Guardrails for Diligence, Financing, and Saying No Even When You Want the Deal

Welcome to Bought the Biz. Today we're talking about what we would like to tell ourselves pre-acquisition. This is a journey down the rabbit holes of financing and due diligence, what went right, what went wrong, and what we'd advise others to do based on our experience and battle wounds. We also talk about the importance of no-go lists and how to avoid negotiating with yourself on the most important parts of a deal. Definitely take a listen, and learn from us.

Bought the Biz is a podcast for ETA entrepreneurs who've gone from searching for a business to actually running one. It tells the real story of what happens after the deal closes. The day-to-day operational, emotional, strategic, and leadership challenges that just don't show up in the highlight reels.

The show is story-driven and practical, sharing real experiences from operators along with clear, actionable takeaways you can use in your own business today.

I'm Garth Fossano.

I'm Christi Loucks. Welcome to Bought the Biz.

This could be one of the most important topics for searchers. What advice would we give to ourselves pre-close? And I think that this is a really important discussion for a lot of people thinking about search, thinking about ETA, getting into operating a small business. And we each have a little bit of a different take on what were the most important parts for us. For me, I would really want to think a lot about the due diligence. And I think for Christi, there's a lot more about the financing side of the business. And these are going to be two sides of the coin that you need to manage in the pre-close process. Got an LOI signed, you're moving towards finally becoming that owner-operator. And these are the important steps between you and that goal. So Christi, tell me a little bit about financing. And I think I know why this one's important to you too. What happened to your deal?

Oh, yes. So I've talked about it, I think maybe once or twice before, just briefly in, in other episodes. But essentially we— so we did a self-funded search and we combined an equity raise like friends and family raise with debt. The equity raise was great, amazing investors, no issues there. On the debt side, we had structured it originally so that there was a 2-year seller note and an SBA loan, normal SBA terms. We were talking to an SBA lender, it was all looking really good. We sat down with them in their Denver office, we printed out spreadsheets and like walked through the numbers. We did have a little bit of not complexity, but just like an extra step in translating Canadian dollars to US dollars. So like we sat down, we went through all of that with the bank and felt really pretty good about it up until a week before close when the bank took the the opportunity, the deal to credit committee. And we were— gosh, I remember very distinctly, we were driving from Denver to Michigan. We had our dog in the back and they called and it was on speaker, like the car speakerphone, right? And like the conversation was a minute long and they said, so sorry, can't do it. Like, what awkward silence, right? And it wasn't like, oh, we need to kind of rethink about this component or restructure this, or, you know, like, let's have a conversation. It was point blank, no. And I mean, at this point we had done, like, we were about to close.

And like, how much money were you into the deal at that point across due diligence or other stuff? I mean, probably tens of thousands of dollars already.

Easily, easily $50K on diligence. Plus we already had like committed capital from our investors. We had already negotiated with the seller, which was a big part of it, and felt like we had the capital structure to support the deal with that SBA loan in place. That was the biggest thing.

Tell them, to help give everybody a little, paint the picture a little bit. What was it? Was it like the classic percentages are 80% SBA, pay debt, 10% seller, 10% equity injection made up by the buyers and your investors.

Yeah, we did. I'm trying to remember the exact numbers and I don't have them embedded in my brain anymore, but we raised about $1 million in equity and we— the debt was about— yeah, it was about $1 million.

Okay. So you're like in the 50/50, like 50/50-ish. Ish.

Um, and, and we felt like that was— I mean, my husband worked in PE, like he's done a million deals. Like, he was like, yeah, this is like completely sustainable. But it was entirely dependent on the SBA loan. So when we got the point-blank no call, we started scrambling. Now we had been— so we Our— this deal was listed on Acquire.com, and at the time Acquire had partnered with a private lender to like pre-underwrite certain deals. And this was one of the larger deals on the platform. So they had pre-underwritten this particular deal with this lender and we could, you know, it's a little bit of that like free money right now kind of a thing. So we had at least like— it is a yikes and there must be a catch coming, right? Oh, 100%. Yeah, so we had kept that lender like just warm, I guess, and like maintained a relationship with them because we just felt like that was prudent as a backup plan if we needed it, not thinking we ever would have to, but it was like, all right, well, this is like an, you know, option B if we need it. Well, we needed it, so we ended up going to that lender like at the last minute and saying, hey, like, this is You know, we'd like to move forward at your 19% interest rate. Sizzle, sizzle. And, and then our plan, though, was to immediately refinance that debt. Basically, as soon as we closed, we were going to, you know, go find a different lender. We knew that the deal was solid. We knew the finances were good. Like, there were no issues that we were ever told about by this bank. Like, we, as we were going through it, like, everything was fine. They liked the margins, they liked the growth, they liked everything until whatever reason they didn't. So anyhow, we decided, yes, we'll just do this to get the deal across the finish line and refinance it right away.

So, and I mean, we can keep playing out that story, but like, to your pre-close self, Like, what would you do differently? Because this seems like a really— like, you're— all of the steps you took sound pretty logical, but this is the thing you called out as something that you would probably do differently. So like, what, what, what would your advice be to a searcher out there? Like, keep more— I mean, the thing that immediately comes to my mind is like, hey, be working with a handful of banks through this process so you're not sort of put in that position. I mean, that might be one thing, but I'm curious what your take is. Yeah.

I wish that we had multiple banks, uh, like local banks that, you know, was kind of who we were working with. I wish that we had established that up front. Um, I think that we— so it's hard, it's like, you know, hindsight's 20/20, so it's hard to like go back and be like, I wish I would do this. I do wish that we would have been maybe a little bit more astute on where the SBA was going because it did also get much more difficult. And that would have been 2023, 2024 to like get some of these, these loans. It wasn't like, you know, free candy like it maybe used to be in the past. There were a few more like regulations established and just things that they were more strict on. So I, I wish that maybe we would have spent a little bit more time digging into that. Now, don't know what you don't know at the time, so it's kind of hard to say that with a ton of confidence, but I do think that that would have been helpful. I, I think that a lot of it though, a lot of it's emotional at that point. Like, you're so freaking close to getting a deal done, and to have the rug pulled out from underneath you like that in the 11th hour is like emotionally very difficult because you're— I mean, as a, as a, you know, entrepreneur, like I'm about to— I am on the precipice of completely redefining my life. And you're preparing for that mentally, emotionally, spiritually, like everything. And to all of a sudden see that just like fizzle or potentially fizzle that's a hard thing to manage.

I absolutely, I can think of things in my prior to due diligence process that were on my must-have list that were complete non-starters for the seller that I did not get. And I was able to negotiate that away for myself and that became okay, ultimately fine. But I think that sort of emotional roller coaster that you're describing, that you're going to feel that entrepreneurial tug and that excitement might make you change some of those decisions. So I don't know, like, and I think this is probably a really important thing for someone to think through, like, really seriously, what are your 3 must-haves? Like, write them down, make it concrete. And then, you know, make sure that you're checking back with that list if you start negotiating with yourself later on in the process because of those emotions.

Yeah. Because it's so hard to think as much as you think you think you're going to think clearly and logically and rationally. I mean, when you're at that point, you don't always. Yeah. So like, you know, sometimes I ask myself, oh, would I have walked from the deal? Should I have walked from the deal? That's a really tough question to answer because I am simultaneously very grateful for where we are today, everything I've learned, how I've grown. I wouldn't be who I am today if, like, we hadn't gone through what we had gone through with, you know, that acquisition. So, like, would I have done anything differently? I don't know, but I certainly would have probably, like, braced myself a little bit better for how difficult it was going to be.

I think it's sort of like leading the witness. Of course you would have done something differently given what you know now, but, you know, that's okay. It's part of the process. And I think that's part of the process that that everyone needs to take. Yeah, I think for me, a couple of my pieces of advice would be much more about due diligence. I was also a self-funded searcher and, you know, post-LOI getting to close, I felt like my number one job was managing the financing. And I completely agree with the idea of having multiple banks even prior to LOI already, because the banks that I had sort of nurtured pre-LOI ended up going with somebody different. So I do think having sort of a Rolodex of SBA lenders is something that is going to be helpful and make that process faster. But I also feel like the due diligence part of your acquisition is probably one of the most important things you are ever going to do in your life and really deserves very careful thought, time, and process. And managing both of these things, securing the financing in the right way as well as the due diligence, is more than a full-time job for one person. So I think that going into the deal, I would have had both of those structured a little bit more and a plan to get help on some of those activities in a deeper way than what I did. Because a couple of the things that I negotiated on my— with myself on due diligence that I would really encourage searchers to keep in there, like, I am not going to, you know, negotiate on these is the no-no list. But the real no-no list, which was, which was on my original no-no list, but I sort of negotiated myself down and look like it's all fine. But I think again, with hindsight 20/20, this is definitely something that I would do differently. I would not buy a deal if I do not get to meet the key employees. I would not do a deal if I do not get to meet with a customer or 5, depending on how many customers there are. I think that that is level of insight that you just so needed. And I think that there are also, you know, potentially ways that you can do that in a non-intrusive way to the seller as well to make them more comfortable with it. And like, I wish that there had been more discussion about that. I think we probably could have figured something out versus it being like it was in the hard yes category for me and a hard no category for her. And it was negotiated between two brokers and we never got to talk directly about it. And I, I think if we had been able to speak directly about it, we probably would have figured something out.

Yeah. Why, why those two things, employee, key employees and customers, like going through the process that you then went through where you met them after the fact, like obviously everything worked out great because you are where you are. Yeah. But like what makes you say that?

I think that, you know, if you are going to step into this business like and I've talked about this, you know, on another episode where you interviewed myself and Jason, one of those key employees. And, you know, I think some of the things we said is like, well, the seller used me and my entrances, some of the negotiation parts between the two of them, versus like doing that before I entered from stage left as this new actor in the play. Like, and I think if you get to meet those employees beforehand, you're going to start to uncover some of those things in advance and give them the time and space to work out some of that versus like you being this forcing factor that might bubble up into some surprising outcomes, which didn't happen in this case, but obviously could have. And I think, you know, it really depends on the people and how all that stuff works out. And so, you know, I think that that's, that's a really important lens into the company. It's a validation of the things you are asking and learning from the seller. It's another reference point and just more learnings about what you're walking into and what you're going to need to be doing on day one. That I think is a really important perspective.

Yeah, it's so interesting because I think— and this is where it's just important for people to write down what's truly important to them. Like, there is no right answer on what that no-go, no-no, whatever we're calling it list is. Exactly. Because like, I don't know that I even— I didn't meet key employees and I didn't meet clients, um, before acquisition. And, and looking back, I don't know that it would have changed anything for me, or I don't know that I would have in the short term learned much more than I did upon meeting everyone, you know, day one and clients and, you know, the weeks to follow. And that was maybe the nature of the business, uh, but also maybe just like my personal, like, priorities or like, you know, just something that wasn't for me quite as important. But I think that's exactly the point. Like, everybody has different things that are going to be top of that list. But you just really have to know what those are. And not budge.

Yeah, I have a feeling that'd be strong. That's right. I have a feeling though, on the top of your list is maybe like, don't take a 19% interest rate.

Don't take a 19% interest rate, especially if you're not sure if you can refinance it. Because joke was on us, we couldn't. And it was freaking miserable. Yeah, and well, and the other thing too, that my other biggest takeaway. And Alex, so my husband who's done deals before, had told this to me during our search, during our diligence. And I heard it, but it didn't mean anything to me until later. Your lender, your bank is 100% a partner. And that relationship is super, super important. If you don't have a lender or, you know, a banker or somebody that you can really have a, like, a personal relationship with where if shit hits the fan, you can go to them and say, I like— we got to come up with something, right? Like, work with us on a new structure or give us some sort of break. Or like, someone who has the flexibility to, to have that, like, personal management of a certain situation. I think that's very, very important. And I like didn't put the value on that ahead of our deal. Like I cognitively knew that, sure, of course that makes sense. But now, I mean, yeah.

It sounds pretty rough to get that phone call on speaker in the car a week before close, a minute long conversation, nope, sorry, we're out. Like, and no discussion.

No discussion. And they had all but promised us that it was going to be done. Like, It was, I mean, we felt very, very confident in it. And so, yeah, it was, uh, and that's where at the end of the day, like you do have to look, you know, you have to look out for yourself too. And like forming those relationships and having those partnerships with the right people, like it's really, really important, especially when you've got PGs attached to it and all that.

Exactly. Exactly. I think my takeaway is like, the due diligence and the financing starts long before you get to an LOI and you've got to have these plans in place and the relationships to pull all the pieces together to make due diligence happen, to make financing happen and all that stuff. I think a lot of people think about the equity side. Oh yeah, I've got to be nurturing an investor or investors to help get a deal done. And like, it's really— you've got to have a due diligence plan. You've got to know your data requests. You got to know what you're going to go deep on, what you're not. You got to have the lenders, the debt lenders in place. Enough relationships where you've got a couple to go talk to and like maybe even shop around and try and get the best rate or the best terms, like, right, instead of just how do I get it done in the timeline? Yeah, that would be— I could have started a lot earlier than what I did.

Is there anything— I mean, a little bit less on the logistics or like deal transaction side. Is there anything more like I don't know, emotional or cerebral, right? That you maybe wish you would have known or what you would tell yourself or something like that.

It's going to be harder and more fun than you think. And go do a little trip beforehand, go relax a little bit, uh, and then get back, get ready and buckle up and here you go. Yeah.

Yeah. I think it's the. I would tell myself to get ready to dig pretty deep.

Yes. 1,000%. Deeper than what you've done before.

Yes. I, I've always been a hard worker. Like that's who I am. I like to run ultra marathons and do stupid stuff, but like, I didn't know that.

That's great.

Yeah. I've done, oh, I don't know. I've done an ultra marathon relay. I've done an ultra marathon. Solo, I've done like 4 or 5 marathons and like 20 to 30 half marathons, um, and other things in between. So like when it comes to endurance, when it comes to grit, like I do feel like I've exercised that, that muscle quite a bit. And this has still been the most, yeah. Um, this has still been the most like tough. Experience in a good way. Right.

But like challenging and rewarding.

Deep. Yeah.

Challenging. Just like running a long race. So get ready for it and do all the same things you would be preparing for if you were gonna go run an ultra, cuz you're about to. Absolutely.

Cuz you will lose your toenails and hurt for like a month afterwards.

Okay. Well, that great, great image in everybody's mind.

It's very glamorous. Let me tell you.

Welcome to small business.

Yes.