How do search funds approach pricing and valuation negotiations?

Valuation and pricing negotiations in search fund acquisitions require balancing analytical rigor with relationship management, as deals often involve emotionally invested sellers who've built businesses over decades. The process differs significantly from traditional private equity where financial buyers dictate terms backed by competitive auction dynamics. Search fund valuations typically rely on EBITDA multiples as the primary methodology. Target companies generating €1-4 million EBITDA generally trade at 4-6x EBITDA, lower than larger companies due to size, management depth, and customer concentration risks. However, multiple ranges vary considerably by industry—technology-enabled services command premiums while capital-intensive manufacturing or cyclical industries trade at discounts. Searchers begin by analyzing comparable transactions when available, though small private company sales data is limited. They also consider public market multiples for similar businesses, adjusted downward for illiquidity and size. Discounted cash flow (DCF) analysis provides a theoretical framework but relies on assumptions that can be manipulated, so searchers use it primarily as a sanity check rather than primary valuation method. The negotiation dynamics favor building rapport over aggressive positioning. Unlike private equity buyers running parallel processes with multiple sellers, searchers typically develop exclusive relationships with owners before formal negotiations begin. This relationship foundation means that overtly aggressive tactics backfire—sellers have significant discretion about whether to sell and to whom. Successful searchers frame pricing discussions around fairness rather than maximum value extraction. They present comparable transaction evidence, acknowledge the business's strengths while honestly assessing risks, and demonstrate how the proposed price reflects market reality. Transparency about financing structures helps—explaining that higher prices require more debt, creating risk for the business the seller cares about, can moderate expectations. Quality of earnings adjustments represent a common negotiation area. Sellers often present EBITDA inflated by add-backs for personal expenses, one-time costs, or owner salary adjustments. Searchers must diplomatically separate legitimate normalizations from aggressive accounting while ensuring the adjusted EBITDA reflects sustainable earnings. Working capital negotiations also create friction when sellers haven't maintained consistent working capital levels or want to extract excess cash before closing. Deal structure provides flexibility beyond pure price. Earn-outs allow partial payment contingent on future performance, bridging valuation gaps when sellers believe growth potential exceeds what buyers will finance upfront. Seller financing, where the owner provides a portion of purchase price as a loan, reduces external financing needs and demonstrates seller confidence. Employment agreements for transition periods provide ongoing income while facilitating knowledge transfer. Searchers must resist the temptation to overpay due to search pressure or emotional attachment to a deal. Board members provide critical discipline, refusing to approve transactions that don't meet return thresholds regardless of how much effort the searcher invested. The concept of "bid discipline" means walking away from overpriced opportunities even when no alternatives exist, trusting that better deals will emerge. On the seller side, search fund buyers often pay fair but not maximum prices. Strategic buyers might pay more due to synergies, and private equity firms in competitive auctions might stretch multiples. However, search funds offer offsetting benefits—certainty of close (fewer financing contingencies), faster timelines (no board approvals required), relationship continuity, and the personal satisfaction of selling to someone who'll care for the business. When negotiating from a position of mutual respect rather than adversarial competition, many sellers accept moderately lower valuations from searchers they trust. The final price must satisfy multiple constituencies—sellers seeking fair value for life's work, lenders requiring sustainable debt service coverage, equity investors expecting target returns, and the searcher who must successfully operate the business. Balancing these interests while maintaining relationships represents one of the searcher's most challenging responsibilities during acquisition.