyers often need enhanced protections, including longer transition services agreements, expanded indemnities, escrow holdbacks, and tighter covenants tied to customer retention or financial performance. Understanding industry default trends helps buyers align legal risk allocation with operational reality. Implications for Investors and Family Offices For family offices allocating capital to search funds, independent sponsors, or direct acquisitions, SBA performance data offers an additional underwriting lens. It helps evaluate not just sponsor capability, but business durability. Investors increasingly expect sponsors to articulate why a target industry supports sustainable leverage, predictable operations, and long-term value creation. Default-rate data provides objective context for investment committee discussions and portfolio construction decisions. It also supports diversification across industries with varying risk profiles, rather than concentration in sectors vulnerable to economic or regulatory shifts. Final Thoughts The 2025 SBA loan performance analysis reinforces a simple but critical point: not all small businesses carry the same risk, even at similar price points. Industries with lower default rates tend to reward discipline, operational focus, and patience—traits that align closely with successful ETA and private capital strategies. For buyers, this is a reminder to look beyond the deal structure and focus on the durability of the underlying business. For investors, it reinforces the importance of industry selection as a cornerstone of long-term capital preservation and growth.
February 2, 2026
Business
Before You Exit: Navigating Succession Planning and Growth in Privately Held Companies
The Third Annual Private Business Owner Survey by Brown Brothers Harriman (BBH) is out, and it provides a revealing and timely look into the mindset, priorities, and risks facing today’s private business owners. We're all aware of it by now - the largest cohort of founders and business owners are reaching retirement age. The survey from BBH and findings in the report shed light on the intersection of personal planning and corporate continuity. For business owners, investors, advisors, and those preparing to take the reins, this report offers not just data, but direction. Succession and sustainable growth are clearly interconnected based on the information collected. The BBH report also underscores the importance of understanding the broader exit landscape. In addition to estate planning, it should be considered how search funds, independent sponsors, and family office buyers fit in. As deal volume rises and ownership transitions accelerate, sellers must weigh the nature of their successors just as carefully as the valuation terms. Succession: More Talked About, Still Under-Planned Although 62% of business owners express a desire to pass their business to the next generation, only 23% have taken concrete steps to implement a formal succession plan with key executives. An alarming 30% have no succession plan at all, despite the majority having been in business for decades. The balance (~46%) have some form of succession plan in progress. Key barriers to succession planning were reported to include: Emotional reluctance to step away (28%) Uncertainty over the right successor (41%) Complex family dynamics (46%) The business owner's perception of the successor's preparedness is also likely an issue, where the overwhelming majority reported that the successor is not yet fully prepared. Business owners hope that informal conversations will serve as a roadmap, but the reality is far less forgiving. Without clear documentation and defined leadership roles, businesses face confusion, instability, and risk of value erosion during a transition. Succession isn’t a one-time event - it’s a process requiring candid conversations, objective planning, and consistent follow-through. This is where search funds and independent sponsors can play a unique role. These buyers, often backed by seasoned investors or family offices, are well-positioned to acquire and operate businesses where no natural successor exists. Their appeal lies in their hands-on involvement, long-term view, and ability to step into the role of owner-operator while respecting the legacy of the founder. This also ties into the critical question of estate planning. The BBH report found that of the 70% of business owners with an estate plan, 76% will be using a trust. Growing and Sustaining: A Top Priority with Diverging Paths A strong growth mindset persists among private business owners. 78% of respondents prefer reinvestment and long-term growth over extracting profits or maintaining full ownership. However, this growth focus can lead to diverging opinions within ownership groups, especially when generational views or risk tolerances differ. The survey revealed that while 59% of owners believe their leadership teams are very well aligned on business strategy, 32% admitted to only moderate alignment. That misalignment can be costly—it often leads to stalled initiatives, delayed decision-making, and increased friction over strategic direction. To support growth, owners are considering various funding strategies: 69% plan to use traditional bank financing 30% are open to family office partnerships 20% are exploring private equity as a source of growth capital Still, the most commonly cited barrier to external capital is loss of control. Many owners fear that selling equity or bringing in new stakeholders may compromise their values, culture, or influence. However, those who thoughtfully structure outside capital arrangements may find they unlock opportunities that far exceed the costs. It’s worth noting that the search fund (ETA) and independent sponsor space is seeing a sharp uptick in activity, with many of these buyers receiving funding from family offices and specialty investors. Many of these groups offer capital and continuity without the pressures of a traditional private equity exit cycle. Some family offices are combining direct investment strategies with multi-generational wealth management, leading them to become increasingly active in small and mid-market acquisitions. The Legacy Lens: Transcending the Exit Succession is not simply about exiting the business or passing on shares. It’s about defining and preserving a legacy that goes beyond spreadsheets and valuations. Owners in the BBH survey expressed deep commitments to continuity. They desire to see family harmony, company culture, employee loyalty, and community impact. These “soft” values often matter just as much as legal or tax considerations. To preserve legacy and sustain the business beyond the current generation, owners must: Foster regular dialogue with heirs and management teams Evaluate successor readiness across leadership roles Introduce outside advisors who offer perspective and neutrality Reassess governance frameworks to support long-term strategy Document as much as possible Moreover, it’s vital to build structures that allow next-generation leaders to grow into their roles while being mentored by the outgoing generation. Done well, this approach creates both continuity and momentum. Preparing the Business, Not Just the Owner: Legal Review Succession planning is as much about preparing the business as it is about preparing the people. Even the most well-intentioned plan will falter if the company’s infrastructure, processes, or governance can’t support new leadership. Important readiness steps include: Reviewing key contracts for assignability or change-of-control clauses Establishing clear reporting systems and operational playbooks Addressing concentration risks (customer, supplier, key employee) Implementing equity compensation or retention plans for critical staff Transition planning should include a full enterprise audit of both legal and operational functions of the business to ensure the next owner or leader inherits a stable foundation. This level of diligence is especially critical in independent sponsor or search fund transactions. Buyers in these transactions often inherit businesses with informal structures or legacy systems that require immediate modernization. Business owners planning an exit should prepare for this scrutiny and invest in proactive documentation and governance to avoid valuation discounts or deal delays. This will also help the business command a higher valuation. Final Thoughts Whether your long-term vision includes a family transition, a management buyout, or a strategic sale to a search funder or family office, the path forward must be deliberate. Integrating succession with growth planning is key to protecting enterprise value and maintaining continuity. Planning early provides more flexibility, more stakeholder buy-in, and ultimately, a smoother transfer of both ownership and leadership. The BBH survey reveals a growing awareness of these issues, but this awareness must also be followed by action. Fortunately, a wide range of advisors, tools, and capital partners are now supporting business owners through these pivotal moments. Read the full BBH report here: BBH Thid Annual Business Owner Survey
November 14, 2025
Business
The SMB Market Is Moving: Record SBA Lending, Strong Deal Flow, and What It Means for Buyers
According to the latest BizBuySell report, Q3 2025 saw 2,599 small business sale transactions. This is an 8% year-over-year increase and 11% growth over Q2. Data also shows a steady wave of buyers are seeking the right opportunity to operate and grow established businesses. In parallel, the Small Business Administration (SBA) was on pace to close $4.8 billion in loan approvals before the federal shutdown temporarily paused operations. This is the highest volume of capital deployed to small businesses in a single fiscal year. That includes over 84,400 7(a) and 504 loans, amounting to 1,600 loans a week. The appetite is clear. What’s Fueling the Market? Despite macroeconomic pressures (inflation, tariff-driven supply costs, etc.), many buyers remain focused on long-term fundamentals. The median sale price for a business this quarter was $320,044, down slightly from last year. This is likely a lower sale price than many Searchfunders/Independent Sponsors are targeting, but the data also shows a shorter time on market (149 days), evidencing strong buyer demand. Essential services were the leading category of sales. I work with buyers, investors, and operators on a daily basis. Here is what I am noticing: These Are Small Businesses — Not Just Small Corporations Many of these deals involve main street and lower middle market businesses, where the seller is not just the owner — they’re often the primary operator, manager, and customer relationship lead. This model can work well, but it’s important for buyers to go in with eyes wide open. These are not absentee owner businesses. These are owner-operator businesses, and unless the buyer has a plan to step into the day-to-day, or grow and install leadership, the absence of middle management may lead to significant demands on the business owner's time. Diligence Is Critical — Especially for Deals at or below $1 Million Buyers and advisors need to scrutinize: Owner reliance — Will customer or vendor relationships walk out the door post-close? Documentation gaps — Are there written contracts? Employment terms? Assignable leases? Many of these businesses fail to properly maintain documentation. Employee risk — What’s the true culture, compensation model, and turnover rate? System maturity — Is there any standardization, or will you be rebuilding ops from scratch? The Desire to Own Must Match the Business Type Entrepreneurship through acquisition (ETA) is a powerful path. But not every business fits every buyer. I always advise clients to ask: “Do I want to run this business, or do I just want to own it?” In the start-up world this is called "founder-market fit." The same concept applies here. Some deals are perfect for someone who wants to buy a job and eventually grow it. Others might require an immediate team build or capital outlay to systematize operations. It’s critical to understand the type of role you’re buying into, the basics of the industry, and what that means when operating solo or with lean support. Deals Are Happening — But You Need the Right Team This market shows real momentum. That being said, deals still require precision. That means: Structuring with SBA or seller financing Negotiating reps, indemnities, and transition terms Performing adequate due diligence Aligning tax, legal, and operational diligence Preparing to serve as both the owner and the operator (or installing trusted leadership) I work closely with searchers, independent sponsors, and advisors both during the acquisition and long after the closing. From real estate and contracts to employee issues and outside general counsel support, you need the support to manage the risk and build the value. It is exciting to see the growing volume of deals and buyer interest. But remember not to lose sight of the need to find the right acquisition target and to protect your downside.
October 23, 2025
Business
AI Reps & Warranties: Emerging Issues in Deals and Commercial Contracts
Artificial intelligence quickly became embedded into business operations, software platforms, internal workflows, and consumer-facing applications. This means the legal risks associated with its development and growth are moving from the abstract to the real world. AI is not only changing how businesses operate, but also how leaders and legal practitioners must structure and negotiate contracts. Legal teams, in-house counsel, and M&A deal professionals can no longer consider this a niche issue and should consider it a negotiated deal point involving risk allocation, liability exposure, and asset valuation. While there is significant attention paid to the disruptive operational power of AI, its implications on representations and warranties in commercial agreements and corporate transactions deserve just as much attention within the legal community. Some tailored legal frameworks are already emerging to address the novel concerns around data privacy, intellectual property, indemnity, and operational continuity. These issues are especially critical in the context of software acquisitions, SaaS contracts, and any M&A deal involving AI-derived intellectual property or business processes. AI-Specific Representations in Deals The National Venture Capital Association (NVCA) model forms were updated at the end of 2024 to incorporate AI-specific representations and warranties. These terms are increasingly reflected in market practice: Targets must affirm that AI tools were used in compliance with applicable licenses, regulations, and data use agreements. Targets must represent that they did not input any personal, confidential, or protected information into AI tools, unless those tools guarantee that such data is not used for training or product enhancement. Targets must represent that data was deidentified or anonymized prior to use in training models to avoid running afoul of applicable data protection standards. Targets must disclose any generative AI platforms used to develop proprietary IP and warrant that such use does not jeopardize any ownership rights being acquired. The above issues are only the tip of the iceberg. Transactions and agreements involving complex AI products must include increasingly technical reps concerning: Model training logs and documentation Fine-tuning methods and retention of model weights Mechanisms used in retrieval-augmented generation (RAG) Use of synthetic or auto-generated content in commercial workflows Model validation performance thresholds, including floating point operation limits and accuracy ranges As the technology matures, the legal community is catching up by embedding operational guardrails directly into transactional documentation. Practical Contractual Risk Areas in AI Licensing Commercial licensing agreements involving AI must now be viewed through a much more detailed legal lens. Counsel should be prepared to negotiate contract terms specifically addressing: Non-infringement guarantees concerning both source code and training data, especially where data scraping or aggregation may have occurred Explicit ownership claims over AI outputs, derivatives, and model weights Training data auditability, including the legal basis for data collection, classification, and labeling Compliance with global privacy and cybersecurity laws, including GDPR, CPRA, and HIPAA when applicable Robust indemnification obligations for breaches of data usage restrictions, IP violations, or algorithmic harms Tech E&O and cyber liability insurance provisions, ensuring recourse exists if generative tools malfunction, hallucinate, or produce defamatory content In many cases, the liability profile of AI is uncertain and difficult to quantify. Because many models operate as "black boxes," licensees are often left without a clear explanation of how certain outputs were generated or what datasets were used in training. This makes traditional warranties about performance or fitness for a particular purpose difficult to enforce. As a result, buyers and licensees are demanding broader representations, heightened disclosure obligations, and post-closing audit rights to mitigate these unknowns (while sellers are seeking to disclaim warranties and narrow representations). M&A and AI Due Diligence AI risk has quickly become a key diligence category in M&A deals, especially in transactions involving software, e-commerce, analytics, or consumer engagement platforms. Buyers are now expected to conduct diligence not just on IP rights and customer contracts, but also on how AI has been implemented and governed. Pre-Acquisition Diligence Key diligence areas include: Training data sourcing: Was the data obtained lawfully and under enforceable terms? Privacy risk: Was any personally identifiable information (PII) used in training or prompting without consent? Third-party code and APIs: Does the AI product depend on third-party components that might limit assignability or trigger license fees? Model update and retraining rights: Who controls the model lifecycle, including patches and performance tuning? Export control risks: Could the AI model be subject to ITAR, EAR, or other national security controls due to its capabilities? Post-Closing Continuity Buyers should also require: Complete AI architecture diagrams and component inventories Documentation of ethical safeguards and bias mitigation processes Retention policies around input prompts and AI-generated output logs Model deployment playbooks and downtime risk disclosures Transition services agreements, software escrow, and founder retention may also be needed to ensure business continuity and proper knowledge transfer where AI is a critical but complex asset. IP, Privacy, and Employment Triggers This isn't only an issue for "tech transactions." As AI expands across business functions, its legal implications multiply. Core issues include: Intellectual property ownership, particularly whether AI-generated outputs are protectable under U.S. copyright law or must be secured as trade secrets Privacy and cybersecurity risks stemming from unstructured data ingestion and prompt leakage, especially when sensitive information is processed or used Employment law exposure, including discriminatory hiring algorithms or opaque automated decision-making processes that may violate EEOC or state-level labor rules Recent case law and regulatory action suggest that companies using AI for decision-making will be held to explainability and fairness standards, even if they do not fully control or understand the model. Additionally, companies leveraging AI in consumer products or safety-critical environments must consider product liability exposure under traditional tort theories, especially if AI contributes to physical or economic harm. Think about the auto-driving taxi that must decide whether to hit the pedestrian or crash the car. AI and IP Security Agreements As more companies develop proprietary AI tools, models, and datasets, lenders and investors are increasingly taking security interests in these intangible assets. This requires a rethinking of traditional IP Security Agreements. When collateral includes AI-generated or AI-driven intellectual property, legal teams should evaluate: Whether model weights, training datasets, or prompt libraries are clearly documented and listed as pledged assets Whether the borrower can demonstrate ownership and provenance of the training data and model code If the model is fine-tuned from a third-party foundation model, whether the underlying license permits encumbrance or assignment If retrieval-augmented generation (RAG) is used, whether the underlying corpuses and connectors are part of the security package The existence of source code escrow to ensure access in the event of default or bankruptcy Any restrictions in open source or SaaS agreements that may limit foreclosure or reassignment rights Moreover, the lender’s enforcement rights may be limited if the AI model or data is co-owned, cloud-hosted, or reliant on third-party APIs. Security interests must be carefully drafted to reflect operational dependencies, and perfection of those interests may require filings beyond the USPTO, including notice to cloud vendors or consent from licensors. IP Security Agreements for AI assets must go beyond standard boilerplate and should be tailored to the unique hybrid nature of AI systems combining software, services, and data streams. In many cases, a supplemental AI-specific collateral schedule may be appropriate. Takeaways for Legal and Deal Teams AI is no longer a novel technology element to be glossed over in standard reps and warranties. It is a high-stakes business driver that intersects with every major legal category: IP, privacy, cybersecurity, employment, antitrust, and contract liability. Actionable takeaways include: Draft AI-specific reps and warranties that cover data sourcing, training protocols, model rights, and use case restrictions Build diligence frameworks that include discussions with technical teams and review of logs, policies, and product roadmaps Negotiate indemnification mechanisms that allocate financial risk from misuse, error, or regulatory exposure Ensure insurance provisions cover AI incidents, from hallucinated content to data leakage Establish post-closing governance and monitoring structures, particularly in acquisitions involving live AI models or mission-critical algorithms Review and update IP Security Agreements to specifically address AI collateral and embedded third-party dependencies Ultimately, the central legal question becomes: When AI makes a mistake, who pays? Whether drafting a commercial SaaS agreement or executing a strategic acquisition, every deal team must be ready to answer that. As legal and technological standards continue to evolve, ongoing adaptation will be essential.
June 19, 2025
Business
Avoiding Common Contract Pitfalls: Legal Landmines in Agreements
Contracts are the backbone of every business relationship. Whether buying a business or entering into a new commercial agreement, many small to mid-sized businesses do not fully negotiate critical clauses within the document. Failing to fully negotiate certain language, relying on informal agreements, or failing to update commercial contracts with appropriate amendments as the relationship evolves can become a significant liability to a company. Informal arrangements may feel efficient in the short term but can create significant issues if a dispute arises. In this edition of Search Fund Operate, we break down the most commonly negotiated (and litigated) provisions in contracts. The below is an overview of how acquirers, operators, and business owners can proactively protect themselves from exposure. The Risk of Informal Agreements Many business relationships begin with trust — a handshake deal, an email exchange, or a PDF template someone downloaded online years ago. But when disputes arise, courts look for formal agreements. Informal or undocumented agreements often lack enforceable provisions around risk allocation, dispute resolution, and payment mechanics. Even worse, they often fail to outline each party’s actual responsibilities, deadlines, or remedies. Tip: If a dispute reaches litigation, and there is no signed agreement or only partial documentation, courts may rely on the parties' prior conduct or applicable statutory rules that might not reflect the parties’ original intentions. Inconsistencies can lead to conflicting testimony and unpredictable results. Without formal terms, operators risk operational confusion and disruptions, customer dissatisfaction, and expensive court battles. This risk grows exponentially when the business is being sold or scaled, as buyers expect to inherit clear, enforceable rights and obligations. Liability and Indemnification Indemnification Clauses Indemnity provisions shift the burden of financial responsibility for specific claims. These are some of the most heavily negotiated clauses. Poorly drafted clauses can: Leave you liable for the other party’s negligence or misconduct. Fail to include third-party claims (e.g., customer injuries from vendor products). Omit procedural requirements for notice and defense, leaving you without control of litigation that affects your reputation. Tip: Ensure that the indemnification clause is protective of your interests. Push for mutual indemnification, defense, and settlement rights, not just reimbursement. Also consider whether to limit indemnification to direct damages or extend it to consequential losses. Environmental Indemnity In certain industries — such as manufacturing, logistics, or commercial real estate — environmental risk requires special attention. Contracts should: Clearly allocate responsibility for environmental conditions, both known and unknown. Include representations about compliance with environmental laws and past environmental issues. Address remediation costs and third-party claims. Tip: Require the disclosing party to provide environmental reports and clarify who bears responsibility for pre-existing contamination. Liability Carve-Outs Clauses that attempt to shift risk should specify whether they cover negligence, gross negligence, or willful misconduct. The broader the language, the greater the protection. Sophisticated parties often negotiate carve-outs for fraud or breaches of confidentiality. Limitation of Liability: Know Your Exposure Exclusion of Damages Most contracts attempt to exclude certain categories of damages: Consequential damages (e.g., lost profits or reputational harm) Incidental damages (e.g., additional shipping or handling costs) Punitive damages (rare, but potentially significant in litigation) However, these clauses must be: Clearly drafted and conspicuously presented in the agreement Consistent with governing law and not prohibited by statute Tied to specific breaches or defined categories of claims Tip: Courts may strike down limitation clauses if they are hidden in boilerplate language or conflict with public policy (e.g., consumer harm or gross negligence). Careful drafting is necessary to ensure these clauses are enforceable. Caps on Damages Liability caps are common. These are often limited to: The total fees paid under the agreement over a certain period A multiple of the monthly or annual contract value These types of damages caps should be: Commercially reasonable Include carve outs for egregious conduct (e.g., fraud, IP infringement) Reviewed for enforceability in high-risk jurisdictions (such as California or New York) Tip: Combine caps on damages with tailored indemnification clauses and insurance requirements offer the most balanced protection. Right to Recover Damages Parties should not assume that silence on damages means full recovery. Contracts should affirmatively state: Whether consequential or incidental damages are recoverable Whether lost profits are compensable Whether the right to injunctive relief is preserved for breaches such as misuse of IP, confidential information, or violation of non-competes (if included and within a jurisdiction where enforceable) Tip: Courts can be reluctant to award damages not clearly contemplated in the contract language. Assignability and Change of Control An often overlooked provision is whether contracts can be assigned to another party — a crucial issue during a business sale or restructuring. If assignment is restricted, it may require: Written consent from the counterparty Disclosure of assignee's financial information Attorney fees associated with any legal review prior to consenting to the assignment Some contracts even treat a change of ownership or control as a default or termination trigger. Tip: Failing to secure assignability can delay or derail an acquisition, especially if key customer contracts are involved. Operators should inventory and review top agreements well before a contemplated sale. Payment Terms and Dispute Mechanics Clear Payment Language Contracts should specify: Invoice frequency and delivery method Payment deadlines, accepted payment methods Grace periods, late fees, and interest charges Whether payments are conditional on acceptance, delivery, or milestones Right to stop future delivery of services or products in the event of non-payment Vague or missing language around payment terms is a common source of cash flow disruption. Courts often apply standard practices or industry norms — which may not reflect your business model. Tip: Use net terms that clearly reflect the payment terms. Add provisions for disputed invoices and partial payments. Condition of Delivered Goods or Services Ensure the contract addresses: Acceptance criteria and inspection periods What constitutes a material defect Remedies for nonconforming or damaged goods Whether services must meet a defined performance standard Tip: If materials are delivered late or defective, and the contract is silent, the buyer may have limited options to reject or recover costs. Dispute Resolution Well-structured dispute resolution clauses can minimize litigation costs and clarify where and how conflicts are resolved. These clauses should address: Venue and jurisdiction Governing law (state of choice) Mediation or arbitration requirements before litigation Scope of issues subject to arbitration Tip: Choose arbitration only when you can afford and control it — not all arbitration is cheaper or faster than court. Choice of Law and Venue Failing to specify a governing law can create confusion and increase cost. Choose a state with predictable case law and commercial friendliness Clarify venue for both lawsuits and arbitration (county and state) Tip: Courts generally uphold these clauses, but ambiguity can invite satellite litigation over which rules apply. Recovery of Attorneys’ Fees By default, parties generally pay their own legal fees unless the contract provides otherwise. A prevailing party clause can: Deter frivolous lawsuits Improve recovery leverage for the aggrieved party Help offset enforcement costs in breach scenarios Tip: Ensure the clause clearly defines "prevailing party" and whether partial victories count. Other Heavily Litigated Provisions Force Majeure Since COVID-19, courts have closely scrutinized force majeure clauses. These should be specific and include: Pandemics, epidemics, and public health emergencies Cybersecurity incidents and data breaches Labor strikes, natural disasters, and government actions Tip: Clarify notice requirements and what obligations are suspended or excused. Termination Rights Contracts should clearly state: Whether either party may terminate for convenience Grounds for termination for cause (e.g., material breach, insolvency) Required notice periods Obligations upon termination (e.g., final payments, transition support) Tip: Courts often look to see if the termination provisions were exercised in good faith and consistent with the contract’s intent. Integration Clause A merger or integration clause ensures that only the written agreement governs the relationship. This is a critical protection against claims of oral promises or email side agreements that contradict the final document. Conclusion Contracts are not just formalities — they are critical risk allocation tools. Whether you are acquiring a business, managing a commercial relationship, or selling to customers, business owners should ensure that agreements are thorough, clear, and enforceable. This will reduce litigation risk and protect your enterprise value. For buyers and operators, reviewing all critical contracts pre- and post-close is an essential part of your diligence and compliance process. Don’t assume the existing agreements are sufficient — many are not. Where possible, standardize contract templates, build clear negotiation guardrails, and involve legal counsel to spot ambiguous or dangerous provisions before they become problems.
May 14, 2025
Business
Succession Planning for Business Owners: Preparing for the Expected—and the Unexpected
Acquiring a business is an exciting and rewarding achievement, but it’s only the beginning of the journey. Many new business owners focus on growth, operations, and profitability, but one critical factor often gets overlooked: succession planning. What happens if you’re suddenly unable to lead? Have you prepared your business to survive and thrive beyond your direct involvement? According to industry insights, over two-thirds of small business owners plan to retire within the next decade, yet nearly two-thirds of family-owned businesses lack a documented succession plan. Without a solid contingency strategy, a business can face severe disruptions, loss of value, or even risk closure. Succession planning is not just about retirement—it’s about ensuring the business can withstand unexpected challenges, leadership transitions, and shifts in ownership dynamics. It must also take into account your financial legacy, meaning your estate plan is a critical piece of this process. Two Critical Aspects of Succession Planning Succession planning can be broken down into two key areas: management succession and ownership succession through estate planning. While management succession ensures the business continues to operate efficiently after leadership changes, ownership succession focuses on transitioning equity and control in a way that preserves family wealth and business continuity. Succession Planning for Management Purposes For search fund entrepreneurs and independent sponsors, acquiring a business often means stepping into an operation that has relied heavily on the prior owner’s relationships and institutional knowledge. If a crisis arises—whether due to illness, a sudden exit, or unforeseen personal events—having a structured plan ensures the company’s continuity and stability. A business should be able to function independently of its owner to maintain investment value, operational efficiency, and strategic direction. Investors such as family offices and other patient capital providers are increasingly focused on long-term business sustainability. They recognize that a company’s ability to transition leadership smoothly directly impacts its valuation, resilience, and growth potential. Businesses with strong management succession plans are inherently more attractive to investors, lenders, and strategic partners. Key Steps in Management Succession Planning Identifying Future Leadership – Develop a leadership pipeline and invest in training potential successors. Creating Governance Frameworks – Establish clear decision-making protocols, performance benchmarks, and board roles. Documenting Operational Processes – Maintain SOPs, financial reporting procedures, and relationship management protocols. Legal & Financial Structuring – Draft contingency plans, transition agreements, and updated leadership contracts. Employee & Stakeholder Communication – Foster transparency to maintain trust and engagement during transitions. Disney - A Succession Planning Failure: A well-known cautionary tale is Disney’s prolonged succession struggle. It offers a public case study in the risks of delayed or unclear leadership planning. Harvard Law’s analysis explores how missteps in succession planning can result in strategic confusion and shareholder concern. Succession Planning for Ownership & Estate Purposes While leadership succession supports operational continuity, ownership succession via estate planning ensures that equity transfers are executed in a tax-efficient, structured, and family-aligned way. Many business owners delay these conversations until it's too late, leading to conflict and financial inefficiencies. A recent article from J.P. Morgan Private Bank highlights the value of family meetings as tools for creating transparency, aligning generational goals, and easing the emotional weight of wealth transfer decisions. Clear communication and proactive planning are essential to avoiding misunderstandings and ensuring continuity. Key Considerations for Ownership & Estate Succession Planning Recapitalization & Equity Transfers – Gradually shift ownership to heirs, employees, or outside investors. Trust & Estate Structures – Use trusts, GRATs, or similar tools to reduce tax burden and streamline asset transition. Buy-Sell Agreements – Protect against disruption in the event of death, incapacity, or ownership disputes. Liquidity Planning – Ensure cash availability to meet estate taxes and avoid forced asset sales. Open Family Conversations – Define expectations, roles, and stewardship principles across generations. Estate Planning Beyond Business Ownership Estate planning must extend beyond business assets. All holdings—real estate, private equity, marketable securities, and personal property—should be included. A comprehensive plan reduces the risk of asset disputes, tax inefficiencies, and missed philanthropic goals. Key Components of a Comprehensive Estate Plan Multi-Generational Wealth Strategy – Articulate long-term objectives for family stewardship and legacy. Liquidity for Tax Obligations – Prepare for estate taxes without disturbing business operations. Asset Protection – Use legal mechanisms to guard against litigation and liability. Charitable Planning – Incorporate giving strategies that reflect family values and optimize tax outcomes. Building Your Estate Planning Team: Successful estate planning requires the coordinated efforts of legal, tax, and financial professionals. Business owners often work with corporate, tax, and estate attorneys. In addition to legal, family offices are increasingly emerging as a central resource for coordinating these efforts across generations. For example, Cresset Capital offers a holistic family office model that integrates investment, planning, and advisory services. The Role of Recapitalization in Succession Planning Recapitalization is a versatile strategy that supports both management transitions and estate planning. It allows business owners to restructure equity, generate liquidity, and introduce new ownership stakeholders while maintaining stability. Preserve Business Value – Transition ownership strategically to avoid disruption. Generate Liquidity – Create financial flexibility without an outright sale. Support Long-Term Sustainability – Bring in aligned investors who support the next generation of leadership. Final Thoughts: Don’t Leave the Future to Chance Whether you’re planning an exit, acquiring your first business, or simply organizing your affairs, succession planning is not optional. It’s a fundamental aspect of preserving the value you’ve built and ensuring your enterprise—and legacy—endures. A business without a succession plan is a business with an expiration date. Start now. Incorporate recapitalization, leadership development, and comprehensive estate planning into your long-term strategy.
March 21, 2025
Business
Financing in the Independent Sponsor and Search Fund World: SBA vs. Conventional Lending
Financing is one of the most critical components of a successful search fund or independent sponsor acquisition, influencing not just deal structure and capital requirements but also long-term financial health and growth potential. Entrepreneurs and investors evaluating a business purchase must carefully weigh two primary financing options: Small Business Administration (SBA) loans and conventional bank loans. While both have their merits, the choice between SBA and conventional lending impacts everything from cash flow management and debt servicing to operational flexibility and future capital raises. Selecting the right option requires a clear understanding of short-term liquidity needs, financial reporting obligations, investor expectations, and the intended growth trajectory of the acquired company. SBA Loans: Flexible but Costly in Equity Terms The SBA 7(a) loan program is a widely used financing tool, particularly for first-time entrepreneurs and acquisitions of lower middle-market businesses. The program is designed to make small business ownership more accessible by offering low down payments, extended repayment terms, and fewer financial covenants compared to conventional loans. Key Advantages of SBA Loans: Lower Equity Requirements – SBA loans typically require only 10% equity, making them an attractive option for buyers with limited personal capital. In contrast, conventional loans often require 20-50% equity, significantly raising the cash burden. Longer Repayment Terms – The standard 10-year amortization schedule allows borrowers to maintain lower monthly payments, easing cash flow constraints. Limited Financial Covenants – Unlike conventional lenders, SBA-backed loans do not impose strict financial performance benchmarks, providing greater flexibility in early-stage business operations. Easier Qualification Process – Many first-time buyers may find it easier to secure an SBA loan compared to conventional financing due to the government-backed guarantee, reducing lender risk. Challenges of SBA Loans Despite their accessibility, SBA loans come with notable downsides, particularly for search funders and independent sponsors looking for long-term capital efficiency and equity retention: Personal Guarantee Requirements – SBA loans require personal liability from the borrower, meaning that if the business fails, personal assets may be at risk. Restrictions on Seller Notes & Subordinated Debt – The SBA often limits the use of seller financing and additional subordinate debt, making capital structuring more rigid. Prepayment Penalties & Financing Limitations – Borrowers looking to refinance into more favorable debt structures down the road may face prepayment penalties, increasing overall financing costs. Growth Limitations – The lack of institutional-style covenants can prevent businesses from building the structured financial discipline needed for future capital raises or attracting private equity investment. For sponsors and search fund entrepreneurs planning recapitalization, secondary financing rounds, or eventual exit strategies, the limitations associated with SBA loans should be carefully considered. Conventional Bank Lending: More Rigid, but (Maybe) a Stronger Long-Term Fit For experienced operators or businesses with strong existing cash flow, conventional loans can be a more sustainable long-term financing solution. These loans provide greater flexibility in structuring deals, but they also come with stricter requirements. Key Advantages of Conventional Loans: Higher Loan Amounts – Unlike SBA loans, which cap at $5 million, conventional banks can finance larger acquisitions, making them more suitable for companies with $5M+ in EBITDA. Stronger Banking Relationships – Working with a commercial bank can create opportunities for long-term financial partnerships, including credit facilities, treasury services, and strategic capital allocation. More Favorable Equity Retention Terms – Conventional lenders often allow higher levels of seller financing and preferred equity arrangements, giving the buyer greater control over the capital stack. Stricter Covenants: More Financial Controls and Reporting Unlike SBA loans, conventional financing requires detailed financial oversight, which, while adding complexity, can ultimately benefit long-term financial planning and investor confidence: Debt Service Coverage Ratios (DSCR) – Lenders typically mandate a minimum DSCR threshold, ensuring the business maintains healthy cash flow relative to debt obligations. Regular Financial Reporting – Borrowers must provide quarterly and annual financial statements, reinforcing financial discipline and operational transparency. Leverage & Liquidity Limits – Many conventional loans include leverage constraints, preventing businesses from taking on excessive debt that could jeopardize financial stability. While these restrictions may seem burdensome, they prepare companies for future institutional investment and create stronger exit opportunities by making businesses more attractive to private equity firms and strategic acquirers. Choosing the Right Financing for Sponsors and Search Funds The decision between SBA and conventional financing depends largely on the business model, investor profile, and long-term capital strategy of the acquirer. SBA Loans Are Best For: First-time search funders acquiring sub-$5 million EBITDA businesses Deals where seller financing is limited or unavailable Entrepreneurs seeking maximum leverage with minimal equity investment Buyers prioritizing cash flow flexibility over institutional financing constraints Conventional Loans Are Best For: Larger acquisitions requiring more flexible financing structures Search funders looking to build long-term banking relationships Companies planning to secure future private capital or institutional investment Acquisitions where financial discipline and structured reporting will be critical for growth and scalability Final Thoughts: Aligning Capital with Growth Strategy For independent sponsors and search fund entrepreneurs, financing is about more than just getting the deal done—it’s about positioning the business for long-term success. SBA loans can provide immediate access to capital, but conventional financing ensures long-term scalability and financial discipline. Navigating the complexities of acquisition financing requires strategic planning and expert guidance. Working with an experienced attorney and financial advisor can help independent sponsors and search funders structure deals properly, negotiate loan agreements, and ensure compliance with lender requirements, ultimately protecting long-term equity value.
February 28, 2025
Business
Search Funds Are Changing the Small Business M&A Landscape
In recent years, search funds have seen increased usage in small business acquisitions, offering a structured yet flexible approach to acquiring and growing companies. The "origin story" is often credited as arising out of Stanford Business School in the 1980s, and has gained traction among entrepreneurs, investors, and family offices since then. It provides a new path to ownership and long-term value creation. So, why are search funds transforming the small business M&A landscape? The answer starts first with the structure of these search funds, how they differ from traditional private equity, and the legal and financial considerations investors and entrepreneurs need to understand. They share many similarities with independent sponsor deals but also have a number of stark differences. What Is a Search Fund? A search fund is a structured investment vehicle designed to help an entrepreneur find, acquire, and operate a small business. It typically follows a two-stage process: Search Phase Investors provide initial capital to support a qualified entrepreneur as they search for a business to acquire. The timeline for this search can typically take 12–24 months and is often dictated by the terms of the investment documents. This initial capital is used to cover due diligence expenses, professional fees, and provide some form of compensation to the searcher (although this last point can turn off some investors). Searchers typically target businesses that fit a particular investment thesis, such as those with strong recurring revenue, low customer concentration, and proven stability. The process requires extensive outreach, negotiation, and due diligence, making it both intensive and time-consuming. Acquisition & Operation Phase Once a suitable business is identified during the search phase, the entrepreneur leads the acquisition, often bringing in additional investor capital and financing for the purchase. SBA loans are often utilized as a financing option unless it is an asset-heavy target, in which case a traditional lender may be willing to finance the deal. Post-acquisition, the entrepreneur operates and scales the business, creating value for investors over a 5- to 10-year horizon. This differs from independent sponsor deals where the independent sponsor may prefer a "hands-off" approach rather than taking on the "operating partner" role. The target size for these acquisitions is typically small businesses with $1M–$5M in EBITDA, focusing on stable, profitable companies where an operational leader can add significant value. Some might be willing to acquire a business with less stable footing if there are clear deficiencies that can be quickly remedied. An example of these remedies can include digital transformation, improved sales or operational processes, faster accounts receivable cycles, or vendor/supplier issues that can be addressed with fresh capital. Why Are Search Funds Growing in Popularity? Aging Business Owners & Succession Gaps Many Baby Boomer-owned businesses are coming up for sale, but they lack internal succession plans. We've all heard about the upcoming "transfer of wealth." This is largely what is being discussed. There are huge amounts of capital locked up in small business ownership. Search funds provide a structured solution, offering business owners an exit while ensuring continuity under capable leadership. Alternative to Private Equity & Traditional M&A Private equity (PE) firms often seek larger, high-growth businesses or require substantial restructuring post-acquisition. Search funds focus on stable, cash-flow-positive businesses, often without excessive debt financing. These search funds also offer emerging managers a platform to showcase their skills and set up future (larger) deals. Strong Investor Interest in Small Business Buyouts Many family offices, high-net-worth individuals, and independent investors are attracted to the long-term, hands-on nature of search fund investments, and the chance to mentor emerging entrepreneurs. Unlike traditional PE, investors partner directly with an operator, aligning interests toward sustainable growth rather than quick flips. Proven Success & Institutional Recognition Studies show that successful search funds yield attractive returns. Stanford’s research indicates an average IRR of 30–35% for successful search fund investments. Business schools and institutional investors are increasingly supporting search funds as a legitimate investment class, with many schools creating "entrepreneurship through acquisition" workshops or curriculums. Key Legal & Financial Considerations While search funds present compelling opportunities, structuring the deal properly is critical to long-term success. Here are key legal and financial considerations investors and entrepreneurs should keep in mind: Legal Considerations: Fund Formation & Investor Agreements: Search fund structures vary—some use traditional LP/GP models, while others form LLCs with pro-rata investor rights. Well-drafted legal agreements define profit splits, investor rights, and operational control. Due Diligence & M&A Structuring: Business acquisitions involve legal, tax, and regulatory complexities. Asset vs. stock purchases have different tax implications and liability considerations. Governance & Founder-Investor Alignment: Search funds operate with investor oversight, often with board seats or advisory committees. Proper corporate governance structures protect both investors and the entrepreneur. Financial Considerations: Equity vs. Debt Financing: Search funds typically rely on equity-heavy funding rather than high levels of debt. However, some deals incorporate SBA 7(a) loans or seller financing to optimize capital efficiency. Profitability & Valuation Metrics: Investors focus on stable EBITDA margins, typically in the 15–25% range. Many search-acquired companies operate in low-tech, recession-resistant industries (e.g., B2B services, healthcare, niche manufacturing). Exit Strategies: Search fund exits typically occur via private equity acquisition, strategic buyer sale, or investor buyout. Holding periods range from 5–10 years, aligning with long-term wealth creation. Should You Invest in or Launch a Search Fund? For investors, search funds offer a compelling alternative to traditional private equity, allowing for: Higher potential returns in undercapitalized small business sectors. More direct involvement and operational influence in acquired businesses. Alignment with long-term value creation, rather than short-term financial engineering. For entrepreneurs, search funds provide: A structured pathway to business ownership with investor-backed support. Access to capital and advisory networks without needing personal funds upfront. A leadership role with strong financial upside. Final Thoughts: The Search Fund Model Is Likely to Continue Trending Upwards As small business ownership transitions accelerate, search funds will continue to play a growing role in the M&A ecosystem. For investors, they provide an opportunity to back talented entrepreneurs in acquiring and scaling high-quality businesses. For "searchers" or buyers, search funds offer a viable and structured alternative to a startup.
February 19, 2025
Business
Startup Success Starts with Governance Documents and Clear Ownership Rules
If you are launching a new business without proper governance documents, you’re risking financial loss and business owner disputes. Every business owner needs properly drafted governance documents. This cannot be overstated. It’s exciting to launch a new business, but failing to properly document the business relationship between owners is a major pitfall. It is not uncommon for attorneys to have witnessed this firsthand, numerous times, and it almost always results in financial loss or dispute. An episode on Acquiring Minds podcast provides a powerful example of the troubles you can face without these governance documents (jump to the 51-minute mark to hear why). Learn how to safeguard your venture from the outset. Assuming a business is structured as an LLC, an operating agreement sets the governance foundation and prevents many avoidable disputes. Key Provisions to Consider Equity Vesting Schedule: For startups and emerging companies, it’s critical to protect the company from premature departures. Implementing a vesting schedule keeps everyone incentivized for the long haul, ensuring commitment and stability. Dispute Resolution: Conflict is inevitable. Whether it’s a disagreement over strategy or management style, a clear dispute resolution mechanism (such as mediation or arbitration) can help resolve disputes without causing a full breakdown of the business. In the Acquiring Minds podcast example, a "shotgun clause" would have been helpful. This is a buyout mechanism that also doubles as a form of dispute resolution. These tools work together to protect the business during critical decision-making moments. Equity Buyout Terms: Define how ownership interests can be bought or sold to ensure fairness while protecting the business from being forced into unwelcome arrangements. Important terms include shotgun clauses, puts, and call options. Decision-Making Processes: Specify how major business decisions will be made. This includes setting voting thresholds and identifying areas that require unanimous consent. It’s also important to establish early on whether someone will hold a majority stake in the company. Even a 1–2% difference in ownership can make a significant impact. Exit Strategies: Plan for the future by outlining provisions for dissolution, sale, or succession. For instance, drag-along rights protect majority shareholders in a sale, while tag-along rights safeguard minority interests. These provisions ensure smooth transitions and clarity for all parties. Don’t Rely on A Handshake A handshake may start a partnership, but only a well-drafted operating agreement can protect it. Having robust governance documents isn’t just a best-practice, it’s essential for protecting your venture and ensuring long-term success. Don’t overlook the importance of partnering with experienced legal professionals to get it right.
January 29, 2025
