Advice on selecting Industries and talking to owners?

April 26, 2018

by a searcher from Bentley University in Boston, MA, USA

I'm a geographic searcher self funding, read more about my history in my bio. I'm only a few weeks into the process, reading and poking around and now it is time to start generating real deal flow. Everything I've read says to narrow the search down to a 2-4 industries to start. Once the industries are selected get to know them so you can evaluate deals and intelligently talk to owners.

When people are talking about selecting industries are they talking SIC codes? Those are so broad I don't see how that helps narrow anything. For example SIC 73 is Business Services, which encompasses thousands of different business models. Are people thinking much more specific, perhaps around business types? Examples would be window washing or commercial equipment service. That seems to narrow, at least for geographic searchers, so what is between?

Additional thought EDIT - How are you selecting industries? I currently feel somewhat business agnostic, what I enjoy is the leadership, responsibility and multi-hat experience, along with being the boss, of course. How are people saying, that window washing (or whatever) is a good space to look at? What is your determination if a business is 'enduringly profitable"?

Once an industry is selected and deals are flowing how are people talking to owners, especially cold intros? I haven't seen any helpful guides on how to intro yourself, how to gain the owners confidence and trust, when and how to bring up sale price, how to ask for seller financing, what questions to ask to draw out red flags, how to gauge sellers motivation to sell, etc. etc. etc. I'm looking for an etiquette guide so I don't stick my foot in my mouth asking about things at the wrong times. I tend to act on a transactional basis (I have money, you have a business, lets make a deal), but understand that when buying someone's legacy that doesn't work. I inadvertently torpedoed a relationship already by not realizing this and low balling someone.

Also how are people arriving at a selling price if the seller doesn't have one? 3-5x ebita or 2-3 SDE have been kicked around but that is a big range. Are people using external business valuations?

Thanks, Tim

Reply by a searcher
from University of Pennsylvania in Chicago, IL, USA

Great conversation to be had on this topic. I think what works for you is the answer - I realize that is sort of dodging the question! I will list some things that I think are worth thinking about along these lines: SECTOR: - Especially since you are self-funded, you are both an investor and a CEO. Empirically, the best CEOs are good investors (Read the book "The Outsiders"). The two hats are naturally intertwined but there are points at which they are at odds. For example, a pure investor doesn't have to manage day to day operations, so things like location, type of business, etc. don't matter - it is about risk, return, etc. The CEO on the other hand (especially in a small business) has to run the thing, and so if you hate hot dog stands, you might want to think twice about being a hot dog stand CEO! Passion businesses (do it because you love it) are almost always a disaster, however, I think balance is possible - i.e. do something that is a sound investment, makes good risk-adjusted returns, but is still something that day-in day-out you are excited about. Invariably, there will be hurdles to clear and setbacks - and it is easier to deal with them I think if you are enjoying what you do. So I would eliminate some industries that just don't fit your vision for yourself - that is totally subjective and qualitative but immensely important. - Ask the question, what could I manage well? Yes, business is business, and I agree that top executives can run anything effectively. The problem is that small business depending on size is a lot messier than being an executive in a larger organization. Each person is different, but envision yourself running the business and make sure you feel like you could excel at it (and enjoy it). Sometimes the only way to figure this out is look at listings, read the business descriptions, and think through the operations. It is pretty easy to get a basic idea of what it would take to run it. Ask the question, what are the current owners doing in terms of job functions? How do you replace it? Will you do it yourself? Will you hire someone, etc.? MANAGING THE SELLER - Try to figure out what they care about other than price. This is hard in practice; from my experience some sellers are very tight lipped, others will talk and talk and divulge info that is definitely not in their best interest to divulge, etc. A company that I'm closing on next week, I ended up getting at a lower price and with 20% seller financing largely because of likability. The Sellers told me months afterward that they went with us because we seemed genuinely interested in the business and the customers, and we focused on the operations and didn't obsess over the accounting/ financials. Our competitors for this deal also were going to shut down and move operations, and the sellers hated that idea - they turned down much higher offers than mine and those offers were cash. The first company that I acquired was just the opposite - the Seller wouldn't talk about anything. All of my efforts to build rapport appeared to fail. - Realize that getting the seller to sell is often an exercise in persuasion - the money is only one "need" that they have. Fulfill as many of the non-money "needs" that you can and you will be well on your way to getting a deal done. - How DD is done can be at odds with building rapport and it is possible to go overboard with it. Start with "do I think the seller is trustworthy?" Sometimes doing a name search with the County Circuit Clerk is the best starting point - reveals all past litigation, criminal stuff, etc. Take a commonsense approach to the DD. If what the seller says checks against the documentation, do what is reasonable - don't push it to the point of insanity. However, if a Seller is not willing to comply with basic, reasonable queries - I would be very hesitant to move forward. Good luck w/ the search!

Reply by an investor
from The University of Chicago in Honolulu, HI, USA

Hi Timothy, I did a geographic focused search on my own a few years ago and completed successful searches a couple of times. One thing you'll quickly see is that for many small to mid sized business owners in a specific geography and industry is that many of them will know each other and know what's going on with each other's businesses, who's expanding, who's struggling, who's thinking about getting out, etc. So my advice would be to just jump right in and go down the rabbit hole until you know if you want to be a part of that business community. Start with an industry you have some interest in, go to an industry specific networking event or local chamber of commerce event and just start meeting people with the open mind that you're just their to learn about the business community and industry. Remember, that if you end up acquiring one of these businesses all the previous owners you spoke with instantly become your competitors and also your support network when you have to actually operate the business.

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