Brokers and Intermediaries
Brokers, M&A advisors and other intermediaries may stand between you and your ideal seller. Developing the skills to manage this source of prospects is critical to the success of your search. Since about 40% of search transactions are sourced through these intermediaries, you cannot afford to exclude them!
The range of competency across intermediaries varies widely. Yet, they often have ‘pre-qualified’ the prospective seller for you by convincing them to “list” their business for sale. In doing so, they have crossed over one of the most significant hurdles that an owner has to make: “Am I ready to sell my business”? The flipside of working with an intermediary is that they may also become the biggest obstacle to closing a deal. Keep your eye on the net, not on the goalkeeper!
Brokers bring value to your search
These intermediaries make their livings by getting deals done; it is their only payday. Customarily, the business broker act as a first level screen for profitability; you seldom see CIM’s (Confidential Information Memorandums) for turnaround situations. While seller expectations can be high, a competent broker can keep the owner grounded in what the “market will pay” for their business.
Many brokers have been in the business for many years, have closed a lot of transactions and have seen a variety of creative solutions for obstacles that would normally get in the way of finalizing a deal. More than one searcher has told me that they have learned a lot from a broker willing to take their time to educate the searcher on how handle a particularly difficult seller.
Consider their offerings “pre-qualified. Because they have engaged someone to sell their business, owners have a much higher likelihood of closing than prospects developed through a proprietary search. There is a big difference between initiating a dialog about selling a business and the time-intensive commitment an owner makes to find an intermediary to sell their business.
In most instances, the broker will provide historical data with reconstructed EBITDA values and in some cases projections of income, cash flow and balance sheets. This may take months of effort by the seller. While not enough information for deep due diligence, this is certainly enough to prepare an IOI.
Establishing a broker “profile” as you do with sellers helps highlight their value. Those who have experience with multiple transactions in the SME space, close quickly have very specific industry or geographic knowledge and positive prior experience with searchers should be great to work with. Lars Gehre of Green Vault Partners established a 1-3 ranking, focusing his attention on the best brokers in Tier 1. Those who exclusively work with strategic acquirers, who are willing to pay a higher price for a business, are classified as a 3.
Not all owners who retain a broker reach a sale. Axial Networks, who aggregates many of the listings claims on their website that 1,000 deals go live every month and 50 deals close. Just because the seller agrees to be listed, does not necessarily mean they will get to closing.
What brokers are looking for?
Most important to the intermediary is your ability to close a deal. Your urgency to find a business demonstrates that you are not kicking tires, looking to steal a business or wanting to waste either party’s time; they will see you are on a self-imposed deadline. They will want you to make offers to show their sellers that they are actively looking for buyers on their behalf. While price is important, the intermediary favors speed and quality.
Your capability to fund is important, but they will not be looking for bank records or funds in an account, just confidence in how you will raise the money. Funded searchers can point to their investors. Lee Swanson at Rock Lake is self-funded and has a letter from a deep-pocketed investor indicating willingness to commit equity in a deal- this satisfies most brokers.
While the seller may resonate with your willingness to move to their area, the broker will be less interested and more skeptical about your age and lack of experience. Many intermediaries have reported to have difficult experience with searchers, preferring buyers who are doing “bolt-ons” or synergistic buyers willing to pay higher multiples.
Highest value at the beginning of your search
Your prospecting “engine” that directly engages business owners with snail/email takes a while to get traction. It is very valuable early in your search to build your database of brokers and begin to evaluate CIM’s. Just reviewing what is available may reveal industries and market niches that you had never considered before.
Whether you like the specifics of the business or not, you may be willing to consider new target segments that have more than 200 potential prospects. 90% of funded searchers end up buying a business outside of their original PPM industry focus and many of their ideas come from seeing “patterns” in what is available in the market.
Where to find brokers and intermediaries
Deal Nexus and Axial Networks offer paid services to access deals listed by brokers and in some instances, by sellers themselves. Costs range from $2K-$10K/Year. If geographically focused, you may be paying for a much wider range of prospects than you need. Some have private listings on their own sites that are worth “trolling” from time to time. National and regional groups like ABBA, NEBBA, MBBI CABB or BizBuySell have company listings without charging fees.
Many “broker lists” are passed from searcher to searcher as part of their “sharing” sources, especially those who have already closed on a deal. Sharing within the search community benefits everyone, and is a way to “give back” to those who come along behind you. A search should not be a “profit center”, be willing to give back!
Nic Anderson at Elm Grove says: “we find that the best brokered opportunities are the ones that don’t make it onto Axial, so we spend a lot of time digging through small or niche brokers to try and uncover deals that have been poorly marketed.”
You want to build up a database of brokers that you regularly touch to remind them of your search criteria as it develops over time, ramping up in the beginning of your search and tapering down as time goes on. With each industry “dive”, you may add up to a dozen specialized sources.
Some brokers may respond better to ‘specific’ industries of interest than an overly broad or restrictive set of financial criteria. Remember, your goal it to catch their attention and make them see how you could be a great fit for a current or potential client . Even small brokers might have over 2,000 buyers looking for similar ‘financial criteria’ in their database.
While face-to-face meetings with a seller are imperative, meeting with intermediaries in person is less necessary. In the early stages of your search, a few visits to some in your area can be a good way to get a sense of how they do their work. Email solicitation works well, snail mail and direct phone calls are less effective.
Managing intermediaries – a two way street
Adam Barker from New Forest reports that many intermediaries are sole proprietors and more responsive at the end of the week and weekends. He also advises, “Don’t waste time with an intermediary who isn’t communicating your interest to the owner and don’t get sucked into conforming to their ‘process’ and waste a lot of time with phone calls before establishing / agreeing on a price and structure.“ From your proprietary search, you may come across business owners that don’t fit your criteria who you can refer you to brokers – they will be grateful.
Be cautious about being put in front of a seller before you have fully qualified them. Being “shown” to a prospect is in the broker’s best interest, but may not be in yours if you have a long distance to travel or incomplete information to make an offer. Request early to be in front of the seller when you are ready to make an offer.
The intermediary is appraising you as much as you are evaluating them. Be prepared to speak intelligently about your industry focus, objectives, size parameters and experience to date. They do not want to be having to “get you up to speed” and are looking for knowledgeable buyers. Devlop multiple explanations of the “search” process to gauge how credible it makes you appear to them; many are skeptical of the model!
Stay firm on your valuation parameters. You don’t want to be bidding against yourself nor being overly influenced by traditional negotiating tactics like “I would be embarrassed to make this offer on your behalf”, or “the seller won’t consider anything under $x”. Resist the temptation to raise your bid based on the immediate reaction from the intermediary that the seller will not “like” it. Stress to have your IOI presented to the seller and be sure it includes terms beyond price. The Business Reference Guide is a credible source on pricing and to base a frank discussion about their methodology can help break valuation gaps.
Often times a broker will come back after a deal falls through or when they realize it isn’t selling at its current price. On some occasions, you might actually have the only offer and they will simply be trying to get more out of you or use you to re-condition their sellers / as a base for future offers.
In some instances, brokers want to control all access to the seller, perhaps even at the seller’s request. Going behind their back directly to the seller will reduce their trust in you, and potentially scuttle the deal. Generally, as you move from IOI to LOI and later during due diligence, these restrictions are lifted, allowing you to build a critically important direct relationship with the seller. Sometimes it is useful to have the seller listening to the “voice” of their advisor, especially if they are the voice or reason. This is a delicate balance. Be mindful that the seller is paying the intermediary. You will need to be patient and clear with your communication.
Just like Real Estate brokers who do not know how to build houses, most intermediaries are not skilled accountants, tax advisors, operational or financing experts. Try to understand their skill set and be aware of their deficiencies. Keep your “game face” on, there is little value in trying to be “right” or “prove a point” in this relationship. I remember having to call a broker after our first meeting to admit that I was having a challenging day after challenging his understanding of a “working capital adjustment”.
Prepare to sign their NDA’s; be concerned if they don’t request one. Protect yourself by having clear expiration dates and avoid non-competes, buy-side commissions and onerous non-solicitation of employees clauses. Be extra cautious with an overly long document, there may be some objectionable clauses in it.
Much of this activity can be delegated to high-level intern who can handle a range of activities including reviewing CIM’s, getting NDA’s signed, seeking clarifying data and even making IOI’s under the direction of the searcher.
Buy-side and finders fees
Buy-side intermediaries will often seem attractive, especially when they have a business that sounds appealing to you. Be careful of paying for a phone call introduction or just a seller’s name without much added value. In some instances, they may be double dipping and referring you to opportunities they uncovered for retainer clients who already passed on the opportunity.
If they will be available for interaction with the seller and have in-depth knowledge of the market then they may be worth the cost, but generally, “finders’ fees” are an expensive luxury, which comes out of your investors’ or your own pocket. Save the $25K-200K fee for yourself, as you will need it when you are running your business.
Sellers report a low level of credibility when they hear “I represent a buyer who is interested in your specific business and want to introduce you to them.” Your “direct” approach has a much higher ability to resonate with a business owner.
Timing is everything
Since brokers highly incentivized to get to closing in as little time as possible, rather than waiting for a better price, they will “shop” their initial listings to their most “active” buyers who are also looking for recurring revenue. These are generally those who have a track record of multiple purchases and don’t include you! By the time you see it, many others have had a first look. In some cases, even the intermediary may make an offer if it is a great deal!
As a listing gets “cold”, you may be looking at a business that is “un-sellable”! However, as time passes, the seller is getting experience with the process, valuations, deal terms and most significantly, the “reality” of leaving their business. An owner early in the process may be reluctant to negotiate and willing to wait for a better deal. When their business has been available for over six months, they be more realistic about a dialog with a searcher who is interested in protecting their legacy, especially if they have a weak management team.
Brokers and intermediaries play an import role in your search process – ranging from 70% of your prospecting effort in the first few months and shifting to 20-30% in your later stages. Determining ways to effectively interact with someone in the “middle” will require practice and sensitivity if you intend to establish a relationship with the seller and close the transaction.
Feel free to share some of your own best practices or experiences in dealing with these issues in the blog comments. I encourage comments and dialog, allowing all to learn from both my views and the views of others – a virtuous learning cycle. Jump right in!