Brokers & Intermediaries
Brokers, M&A advisors and other intermediaries may stand between you and your ideal seller or they may facilitate the process. 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. Generally, buyers are a lot easier for them to find and business owners who will “list” their business with them. They often have ‘pre-qualified’ the prospective business owner for you by convincing them to “list” their business for sale with them. In doing so, they have crossed over one of the most significant hurdles that an owner makes: “Am I ready to sell my business”? The flipside of your 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 living by getting deals done; it is their only payday. Customarily, the business broker acts as a first level screen for profitability and revenue by providing a CIM Confidential Information Memorandums after your signing a non-disclosure agreement (NDA). This will include historical data with reconstructed EBITDA values and in some cases projections of income, cash flow and balance sheets and reflect months of effort by the seller and is certainly enough to prepare an IOI (See Blog Post: Indication of Interest).
They have also worked with the seller to set a price. This “anchor price” always has room to negotiate in it and may be just the beginning round of protracted back and forth negotiations with the seller, but often creates “cognitive bias” that searchers are cautioned to resist in making an offer. A competent broker can keep the owner grounded in what the “market will pay” for their business compared to what this asking price is.
Many brokers have been in the business for years, 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. Beyond price, there are many other terms of the purchase that will be viewed as “value” for the seller including seller note interest and payment structure, consulting and non-compete outlays, lease obligations, escrows and working capital true-up. One searcher observes, “Having someone in the middle meant that I never got frustrated directly with my seller. Also, the broker spent time educating me and was able to find out what was important to me and what was important to the seller when negotiations deadlocked. Late in the game, the broker seemed to ‘switched sides’ and start working for me as the buyer. However, they are one more person with enough skin in the game to become irrational, emotional, and unpredictable!”
Sellers presented by brokers can be considered “pre-qualified” because they have engaged someone to sell their business and these owners have a 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 commitment an owner makes when selecting an intermediary to sell their business. These business owners are more likely to move forward to a signed LOI. However, sellers do change their minds and it has been reported that only 23% sellers who list actually sell. If you are doing a tightly focused geographic search as self-funded searcher/CEO Scott Holley at Eddyline Kayak in mid-career did in Seattle, “I was in contact with every reputable broker in my area and my deal came from one of them.”
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 with monthly outreach, handled by his team of interns. Brokers who work exclusively with strategic acquirers that are willing to pay a higher price for a business, are classified as a 3 and Tier 2 might receive a contact every quarter.
What brokers are looking for
Most important to the intermediary is your ability to close a deal and may do a half dozen deals a year and don’t want to start over if financing falls apart. The 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 must see that you are on a self-imposed deadline. Brokers also want you to make an offer to show their sellers that they are actively looking for buyers on their behalf. While price is important, the intermediary favors speed and competency. The later comes from practice requiring that you make frequent offers, especially early in your search. A good rule of thumb is 3-5 IOI’s per month.
Most transactions completed by a broker is with a financial (PE) or strategic buyer, often with deeper pockets and a long term outlook. As an individual you represent a solution for the broker with a seller who may want to exit from the business and not “stay on”. Or desirous of protecting their legacy, live in a remote geographic area, has a weak management team or have some special niche or characteristics that make it difficult to sell otherwise.
Be mindful that a broker may stand in the way of your getting to close a deal on a good business. As one searcher pointed out, “They can kill the deal if they don’t like you. Typically, they know very little about the business or industry unless they are specialists. Brokers always have other stuff going on and are always out prospecting for new clients just like I was. Some are even trying to find their own deals. They are frequently “trusted” by the seller more than you.“ Another searcher points out that “you are not going to be the first buyer they shop deals to. Instead, they will reach out to the financial or strategic buyers they have dealt with in the past before introducing you to the seller.”
Your capability to fund is important, but they will not be looking for bank records or funds in an account, just a confident understanding of how you will raise the money. Funded searchers can point to their investors. Lee Swanson at Rock Lake self-funded his search and says, “I have a letter from a deep-pocketed investor indicating willingness to commit equity to a deal and this satisfies most brokers and sellers.” Another found, “Very few brokers questioned my lack of funds outright. I always said that I had access to $1M+ in capital on any financial statements I sent in. If they pushed me, I said I was working on behalf of HNW’s and family offices that needed confidentiality and implied that there was no shortage of good deals for them to look at that did not require me to give out their personal information. I didn’t waste more than 10 seconds on a broker who pushed back, there are plenty more out there.”
While the seller may resonate with your willingness to move to their area, the broker will be less interested in this motivation and more skeptical about your age and lack of experience. Many intermediaries have reported to have difficult experience with searchers, preferring “qualified” buyers who are doing “bolt-ons” or synergistic buyers willing to pay higher multiples. To overcome this, one searcher says, “Try to be distinctive. Brokers have long lists of better qualified buyers than you. Be memorable and the best way to achieve it is to be in regular contact with them. Ask them about deals they have done in the past and be willing to listen to their stories more than just once. Finally, do what you say you are going to do.”
Intermediaries have the highest value at the beginning of your search
Your prospecting “engine” that directly reaches out to business owners with a snail/email effort takes a while to get traction. Therefore, it is very valuable early in your search to build your database of brokers and get them into your CRM so you can reach out. Just reviewing what they have available may reveal industries and market niches that you had never considered before and will give you what the asking price ranges are.
Whether you like the specifics of the business or not, you may be willing to consider new target segments that have more than 100 potential prospects. 90% of funded searchers end up buying a business outside of their original PPM industry focus in any case and many of their ideas come from seeing “patterns” in what is available in the broker “listings”.
Sarah Moore, a self-funded searcher/CEO at King Sales found, “Brokers were very helpful when when I was first starting out and had no idea what I was doing. When I knew nothing about an industry I’d look for a brokered deal in that industry or an ancillary industry and call the broker to ask questions about the industry. The broker didn’t know all the answers, but the owner they represented usually did. As time went on, I gravitated away from brokers to reaching out to business owners directly.”
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. Others will put you on their “deal list” that they publish. National and regional groups ABBA, NEBBA, MBBI, MNA, CABB, BizQuest 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 these resources at no cost within the search community benefits everyone and is a way to “give back” to those who come along behind you. It “takes a village” to succeed at search, but you have to learn to ask for help. Searchers should not be looking to make a profit from other searchers!
Nic Anderson at Elm Grove says: “we found that the best brokered opportunities are the ones that don’t make it onto Axial, so we spent a lot of time digging up small or niche brokers to try and uncover deals that have been poorly marketed.” You should regularly touch bases with brokers in your CRM 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 new specialized brokers and these contacts can be very valuable in educating yourself.
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 with unique characteristics. Even small brokers might have over 2,000 buyers looking for similar ‘financial criteria’ in their database. More specifically, as highlighted Searching as a Woman and Searching as a Veteran, brokers respond well to a request to “Only show me women/veteran owned businesses with $500K to $2M of EBITDA.”
While face-to-face meetings with a seller are imperative, meeting with these brokers in person is less necessary given your tight search time constraints. However, 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. One searcher reports, “My response rate from brokers when completing the little side bar inquiries on bizbuysell or bizquest was probably less than 50% but I found that if I just pick up the phone and call the broker directly it has been effective. If they don’t answer, I leave a voicemail and follow-up with an email getting my broker response rate up to 75%.”
Very few searchers engage a “buy side” broker. With a robust search campaign, the value of these may sound attractive, but there are very few “short-cuts” in the search process. Many funded searchers get push back from their investors on this added cost.
Managing intermediaries – a two-way street
A broker 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. Brokers do not want to be having to “get you up to speed” and are looking for knowledgeable buyers. Develop multiple explanations of the “search” process to gauge how credible it makes you appear to them; many are skeptical of the model and you may find it better to avoid “search” terminology altogether, a lesson it takes a while to learn! One searcher points out, “As the search path has become more popular, more and more brokers are aware of it. The brokers with a negative view of the search model outnumber the ones with a positive view by an order of magnitude.”
Ben Murray 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 to brokers – both 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.
Stay firm on your valuation parameters. You don’t want to be bidding against yourself nor being overly influenced by broker “bullying” 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. Marc Cussenot, a self-funded searcher/CEO of Precision Concrete Cutting, advises, “move fast and try to get direct contact and connection with seller, if possible organize meetings without the broker.”
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 a broker will come back after a deal falls through or when they realize it isn’t selling at its listed price. On some occasions, you might have the only offer on the table and the broker 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; just beg forgiveness. 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 of 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 questioning their understanding of a “working capital adjustment”. Sarah Moore, at Kenston Green, warns “You can go far along in a deal only to find out that you’ve received a lot of misinformation along the way and this misinformation often kills the deal. In my experience, many brokered deals were well picked over and usually overpriced ending up closing with deep-pocketed PE groups or strategic acquirers.”
Prepare to sign their NDA’s; be concerned if they don’t request one. Marc Cussenot says, “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.
Searchers find that much of their broker activity can be delegated to highly experienced 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 your direction.
Buy-side and finders fees
Buy-side intermediaries will often seem attractive, especially when they have a business that sounds appealing to you. These are seldom a short cut to seeing deal flow and replicate what some of your own processes are about. Investors of funded-searchers often balk at utilizing these buy-side brokers who primarily provide benefit to late-career searchers unwilling to leave their jobs and search. In reality, funded investors are not paying your salary to hire someone else to find the business for you.
As for “finders fees”, be careful of paying for a phone call introduction or just a seller’s name without much added value. 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. Paying another searcher for a “lead or prospect” is very uncommon, search should not be a “profit center”, instead searchers should be willing to give back to their community!
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 their offering, many others have had a first look.
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.
Upon reflection, a self-funded searcher says “Looking back, I don’t think there is one right way to generate deal flow, and I probably would have done more proprietary searching. Using brokers meant that I saw a lot of info on a lot of deals very early on, which made it easier for me to say no to sub-par deals quickly. My limited funds meant I had a shorter timeline, and using brokers meant that it took less time for me to find out what a ‘good enough’ business actually was.”
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” requires practice and sensitivity if you intend to close the transaction. The broker will not be “going away” and you have to work effectively toward the same goal of encouraging the business owner to sell their business, to you!
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 in the community to learn from both my views and the views of others – a virtuous learning cycle. Jump right in! I frequently update individual blog posts, add to the Reference section and Search tips, so visit <a href=”https://jimsteinsharpe.com”>www.jimsteinsharpe.com website</a> regularly.
Created: 06/10/2018, Last Revised: 02/15/2021