Expert Insights into Building an Empire through Strategic M&A (Part 2)

How to find and close proprietary deals for business growth

When it comes to sourcing proprietary deals, the first question is: do you have time or do you have money? If you have money but not time, hire a buy-side advisor. You give them your buy box or avatar of the ideal acquisition target, and they take on the work of building a funnel, identifying companies, qualifying them, and bringing suitable opportunities to you. 

In every company I’ve managed, I’ve hired a buy-side advisor and paired them with an in-house VP of Business Development to oversee the process. This approach saves time but comes at a cost.

If you don’t have the money but do have time, you’ll need to build that funnel yourself. For this, there are various tools you can use. Sales software like Dun & Bradstreet Hoovers or Grata can help identify potential targets. 

Hoovers is more manual and costs less, while Grata is more efficient but significantly more expensive. The choice depends on your resources. If you have neither money nor time, you can use Google or even hire college interns to build a list of companies that match your criteria.

The key to successful deal sourcing is relationships. Selling a company is a personal transaction, not a cold one. You need a strategy for outreach. This often requires multiple attempts—six to eight touches—to get someone to engage in a conversation. The outreach method will depend on your target. 

For example, if the seller is younger and on LinkedIn, reach out there. If they’re older and not active on social media, consider snail mail, phone calls, or email.

If you use direct mail, make it personal. A handwritten envelope, rather than a printed label, increases the chance of it being opened. 

Inside, include a short, personalized letter introducing yourself, explaining your interest in their business, and a one-page slick with more details about your company and intentions. 

You’d be surprised how often someone files that letter away and comes back to it months later, prompted by a health scare, a bad day, or a change in circumstances.

Proprietary deals don’t necessarily mean you’ll get the business at a lower price. They mean you’ve built a relationship that leads to a deal without competing in an auction. 

Brokers, on the other hand, often pitch the business to multiple buyers, turning it into a competitive process. Proprietary deals come from investing time and effort into creating trust and understanding with the seller.

In my experience, at maturity in any of my companies, about a third of deals were sourced internally by my team, a third came from brokers—often lazy ones who weren’t running a formal process—and a third came through inbound inquiries via our website. 

For example, my last company’s website had a prominent "Sell Me Your Company" tab, and for a time, even a homepage pop-up inviting owners to consider selling to us.

Building this funnel is similar to acquiring customers. You might need a thousand companies at the top of your funnel to get a hundred worth pursuing. 

From there, you narrow it down to 15 or 20 with active conversations, NDAs, and data exchanges to finally land the one you’ll acquire. It’s a process that takes effort and consistency, but if you stay disciplined and know what a good deal looks like, you’ll find success.

Building relationships and effective outreach strategies

My goal in the first conversation is to establish a connection and set the stage for an in-person meeting, ideally over lunch. The initial phone or Zoom call is about reiterating the key points from my outreach and beginning to build a human connection. I’ll suggest meeting off-site, like for lunch, to talk further.

When we get to lunch, it’s about building rapport. If it’s a 90-minute meeting, I’ll spend the first hour chatting, getting to know them, learning about their life, interests, and passions. 

Toward the end, I’ll outline how the process works: I’ll sign an NDA, request basic financial information, and ask some follow-up questions. 

Once I review the information, I’ll return with a number. If they like the number, we keep talking. If not, we part as friends, with the understanding that circumstances may change, and we can revisit in the future.

The second meeting is when I present the NDA and request the data I need to evaluate the business. By the third meeting, I’ll bring a valuation number. This meeting could be in person or via Zoom, depending on convenience. The goal is to set the framework for the letter of intent (LOI), which will come next.

When I present the number, it’s based on the data I’ve reviewed so far. At this stage, I’ll discuss potential deal structures, such as seller rollovers, seller notes, or financing options, to prepare for the LOI. 

After the LOI is signed, the most critical part of due diligence is verifying the financials to ensure the numbers are accurate. Often, errors aren’t due to fraud but rather a lack of sophistication in the seller’s bookkeeping. 

For example, some entrepreneurs mistakenly count PPP loans or ERC tax credits as revenue, or they might use cash-based accounting when they should be on an accrual basis.

Financial diligence is crucial because it confirms the price. If the numbers are off by less than 10%, I’ll typically proceed without repricing. If the discrepancy is between 10-30%, I’ll renegotiate. 

If it’s over 30%, I’ll disengage, explain the discrepancies to the seller, and suggest staying in touch for future opportunities. Sellers often have an emotional attachment to the initial number in the LOI, imagining how they’ll spend the proceeds. A drastic price reduction can sour the relationship, so I handle these situations delicately to maintain goodwill.

Throughout this process, I emphasize that I pay fair market value for good companies. If the business is growing during diligence, I’m open to adjusting the price upward. Similarly, if diligence drags out, I consider growth that occurs during the process. However, for discrepancies within 10%, I remain firm on the original price.

Entrepreneurs often underestimate the importance of diligence when buying companies. Skimping on this step can lead to unforeseen expenses, such as addressing working capital issues or other hidden liabilities. Diligence is where you confirm the foundation of the deal and ensure you’re making a sound investment.

For outreach, my approach is to personalize the message. If I’m private equity-backed, I emphasize that. If I’m independently owned, I highlight that too. My initial message introduces who I am, my company, and my growth strategy. 

I’ll add a personal touch, like mentioning something unique about their company that caught my attention. This shows I’ve done my homework and that I value their business.

The outreach might include a one-page letter and a slick—a concise, visually appealing document about my company and goals. Handwriting the envelope increases the chances it gets opened, as opposed to a bulk mail look that’s often ignored. 

If the first attempt doesn’t get a response, I follow up with a different method—an email, a LinkedIn message, or another letter. It’s a multi-touch strategy, spaced over weeks, to build awareness and encourage a response.

When using a buy-side advisor, they often create a one-page handout and a longer 20-page deck to explain who we are, what we’re building, and why the target company fits into our vision. These materials support consistent, professional outreach that can span multiple channels.

Outreach is a numbers game. It takes persistence and personalization. On average, a buy-side advisor expects to make six to eight attempts before getting a response, but they achieve an 80-85% response rate. The key is to stay consistent and genuinely demonstrate why the business fits your strategy.

The key to these conversations is flexibility. By the time I’m reaching out, I’ve likely done my homework. I’ve probably seen their website, checked the “About Us” section, or researched their social media. I know if the owner is younger and likely to want to stay on or older and perhaps considering retirement. With that insight, I tailor my message.

If I’m reaching out to someone closer to retirement age, I might ask if they’ve thought about their future or when the right time to sell might be. I also emphasize flexibility in how the deal could be structured. 

For example, they could stay on for a few years, roll over a portion of their proceeds into my company for a second payday, or take a mix of upfront cash and seller financing.

Let me give you an example. My brother and I sold our insurance agency in January 2020. He was 63 at the time and wasn’t ready to retire. 

We structured the sale with a strategic buyer, Acrosure, a large company acquiring hundreds of insurance agencies annually. He stayed on for a few years and rolled over part of his proceeds, setting himself up for a second bite of the apple when they go public. 

Now, five years later, he’s ready to retire, having enjoyed additional income and the prospect of significant gains from the IPO.

Every seller has unique motivations. Some want to cash out and leave immediately. Others prefer seller financing for steady income over time. Younger owners often want to stay involved and continue growing their business. I adapt the conversation to their needs, whether they want a lump sum, a long-term note, or equity in my company.

The goal is to understand what drives them. Once I identify their priorities, I outline a simple process: I’ll sign an NDA, request financials, and put a number in front of them. If they like the number, we keep talking and explore how to move forward.

Structuring deals with financial levers for sustainable growth

When it comes to structuring deals, I’m open to using a combination of financial tools—debt, rollover equity, seller notes, or even seller financing—to get the deal done. My primary goal is to use other people’s money whenever possible, but I design every deal with a 2-to-1 debt coverage ratio in mind.

What does that mean? Let’s say I’m buying a company with $500,000 in earnings. I won’t use more than $250,000 of that cash flow to service the debt. This ratio ensures that even if the business cycles down or loses 20-30% of its revenue, I’m not scrambling to cover loan payments. 

A 2-to-1 coverage ratio provides a buffer, giving me 50% equity in the deal, whether it’s through seller rollover, equity injection, or another mechanism.

SBA loans, for example, often allow financing at a 1.2-to-1 ratio, leaving a slim margin for error. I won’t rely on such thin coverage, even if it’s technically permissible. Instead, I ask, “How much debt can this company comfortably support with a 2-to-1 ratio?” From there, I work to bridge any gaps using seller notes, rollover equity, or creative financing solutions.

In fragmented industries where multiples are generally low, I often rely on seller rollover or notes to cover those gaps. A common structure might involve a seller note on standby—a 10-year note with no payments required for the first two years. 

SBA lenders treat this as equity rather than debt, which strengthens the financial profile of the deal. Similarly, rollover equity allows the seller’s equity to become part of my equity, which can effectively reduce the down payment required.

Entrepreneurs often believe money is their biggest hurdle, but that’s because they don’t understand how to work with it. There’s no shortage of capital—it’s about structuring the deal properly. There are trillions of dollars looking for investment opportunities. If you treat money well, you’ll find it.

For those without expertise in deal structuring, there are buy-side advisors who specialize in not only identifying companies but also helping secure financing. 

These advisors typically have relationships with a range of lenders and understand the creative ways to get deals funded. While they charge a success fee, they earn it by navigating complex financial arrangements.

The real challenge isn’t finding money—it’s finding good companies in industries that trade at reasonable multiples. If you’re looking at industries with high multiples, like software, the structuring becomes more complex. 

For example, a software company might have no earnings but significant potential, leading to valuations that seem disconnected from traditional metrics. That’s where tools like large rollovers or creative equity structures come into play.

For me, the 2-to-1 debt coverage ratio is the key to designing sustainable deals. It allows flexibility, provides a safety net, and ensures that the business can weather downturns while servicing its debt. By following this framework, you can navigate deal structures across various industries, whether the multiples are low or high.

Mastering integration and building M&A expertise through experience

We can’t just focus on buying companies; we must integrate them effectively to demonstrate that we get more profitable as we grow. 

During diligence, I map out the differences between how the target company operates and how we operate. I start with two income statements side by side, analyzing line by line—advertising spend, operational costs, and other categories. 

This process reveals potential synergies, which I classify as positive, negative, or neutral. This mapping helps drive the integration process.

Integration is just as critical as acquisition. If you’re good at buying but bad at integrating, you’ll end up with chaos. Conversely, if you’re good at integrating but buy the wrong companies, you’ll still create chaos. You need to excel at both. 

For low-volume M&A, you can outsource integration or hire a project manager with integration experience. However, if M&A is going to be a strategic growth driver, you need to build an in-house team with institutional knowledge and muscle memory.

As I scale M&A activity, I gradually build my team. Initially, I hire a buy-side advisor and an in-house business development professional. Then, I add a junior business development resource to support the senior person. 

The third hire is often an integration manager, someone whose sole responsibility is ensuring that acquisitions are seamlessly integrated and that no details are overlooked. Over time, this team may grow to six or eight dedicated M&A professionals, even in a smaller company.

You don’t need to be a massive corporation to implement this. One of my first clients had under $2 million in EBITDA. Within three years, they hired a VP of business development, engaged buy-side advisors, and secured capital. 

They completed six acquisitions, growing to $15 million in EBITDA. Today, their company is worth $250 million. By accelerating growth through M&A, they achieved in three years what would have taken decades organically.

Entrepreneurs often underestimate their potential. The difference between millionaires and billionaires is that billionaires went all in and stayed committed until they achieved success. Hard work, vision, and perseverance make the difference. 

Even individuals like Elon Musk, who repeatedly achieves massive success in different industries, emphasize the importance of vision and execution over innate brilliance.

To succeed, start by believing in yourself. Surround yourself with knowledgeable people, build a team, and use a structured process. Stop talking about your goals and start taking action. Success begins with execution.

Your company must continually improve its ability to integrate acquisitions and capture value. This includes increasing margins and free cash flow while building institutional muscle memory. 

Integration is a process that gets easier over time. During my last CEO tenure, we acquired one company in the first year, seven in the next two years, and fifteen in the two years after that.

It’s like priming a pump on a deep well. Initially, you pump and pump with little to show for it, but once the water flows, it becomes easier to maintain. Similarly, M&A takes time to build momentum. 

As you learn to manage deal flow, diligence, and integration, you get better and more efficient. The process snowballs, allowing you to scale faster and handle greater volume. Be prepared for a slow start, but know that consistency and persistence will lead to success.

Strategic exit points and the value of partnering for growth

There’s a lot to unpack here. First, you mentioned that reaching a specific size increases value—that’s absolutely correct. Where you exit matters because natural exit points exist, and understanding them is key to getting the best deal.

Private equity (PE) funds operate in tiers, and not all funds are the same size. Smaller funds target smaller companies, while larger funds focus on bigger companies. 

All funds have a limited lifespan, typically 10 years, with capital deployed in the first six years and an average hold period of five years. This creates natural exit windows based on company size. For example:

• $4 to $7 million in EBITDA: The first real exit window. Lower middle-market PE firms typically target this range. Below $4 million, you’re either selling to a strategic as an add-on or to smaller PE firms that operate more like angel investors with smaller, private pools of capital.
• $10 to $17 million in EBITDA: The next tier. This is where you’ll find a larger pool of middle-market buyers.
• $40 million in EBITDA and beyond: Larger PE firms look here, and this is where you start seeing exits to even bigger players or potential IPOs.

The idea is that firms buying at one tier grow companies to the next tier, where they can sell to larger funds or strategics at higher multiples. 

For example, someone buying at $4 million EBITDA aims to grow the company to $15 million EBITDA and then exit. Buyers at $15 million aim to grow to $50 million, and so on. Knowing these natural thresholds allows you to plan strategically and maximize valuation through multiple arbitrage.

On choosing the right partner: who you sell to matters just as much as when you sell. Picking the right partner is critical. Do your diligence. 

Talk to CEOs who have worked with the firm—both those still there and those who’ve left. Find out what it’s like to work with them. Every PE firm will pitch themselves as a great partner, but with 8,000 firms out there, quality varies greatly.

You also mentioned minority versus majority sales. Most PE capital is in buyout funds, which require a 51% controlling stake. If you insist on a minority sale, you’ll eliminate a significant portion of available capital. 

Fewer buyers mean less competition and typically lower valuations. That said, minority deals are possible, but they’re more akin to mezzanine financing. You’ll retain control, but it often comes at the cost of a lower valuation.

For entrepreneurs concerned about being a minority shareholder, look at Elon Musk and Jeff Bezos. Both are among the wealthiest people on the planet and own less than 13% of their companies. It’s okay to be a minority shareholder if you have the right partner. 

A good PE firm will bring capital, expertise, and relationships to help you scale. Your job remains the same: grow the business. The right partner won’t interfere unnecessarily, but they will expect you to work hard to achieve shared goals.

On timing and strategy, if you’re thinking about a minority sale, be clear on your goals. You could take some chips off the table with a dividend recapitalization, giving up a portion of equity while servicing debt with company cash flow. 

But if you’re aiming for growth, selling a majority stake to a strong partner might make more sense. It provides the capital and support needed to scale while setting you up for a lucrative second bite of the apple at the next exit.

Ultimately, whether it’s a minority or majority sale, the key is to choose wisely. Understand your growth trajectory, know the natural exit points, and align with a partner who shares your vision and has the resources to help you succeed. Don’t just think of selling as the end of the journey; it’s often the beginning of a new and exciting phase for your business.

How to perform diligence on private equity buyers as a seller

The best way to do diligence on a private equity (PE) buyer is to ask for references. Specifically, ask for references of portfolio companies they’ve sold. You want to talk to someone who’s been through the full five-year flip with them and had an outcome. Then, ask to speak with current founders who have sold to them. Finally, and this is critical, request to speak to a founder who sold to them and was fired.

At that point, they might ask, “Why would you want to do that?” My response is simple: divorces happen. It’s not about the why, but about understanding how the divorce was handled. When you negotiate contracts, employment agreements, or shareholder agreements, these are essentially prenups. They govern what happens during a “divorce,” and you want to know how people were treated when things didn’t work out.

I’ve been in this business a long time. I’ve made a lot of money for people, but there have also been instances where differences of opinion led to parting ways. I’ve moved from one company to another, made the first two buyers a ton of money, and then had a third situation that didn’t work out. Sometimes, buyers overpay, and that becomes their problem—not mine. What matters is how firms handle situations when things go south.

Some PE firms treat people fairly during a separation. They enter the relationship as good people, and they exit it the same way. Talking to people who’ve completed the journey, those who’ve been let go, and those who are currently working with the firm will give you a balanced picture. Entrepreneurs tend to be candid when speaking to other entrepreneurs, so they won’t just parrot a company line—they’ll tell you what they really think.

The ideal time to perform this level of diligence on a buyer is after the Letter of Intent (LOI) has been signed but before the deal closes. If you’re the seller, this is your window. If you’ve hired an investment bank and there are 30 potential buyers in a process, it’s impractical to do deep diligence on all of them. However, as the bids narrow to five, you can start investigating those firms more thoroughly.

Look at the companies they’ve previously acquired. You might know someone who built or ran one of those businesses. Reach out and gather intelligence on what kind of buyer they are. By the time you’re close to the finish line, you should know if this is a partner you can work with.

Remember, in your first sale, you’ll never have more control than you do at that moment. You have the power to say yes or no. It’s not just about getting the highest price; it’s also about choosing the right buyer. 

Once you’re part of their ecosystem, the firm will likely prioritize the highest bidder in future sales. As a CEO, you can still guide that process somewhat—by deciding whether or not to stay—but the initial sale is your best chance to exercise control.

Diligence isn’t just a step in the process; it’s your opportunity to ensure that you’re entering into a partnership with the right people.