I am noticing some recent behavior from business brokers representing 1-2 million EBITDA opportunities I found odd and I wanted to share for feedback. As soon as a broker lists an opportunity on various listing sites with strong financials I quickly contact them for more information. They quickly inform me that within days they already have multiple full price offers which surprises me that someone would submit a LOI so quickly with little more than the broker business summary to form their evaluation. I can only think of three reasons why this would happen.
Option 1, is the broker doesn't believe I am a serious buyer and tells me this so that I stop contacting them for information.
Option 2, other potential buyers are submitting full price LOI's even if the valuation multiple is higher than typical and with little to no information.
Option 3, the broker doesn't have any offers and is telling me this so that I submit a full price offer.
I am inclined to believe option 2 is true because the listings disappear a few weeks later.
In option 2, is it possible people are submitting LOI's just to lock up an exclusive negotiation period and then renegotiating the EEV or EBITDA multiple in due diligence? For instance telling the seller yes we agreed on a multiple of 5 times but upon further review we believe a multiple of 4 is more appropriate for your business. Would this be a normal situation or expectation of the buying process?
In my personal life when I was selling my house I had someone try option 2 on me and felt it was very unethical and poor taste.
I am looking forward to hearing other searcher's experiences and opinions so I can decide best how to proceed the next time I see what looks like a great broker opportunity.
Buyer Competition with Brokers Representing 1-2 Million EBITDA Businesses
by a searcher from Duke University
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It's been our experience that brokers often skirt the line of truth, and sometimes just outright lie (depending on the size of the lie, we've decided not to work with certain brokers again). If information you're getting from a broker smells like BS, especially around factors that are unprovable to you (i.e. how many other offers they've gotten, what the quality of the offers are), don't ignore the hunch. I'm not saying there aren't some great, honest brokers out there. I'm just saying there are some that aren't.
Regarding option 2, there are some buyers who are less discriminate in how they value deals and are eager to deploy capital as quickly as possible. In any good market you're going to find some "dumb money". Deals follow the good, cheap, and fast rule: You can only have 2. Eager buyers may pay above market value in order to snap up what they feel are premium opportunities quickly. It's up to you whether you want to join those bidding wars or take a more patient approach.
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