4. Source & Screen Deals
The Stage in Brief
Sourcing and screening are one loop: fill the funnel, then empty it fast. Deals come from two channels, on-market (brokers, marketplaces, aggregators) and off-market (direct outreach to owners who haven't listed), run as a weekly pipeline with real numbers. Screening is a speed game on top of that: hard kill-criteria to clear the noise, then real work on survivors, meaning CIM review with careful add-back scrutiny, customer-concentration checks, and valuation anchored to what debt service can support rather than what the seller is asking. When a deal is real, move: good businesses at fair prices don't wait.
Screen a Live Deal
The checks from this playbook, applied to the deal in front of you.
Where the Paths Diverge
- Traditional
- A larger equity pool raises that ceiling, and the screen weighs whether a target is big enough to carry a board and a management layer.
- Self-Funded
- The 7(a) cap and your injection put a ceiling on price, so the screen is as much about what is financeable as what is good.
- Employed
- The firm's committee sees the deal too, so a target that cannot be explained to it is not a target.
Questions to Answer Before Moving On
- How many qualified at-bats per week does my funnel actually need?
- Do I see every on-market listing in my thesis, deduplicated and fast?
- What's my off-market system: list building, enrichment, outreach, follow-up?
- Does it pass my thesis and cover debt service at the asking price?
- Can I get to a credible LOI before a faster buyer does?
Mistakes That Cost Searchers Months
- Browsing one marketplace and calling it sourcing
- Sporadic bursts of outreach instead of a weekly cadence
- Anchoring on asking price instead of financeable value
- Slow-walking good deals; the good ones go fast
What the Data Says
Where the buyable targets are is a count, not a feeling: there are roughly 4,400 plumbing and HVAC companies with staff in California against 1,600 in Pennsylvania, and the gap decides how many owners will ever pick up the phone.
What actually changes hands differs by state: SBA acquisition lending shows restaurants and gas stations dominating some markets and trades others, which tells a sourcer where their thesis has depth before they start dialing.
A seller's payroll line can be checked against the industry: an HVAC company claiming $25,000 per employee contradicts an industry average near $70,000, and that gap is part-time work, cash, an error, or a story worth chasing down.
Source: Industry Economics (Census CBP)
Charge-off rates on seasoned SBA loans separate the industries that fail from the ones that hold: the ordering is the signal, not the level, and it is a free screen a buyer can apply to a whole shortlist before spending a dollar on diligence.
Source: SBA Default Rates by Industry
The Playbook
Size the funnel from the close backward
Closes come from LOIs, LOIs from CIMs read, CIMs from inquiries sent. Whatever your ratios turn out to be, the arithmetic starts with volume: a search that reviews three deals a week is a hobby. Decide the weekly at-bat number your timeline requires, then build the machine that produces it; everything else in this stage is in service of that number.
On-market: coverage plus speed
The on-market game has two variables you control. Coverage (seeing every listing in your thesis, which is what aggregators earn their fee doing) and response speed, because fresh listings from good brokers collect serious inquiries within days. A saved-search-and-alert setup that surfaces matches daily, plus a same-day inquiry habit, beats a bigger tool budget used lazily.
Off-market: a system, not a spree
Direct outreach works as a rhythm, never as a burst: a list built from your thesis, enriched with owner contacts, contacted in small weekly batches with unembarrassing follow-up. Expect low single-digit response rates and long fuses; owners who reply in month six count. Track every touch; the searcher who follows up twice politely is rarer than you'd hope.
Weekly numbers or it isn't happening
Sourcing decays the moment attention wanders; a two-week gap empties the pipeline sixty days later. Keep a scoreboard of inquiries sent, CIMs received, calls held, and owners contacted, reviewed the same hour each week. The Pipeline Tracker computes your own funnel from the record (sourced to contacted, CIM to LOI, and which deals are drifting untouched), and its Outreach Log dates every touch so the follow-up has a day to count from; a CRM or a legal pad also work. What matters is that the numbers exist and embarrass you when they're zero.
Write kill criteria before you browse
Decide in advance what ends a deal in sixty seconds: customer concentration above your line, licenses you can't hold, owner-operator skills you don't have, geography you won't move to. Screening is only fast when the noes are pre-decided; every criterion you leave fuzzy becomes an afternoon of motivated reasoning on a deal that was never viable.
Rebuild the earnings yourself
Take the seller's adjusted number apart and reassemble it: start from tax returns, add back only what you can defend to a lender, and price the manager you'd need to hire for whatever the owner actually does. The spread between marketed SDE and your rebuilt number is usually the negotiation, and occasionally the whole deal.
Price from financeability, not the ask
Run every serious deal through the debt math before emotional attachment forms: at your structure and today's rates, what price does the business's own cash flow support at the coverage lenders screen for? That number, not the asking price, is your anchor. The SBA Acquisition Calculator runs it in thirty seconds; comps from actual closed SBA deals tell you if the ask is even in the county.
Move decisively when it's real
Screening discipline exists to buy you speed when it counts. A fair deal on a good business clears your criteria quickly, so make the offer quickly: a clean LOI with fair terms, submitted while slower buyers are still scheduling calls, wins deals without overpaying. Good businesses at defensible prices do not wait for your third review cycle.
Tools for This Stage
Pipeline Tracker
Deals, contacts, and outreach in one workspace.
Sourcing & Screening Resources
Where deals come from and who judges them.
Sourcing & Screening Tools
Price it, then keep digging or walk.
Work a Deal
One deal through every tool, in order.
Deal Screener
Screen it: keep digging, or walk.
Deal Comparer
Two listings, one financing basis.
CIM & Document Analysis
Read the memo, then the business under it.
Rebuild the Earnings
Test the seller's schedule before you price it.
Business Valuation Calculator
A cited band prices the earnings you bring it.
Sourcing & Screening Templates
Opening a thread with a broker or an owner.
Resources for This Stage
Books
CRM & Pipeline
Listing Marketplaces
Deal Aggregators
Off-Market Data & Outreach
AI Deal Analysis
The Words This Stage Uses
Add-backs
Expenses added back to profit to show what an owner really earned.
CIM (Confidential Information Memorandum)
The broker's marketing document, shared after an NDA and written to sell.
Customer concentration
How much of the revenue rides on the largest customer or few.
EBITDA
Profit before interest, taxes, depreciation, and amortization.
Goodwill
The part of a price paid above the hard assets, for the earnings.
LOI (Letter of Intent)
A mostly non-binding letter agreeing price and key terms; it starts exclusivity.
Multiple
The ratio of price to earnings a business is priced at.
NDA (Non-Disclosure Agreement)
A confidentiality contract signed to see a listing's name and financials.
Proof of funds
Documentation that your cash for the deal exists and is yours.
SDE (Seller's Discretionary Earnings)
Owner earnings: profit with the owner's pay and perks added back.
ARR (Annual Recurring Revenue)
The annualized value of a subscription business's recurring revenue.
Backlog
Work a contractor has won and not yet built, measured in dollars.
A selection of the words this stage uses. The rest are in the glossary.