SOURCING WITH INTERMEDIARIES
What's the easiest way to find a business owner who wants to sell? Find one who has already self-selected by hiring an intermediary to sell the business on their behalf!
Business Brokers, Investment Bankers, family accountant, lawyer, there are plenty of different types of professionals who a small business owner might trust to give them advice (free or paid) in selling their business. For our sake, I call them all 'intermediaries' or ‘brokers’ if they actively list the business. I don't enjoy talking to any of them and find that many of them are ‘not my type’ of people.... but I can't deny they're useful in Search. They have usually been involved in closed deals in the past and they know how these things progress, which means they can help acclimate the sellers. Plus, in most cases (At least with business brokers and IB's) they work on commission and want the deal to close as much as you do. This can be very helpful as you get closer to signing the final paperwork but hurtful throughout the process of getting to that last day before becoming an Operator.
They understand the terms you use (I don't know how many times I have had to avoid using business terms as simple as 'Revenue' or else have to explain it in detail when speaking with business owners on a first call) but they also ignore 90% of what you say until an offer has been at least hinted at. That's when they know you are committed yourself. Don't forget, they work on commission and they will be very misleading to get you to put forth an offer. Teasers, CIMS, initial calls, are all just attempts of saying what they think you want to hear. They won't admit to saying anything incorrect and most of the time it won't 'technically' be wrong...but you'll find odd inconsistencies most of the time as you do your DD (and earlier).
My favorite way to deal with brokers is via email. Phone calls last an unknown amount of time and so do personal meetings...and most of what needs to be said can be said in 10 minutes. It can be a very big waste of time. It's important to have calls and meetings to develop relationships for the long-haul but it isn't good to do them often because you just can't maintain enough relationships that way if you want to do proprietary sourcing and manage a DD process at the same time. Or, more importantly, running your business. Your end goal is to buy one business and while they want to do their best to sell you a business they will like you a lot more if they think they can sell you multiple businesses over time. Send emails expressing interest, verifying you have money and are going to close a deal, describing your interests, and asking if they have questions or anything that might be of interest and to get back to you...you'll get a few people who read none of your message and send you totally unrelated teasers back. More often than that you will be ignored because they don't have what you are looking for...follow-up. If you don’t follow-up, then by the time they have what you want they will have forgotten about you.
Networks like Axial, DealNexus, BizBuySell, etc. are great for ideas, meeting brokers, and getting started...but they are terrible for finding the business you will buy. By the time a deal hits these networks it has already been shopped around to an intermediary’s top buyers and passed on by all of them. It is often the nasty stuff nobody else wanted. It might not be bad for you but it is less likely to be good... As I described above, emailing intermediaries regularly is the best way around this. Stay on their mind so as soon as they get a deal they send it your way and you beat the rest of the public market on Axial to the punch.
As you develop relationships with intermediaries you will spend less time beating around the bush. They will tell you that the previous owner wants to stay on for 5 years, that there is a disease causing them to sell, that the owner isn’t likely to sell for less than some outrageous amount, etc. There are hints about why the owner is selling and what that seller is like and you have to listen carefully for these clues because it will save you a lot of time.
Make a lot of offers. Everything on your end is cheap until you have a signed LOI. Up until that point its time but not money. You should be able to read a teaser in 2-3 minutes and inherently know how likely you are to make an offer…by the time you read the CIM (in 5-6 minutes) you should have an idea of what multiple you will offer…. you may have a few follow-up questions but unless the answers are wholly unexpected they aren’t likely to make a big difference on your offer. In a period of 2-4 days, including all communications and waiting for information, you can have a ‘soft offer’ or IOI out to the broker. The most difficult piece for you in that period is making appropriate adjustments to the P&L so you know what SDE is (never trust what they give you in a Teaser or CIM when it comes to financials. Even great intermediaries make mistakes so you should always do the legwork on your own). These initial offers should lead to quick experience early on and a lot of ‘No’s’ very quickly which is essential for you as a Searcher. You don’t want to drag out a ‘no’ for weeks. No seller I have met has been willing to drop their price because they found the son / daughter they never had in a Searcher. It doesn’t matter how well you get along – they won’t sell to you if you can’t meet their price expectations. So let them know the price you are willing to pay and then work on being a match for one another.
A hint towards a future article: everything written in the paragraph above can be done by an intern (trust me, I have personal experience as an intern who did this AND training other interns to do it after me). It is what interns are great for! Transition the relationship of the owner after you have established that you can and might buy the business.
Working with brokers has its ups and downs just like everything else. You know the seller is very likely to sell (for the right price). So introduce yourself to as many brokers as possible. Prove you are a valid buyer. Make lots of offers and use your interns to ‘get to no’ quickly and save your time for the more valuable parts of this process (the LOI, DD, KYC, etc).
Nathan Israel has been the lead intern in charge of sourcing and technology at multiple search funds. He has participated in a search fund acquisition as well