Hi Reader

When private equity professionals move into SMB acquisitions, they often find it frustratingly “unprofessionalized.” I couldn’t agree more.

Beyond brokers, you’ll encounter a range of advisors—from real estate agents to side-hustling lawyers to certified M&A intermediaries—each with their quirks. And seller teams can bring unusual demands. Here’s how to handle some of the more surprising ones:

1. PA Up Front

• Demand: “Only serious buyers submit a Purchase Agreement (PA) upfront, not just an LOI.”
• Problem: Unlike real estate deals, business acquisitions need flexible terms, as diligence impacts everything from price to payment structure. Negotiations on a PA can take months, with multiple revisions.
• Solution: 1) Insist on starting with an LOI (though this approach has mixed success), or 2) Have a lawyer draft a “bare-bones” PA that commits both parties to finalizing terms like reps and warranties in good faith post-diligence.

2. Excessive Good Faith Deposits (GFD)

• Demand: Sellers may ask for GFDs with steep amounts—sometimes $100K+.
• Problem: Real estate-inspired, this request can trap funds indefinitely, or worse, lead to costly court disputes if you want it returned.
• Solution: 1) Decline outright, 2) Offer proof of funds from your banker, 3) Provide the deposit post-PA signing, or 4) Agree to refundable GFD terms with third-party escrow.

3. Financial Statement Requirement

• Demand: “We’ll share the CIM after you sign an NDA and provide a personal financial statement.”
• Problem: Sellers often fear buyers lack closing funds, but disclosing personal finances prematurely weakens your negotiating stance.
• Solution: A “proof of funds” letter from your banker or an SBA broker, indicating liquidity for the deal, should suffice.

4. “Neutral” Lawyer

• Demand: “Let’s save by using a single lawyer for both parties.”
• Problem: Dual representation compromises confidentiality and fair negotiation. A single lawyer cannot give private advice to either side and must meet with both parties simultaneously.
• Solution: Just say “no.” A dedicated lawyer for each party is non-negotiable.

5. Short Seller Note Repayment

• Demand: “Seller note must be fully repaid within 12 months.”
• Problem: This repayment timeline can strain cash flow during your transition period, complicating SBA lending and reducing indemnity security.
• Solution: Explain the impact on cash flow and SBA loan approval. If needed, propose splitting the note into short- and long-term payments.

In Summary: Navigating SMB acquisitions can be challenging, especially when unexpected demands surface from sellers or their advisors. From upfront Purchase Agreements to hefty Good Faith Deposits, knowing how to respond can make all the difference. As you move through this process, remember that preparation, firm boundaries, and clear alternatives are key to keeping the deal on track without sacrificing your interests. Happy searching—and may your next acquisition be both smooth and successful!

- Eric

M&A Lawyer

Publisher, Freedom Through Acquisition Newsletter

​

​