In my upcoming episode of Deal Flow, my guest Chandler Reed and I discuss whether or not you need a brokered deal to buy a business.
Now, full disclosure, for those who do not know, we are hired by individuals and companies to find companies for them to buy. We also help sellers find the right M&A Advisor to help them sell their business. So, I work on both sides of the table here. Now that my bias and interests are out in the open, let’s continue.
Chandler makes a great point, which is that sell-side brokered deals are the most actionable. There are several reasons for this:
They have made their intention quite clear - they have hired someone to take their company to market.
A sell-side broker/M&A Advisor can spend 300-400 hours per transaction to ensure that they close.
An owner/searcher might not be the best person to give the company a fair market value.
There is no established mediator to speak with when tempers run hot.1
Most buyers and sellers will only transact like this once in their life, and many people will never do one. This means it is not the same as selling a home on your own, where most people you know have bought and sold a couple, some with real estate agents and others without.
Also, the stakes are much higher. A business acquisition can carry lingering litigation risks for years to come.
So, do you need to hire someone to help you buy a company?
Probably.
Searchers face several issues when looking for a company to acquire. We’ll boil it down to four main problems:
Not enough deal flow.
Competing over the same deals.
Too narrow of a focus.
Not enough cash.
It works like this: Buyer Bob decides that he wants to buy a company. So, he contacts three or four sell-side brokers, checks the latest listings on bizbuysell.com, and makes a few phone calls and emails to business owners.
Then, one day, a listing pops up on bizbuysell.com that fits exactly what he is looking for, as it does for everyone else. So, he requests financials and gets to work. Over the next few days, he determines this is the deal for him.
He reaches out to the broker representing the seller and submits an LOI. For a myriad of reasons, two months later, the deal falls apart. During this time, Bob did not have time to generate many other deals and was not focused on growing his deal pool.
This process repeats a few times until Bob either finds a deal or runs out of money and returns to the workforce, waiting to search at a later date.
What Bob should have done is keep generating deals, submitting LOIs, and grinding out every lead he possibly could until one closes.
Buying a company is tough, for many reasons. Finding the right deal is just step one in the process. However you decide to go about searching for your next company to buy, just keep in mind that it will likely require you to look at more deals than you expect. Emotions during the acquisition process will be high, and many things can ruin your first or next business acquisition.
To clarify, the sell-side broker does not represent the buyer but should serve as an effective intermediary between the buyer and seller. A request from the buyer might appear excessive, but the broker/advisor is well-equipped to discern what constitutes a reasonable request, especially in comparison to a first-time seller.
