Notes for Owners
Why deals die after the letter of intent
A signed letter of intent is not a funded deal. At the size where most owners sell, the buyer's balance sheet is your deal risk, and the number that ends it is set upstairs by a credit officer who never meets you and never reads your financials. We know the shape of it because it happened to us, on a deal we had already won.
The ceiling that has nothing to do with your business
A bank lending under the Small Business Administration's 7(a) program looks at two things that people outside the process tend to blur together. The first is whether the business throws off enough cash to service the loan. The second is what the bank can seize if it does not. Whatever portion of the loan is not covered by hard collateral (equipment and receivables at liquidation value, plus any real estate the buyer pledges) sits on the bank's books as unsecured exposure, and every credit committee sets a hard number for how much of that it will carry on one deal.
That ceiling has nothing to do with your business. It is set before anyone reads your financials. If the gap between the loan and the collateral is bigger than the ceiling, the deal does not fund at any price, with any buyer, no matter how well the meetings went.
For an owner, the cost of not knowing this is three months off the market, a signed exclusivity you cannot use, a few employees who have started to guess, and no closing.
We had an accepted letter of intent and no lender
In late April of 2024 we put a letter of intent (LOI) in front of the owners of a commercial kitchen equipment service company in the Southeast: $5,406,238, a 5.15x multiple on $1.05M of pro forma adjusted EBITDA, ninety percent cash at close and a ten percent seller note, senior debt through SBA 7(a), simultaneous sign and close targeted for late July, and a $50,000 breakup fee if the sellers broke exclusivity.
They accepted the same day, then countered up about two weeks later: 5.25x on trailing twelve months (TTM), personal guarantees from the buyers behind the seller note, and a junior lien to secure it. Sellers who counter up are sellers who want to do the deal.
They also asked, before their lawyer wrote it, to cut the financing proof window from sixty days to thirty, with immediate termination if we missed it. That was the correct instinct. It was also aimed at the wrong risk.
The broker asked the only question that mattered, and we did not have the answer
One day after the acceptance, the sell-side banker asked for the name of the lender, the total amount to be financed, and any specific requirements that lender had. We wrote back that we were narrowing down options and did not have specifics yet.
Everything that followed was already decided at that moment.
A credit officer ran the arithmetic in a day and that was that
In late May, the senior lender at a regional bank with an active SBA desk asked one question: how much equity was in the home our operating partner could pledge. The answer was $250,000. She came back after speaking with her credit officer and said the collateral shortfall was too big for her loan committee, and that the most unsecured lending they would consider on a single credit was $2M.
Roughly $5M of debt against about $250K of pledgeable collateral, with no fund equity behind us, is close to a $3M unsecured residual sitting against a $2M institutional ceiling. No bank in the country was going to clear it. Not that bank, not a better pitch, not a tighter model.
There was no second door, and that is the part nobody tells you
The obvious fix is to stop borrowing and bring equity. At $1.05M of earnings before interest, taxes, depreciation and amortization (EBITDA), that door was already closed. A $5.4M enterprise value implies an equity check of roughly $2M, and the funds and family offices that back independent sponsors carry the same diligence, legal, and monitoring cost on a $2M check that they carry on a $20M one. The sponsor's own fee on a deal that size does not cover the work of doing it.
It did not kill one deal, it killed the method
Every letter of intent we wrote in the first half of 2024 ran the same play: a small target, 7(a) senior debt, personal guarantees, buyer collateral. Six of those deal folders stop dead within weeks of each other, the last documents landing between mid February and mid June of that year.
Our response at the time was volume rather than structure. Sourcing exploded that fall, more than three hundred files in a single month that September, most of them a teaser, a look, and a drop. That is hunting harder. It is not fixing the reason the last one died.
What we eventually concluded was not a financing lesson. Every structure available to us below roughly $2M of EBITDA required signing a personal guarantee and then running the company ourselves. That is a legitimate life, and plenty of good people choose it. It was not what we and our operating partners were building. We wanted to be investors.
So we moved up rather than sideways. Our letters of intent are now written against committed debt and equity from institutional partners, with no 7(a) facility, no personal guarantee, and no home pledged. That is a different vehicle, not a bigger version of the old one, and it carries its own hard trade: at that size the capital partner becomes the load-bearing member of the structure, and an owner is entitled to ask who it is.
What to ask before you sign exclusivity
If your business earns somewhere around $1M, most of your buyer pool is dependent on this kind of lending, which means their balance sheet is your deal risk. Four questions, and you can ask all of them in one phone call before you take your business off the market.
Not "we have strong banking relationships." A bank, a banker, and whether that banker has taken this specific deal to their credit officer yet. "We are narrowing down options" means no.
It is a real number, the banker knows it, and it is not confidential. Anyone who has actually had the conversation can answer in one sentence.
Home equity, other real estate, securities. Ask for the number, not the asset. Then do the subtraction yourself: loan minus collateral against the ceiling in question two.
If the answer is that they will raise it, that is a second process running on your clock, with its own approval committee and its own reasons to say no.
Shortening the financing window is not protection. Our sellers cut ours from sixty days to thirty and their instinct was right, but all it can ever do is tell you sooner that the answer was no all along. The subtraction above tells you before you sign.
None of this means a buyer using this kind of financing is a bad buyer. It means the deal has a hard ceiling somebody should measure on day one, and it is usually cheaper for you to measure it than to wait ninety days for a bank to do it for you. If you want a second opinion on where a specific buyer sits, a defensible earnings number is the input to every version of that arithmetic, and it is worth having before anyone asks you for exclusivity.
BDE Capital is an independent sponsor. We acquire lower middle market companies in healthcare services, B2B services, and trade schools, and hold them long term rather than on a fund clock.
We wrote this one against ourselves on purpose. The failure above is ours, it cost a seller who wanted to do the deal three months of their life, and the question that would have caught it is one we now expect to be asked of us.
The first thing we ask about is not a number. It is where you want this business to go, what you want it to look like in five years whether or not you own it, and what your own next step is: staying on and running it, stepping back to a chairman seat, or being finished entirely. Every structure that follows is built backwards from that answer. A price is easy to agree on. A price attached to the wrong ending is what an owner regrets two years later.
Then the business itself. Send a one-page summary, or just tell us what it does and roughly what it earns. Nothing confidential at this stage.
If it looks like a fit, we sign your NDA or your banker's. Then we want a CIM if you have one and three to five years of P&L if you do not. That is enough for a real answer. Tax returns, customer lists, and anything involving your employees come much later, or not at all.
The answer is usually fast, often the same day we see financials, and it comes with a number and the reasons behind it. Most of the time the answer is no. When it is, you get the reasons in writing. At no point do we contact your employees, your customers, or your vendors, and anyone we bring in to look signs the same NDA you signed with us.
On the money, since one of these notes tells you to ask: we are an independent sponsor, so capital is raised against a specific deal rather than pooled in a fund. That is exactly why there is no clock forcing a sale in year five. If you want to know who is behind a deal before you give anyone exclusivity, ask, and we will tell you.
You will hear back within two business days.
No process, no listing, no fee. One conversation about where you want this to go and whether the capital exists to get you there.
team@bdecap.com