Reducing Broken Deal Costs for Self-Funded Searchers?
August 10, 2023
by a searcher in Brickell, Miami, FL, USA
In self-funded searches, broken deal costs can quickly add up. For those who have faced this challenge, what strategies have worked best for you to reduce these costs? How do you approach due diligence and negotiations to minimize risks without cutting corners? Practical tips on handling these expenses would be greatly appreciated.
in Las Vegas, NV, USA
1. For industry 'gotchas' join Facebook groups and gather Linkedin connections of those in the industry. That way you can see the issues others have and also ask questions. This can be hot or miss, but you will definitely get some great nuggets that wont be highlighted by a lawyer, CPA, appraiser etc. An example: We looked at a roofing company in Colorado, that looked pretty good on paper, however when I spoke to a roofing company owner in Florida he said 85% of the work is due to hail damage. "One year without hail and you will struggle to stay afloat". None of that showed up in IBIS reports, talking to appraisers, lawyers or CPAs.
2. To understand financials I recommend the following course which costs $10 a month. It offers some great training for a tiny amount of money. https://www.asimplemodel.com
3. Have a play with ChatGPT and ask it difficult questions about industries, what are the pros/cons, what capex will I expect, qualifications, financial issues etc etc. It wont be perfect by any stretch, but it is a great stepping off point that you can then build on and send to a seller as a Google Sheet for them to work through.
4. Embrace automation, checklists and SOPs. This will speed up work as it becomes repeatable and standardized. If you do something more than twice, then write and SOP/checklist.
5. Utilize virtual assistants. If you have everything in paragraph 4 above in place, this means you can pay $5 an hour for a VA in Pakistan with a Masters degree to do some of the work for you. I would encourage you to pay at least 2 VAs to do the same work as that way you can compare them.
6. If employing VAs then it is always better to use Freelancer.com as it allows you the ability to run a competition vs just posting a job. This allows you to post a VERY detailed spec sheet of what you need and people will then submit bids to you. The trick to this is make the gig description long and boring with a lot of short paragraphs. This encourages people to skim read. The 2nd or 3rd last sentence I always put in a comment like "please ensure you add in the word ecstatic, honored or super-keen (without making it obvious), to your reply so that I know you read this". That way you can filter 90% of the people that cant follow instructions. Also, on a 7 day competition, almost every reply within the first 15 mins will be an autoresponder, so you can delete those straight away. The replies from the first 5 days may not be as good and the experts will wait until day 6 or 7 to see who replied and what they offered before they submit their offer.
7. Dont be afraid to pick up the phone or visit local businesses in the same industry and explain your situation. Ideally if you are buying locally, then call or visit a business in another state so that competition doesn't become an issue. This is why I called the Florida roofer for a biz in CO.
Hopefully that helps?
from Hofstra University in Melville, NY, USA
Start doing the pre-DD yourself.
1. Analyse the books yourself over and over again and look for concentrations that you want to ask about.
2. Large items on balance sheet, especially around items around loans to and from owners.
3. Check cash flows and see if they seem to be inline and trending with how the financial statement reads.
4. Run Lexis/Nexis searches on owners, companies and other assets they hold.
This is really just scratching the surface. Invest in a book on DD for buying a company if you like.
Assuming you feel you lowered the chance of financial DD finding a deal killer go forward. Financial DD and the legal docs negotiations are, anecdotally speaking, the largest killers of deals.
From the legal docs standpoint there are business terms and legal point. Doing the negotiating between buyer and seller directly without attorneys on the phone can save a lot of billable expenses. I often have my attorney markup the contract and I get advice where needed on select points, but if the other party is willing to negotiate business terms directly.
Legal items and reps and warranties are most definitely best left to attorney's unless you have significant experience. If you are stuck on some those reps and warranties sometimes splitting reps and warranty insurance costs could get you over contract sticking points and save a deal!
The above is not ideal, especially when you are new, but it's how you can save money on deal breakup fees.