Does anyone have experience in acquiring off-market deals?

searcher profile

July 29, 2022

by a searcher in Newport Coast, Newport Beach, CA, USA

I have acquired small businesses from brokers and have had some challenges with off-market deals. (sourcing direct from an owner) Finding off-market deals is not the challenge. Instead, it's in the negotiations and deal process for me where I have had roadblocks which I know is normal. If anyone can spare###-###-#### minute conversations regarding experience with off-market deals, pros and cons, and preference over broker deals, I would be grateful for the time.

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commentor profile
Reply by a professional
in Nashville, TN, USA
I exclusively do proprietary buy-side searchers for clients, and developing trust through a give-and-take process is key. Here's what I've observed to work well:

Preface) Understand the industry you are searching exceptionally as well as how to value those businesses. It's not the sellers responsibility to educate you, and it will be an immediate red flag if you don't know the space.

1) After developing rapport with the potentially seller, provide a short request list (ex: 3 years of P&Ls, balance sheets, and tax returns), which will enable and IOI with a valuation range.

2) After receiving these materials, provide seller with an IOI with a valuation range. Providing them a written IOI will build trust and communicate seriousness.

3) If both buyer and seller are in the same valuation neighborhood, share a more extensive request list (ex: customer information, revenue by segment, monthly financials, etc.), which will produce an LOI.

4) After receiving materials, provide seller with said LOI with specific valuation and deal structure.

I recommend communicating this process up from to the potential seller, so they know what to expect and are motivated to walk down the path with you. There will likely be other steps/conversations as you unpack the information they provide, but this is the general approach I've seen work best for my clients.
commentor profile
Reply by a lender
from University of Wisconsin in Minneapolis, MN, USA
I agree with Thomas, off market deals seem to take 2-3x as long to close compared to deals on the market. If you look at the timeline of a sale, once a deal has come on the market there is probably 1/3 of the selling process left compared to the 2/3rds you don't see. Brokers do take the brunt of the initial interactions including collecting and interpreting financials, educating the seller on how much their company is actually worth, and establishing what the market norms are when negotiating the terms/PA. A good M&A attorney and accountant representing the seller can help in some of these matters, but unfortunately I do see sellers hiring general business attorneys and not consulting their accountant. I have financed several off-market deals, so it does happen, but I always let my buyers know its likely going to take 12 months and a lot of patience and education compared to 2-3 months to close.
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