3 Deal Killers My MBA Could Never Teach

We often focus on the sexy parts of ETA, the parts that feel like private equity: deal sourcing, valuation methods, and growth strategies.?

And while those topics are interesting, I want to talk about the unglamorous things, such as quibbling over purchase agreements and dealing with the minutiae of accounting. These elements – not the valuation models and sourcing methods – are the crucial factors that could have saved me tens of thousands of dollars and months of wasted time in my search.

1. Front-Load Critical Terms

Imagine this: you’ve looked at 30 companies in 3 months. You’re feeling the drudgery of the “talk to broker - construct model - pass on deal” cycle that all searchers go through.?

And then a close friend refers you to a seller she trusts, a former employer and current mentor. The seller is willing to share everything, the business looks great, and they have Fortune 50 clients!

That was my first serious deal…?

…and it fell apart at the eleventh hour over standard reps and warranties that the sellers refused to sign. Like many first-time searchers, I focused on building trust and rapport with the sellers. I flew out to meet them, worked in their business as part of diligence, developed detailed growth plans, and spent hundreds of hours understanding their business. We had great chemistry, and I truly believed if we were aligned on the vision for the company’s future, the legal stuff would just happen naturally.?

Boy, was I wrong. I avoided discussing the nitty-gritty legal terms until just before closing, worried that complex legal jargon might spook the sellers or damage our carefully nurtured relationship. This backfired spectacularly.?

When we finally presented the purchase agreement, complete with standard reps and warranties, the sellers balked. Despite months of relationship building and tens of thousands spent on diligence, the deal fell apart over terms that could have been discussed during LOI.?

Now, I share key legal terms during LOI negotiations. Yes, it might feel awkward to discuss representations and warranties before you've built deep trust. But if a seller balks at standard deal terms that you need, better to pass before investing significant time and money in diligence.?

Get to "no" fast.

2. Don't Let Big Law Firms Kill Small Deals

Dovetailing with the above, my second key learning was about choosing the right legal partner.?

As I got my first deal under LOI, I hired a prestigious (at least for Cincinnati)? M&A specialist law firm.?

Mind you my deal was < $2M, but I figured as a first-time searcher, I wanted the best counsel.

How deluded I was.

While my chosen firm had impressive credentials, their approach was completely misaligned with the realities of small business acquisitions. They treated our deal like a $100M transaction, burning through our budget with exhaustive due diligence on minor issues. And large law firms only deliver monthly invoices, so I wasn’t sure how many billable hours I was racking up.

When my deal crashed and burned right before closing, I was saddled with $40k in legal fees and no acquisition to show for it.

For small self-funded deals, you need lawyers who understand ETA specifically and can right-size their approach. Look for attorneys who specialize in search funds and small business acquisitions - they'll focus on what matters while keeping costs reasonable. Many will offer a “fixed-fee” model and while it seems expensive at first, I guarantee you’ll spend less with this model than hourly counsel.

For what it’s worth, I have nothing bad to say about the quality of the law firm I worked with. Their attorneys are knowledgeable and talented, but simply not right for my situation, in hindsight.

3.? Master the Cash Conversion Cycle

Finally, after looking at 70+ deals over the course of 2024, I finally bought a travel business.

Travel not a popular search industry: it’s B2C, non-recurring discretionary spending, and exposed to the macro-economy.?

But it has one key accounting feature going for it: a negative cash conversion cycle.?

Customers pay us at least 90 days before their trips, while we pay most vendors during or after service delivery.?

Because the cash can sit on our balance sheet for 90+ days, we can make money off the float (by investing in treasuries, for example – this covers our seller payments). Negative CCC means lower working capital needs and less risk since we know how much revenue we’ll make before we have to pay vendors for associated COGS.

But here's the fascinating paradox I discovered during the transition: this same attractive characteristic created a significant cash crunch during the first few months of ownership.?

Why? In an asset sale, you buy the assets of the business on a “cash-free, debt-free” basis. This means that the seller keeps all cash, net of debt expenses (including payables due) including already collected customer deposits for future trips.?

In my case, the seller collected all the revenue for October through December trips, but I inherited all the expenses. I was left holding $60,000 in upcoming vendor payments and had no revenue to show for those months. This created a three-month period where we essentially operated at a loss despite the business being fundamentally profitable.

The lesson? Negative cash conversion cycles remain fantastic for long-term business operations, but you need to carefully structure your purchase agreement to account for this. Either negotiate for the seller to leave cash equivalent to unearned revenue in the business, or reduce the purchase price accordingly.?

Don't make the mistake of discovering this after closing.

The Bottom Line

The most expensive conversations are the ones you avoid having early.?

My journey through diligencing 70 companies, tanking 4 deals, and finally succeeding at 1 acquisition (with dry powder on the books for more) taught me that it's rarely the business fundamentals that make or break a deal - it's how you handle the details.?

Success in ETA comes down to building a systematic process that surfaces potential deal-killers early and efficiently. The faster you can have these tough conversations, the more deals you can evaluate, and the higher your chances of closing the right one.