the micro pe deal funnel: from lead to LOI
If you haven’t already, make sure to read the first 2 articles in this series:
Converting leads into signed LOIs is where the real work of micro private equity begins. Let's break down how to efficiently move deals through your funnel without wasting time on dead-end opportunities.
filter out bad deals fast: avoid this common trap
Don't fall in love with a deal too early. Every potential acquisition must pass through these basic filters:
Business Size: Does it match your sweet spot for business earnings? For example, many private equity firms have a hard cut-off of $500,000 EBITDA. To avoid competition, many micro PE firms focus on deals between $250,000 to $1M EBITDA.
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Industry: Many people "love" the idea of buying a boring cash-flowing business like portable toilets—until literal shit hits the fan and your technician calls in sick, leaving you to handle the messy work yourself. If you're planning to buy a business in a "dirty" industry, make sure you're willing to roll up your sleeves and do the work yourself. There's a reason these businesses can charge high prices.
Location Fit: Buying a business is a big personal decision for you and your family. In the stupor blur of chasing EBITDA you might say, "Yeah, I could live in Edmonton, Alberta to buy the right business"—until the -40° winters sober you up and you’ve re-located your entire family. Another crucial factor is the location's growth potential. What's the population size? Is the area growing or shrinking? What other macroeconomic factors could impact the business?
Owner Motivation: While it's difficult to know with 100% certainty why an owner wants to sell, start by asking about their motivations. Are they planning to start a new business? Looking to retire? Want to relocate? These key questions need to be asked early—well before submitting an offer.
Remember: Micro PE is a game of quick yes or no decisions (with a lot of no’s). You’re going to kiss a lot of frogs before you find that charming business to buy.
deal kill list
Apply these clear deal-killer checklist from the get-go:
Revenue or EBITDA below your minimum thresholds
Owner dependency within a specialized field (spoiler: you can’t make your parents happy by buying a surgical practice at 48 to say you are in ‘medicine’).
Unrealistic valuation expectations from the seller or representing broker
The business is located somewhere they couldn’t pay YOU to move to
where to spend your diligence time
Beyond financial constraints, time limitations are one of the biggest challenges you'll face as an acquisition entrepreneur.
Once a deal passes initial screening, focus on these critical areas:
Financial Health
Three years of financial statements and tax returns
Revenue trends and profit margin stability
Customer concentration risk (i.e. no customer should comprise more than 20% of revenue and top 5 less than 50%)
Operations
Key employee dependencies (risk of the General Manager leaving post-closing?)
Systems and vendor relationships (do they have contracts in place to prevent suppliers leaving?)
Market Position
Competitive landscape and growth potential
Regulatory environment
how to win the most competitive deals (uncommon advice)
Before moving to LOI, most buyers develop a clear thesis addressing:
Value Creation Opportunities: Specific improvement strategies
Risk Mitigation Plan
Growth Strategy and Exit Potential
But, frankly, that’s a lot of MBA crap that doesn’t actually help you win the best deals. You know what does? Charisma.
No, not your Italian hair dresser’s style of charisma. I’m talking about how you can avoid coming across as a blood sucking vampire squid when you’re speaking with a business owner. This comes down to building goodwill (not the accounting kind of goodwill, nerd) but goodwill in your relationship with the seller.
How do you build goodwill? It all starts with the Management Meeting.
stop coming across like a jerk, master the management meeting.
Now if you’re buying a business from my company, Breakwater M&A, you’ll have ample opportunity to build a relationship with the seller.
Unfortunately, not all M&A advisors/brokers will give you this opportunity - so here’s what you can do.
how to build an irresitable buyer profile
Did that headline sound like a dating tip? Well, it's not far off.
With dozens hundreds of interested buyers on every deal, business brokers are overwhelmed. Even worse, the interested buyers are all the same flavor of sugar-free vanilla frozen yogurt:
Name is something like Chip Bradson
Chip has a search fund looking for businesses with $500K+ EBITDA
His firm is named Oakmont & Oak
Chip and his business partner, Chadson, worked in investment banking for 2 years, got their MBAs, and have now raised a small "friends and family" fund of $20M
They claim 78 years of combined experience—mostly because Chip's dad is on the "Team" page
Feeling queasy yet? Well, imagine having multiple calls like this every week as a broker.
Or picture Frank, a blue-collar business owner who's been working 12-hour days in the HVAC industry for 40 years - would he really want to sell to these jabronis wearing cashmere sweaters?
stand out from the crowd with these 2 simple steps
Buyer Resume: Create a one-page description of your background, industries of interest (have multiple? check out my strategy here), and funding—ideally including a pre-approval letter from a bank or broker.
Submit this resume with your inquiry and NDA to the representing broker or seller.
Selfie Time: After reviewing the initial details (and going through your deal killer list), record a 2–5 minute video on your phone explaining your background and what excites you about the deal. Share this with the broker to pass along to the seller.
Why go to all this work? Well, the best deals are ones where you'll have to compete with other well-qualified buyers. Just like buying a house in a hot market, you need to stand out. By following these two steps, you'll differentiate yourself from 95% of the competition.
deal making: setting the valuation and deal structure
Let's talk numbers - but don't worry, I won't bore you with complex financial jargon. If you’re looking for that, subscribe to our buyer office hours calendar HERE.
So here’s what you actually need to know about valuing a business:
Here are the 3 main components of a deal you want to understand:
Purchase Price and Multiple
What's the asking price?
How does this compare to similar businesses in the industry?
Is there room for negotiation based on your findings?
Normalized Earnings
Strip out one-time expenses and owner perks
Try to understand what the business actually produces in both PRE and POST tax profit for you as the new owner (remember EBITDA ≠ Free Cash Flow)
Watch out for hidden costs when buying the business. This includes employees being paid under the table, expenses being shared between multiple companies owned by the seller… unfortunately the list goes on.
Financing Structure
How much can you borrow? (Hint: speak to your local SBA lender or broker before you put an LOI in-place).
What's your debt service coverage ratio (DSCR)? Basically - how much ‘breathing room’ do you have if the business revenue or profits start to drop?
The combination of these 3 factors will determine both your purchase price and deal structure. A timeless piece of negotiation advice (that both buyers and sellers often forget) is this simple concept:
"Your price, my terms. Your terms, my price."
Don't get this part twisted.
crafting an loi (that actually gets accepted)
Here's the truth about LOIs - they're more art than science. While you shouldn't wait for perfect information, you need to move with confidence. Think of the LOI like moving to the next step in your relationship - holding hands (yeah, it’s getting seriousss).
Your LOI should address these key components:
Purchase Price Structure
Cash at closing
Seller financing terms (if applicable)
Earn-out provisions (if applicable)
Timeline and Exclusivity
Usually 60-90 days is standard
Include key milestones
Define what happens if deadlines aren't met
Transition Support
How long will the seller stick around?
What type of training will they provide?
Any consulting arrangement post-close?
Pro tip: Don't blast out LOIs like late-night Instagram DMs hoping for the best. Instead, offer to schedule a meeting with the Seller or M&A Advisor to walk through the LOI together. This personal touch shows respect and allows you to address any concerns in real-time.
deal killers (that actually matter)
Based on hundreds of deals, here are the genuine red flags that should send you running:
Seller Psychology
Unrealistic valuation expectations
Reluctance to share essential information
Inconsistent narratives about the business
You get a sense they’re a sociopath or have any other sort of anti-social personality disorder
Financial Red Flags
Poorly maintained financial records
Excessive unreported cash transactions (suggesting tax avoidance)
Unexplained revenue fluctuations
Business Fundamentals
No viable strategy to turn around declining performance
Business success depends entirely on the owner's relationships
Critical staff preparing to leave
Final takeaway: In micro PE, knowing when to say "no" is as crucial as knowing when to say "yes." Success isn't about reviewing the most deals—it's about closing the right one.
Since you've read this far, you're clearly committed to this journey. Want access to the templates I use to evaluate deals?
Reach out HERE and I'll share our deal screening templates and LOI framework—the same tools we use at Breakwater M&A to evaluate millions in deal flow monthly.
every second counts.
