What are broken deal costs? They are costs incurred for a potential investment that ends up not consummating.

Broken deal costs tend to affect self-funded searchers most. Here are 31 ways for self-funded searchers to mitigate broken deal costs, so you can implement them immediately.

Some of the lowest hanging fruit for searchers include #5 and #24, but the most interesting one that searchers aren't considering yet is #21.

1. Prioritize your masterlist of due diligence dealbreakers by urgency

The objective is to avoid boiling the ocean and be efficient with your resources when evaluating a deal. You should already know to have a list of due diligence dealbreakers. Stackrank them so that the first dealbreakers in your list are most critical for the deal, inexpensive to verify, and easy for you to verify by yourself.

If you know that retaining a key employee is critical for your deal's success, then coming up with a new agreement with the key employee might deserve to be near the top of your dealbreaker list. Spending money on lawyers might be unnecessary if the key employee doesn't agree to stay on with you post-close.

2. Ask hard questions early

Don't let your desire to build rapport with the seller prevent you from asking difficult questions about the business. I look at hard questions as an opportunity for the seller to show you their eagerness to collaborate with you on difficult issues.

We've met some sellers who refuse to carry any seller financing, but 0% seller financing is a dealbreaker for us. By pressing further into the seller's appetite for a seller note, we can kill some deals quickly.

3. Create a basic financial model with a reasonable downside case

A couple mentors have said to model the bottom decile case, and if it still pencils, then the deal is good. The critical detail here is your assumptions for this downside case. These assumptions should emulate a bad but realistic macro environment for your business. Make sure the assumptions are fair. If the savvy investors that you intend to pitch can't get behind your assumptions, then you shouldn't either.

4. Do your own proof of cash

To be clear, doing your own proof of cash doesn't mean you can skip a professional QoE. But a professional QoE costs money, and you can do a rudimentary 80/20 proof of cash analysis before spending money on QoE.

5. Leverage free resources from SMB-specific lenders

Lenders like Live Oak make themselves available to all searchers as a resource to underwrite deals. They even have LBO model templates for searchers to use.

6. Use free LOI templates

Not every searcher will feel comfortable cutting corners on the LOI. But if your risk appetite permits, then a free LOI template prevents you from hiring a lawyer to draft your LOI.

7. Make sure the seller has their own attorney

Especially for deals that you sourced off-market, working with a seller without a lawyer is a great way for your deal to go sideways. Even better if your seller chooses a lawyer who specializes in small business M&A, not just a family lawyer.

8. Recruit investment partners who can help with due diligence

Many investors want to contribute to their investments in ways beyond their capital. Some of these investors will have a valuable superpower, like domain expertise or financial modeling or revenue generation, that can be helpful during your diligence process.

9. Trade superpowers with other professionals

You can also trade skills with other people. If you need finance expertise but can offer, say, technology expertise in return, you might find a finance professional who can help you in exchange for you helping them with technology.

10. Remember that paying for a broken deal is better than buying a bad deal

A broken deal might cost a couple percentage points of the total deal size. A bad deal that you closed costs way more. A valid way to reframe broken deal costs is the cost to avoid buying a bad company that you almost bought anyway.

11. Don't get under LOI unless you already know lenders and investors would be excited about the deal

Many investors and lenders are eager to build relationships with searchers before they go under LOI with a company. Some of them want to help you evaluate deals and give you feedback. This is helpful not just for their deal-specific feedback, but also for understanding how they evaluate investment opportunities and what it'd take for them to commit their capital.

12. Meet the seller on a call before submitting an LOI

Start building rapport with sellers early. We once found a deal that was perfect until we met the seller and realized he was determined to be combative. Rapport between buyer and seller is the foundation for you to navigate the due diligence process together, so the earlier you can establish rapport, the better.

13. Learn whether the seller was under LOI previously, and why previous LOIs didn't close

Some businesses stay on the market for long periods of time, even if the businesses are strong. If a business was under LOI before, the seller likely has some scar tissue over it. This is an opportunity for you to learn at the previous buyer's expense and understand how your seller expects the due diligence process to go.

14. Join industry-specific facebook and linkedin groups

You can do market-specific due diligence by accessing these groups of domain experts and seeing their posts and comments. See if any one particular topic dominates the conversations and make sure you know how that topic affects your business.

15. Cold call similar businesses in different markets

You can ask domain-specific questions to owners of similar businesses. Directing your outreach to different markets is important to avoid tipping off anyone in your business's immediate market about the pending transaction.

I heard of a searcher who wanted to buy a commercial roofing company in New England, so he cold called a roofing company in Florida with diligence questions, and he learned that the company's revenue is concentrated on hail. One year with fair weather and no hail could sink the business, so he passed.

16. Plug your weaknesses with a course

Professional resources for private equity analysts can cost as little as $10. At that price point, www.asimplemodel.com offers courses for financial modeling and due diligence.

17. Don't forget about SBA lender fees

The usual suspects for deal fees are QoE and M&A lawyers. But many searchers forget about SBA fees! Be sure to verify SBA fees with your lender.

18. Ask for at least 90 days of exclusivity

Don't promise to be a hero and promise to blaze through due diligence in 45 days just to win the bid and get under LOI. You'd rather under-promise and over-deliver by asking for more time upfront.

19. Insist on at least a small seller note

The benefits of seller notes to the searcher are well-documented. A seller's refusal to carry any financing can be a harbinger for a difficult diligence process, or worse surprises post-close when you're the owner. Seller notes are so common for small business acquisitions that forgoing it makes no sense.

20. Add a clause in LOI requiring the seller to share the burden of broken deal costs

Some sellers agree to paying some portion of broken deal costs if the sellers back out for reasons outside of the LOI. You have room to be creative with how you'd structure this clause.

21. Negotiate for the seller to pay for breakup fees

This is a more extreme version of the previous one. You can negotiate for the seller to pay breakup fees as a bargaining chip to concede higher valuations or more seller-friendly terms.

22. Be upfront with your deal costs and your expectations to pass due diligence

Make sure the seller understands all the costs you'll endure and all the hurdles you'll pass together to reach the end of the process. Manage expectations aggressively.

23. Choose advisors specializing in SMB acquisitions and local advisors over brand-name advisors

One of the easiest ways to lower broken deal costs is to, well, spend less money. SMB specialists and local advisors tend to be more affordable than the national brand names, and they are more eager to structure their fees to align their incentives with yours.

24. Choose fixed fees over hourly rates

An hourly lawyer will end up charging twice as much as a fixed rate lawyer. Hourly rate advisors are incentivized to charge maximum hours. Fixed rate advisors are incentivized to get the deal done well and quickly.

25. Understand how a broken deal affects your advisor fees

Many SMB-specialized advisors have unique ways to handle their owed fees if your deal falls through, such as deferred payment, payment by milestone, or rolling your fees into your next deal.

26. Find an accounting friend who can give you a pre-QoE report

If you feel comfortable asking your accounting friends for low-cost help, you might be able to get 80% of the value of a real QoE for 20% of the cost. But cheap options tend to be cheap for a reason. You should be prepared to be more hands-on and direct your accounting friends to specific dealbreakers that you'd like them to find.

27. Bring in lawyers only when deal is extremely likely to close

Your lawyers should come at the end of your due diligence process. By the time you engage lawyers, you should be very happy with how the rest of diligence has gone, and the additional spending on lawyers should feel like it has a high likelihood of paying off.

28. Stay engaged with the seller

As you navigate due diligence, you'd ideally message your seller regularly with updates on your process and reiterations of your excitement for the company. Seller emotions can sink a deal as quickly as anything on a CIM.

29. Don't let your lawyers speak or negotiate directly to each other

If you had the misfortune of paying your lawyer by the hour (or by every 6 minutes, as I have in the past), your lawyer will love billing hours to you while speaking with the seller's lawyer. In addition to driving up your costs, lawyers speaking directly with each other also creates opportunities for other parties to distort the narrative against you to the seller. As you build rapport with sellers, owning communications with them also prevents other parties from twisting your words and causing a rift between you and the sellers.

30. Lead sellers through your lawyer's docs to avoid spooking them

Like the previous tip, you want to avoid losing control of your deal's narrative with the seller. When your lawyer drafts a document and you share the document with the seller, the seller is likely to feel overwhelmed, perhaps even intimidated. Any chance to avoid spooking the seller is worth taking.

31. Use trello to manage the process

Due diligence is a project management exercise. Use simple, free project management software, such as Trello, to manage your DD process.

It's tedious to compile best practices across many experts and sources and turn them into guides like this. If you'd like to skip the tedium and get more analysis like this delivered to your inbox, comment below and I'll add you to my email list!