The Proprietary Deal Playbook

Why Proprietary

Most acquisition frameworks begin at the wrong point in the process. They assume a deal already exists. A broker has packaged the opportunity, assembled a CIM, and distributed it to a curated list of 30 to 50 pre-qualified buyers. You receive the materials, build a model, submit an IOI, and hope your offer is competitive enough to advance. This is the default path. It is also, by design, the most expensive way to buy a business.

The economics are simple. In a brokered process, the seller has hired a professional whose singular job is to maximize the sale price. The broker creates competitive tension by running multiple buyers through a structured timeline. The information advantage belongs entirely to the sell side. The broker controls what you see, when you see it, and how quickly you must respond. Every element of the process is engineered to push the price up and the terms toward the seller's favor.

Proprietary outreach inverts every one of those dynamics.

When you reach an owner directly, before they have engaged a broker, you are operating in a fundamentally different environment. There is no asking price because the owner has not gone through a valuation process. There is no competitive tension because no other buyer knows this opportunity exists. There is no timeline pressure because the owner has not committed to a process with milestones and deadlines. You are not competing for a deal. You are creating one.

The Deal Economics of Proprietary vs. Brokered

The financial impact of sourcing proprietary deals compounds across every dimension of the transaction.

Consider what this means on a specific deal. A $5M revenue business with $1.2M in adjusted EBITDA might trade at 5.5x in a brokered process ($6.6M enterprise value) with 90% cash at close. The same business, sourced proprietary, might close at 4.0x ($4.8M) with 75% cash, a 15% seller note at 6%, and a 10% earnout tied to customer retention. The difference in total equity required is often $1M or more. On a deal of this size, that is the difference between needing one investor and needing four.

The Structural Supply of Off-Market Deals

This is not a niche tactic. It is a response to a structural demographic shift that has no precedent in American business history.

The math is directional, not precise, but the magnitude is clear. There are millions of business owners in America who are within five to ten years of wanting to exit. Most of them have not taken a single concrete step toward that exit. They have not hired a broker. They have not gotten a valuation. They have not told their employees or their accountant that they are thinking about it. They are sitting with the decision, privately, waiting for something to catalyze action.

Your outreach is that catalyst. Not because you are pushing them toward a sale, but because you are making the abstract feel concrete. For many of these owners, the first serious acquisition inquiry they receive will be from someone who took the time to find them directly. That person has a structural advantage that no amount of competitive bidding can replicate.

What Proprietary Does Not Mean

A few clarifications before we go further, because this term is overused and under-defined.

• Proprietary does not mean you never work with brokers. Broker-sourced deals are fine. Many good acquisitions come through intermediaries. But if broker flow is your only pipeline, you are seeing 20% of the market and competing with everyone else who sees the same 20%.
• Proprietary does not mean mass email blasting. Sending 10,000 generic emails to purchased lists is not proprietary outreach. It is spam with a different label. The owners who respond to that approach are typically the ones no one else wants to buy from.
• Proprietary does not mean you skip diligence. The absence of a broker does not mean the absence of process. If anything, proprietary deals require more discipline because there is no intermediary quality-checking the opportunity before it reaches you.
• Proprietary does not mean cheap. You are not "getting a deal" because the owner is unsophisticated. You are getting a fair price because there is no competitive auction inflating it. The owner should feel good about the outcome. If they do not, the deal will fall apart during diligence or, worse, after closing.

Building Your Target List

Outreach without targeting is spam. Before you write a single message, you need a clear picture of what you are looking for, a defensible method for finding it, and a system for prioritizing the opportunities most likely to convert into conversations.

The quality of your target list is the single biggest determinant of your outreach performance. A well-built list of 500 highly targeted companies will outperform a spray-and-pray list of 5,000 every time. This section covers how to build that list from scratch.

Define Your Acquisition Criteria

Your criteria need to be specific enough that you can explain them in two sentences to a stranger and that stranger could go find matching businesses on their own. If your criteria are "a good business with good margins in a growing industry," you do not have criteria. You have a wish list.

The framework below forces specificity across five dimensions. Fill in each one before you build your first list.

Data Sources for Building Lists

There is no single database of "businesses that aren't for sale but should be." You build your list by cross-referencing multiple sources, each of which gives you a different piece of the puzzle. The goal is to construct a profile for each target that includes: company name, owner name, industry, location, approximate size, formation date, and contact information.

Building the List: A Step-by-Step Workflow

Here is the process we recommend for constructing a target list from scratch. This assumes you have defined your criteria and identified 2-3 geographies to focus on.

1. Pull the universe. Start with a broad query from Reference USA, ZoomInfo, or your SOS bulk data. Filter by NAICS code, geography, and employee count. This gives you the raw universe. For a single metro in a specific industry, expect 200-2,000 results.
2. Enrich with owner data. Cross-reference against LinkedIn and ZoomInfo to identify the owner or president of each company. You need a name, not just a company. Outreach addressed to a person converts at 3-5x the rate of outreach addressed to a company.
3. Filter for owner profile. Remove companies where the owner is under 50 (unless you have a specific reason to target younger owners). Remove companies with obvious next-generation leadership already in place. Remove companies owned by PE firms or larger parent entities.
4. Assess succession signals. For each remaining target, spend 60-90 seconds on their website. Look for: founding year, "About Us" page with owner bio, team page (or lack thereof), any mention of family involvement, any mention of growth or expansion (which may signal an owner who is not ready to exit). This manual review is the highest-value step. It turns a database dump into an informed target list.
5. Score and tier. Assign each target to one of three tiers based on your assessment of receptivity. Tier 1 (high likelihood of receptivity) gets the most personalized outreach. Tier 2 gets standard personalized outreach. Tier 3 gets a more templated approach with lighter personalization.
6. Verify contact info. Before you launch a campaign, verify email addresses (use a tool like NeverBounce, ZeroBounce, or MillionVerifier). A bounce rate above 5% will damage your sender reputation and reduce deliverability for future campaigns.

Scoring Model: Weighted Receptivity Score

Not every target on your list is equally likely to engage. A simple scoring model helps you prioritize where to invest the most effort.

NAICS Codes Worth Knowing

If you are targeting specific industries, knowing the right NAICS codes at the 4-6 digit level dramatically improves the precision of your database queries. Here are codes commonly relevant to search fund buyers.

The Outreach Sequence

This is where most buyers fail. Not because they do not try, but because they approach owner outreach the same way they would approach a B2B sales campaign. They write a template, load a list, press send, and wait. When it does not work, they blame the list or the market. The problem is almost always the message and the mindset behind it.

Business owners are not leads. They are people who spent decades building something. Many of them have never received a serious acquisition inquiry. The first one they receive sets their expectations for what the entire process looks like. If that first touch feels like a mass email, the owner builds a mental model that says: "acquisition inquiries are spam." You have now made it harder for every subsequent message you or anyone else sends.

The stakes of getting this right are higher than most buyers appreciate.

The Psychology of the Owner Inbox

Before we talk about channels and cadence, you need to understand what is happening on the other side of your message. The owner of a $3M revenue HVAC company in Charlotte did not wake up this morning thinking about selling their business. They woke up thinking about a truck that broke down, a technician who called in sick, and an invoice that is 60 days overdue. Your email arrives in the middle of that day.

For your message to break through, it needs to accomplish three things in under 10 seconds:

1. Signal that you are a real person, not a robot. Personalization that could only come from someone who actually looked at their business. Not "I noticed your company," which means nothing. Something specific. "I saw that Thompson Mechanical has been serving the Charlotte commercial market since 1994" tells the owner you did the work.
2. Name what you want without being threatening. "I'm looking to acquire and personally operate a commercial HVAC business in the Carolinas." Direct. No euphemisms. No "exploring strategic opportunities." Owners respect people who say what they mean. They are allergic to people who do not.
3. Make the ask small enough to say yes to. You are not asking them to sell their business. You are asking for a phone call. "Would you be open to a brief conversation? Even if the timing isn't right, I'd value the chance to learn from someone with your experience." The compliment is genuine and the ask is low-friction.

Channel Strategy: Letters, Email, Phone, LinkedIn

Each channel has a role. The right approach layers them into a multichannel sequence where each touch builds on the previous one.

The Multichannel Sequence: Day by Day

The most effective outreach combines channels into a coordinated sequence. Each touch serves a different purpose. Here is the framework we recommend based on patterns from hundreds of campaigns.

What to Say: Message Architecture

Every outreach message, regardless of channel, follows the same basic architecture. The specifics change. The structure does not.

1. Opening: demonstrate specificity. Reference the company by name, the industry, the geography, and ideally one detail that proves you actually looked at their business. This should be the first sentence.
2. Context: name what you want. "I'm looking to acquire and personally operate a [type] business in [geography]." One sentence. Do not bury the lead.
3. Credibility: give them a reason to trust you. One or two sentences about your background that are relevant to them, not to you. If you ran a division of a services company, say so. If you have an MBA, do not lead with that. Owners do not care about degrees. They care about whether you can actually run a business.
4. The ask: make it small. "Would you be open to a brief phone call? Even if the timing isn't right, I'd value the chance to learn from your experience." The smaller the ask, the higher the response rate.
5. Close: be human. No "looking forward to hearing from you" corporate sign-offs. "Either way, I appreciate your time" is enough.

What Not to Do

These mistakes are common enough that they deserve explicit listing. Every one of them reduces your response rate measurably.

• "Dear Business Owner." If you do not know their name, do not send the email. Find the name first.
• "Confidential inquiry" in the subject line. This is a red flag to owners. It sounds like a scam, a legal threat, or someone who thinks they are more important than they are.
• "Strategic partnership opportunity." Say what you mean. You want to buy their business. Euphemisms erode trust.
• Attaching a buyer profile, one-pager, or slide deck to the first email. The owner does not want to read about you. They want to know if you are worth talking to. A 10-page PDF attached to a cold email will not get opened.
• Using "we" when you mean "I." If you are an individual searcher, do not pretend to be an institution. Owners see through it. "I am looking to acquire" is more credible than "our firm is seeking acquisition targets."
• Sending from a Gmail, Yahoo, or Outlook consumer address. Get a domain. yourname@yourcompany.com. This costs $6/month on Google Workspace and is the single cheapest credibility investment you can make.
• Sending the same email to 5,000 people. If your email could be sent to every business owner in America without changing a word, it is not outreach. It is a broadcast. Owners can tell the difference.
• Following up every two days. This is harassment. Space your touches appropriately. The owner has a business to run.

Recognizing a Warm Response

First-time buyers often misclassify responses. They treat "not right now" as a rejection and "tell me more" as a buying signal. Both are wrong. Understanding the spectrum of responses is critical to managing your pipeline effectively.

Deliverability and Technical Setup

None of your messaging matters if your emails land in spam. Before you launch your first campaign, ensure the following is in place.

• Custom domain email. yourname@yourdomain.com on Google Workspace or Microsoft 365. Not Gmail. Not a free provider.
• SPF, DKIM, and DMARC records. These are DNS authentication records that prove to receiving mail servers that your emails are legitimate. If these are not configured, your deliverability will be poor. Your email host's documentation will walk you through setup.
• Domain warmup. If your domain is new, do not send 500 emails on day one. Start with 10-20 emails per day for the first two weeks, then gradually increase by 10-15 per day each week. Sending too much too fast from a new domain triggers spam filters.
• Email verification. Run your list through NeverBounce, ZeroBounce, or MillionVerifier before sending. Remove invalid addresses. A bounce rate above 3-5% damages your sender reputation and can get your domain blacklisted.
• Sending limits. Do not send more than 50-80 emails per day per inbox. If you need higher volume, set up 2-3 sending inboxes and rotate between them.
• Unsubscribe compliance. Include an easy unsubscribe mechanism. Beyond being legally required (CAN-SPAM), it protects your reputation. An owner who cannot unsubscribe will mark you as spam instead, which is far worse for deliverability.

Qualifying the Opportunity

You got a response. The owner is willing to talk. This is the transition from outreach to evaluation, and it is the most nuanced phase of the entire process. You are simultaneously building a relationship and assessing whether this business is worth pursuing. Push too hard on evaluation and you lose the relationship. Focus too much on rapport and you waste months on a deal that never had the fundamentals.

In a brokered deal, the CIM gives you enough financial and operational data to make a preliminary assessment before your first call. In a proprietary deal, you have almost nothing. Maybe a website. Maybe a LinkedIn profile. Maybe a Google Maps listing with 47 reviews. Everything else you learn comes through conversation, and the quality of your questions determines the quality of information you receive.

The Three-Call Framework

Most proprietary deals that reach LOI do so after three to five substantive conversations between the buyer and the seller. Each call has a different objective. Trying to accomplish everything in one call is a common mistake. It overwhelms the owner and makes you seem transactional.

Call 1 Questions: The Introduction

Your only objective on the first call is to make the owner comfortable and to learn their story. Do not ask about financials. Do not ask about valuation. Do not ask anything that signals you are evaluating the business as an asset. You are talking to a person.

1. "I'd love to hear how you got into this business." This is the best opening question in proprietary outreach. Every owner has a founding story and most of them rarely get to tell it. This question shows respect and gives you tenure, motivation, and emotional context all at once.
2. "What does a typical week look like for you?" This reveals owner dependence. If they describe working 60-hour weeks and being involved in everything from sales to scheduling, the business is owner-centric. If they describe playing golf on Wednesdays and checking in with their GM, that is a very different (and more attractive) operating model.
3. "What are you most proud of building here?" Reveals values. What they mention first is what they would want preserved in a transition. Employees? Reputation? Customer relationships? Community impact? This will matter deeply when you negotiate.
4. "Have you ever thought about what comes next for you?" Opens the succession door without asking "do you want to sell?" The distinction is important. Selling is a transaction. "What comes next" is a life question. Owners are more open to the life question.
5. "Has anyone else ever approached you about buying the business?" Tells you whether you are the first inquiry or the fifteenth. If they have been approached before, ask what happened. Their answer tells you what went wrong with previous buyers and what you need to do differently.

Call 2 Questions: The Business

The second call shifts from personal to operational. The owner has decided you are worth talking to. Now they need to understand what you are trying to learn. Be transparent about your intent: "I'd like to ask some questions about the business itself to see if it might be a fit for what I'm looking for. I'll be completely open about what I'm looking for and why."

1. "Can you give me a rough sense of annual revenue?" If they resist, give them a range: "Are you in the $2-5M range, or higher?" Most owners will confirm or correct a range even if they would not volunteer a specific number.
2. "After you pay yourself a fair salary, what does the business take home?" You are trying to triangulate SDE (seller's discretionary earnings). This is the number your valuation will be based on. Frame it around their compensation to make it conversational rather than clinical.
3. "Is your revenue spread across many customers, or are there a few that make up a large share?" Customer concentration is the silent killer of small business acquisitions. If any customer is more than 15-20% of revenue, you need to understand that relationship in detail.
4. "Do you have recurring contracts or service agreements, or is it mostly new business each year?" Recurring revenue trades at higher multiples for a reason. It also tells you about the predictability of cash flow.
5. "Tell me about your team. How many people work here? Is there a second-in-command?" The answer to this question has enormous implications for transition risk and for the day-one operating reality you face as a new owner.
6. "How has the business trended over the past 3-5 years? Growing, steady, or has it been a challenging stretch?" Let them answer first. Their framing tells you more than the numbers will. An owner who says "we've been growing 10% a year" versus one who says "it's been tough since COVID" are in very different situations.
7. "Is the business capital-intensive? What does a typical year look like for equipment purchases or facility costs?" Capex requirements directly affect free cash flow and debt service capacity. A $1M EBITDA business that requires $400K/year in equipment replacement is a very different proposition than one that runs on laptops.
8. "Are there any major contracts, leases, or licenses that are critical to the business?" This is an early diligence question disguised as a conversational one. You want to know about concentration risk on the vendor/supplier side, not just the customer side.
9. "What would you say is the biggest risk to the business right now?" Owners who answer this honestly are the ones you want to do business with. The answer also tells you what to focus on during formal diligence.

Call 3 Questions: The Deal

If Call 2 went well and the business passes your preliminary filters, Call 3 is where you begin discussing the shape of a potential transaction. This is the most delicate conversation in the sequence because you are introducing concepts the owner may have never encountered.

1. "Have you ever had the business valued?" Most have not. Their answer tells you whether they have a number in their head and where it came from. An owner who says "my accountant told me it's worth $3M" needs to be handled differently than one who says "I have no idea."
2. "In your mind, what would a good outcome look like? Not just financially, but for you, your employees, your customers." This is the most important question in the entire process. The answer tells you what the owner actually optimizes for, which is often not maximum price. Legacy, employee protection, customer continuity, and personal freedom frequently outweigh a few hundred thousand dollars in purchase price.
3. "Would you be willing to stay on for a transition period after the sale?" In proprietary deals, most owners are open to this and many prefer it. A 6-12 month consulting arrangement gives you a built-in mentor and gives the owner a graceful exit rather than an abrupt one.
4. "Have you talked to anyone about this? Your accountant? Your attorney? Your spouse?" You need to know who the influencers and potential blockers are. A spouse who does not know the owner is considering selling can derail a deal at the worst possible moment. An accountant who counsels against it can as well. Better to surface these dynamics now.
5. "If we were to move forward, what would your ideal timeline look like?" Some owners want to be done in 6 months. Some want to take a year. Some are testing the waters and are not committed to any timeline. The answer shapes your entire approach to the deal.

Financial Pre-Screening: What to Assess Before LOI

By the end of Calls 2 and 3, you should have enough information to make a preliminary financial assessment. You do not need financial statements yet. You need enough data points to decide whether this opportunity is worth the time and cost of formal diligence.

Red Flags That Should Stop a Deal Early

Not every red flag is a deal-killer. But some are. The earlier you identify these, the less time and money you waste.

• Owner cannot explain why they want to sell but is eager to move fast. Urgency without articulated motivation usually means there is a problem you have not found yet. Pending litigation. A lost contract. A key employee who just gave notice. Dig before you proceed.
• Revenue has declined for two or more consecutive years and the owner blames external factors. "The market is down" or "COVID hurt us" may be true, but if the decline is ongoing and the owner has no plan to reverse it, you are buying a shrinking asset. Make sure your thesis accounts for this.
• Owner is evasive about financials after multiple conversations. By Call 3, you should have rough revenue, profitability, and customer mix. If the owner will not share basic numbers after building rapport, the numbers are almost certainly unfavorable. Or the owner does not trust you, which is its own problem.
• Multiple key employees have left in the past 12 months. Turnover at the top of a small business is a leading indicator of operational problems, cultural dysfunction, or pending decline. Ask directly: "Has anyone important left recently?" The owner's reaction to this question is as informative as their answer.
• Owner wants to close in 30 days. Real deals take 60-120 days from LOI to close, at minimum. An owner who wants to rush likely has a deadline you do not know about (lease expiration, loan maturity, health issue, pending legal action).
• Related-party transactions that are not clearly separated. Owner's spouse on the payroll for a no-show job. Owner's property leased to the business above market rate. Personal expenses run through the P&L. All of these are common in small businesses and most are add-backs. But if the owner is defensive about them rather than transparent, proceed carefully.
• The owner has been "thinking about selling" for more than two years without taking action. Some owners will talk indefinitely without ever being willing to sell. After a reasonable exploration period (3-6 months), you need to assess whether this owner is genuinely open to a transaction or is using the conversations to feel valued without intending to follow through.

From Conversation to LOI

You have had three or four productive conversations. The business meets your criteria. The owner is genuinely open to a transaction. Now you need to translate a relationship-based dialogue into a structured offer without breaking the trust you have built.

This is the transition that kills more proprietary deals than any other. The buyer shifts into "deal mode" too abruptly. The language changes. The emails become formal. An attorney drafts a 15-page LOI full of legal jargon the owner has never seen. The owner, who was comfortable and engaged, now feels like they are being processed through a machine. They get cold feet. They stop returning calls. The deal dies.

The antidote is education. In a proprietary deal, you are not just the buyer. You are the guide. You need to walk the owner through each step of the process in a way that builds their confidence rather than their anxiety.

How Proprietary Deals Move Differently

Requesting Financials: The Pre-LOI Ask

Before you can write an LOI, you need enough financial data to propose an informed price. In a proprietary deal, this is a delicate ask. The owner may have never shared their financials with anyone outside their accountant.

Frame the request around the logic, not the demand: "In order to put together a fair proposal for you, I'd like to review a few financial documents. This is standard for any business acquisition and I'll treat everything as completely confidential. Here's what would be most helpful."

Pre-LOI financial request (keep it to this list):

• 3 years of federal tax returns (business and personal if pass-through entity like S-Corp or LLC)
• 3 years of P&L statements (even if they are QuickBooks reports)
• Most recent balance sheet
• Current year-to-date financials (P&L and balance sheet)
• Customer revenue breakdown by year (top 10 customers or all customers if feasible)

Do not send a 50-line document request list at this stage. You will have time for comprehensive diligence after the LOI. Right now, you need enough data to propose a price that is defensible and fair.

Valuation in a Proprietary Context

In a brokered deal, the broker provides a valuation or at least an asking price that anchors the negotiation. In a proprietary deal, you are often the first person to introduce the concept of business valuation to the owner. How you handle this determines whether the conversation advances or stalls.

SDE vs. EBITDA: Which to Use

For businesses under $5M in revenue that are owner-operated, the standard valuation metric is Seller's Discretionary Earnings (SDE). For larger businesses with a management layer, EBITDA is more appropriate.

Common Add-Backs (and How to Explain Them to an Owner)

Most small businesses have legitimate add-backs that increase the adjusted earnings. The owner may not realize these exist or understand why they matter. Walk them through it. This is one of the most productive conversations you will have because it often results in the owner realizing their business is worth more than they thought.

• Owner salary above market. If the owner pays themselves $300K but a GM replacement would cost $150K, the $150K difference is an add-back.
• Owner perks. Personal auto, cell phone, travel, meals, health insurance for owner/family, retirement contributions. These are real expenses that would not exist under a new owner.
• One-time expenses. Lawsuit settlement, equipment replacement (if non-recurring), office buildout, one-time consulting projects.
• Related-party rent. If the owner owns the building and charges above-market rent, the excess is an add-back.
• Depreciation and amortization. Non-cash charges that reduce reported income but do not affect cash flow.
• Interest expense. Reflects the current owner's capital structure, not yours.

Presenting the LOI

The LOI should be 2-4 pages. Not 15. Keep it readable. The owner and probably their spouse will be reading this document, and neither of them went to business school. Write it in plain English.

Key terms to include:

• Purchase price. Present as a range or a specific number. "Subject to the completion of satisfactory due diligence" gives you the ability to adjust if diligence reveals issues.
• Deal structure. Breakdown of cash at close, seller note (if any), earnout (if any). Explain each component in a sentence.
• Transition period. Length and terms of the owner's post-close involvement. Specify whether it is a consulting agreement (1099) or an employment arrangement (W-2).
• Due diligence period. 60-90 days is standard. This is the time you have to confirm what you have been told.
• Exclusivity. Request that the owner not engage with other buyers during the diligence period. This is standard and reasonable.
• Confidentiality. Both parties agree to keep the discussions confidential from employees, customers, and vendors until closing.
• Financing contingency. If you are using SBA or bank financing, the LOI should state that the deal is contingent on obtaining financing on acceptable terms.
• Non-binding. The LOI is a statement of intent, not a contract. Both parties can walk away. Make this clear.

Asset Sale vs. Stock Sale

This will come up in every deal, usually when the owner's accountant or attorney gets involved. Understand the basics so you can discuss them intelligently.

Working Capital: What It Is and Why It Matters

Working capital is the difference between current assets (cash, accounts receivable, inventory, prepaid expenses) and current liabilities (accounts payable, accrued expenses, short-term debt, deferred revenue). It represents the cash the business needs to fund day-to-day operations.

In almost every acquisition, the buyer expects to receive a "normal" level of working capital at closing. If the actual working capital at close is above or below the agreed target, the purchase price adjusts accordingly. This is one of the most frequently negotiated and least understood elements of small business deals.

The Working Capital Peg: How to Set It

1. Calculate trailing 12-month average working capital. Pull monthly balance sheets for the past 12-24 months. Calculate working capital (current assets minus current liabilities) for each month. Average them. This is your baseline.
2. Exclude anomalies. If there was a month with an unusual spike in AR (a one-time project) or an unusual spike in AP (a large equipment purchase), exclude those months from the average.
3. Agree on which accounts are "in" and "out." Cash is almost always excluded from working capital (it is its own line item in the deal). Short-term debt may also be excluded if it is being paid off at close. The specific accounts included are negotiable and should be explicitly defined in the purchase agreement.
4. Set the peg in the LOI. State the target working capital amount and specify that the actual closing working capital will be calculated within 60-90 days post-close. If actual is below target, purchase price decreases. If above, purchase price increases.

Financing the Deal: SBA 7(a) Basics

The SBA 7(a) loan program is the most common financing vehicle for search fund acquisitions in the $1-5M range. Understanding how it works is essential to structuring a deal that can actually close.

Due Diligence for Proprietary Deals

The signed LOI is not the finish line. It is the starting line for the most intensive phase of the acquisition. Due diligence is where you verify everything the owner has told you, uncover what they have not told you (intentionally or otherwise), and build the operating model you will use to run the business on day one.

In a proprietary deal, the diligence process has a unique wrinkle: there is no broker managing the flow of information. There is no curated data room. The seller may not know what a quality of earnings report is or why you need 24 months of bank statements. Your job is to conduct thorough, professional diligence while simultaneously educating the seller on the process and keeping them emotionally committed to the deal.

This is not easy. It is, however, learnable.

Quality of Earnings: The Heart of Financial Diligence

A quality of earnings (QoE) analysis answers the most important question in any acquisition: what does this business actually earn on a sustainable, recurring basis? It is the document your lender will rely on most heavily. It is the foundation of your valuation. Get this wrong and everything downstream is wrong.

Step 1: Determine Accounting Basis

Is the business on cash basis or accrual basis? This sounds simple but it changes everything about how you read the financials.

• Cash basis: Revenue is recognized when cash is received. Expenses are recognized when cash is paid. Most small businesses use cash basis because it is simpler and their accountant recommended it. The problem: cash basis financials can be wildly misleading. A business that received a large pre-payment in December looks like it had a great Q4, but that revenue may relate to work being performed in Q1 of the following year.
• Accrual basis: Revenue is recognized when earned (when the service is delivered or the product is shipped). Expenses are recognized when incurred. Accrual gives you a more accurate picture of economic reality but is more complex to maintain. Many small businesses have "modified" accrual that is neither truly cash nor truly accrual.

If the business is on cash basis, your first diligence task is to convert the financials to accrual basis for your analysis. This means adjusting for timing differences in revenue recognition and expense matching. Your accountant or QoE provider will do this, but you need to understand what it means and why it matters.

Step 2: Build the Adjusted Earnings Bridge

Start with reported net income and build a bridge to adjusted EBITDA or SDE. Every line item in the bridge is an add-back or a subtraction. Every single one needs documentation and justification.

Step 3: Revenue Analysis

Revenue is where the story of the business lives. You need to understand not just the total, but the composition, the trends, and the sustainability.

• Revenue by customer. Build a top-10 (or top-20) customer revenue matrix for each of the past 3 years. How much did each customer spend each year? Is the concentration increasing or decreasing? Did any large customers churn? Were they replaced?
• Revenue by service/product line. If the business has multiple service lines, break out revenue by line. Which are growing? Which are declining? Which have the highest margins?
• Recurring vs. non-recurring. What percentage of revenue is under contract or service agreement? What percentage is project-based or one-time? Recurring revenue is more valuable than project revenue because it is more predictable.
• Seasonality. Pull monthly revenue for the past 24-36 months. Plot it. Identify seasonal patterns. Understand when the business generates cash and when it consumes it. This directly affects your working capital needs.
• Revenue verification. Compare reported revenue on the P&L to deposits in the bank statements for the past 12 months. They should tie within a reasonable tolerance. If reported revenue is significantly higher than bank deposits, there is either an AR collection problem or the revenue numbers are inflated.

Customer Concentration Deep Dive

In small businesses, customer concentration is often the single biggest risk factor. A business with $3M in revenue and one customer representing 35% of that is a $3M business that could become a $2M business overnight.

Working Capital Analysis

• Pull 24 months of monthly balance sheets
• Calculate working capital for each month (current assets minus current liabilities, excluding cash and short-term debt if applicable)
• Identify trends in AR aging. Is the business collecting slower? Are receivables growing faster than revenue? This could indicate credit quality issues or collection problems.
• Review AP timing. Is the business paying vendors on time, or stretching payables to manage cash flow? Stretched payables may normalize post-close and create an unexpected cash drain.
• Analyze inventory levels (if applicable). Is inventory growing faster than revenue? Could indicate obsolescence risk.
• Calculate the trailing 12-month average and propose this as the working capital peg for the purchase agreement
• Reconcile cash per books to bank statements. Discrepancies require explanation.

Document Request List: Phased Approach

In a proprietary deal, do not send a 200-line document request on day one of diligence. You will overwhelm the seller and damage the relationship. Instead, phase your requests over the diligence period, starting with the most critical items and expanding as you build your understanding.

Phase 1: First Two Weeks

• 3 years of federal tax returns (business entity + personal if pass-through)
• 3 years of P&L and balance sheet (annual and monthly if available)
• Current year-to-date P&L and balance sheet
• 12 months of bank statements (all business accounts)
• Customer revenue breakdown by year (top 20 or all)
• Employee roster: name, role, hire date, annual compensation, benefits
• List of all material contracts (customers, vendors, leases)

Phase 2: Weeks 2-4

• AR aging report (current)
• AP aging report (current)
• General ledger detail for the past 2 years (QuickBooks export is fine)
• All material customer contracts and service agreements
• Facility lease agreement
• Equipment list with approximate values and remaining useful life
• Insurance policies: general liability, E&O, workers comp, property, auto, umbrella
• Organizational documents: articles of incorporation/organization, operating agreement, bylaws

Phase 3: Weeks 4-6

• All outstanding debt agreements (loans, lines of credit, equipment leases)
• Licenses, permits, and certifications required to operate
• Any pending or threatened litigation, claims, or regulatory actions
• Employment agreements, non-competes, contractor agreements
• Benefit plan documents (health insurance, 401k, etc.)
• State and local tax returns (if applicable)
• Environmental assessments or compliance documents (if applicable)
• IP documentation: trademarks, patents, domain registrations
• Historical capex detail (past 3 years of equipment/facility purchases)

Typical LOI-to-Close Timeline

The Close

This playbook covers the process from first outreach to signed LOI to close. But it is worth naming what this document cannot give you: the judgment that comes from doing the work.

Every deal is different. The owner in Raleigh who started an HVAC business in 1992 is not the same person as the owner in Nashville who bought a staffing agency in 2005. The frameworks here give you a structure. The conversations give you the data. But the decisions, whether to pursue, how to structure, when to walk away, those are yours.

A few principles worth carrying:

• The best deals come from relationships, not listings. The buyer who invests in building genuine connections with owners, systematically and respectfully, over months and years, will always have better options than the buyer refreshing BizBuySell every morning.
• Timing matters more than technique. An owner who ignores you today may call you in six months. Your nurture list is one of your most valuable assets. Treat it accordingly.
• Speed kills deals. So does inaction. Move deliberately. Do not rush an owner into a decision. But do not let momentum die either. The balance between patience and urgency is the hardest thing to calibrate and the most important.
• The seller's experience of the process determines whether the deal closes. In a proprietary deal, the seller chose you. They can un-choose you at any point. Every interaction either builds their confidence or erodes it. Be the buyer they are glad they chose.
• You will pass on more deals than you close. That is the sign of a disciplined process. The deal you do not do is often more important than the deal you do.

Start your list. Write your first message. Make the call. The deals are out there. They are just not listed anywhere.