Buy, Don't Build: How We Underwrite Lower-Middle-Market Acquisitions

Lower-middle-market acquisition — buying $1M–$10M EBITDA businesses from founders ready to transition — is one of the most attractive corners of American business right now. It's also one of the easiest places to lose money if you underwrite the wrong things. Here's the deal thesis we apply to every opportunity, and the five gates a company has to pass before we write a check.

Why lower-middle-market is the right hunting ground

Sub-$10M EBITDA businesses sit in a price gap. Too small for most traditional private equity (their fund mechanics need bigger checks), too big for most individual buyers (the SBA ceiling and personal-guarantee math caps it). The result is real businesses, real cash flow, transacting at 3.5–5.5x adjusted EBITDA instead of the 8–12x multiples paid further upmarket.

On top of that, the demographic story is real: a wave of founder-owners are in their 60s and 70s, built durable businesses, never planned a transition, and would rather sell to someone who'll keep the company intact than to a strategic that strips it for parts. That seller mindset is worth multiple turns of price if you handle it right.

The five gates every deal has to clear

Gate 1: Cash flow durability

We want at least three years of stable or growing EBITDA, with margins that haven't drifted more than 300 basis points. A business that did $1.4M, $0.9M, $1.8M of EBITDA in the last three years isn't a $1.4M average — it's a story we don't yet understand. Until we do, the model uses the lowest year.

Gate 2: Customer base

Top-five customer concentration under 40%. Top-one under 15% wherever possible. The diligence call we never skip is the bottom of the top ten — the customer paying $80K a year, not the one paying $800K. They tell you what the business is actually like to buy from.

Gate 3: Operator path

Either there's a credible second-in-command already, or there's a 90-day path to one — search candidate identified, contingent offer drafted. No operator path, no deal. We do not buy companies on the promise that we'll find someone post-close.

Gate 4: Financial reporting quality

Books closed monthly within 20 business days. A QoE that produces fewer than ~10% of EBITDA in adjustments. A balance sheet where A/R and inventory both reconcile. If the seller can't tell us last month's revenue without "letting me check with my bookkeeper," we add 60–90 days and a controller search to the post-close integration plan and re-price accordingly.

Gate 5: Defensible market position

Niche category leadership beats general competence. We'd rather buy the #2 commercial overhead door installer in a metro than the #15 general construction company. Specialization shows up in pricing power, customer retention, and the seller's confidence in their own numbers.

The underwriting model — what actually goes in the spreadsheet

Adjustments we accept

• Owner comp normalization to market
• One-time, documented, non-recurring items (legal settlement, building sale, COVID-era PPP)
• Personal expenses run through the business — with documentation
• Family members on payroll who won't be there post-close

Adjustments we don't

• "Pro-forma" revenue from a deal that hasn't closed
• Marketing spend the new owner "won't need"
• Synergies with hypothetical sister companies
• EBITDA from a customer relationship the seller can't transfer

Deal structure — how we align the seller for 24 months

Price is what gets a deal signed. Structure is what makes the first two years work. We use four levers, often in combination:

1. Cash at close — usually 65–80% of total consideration. Enough that the seller takes real chips off the table.
2. Seller note — 10–25% of price, 5-year amortization, 6–8% rate, subordinated to senior debt. Aligns the seller through the riskiest window.
3. Rollover equity — 10–25% of the pro-forma cap table. Especially valuable when the seller is staying in any operating role.
4. Transition consulting agreement — 6–24 months at a defined scope. Not a full-time job — a relationship handoff with a clear end date.

The questions that get a deal killed in our IC

1. Who runs the business 12 months from close, and would they pass our reference check?
2. If the top customer leaves in year one, what does the model look like?
3. What's the maintenance capex, and is it actually in the model?
4. What does the seller do with the cash — and is that consistent with their note staying performing?
5. If we found out the books were 10% off, what part of the thesis breaks?

What "founder-friendly" means at the deal level

Founder-friendly in this context isn't a soft virtue — it's a structural commitment. It means we'll move at the seller's pace through diligence, we'll give them rollover and a real seat at the table post-close if they want one, we won't strip the team, and we'll keep the brand and the building intact. That posture is part of why we win deals at lower-than-market multiples: sellers choose us over a higher number from a strategic that would gut the company they built.

What to do next

If you're sitting on a thesis, write it down. The five-gate framework above is exactly what we run every deal through — and it's the same one we'd use to pressure-test yours.