Friends and Colleagues,

I have been a SF member for about two years. The first year I spent learning, asking questions, and seeking guidance. The second year, with your thoughtful support, I threw myself into a self-funded search. Ultimately, I pursued five proprietary deals with manufacturers in the $4-6 million revenue range, resulting in eight accepted LOI’s, two term sheets, and zero deals.

Along the way, I did all I could to keep a deal alive until I was satisfied it was no longer viable. I met with sellers frequently; I called them regularly and they called me; emails back and forth. One seller gave me access to his ERP. I helped another to improve his service delivery model. I also flew from Massachusetts to San Francisco for a sales call with another.

These were all good and profitable companies that had been run by capable owners over many decades. I approached each deal as though building toward an acquisition, throwing everything I could into making it happen. At the same time, I leveraged the collective wisdom of this community to make well-informed decisions. The following are some commonalities to my observations (all in 2023, mind you), including those that caused me to decline the deals.

The buyer/seller relationship was important to sellers, as was maintaining their legacy and providing for their employees going forward.

In 2023, sellers were experiencing a post-COVID bounce and it was tough to tell whether these numbers would be repeatable.

Sellers were experiencing a “wealth effect” from this post-COVID bounce which made it harder for them to understand/agree with the realities of DSCR, and why it would be calculated to their performance from previous years, not just the current year.

Sellers all had previous conversations with potential PE buyers. While offers never materialized, the conversations invariably increased the value the sellers placed on their companies.

Sellers were familiar with the use of multiples to determine a target price for their business, but those previous PE conversations had driven up the multiple in each case.

Sellers prompting “You should go find an investor. Everybody wants to invest in manufacturing right now.” - more unsubstantiated deal price inflation.

Sellers understood the use of Adjusted EBITDA as the basis for valuation but wanted to include a variety of “adjustments” that neither I nor the lenders would ever agree to.

Company financials were well presented and sellers were willing to share them, as well as their personal taxes, to move the deal forward.

Sellers understood that increased borrowing costs did apply some downward price pressure on the price of their company, but not much..

Customer concentration was acute at each of these companies, but sellers were convinced that having fewer, larger customers could be a benefit as it created less hassle.

There was no real succession plan in place or even a strong “Number 2”. Once the seller leaves, you’re on your own.

I was confident I could have mitigated most of the negative factors taken individually with the right deal price. We just never got to that price for my comfort level because the perceived value the sellers placed on their respective businesses was unsubstantiated.

This year I will keep learning more about EtA and M&A, and give back to the Search Funder community which has already given me so much.

My career spans more than thirty years of team-building, process improvement, and bringing professional management practices to family business-type operations. For the past twenty years, I have also managed boards of directors, finance committees, audit committees, HR, and hiring - just about anything you need to know for an organization in the $5-10 million range.

Please reach out if you have any questions about day-to-day small business operations and I will be happy to help where I can.

With best regards,

JC Schnabl