Direct Derek - Acquisition Playbooks

Buying a Competitor From a Failed Owner

2026-05-13T00:00:00+00:00

"I know this business" is a useful sentence until it becomes a substitute for diligence.

A competitor can recognize the visible pieces quickly: customers, technicians, equipment, licenses, vendor relationships. Familiarity compresses the commercial exam because you already know what good looks like, what merely looks tired, and what belongs in a scrap bin.

The less visible package is less cooperative. Unpaid taxes, employee claims, tort exposure, environmental liabilities, unstable working capital, and undocumented obligations do not become harmless because the buyer recognizes the logo on the trucks. A customer list, meanwhile, is an address book. Its entries still need to answer after closing.

So the first question is narrower than "What is this company worth?" A careful buyer wants to know which assets survive the owner's failure — and which problems can follow them through the door.

Capacity is measured in disorder</h2>
These deals naturally repel scaled capital.
They are small, geographically specific, and poorly documented. Records arrive late or not at all. The timetable compresses while customers drift, employees interview elsewhere, and suppliers reconsider their terms. An institutional buyer adds financing approvals, committees, and a diligence process built for orderly companies. By the time that machine reaches a decision, the target may consist mainly of unwanted receivables and office furniture with strong opinions about depreciation.
An operating competitor has a different advantage. It can judge equipment, customers, employees, and licenses faster because it already understands the industry. It may also be able to buy selected assets rather than inherit an entire platform.
But capacity here is not measured by purchase price alone. The measurements that matter are the employees the acquiring operation can absorb, the customers it can transfer without damaging service, the working capital required after closing, the claims still requiring investigation, and the management hours consumed by integration.
A cheap acquisition that weakens the healthy buyer is too large, regardless of how modest the cheque looks. The purchase price clears the doorway while the operational mess stays wedged in the frame.

Familiarity narrows the unknowns</h2>
An industry buyer can often distinguish an ordinary bad month from real customer defection. It knows whether ugly equipment is serviceable or finished, whether a departing employee is replaceable or carries the operation around in their head, and which contracts or licenses require closer inspection.
That matters. So does the cause of the distress.
A burned-out owner may have a sound operation buried under neglected administration and postponed succession. A failed operation may have damaged customer confidence, unstable suppliers, unpaid obligations, and records that stopped describing reality months ago. Those situations can look identical during the first walkthrough. They should not receive the same structure or price.
The acquisition has to be compared against building the same capability from scratch: the cost of recruiting technicians, winning customers organically, replacing usable equipment, transferring contracts and licenses, and supplying stabilization capital. Legal review and integration belong in that comparison too.
The underwriting figure is expected retained contribution margin, not trailing revenue. Revenue belonging to customers who leave is historical decoration. And the seller does not get paid for synergies the acquiring operation creates after closing.

Speed enters the purchase price</h2>
Distressed assets decay while people discuss them. Customers move. Key employees take other offers. Licenses lapse. Suppliers tighten terms. Working-capital support disappears. A normal process can absorb delay; a distressed one may lose the assets that justified the deal.
Consider an illustrative comparison. Bidder A offers $1.20 million, carries a financing contingency, needs committee approval, and projects a ten-week close. Bidder B offers $1.05 million, brings committed capital, has no financing contingency, and closes in three weeks.
A's number is $150,000 higher. It also asks the seller to wait seven additional weeks and accept the risk that financing or approval falls through.
The arithmetic turns on the decay rate, and the following figures are illustrations rather than market data — nobody publishes a weekly decay curve for a failing HVAC shop. At $10,000 of weekly leakage, seven weeks costs $70,000. At $25,000 a week, the loss reaches $175,000, already more than A's premium. At $50,000, $350,000 disappears before assigning any value to closing certainty.
The seller is choosing between expected outcomes, not headline bids. A ten-week process buys whatever remains in week ten. The lower offer can win because it closes while the essential employees still have company email addresses.

Commercial familiarity increases the need for structure</h2>
Industry knowledge can shorten the commercial exam. It cannot waive the legal one.
Operational diligence does not settle unpaid taxes, employee claims, tort exposure, environmental obligations, successor liability, or fraudulent-transfer risk. Familiarity makes the temptation worse, because the buyer treats the company as a known object when only its storefront is known.
A carefully structured asset purchase may let the buyer select customers, equipment, contracts, and licenses while leaving unwanted corporate history behind, subject to the facts and applicable law. It is not a force field. Successor-liability exposure can remain despite an asset structure.
A court-supervised Section 363 sale can provide speed and "free and clear" title that reduces this exposure. It also brings court oversight and the possibility of competing bids after a stalking-horse buyer has established the floor, which is a cost the stalking horse usually negotiates for in break-up fees and expense reimbursement.
This is business analysis, not legal advice. The unresolved legal work is precisely the part industry familiarity does not touch.

Buy the operating memory explicitly</h2>
The failed owner often retains the operating memory: customer history, vendor terms, quoting habits, passwords, and undocumented workflows. Keeping that person around creates a practical problem. Their knowledge helps the transfer, but their continued presence can confuse authority and preserve the habits that contributed to the failure.
The cleaner instrument is a narrowly scoped transition agreement. Arrangements of this kind commonly run three to twelve months, often beginning at 20 to 40 hours a week before tapering, at roughly $100 to $500 an hour or a fixed retainer. There is no published dataset on transition-agreement terms; these are practitioner conventions rather than measured ranges.
For a distressed competitor, the scope should be surgical: named customer introductions, vendor handoffs, license-transfer support, documented workflows, limited authority, and a hard end date.
Six months at 30 hours a week and $150 an hour costs about $117,000:
30 hours × 26 weeks × $150 = $117,000
That is purchased knowledge migration, and it belongs in the price explicitly rather than discovered after closing, when the most valuable asset has gone home with the seller.
Earn-outs deserve more caution here than they usually get. Degraded records and shifting operational control can turn apparent alignment into an accounting dispute. Direct payment for documented handoff work is often cleaner.

The personal risk is part of the deal</h2>
Employees, customers, and suppliers watch how the failed owner is treated. A fair, orderly transition can build referral capital with the next tired operator in the territory — in this corner of the market the best targets are surfaced by people who have already dealt with you, not by a broker. A humiliating or chaotic transition closes sourcing channels quietly; nobody calls to explain why the calls stopped.
Sympathy creates a different valuation problem. A seller may anchor to sunk effort, old debt, or a stale appraisal, none of which determines recoverable cash flow.
This is also where the method needs watching. A framework built entirely around small, inconvenient, badly documented situations will eventually train the person using it to read friction as mispricing, because friction is the thing the framework was designed to find. Sometimes the friction is not a discount waiting to be collected. Sometimes it is an accurate quote for what the asset is worth.
Buy only the recoverable pieces</h2>
Separate what is required on day one from what is useful but replaceable. Then identify which relationships may survive the change of ownership, which obligations are excluded by contract, and which liabilities might follow anyway. The stabilization burden gets added to the cost rather than hidden beneath a low purchase price.
The capacity limit is whatever the healthy operation can absorb without becoming the next distressed seller. Familiarity moves you quickly through the visible business. The remaining work is finding out what has been accumulating out of sight.

Buying a Business That Also Buys You a Job

2026-05-09T00:00:00+00:00

Acquisition models are meticulous about debt, taxes, entry multiples, and exit multiples. Then they reach the chief executive's labor and enter zero.
A traditional search-fund acquisition carries an enterprise value around $14–16 million, commonly near 6–7 times EBITDA. That is the price everyone models. There is a second price nobody puts on the term sheet: several years of one operator's working life, spent inside the company supplying that operator's salary, equity, and professional reputation.
Buying control does not make management free. It moves the invoice somewhere you are less likely to look.
The asset closes once. The job renews every morning. On the Monday after signing, lenders, customers, employees, and payroll take control of the calendar.
One operator, one company</h2>
This is genuinely capacity-constrained territory. One operator buys one private company, usually with a few million dollars of EBITDA. The deal is often too small for a conventional mid-market private-equity fund because sourcing, diligence, and oversight costs do not decline neatly with enterprise value. Relationships matter, information is uneven, and the market is fragmented. The structure deserves respect.
The capacity limit is unusually literal. One capable person can properly run one acquired company. Scaling the model means adding searchers, loosening acquisition criteria, or moving into larger deals. The last option brings larger buyers with deeper pockets, erasing the reason to operate in this corner in the first place.
An investor can diversify across many searchers and let a handful of outsized outcomes carry the portfolio. The operator gets one company, one vesting schedule, and one concentrated result. Paycheck, equity, reputation, and future earning power all sit behind the same front door. Most other parties to the transaction can spread their exposure elsewhere. The person running payroll cannot.
The cost begins before there is an asset</h2>
A typical search runs 19–20 months. The first letter of intent arrives around month eight, and the average searcher signs roughly 3.6 LOIs before closing. Even then, only about 57% of concluded searches over the last decade have ended in an acquisition — 63% across the full dataset since 1984. The rest consume time and capital without producing a company.
The acquisition rate stepped down noticeably around 2014 and has held near 57% since, although that is not clean proof that competition alone is lowering the hit rate. Financing conditions changed during the same period, and the available data do not separate those effects neatly.
Search-stage salary averages around $139,000 a year. Over 19–20 months, that is roughly $220,000–$230,000 of gross pay for full-time sourcing work. It is compensation, not investment return. Spread the search-stage capital across successful and abandoned attempts, and the expected search cost per completed acquisition rises well above the budget attached to any single search.
The searcher also gives up roughly a year and a half of alternative earnings. That cost belongs in the personal ledger at the searcher's actual counterfactual salary, not at an industry average selected because it improves the presentation.
Time creates another liability. Eighteen months into a funded search, the next LOI is no longer purely a business decision. It is also solving a calendar problem. A dwindling search budget has a quiet way of making the next asking price appear reasonable.
Unbundle the compensation</h2>
Use four separate lines: search-stage salary, post-acquisition CEO salary, equity vested at closing, and equity earned through continued service and performance.
Median first-year CEO salary runs around $190,000, plus a $25,000 target bonus, rising in later years. Five years at that first-year base is approximately $950,000 in gross salary — a deliberately conservative floor. That is legitimate compensation for real work, but it belongs in the operating economics of the company. If an acquisition only works because the model treats management labor as free, the acquisition does not work.
Equity is messier. A solo searcher's headline stake commonly runs around 25%, split into three roughly equal tranches. One vests at acquisition, one over four to five years of service, and one depends on investor returns. Typical hurdle structures award nothing below roughly a 20% investor IRR and the full performance tranche around 35%, although individual terms vary and these conventions are templated rather than universal.
A "25% stake" therefore resembles eight percentage points at closing, another eight for remaining in the job, and a final eight if the return hurdles are met. The headline percentage combines transaction compensation, a retention package, and a performance award. Treating all of it as day-one ownership gives the operator credit today for work that may take five years to perform.
Two ledgers, not one</h2>
The business ledger begins with cash flow after paying for management. It then accounts for debt service, reinvestment, dilution, and eventual exit proceeds. The question is whether the acquired company creates value after recognizing what competent management costs. A skilled operator can clear that bar with room to spare, but the skill has to be measured rather than smuggled into the model at no charge.
The career ledger starts on the first day of the search, not when the acquisition closes. It tracks cash compensation, forgone alternative earnings, and realized equity across a concentrated stretch of one person's working life.
Stanford's dataset covers 681 first-time US and Canadian search funds formed through the end of 2023. It reports a 35.1% aggregate pre-tax IRR and 4.5 times aggregate ROI. Those are investor returns, and they are pooled across four decades, which is a generous way to present anything. The operator's labor does not appear in them at all.
The distribution is also lopsided. Stanford's 2024 study reports that 31% of acquisitions ended in a partial or total loss, while 11% exceeded ten times invested capital. A diversified investor can average a loss against an exceptional winner. A searcher operates one company and receives one outcome.
The test is simple: would the investment still work if you hired an outside CEO and paid what competent management actually costs?
Crowding raises the operating burden</h2>
The preferred target profile is now familiar: recurring revenue, diversified customers, owner-independent operations, and roughly $1.5–7 million of EBITDA. About 48% of searchers launching in 2022–2023 reported enrolling in an ETA class, up from 37% in the prior study. Teaching more buyers the same template does not create more willing sellers of qualifying businesses. It produces more buyers carrying similar checklists.
Consider a company generating $2.5 million of EBITDA. Moving the entry price from 5 times to 7 times raises enterprise value from $12.5 million to $17.5 million, a 40% increase before the operator improves anything. Traditional search-fund deals are generally closer to 6–7 times EBITDA than the 3–5 times figures commonly associated with smaller, self-funded acquisitions.
A higher entry multiple leaves less room for ordinary execution. More of the return must come from growth, improved margins, debt reduction, or a favorable exit. The spreadsheet can assume exceptional operating performance in less than a second. Producing it takes several years.
Where the filter runs out</h2>
The method here looks for markets too small and inconvenient for institutions to pursue directly. That instinct works until inconvenience is mistaken for mispricing. The two are not the same finding, and this framework is not especially good at telling them apart in advance.
The entry multiple, the debt schedule, and the vesting waterfall all model with precision. None of those calculations says whether one person will still make sound decisions in year four, after the novelty is gone and every unresolved problem knows where to find them. That is the step where judgment quietly substitutes for evidence, and no amount of arithmetic downstream of it fixes the substitution.
The deals worth studying are those that still clear after paying for management, charging the operator for forgone earnings, discounting unvested equity, and recognizing the concentration. The seller leaves with liquidity. The buyer keeps the keys and the calendar.
If the economics disappear when someone else is paid to hold both, you have not found a superior investment. You have priced a demanding job at zero.