In the Lower Middle Market, the Highest Bid Doesn’t Always Win — Psychology Often Does

In lower middle market deals, the most overlooked closing risk isn’t price — it’s seller psychology under the strain of data gymnastics. This isn’t a knock on sellers. It’s a normal artifact of founder-led businesses. Because many founder-led businesses weren’t built to produce buyer-grade answers on demand. The “system” is often QuickBooks, a few spreadsheets, and tribal knowledge. Even when the truth exists, it’s scattered, manual, and time-consuming to assemble. Meanwhile, the seller is trying to keep the business running while the buyer requests detailed diligence inputs; the kind that rarely exist as clean, click-a-button reports in founder-led companies. Typical asks include: • Customer concentration / churn signals • Margin drivers and mix • AR aging + collections reality • Inventory/backlog logic • Working capital patterns + “true run-rate” adjustments (Representative examples — not exhaustive.) From the buyer’s side, that’s responsible diligence. From the seller’s side, it’s a second full-time job — with deadlines — while the first full-time job (running the company) is still on their shoulders. 1) Sellers don’t choose in a spreadsheet — they choose under constraints In the lower middle market, most sellers are running the business while selling it. That means the sale process competes with: • Keeping customers happy and shipments on time • Managing employees (who may not know the business is for sale) • Managing vendors and cash • Many other responsibilities So the decision isn’t made in a vacuum. It’s made under time, attention, and uncertainty constraints. In that environment, the winning offer is often the one that creates the most manageable path to close — lower friction, clearer sequencing, fewer decisions — even if another offer is “better” on paper. 2) A real example: alignment lost to ease I recently lived this in a process that illustrates it with painful precision. In my first meaningful conversation with the owner, he didn’t start with valuation. He talked about people: employees who had been with him for decades, the family name on the building, the reputation he wanted to protect, and the legacy he hoped his children would inherit. It was clear this wasn’t just a transaction. It was the closing chapter of a life’s work. So we structured around what he said mattered: • Protecting the team • Preserving culture • Honoring the family legacy • Letting him participate in the turnaround • Allowing the family to share in the upside the reset would create We were the only buyer in the process and had an approved IOI. We didn’t need to “win an auction.” We did not feel any time pressure to submit an LOI. So, we focused on the details that would enable us to build an LOI that would actually survive diligence and close. But to make a responsible commitment as an operator-buyer, we needed clarity — and that’s where the strain began. Requests that looked simple on our side required real effort on his side. Follow-ups accumulated. Spreadsheets arrived incomplete. Numbers didn’t reconcile. When we spoke, he wasn’t evasive — he was bandwidth-limited. Then a strategic buyer entered at exactly the wrong moment. 3) Why strategics feel like “less work” Strategics can move fast, require less detail upfront, and tolerate incomplete data because they’re not underwriting a standalone business the way an operator-buyer must. An operator-buyer needs the business to stand on its own so we need clean clarity on unit economics, working capital mechanics, execution risk, etc. A strategic buyer already knows their own economics and operating model. They’re typically buying specific assets — customers, capabilities, capacity — that they can plug into that known system. If a strategic already has “Operation A,” they don’t have to live with the target’s messy “Operation A” long-term. They can replace it with their own operating model post-close — processes, systems, people — and integrate the target into it. An operator-buyer typically inherits the mess as a constraint they must fix while still running the business. To the seller, the strategic didn’t feel like a better fit. In fact, they didn’t satisfy many of the goals he told me mattered most. They felt like less work. Under load, ease can beat alignment. 4) The practical lesson for SearchFunder buyers Design the LOI + diligence process as a closing system; not as a data hunt. Then ask: Do we understand who else is in the process, what path to close they’re offering the seller (price, certainty, speed, legacy, rollover, reputation), and have we engineered our process and structure to win against that specific threat? The point isn’t to lower diligence standards. The point is to sequence and package diligence so the seller can comply and the process survives long enough to close. 5) What this sets up for Part II Part II is about a counterintuitive truth: In our segment, an “imperfect LOI” is often not a weakness. It’s a necessity. The question is whether it’s done transparently and ethically, with structure that protects both sides and reduces seller anxiety. That’s what we’ll cover in the next chapter of this story: the LOI approach that keeps momentum by acknowledging what’s still unknown, defining how it gets resolved, and keeping the seller engaged and confident through the process. Question for the group: Have you seen a deal where the seller chose the “easier” buyer? What specifically created the ease?