Deal Discipline

Three Types of Deals I Pass On and Why

In private equity and SME investing, your strategy is defined less by the deals you do, and more by the deals you walk away from.

When I talk to potential co-investors—whether they are family offices or private individuals—they often ask about my "deal flow." They want to see the opportunities. But the most important part of my job as a lead buyer is not just finding companies; it is filtering them.

To get to a single signed Letter of Intent (LOI), I have to filter out dozens of companies that look attractive on the surface but carry structural risks that do not fit a disciplined buyout mandate.

I am not a venture capitalist looking for a 100x return on one bet while the other nine fail. I am an SME buyer using bank leverage and my own capital. This means my primary duty is capital preservation and debt service stability.

Here are the three most common types of deals I see in Poland and Germany that I consistently pass on—and why.

1. The "Genius with Helpers" (Extreme Key Man Risk)

The Scenario: I find a specialized engineering firm or a niche consultancy. The financials look excellent: €2M revenue, €500K EBITDA, strong margins.

The Reality Check: When I dig into the operations, I find that the owner is the only person who can close a sale. He is the only one who knows how to quote a complex project. The staff are capable executioners, but they are "helpers," not managers. There is no Second Line.

Why I Pass: From an investment perspective, this is not a business; it is a high-paid job with a support staff. If I buy this company, I am betting that I can clone the owner’s brain in six months. That is a bet I am not willing to take.

If the owner leaves—or even just checks out mentally after receiving the wire transfer—the revenue could drop by 50% overnight. No bank will finance that risk comfortably, and I am not willing to expose our capital—mine or my partners’—to a structure that fragile. I need a system, not a genius.

2. The "Optimist’s Forecast" (Growth-Dependent Structure)

The Scenario: A company presents a "hockey stick" growth story. They have been flat for three years, but they argue that recent changes will double EBITDA next year. They want a valuation based on next year’s numbers.

The Reality Check: The current cash flow (EBITDA) barely covers the proposed debt service (DSCR). The deal only works if the growth happens exactly as planned. If the company has one bad quarter, or if the market softens, the covenants break and the equity is wiped out.

Why I Pass: In an SME buyout, leverage is a tool, but it requires a cushion. I buy based on history, not forecasts.

If a deal requires everything to go right just to survive, it is too fragile. I look for "boring" resilience: a business that can be flat or even shrink slightly and still service its debt and protect investor equity. If I have to pay for growth that hasn't happened yet, I am taking equity risk for debt returns. That is bad math.

3. The "Black Box" (Opaque Financials)

The Scenario: A construction services or logistics company shows decent official numbers, but the owner winks and says, "The real profit is actually 30% higher." They talk about cash payments, personal expenses run through the business, or inventory that doesn't exist on paper.

The Reality Check: They want me to pay a multiple on the "real" (unverified) profit.

Why I Pass: This is non-negotiable. If I cannot trace it in the bank statements and tax returns, I cannot buy it.

First, a bank will never lend against invisible income. This means the equity check would have to be massive, killing the returns. Second, "creative" accounting signals a culture of non-compliance. As a buyer stepping in, I would inherit the tax liabilities and legal risks of the previous owner’s decisions. Third, if an owner cheats the taxman, why would I trust them not to cheat me during the earn-out or transition?

The "Boring" Deal I Actually Want

So, what is left after I filter out these three categories?

The "boring" deals. The unsexy B2B service companies. The manufacturers of essential components.

These are businesses where:

• The management team runs the daily operations.

• The valuation is based on the last 3 years of proven EBITDA.

• The books are clean, boring, and fully compliant.

• The cash flow covers the debt with a healthy 1.4x or 1.5x buffer (DSCR).

These deals are harder to find. They don’t promise to triple in value in 18 months. But they offer something far more valuable to a professional investor: predictability.

Why This Matters for Co-Investors

For anyone considering co-investing in the SME space, the "No" is just as important as the "Yes."

When I present a deal, it means it has already survived these filters. It means I am confident enough to put my own capital into the first loss position. It means the bank has vetted the cash flow and approved the risk.

I don't chase every opportunity. I chase the ones that let everyone involved sleep at night.

If This Approach Aligns With Yours

If you are a professional or semi-professional investor and this disciplined, risk-first approach resonates with how you allocate capital, you can join the invite-only investor waitlist on my site. I use it to share updates on specific, filtered opportunities where I consider selective co-investment.

👉👉 Investor Waitlist link here>>