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Session #4: Business Brokers (Guest Edition!)
Everything You Need to Know about Business Brokers When Buying a Business
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Buying a business? Brace yourself for a reality check: you will almost certainly have to engage with business brokers. Here’s why and how you can navigate these vital interactions.
Business brokers are the gatekeepers of all that juicy cash-flow you’re chasing.
That’s why having the ability to foster productive relationships with brokers is critical to your search.
The goal, in short, is to receive priority from brokers when attractive new businesses go to market.
And, if you don’t, other buyers will.
Despite this, many first-time buyers often fail to approach brokers diplomatically, are quick to criticize, and worse yet, sometimes get frustrated or even combative with brokers when things don’t go smoothly.
Listen, we get it. Business brokers can be frustrating to deal with at times.
They come in varying levels of sophistication, deal experience and approach. That’s no reason, however, to neglect the relationships that are going to make or break your search.
Remember the old saying about catching more flies with honey than vinegar?
Our goal in today’s session is to peel back the curtain and give you a glimpse into the whacky world of business brokering, providing you insights, tools and tactics necessary to source high-quality businesses from brokers.
In today’s session, we bring you insights from two veteran and heavy-hitting business brokers, Clint Fiore and Ed Mysogland.
Welcome to the fourth session of this free business buying masterclass.
Thanks for stopping by!
Ed Mysogland, the managing partner of Indiana Business Advisors (IBA), is a renowned business broker with a rich career spanning nearly three decades.
Clint Fiore, the founder and CEO of the Texas-based Bison Business, is a dynamic business broker boasting a unique blend of entrepreneurial, executive leadership, and high-tech systems expertise.
Mission Critical! Building Relationships with Brokers
To fully understand the value of fostering relationships with brokers, let’s begin by unpacking the process that the average business broker will go through before ever listing a business on a publicly-accessible marketplace like BizBuySell.
Before paying a listing fee or dealing with potential time-wasters on a public marketplace, brokers first promote the business through multiple avenues, including the following:
Direct outreach to ideal buyers and prior clients with relationships
Brokers will begin by sending deals to their prior clients, strategic buyers in the target company’s industry, private equity funds in the space or buyers with whom they’ve developed strong relationships and rapport.
Email outreach to buyers in the broker’s general database
Brokers will then send deals to their general database of buyers. These databases are often comprised of thousands of buyers, who have provided the broker with their search criteria.
Email outreach to other advisors
Brokers will also reach out to other deal advisors in their network (such as other brokers, attorneys, and CPAs), who often have access to additional buyers.
Finally, brokers will share the listing with other buyers through social networking sites like LinkedIn.
This means that, before you see the listing on a website, the broker has used every other tool in their toolbelt to try and sell the business.
Stated more directly: the vast majority of high-quality businesses will be bought before you ever see them on a public marketplace. Thus, if you’re only shopping listed businesses, you’re way behind the field in terms of finding a great business to buy.
Pro Tip: We’ve seen many buyers acquire great businesses from the public marketplaces, so don’t discount a business completely simply because it’s listed.
But there’s no question, buyers that have relationships with brokers are going to get to the cream-of-the-crop. Everyone else, according to Ed, “comes a distant second.”
So how does one go about building relationships with brokers?
Step One: Identify Key Brokers
The first step is arguably the most obvious. But, you’re not just identifying any brokers, but the right brokers.
That means, according to Ed, you should be paying attention to who is doing deals in your target industry and geography.
Google searches, asking for introductions and recommendations from other buyers, brokers and others in the know, and other typical approaches will help lead you in the right direction.
You can also go to https://www.ibba.org/find-a-business-broker/ and put in the type of business to find relevant brokers.
Pro Tip: According to Ed, some brokers will suggest they are experts in all industries. You should avoid these brokers and focus on industry experts!
Step Two: Share Your Criteria and Prove Your Capacity
If you’re following this masterclass, you know from Session #3 “Introduction to Search” that establishing your criteria is a critical first step in any successful search.
Critical to building relationships with brokers is not wasting their time.
Yes, reading and exploring CIMs (confidential information memorandums) is a great way to learn, but proceed with caution as, according to Clint, it can be “very frustrating to brokers when they have to deal with a parade of tire-kickers with no intention of following through.”
“The best approach is one you never make. Know your criteria.”
Before approaching you should confirm that the business is (1) within your size range, (2) in an industry you are interested in, and (3) can either be operated remotely or you’re willing to move to the business’s geographic location.
It’s crucial to begin by ensuring that the businesses you are inquiring about align with your search criteria. A mismatch can result in wasted time and efforts on both sides, and hurt your reputation with brokers.
Ed underscores that “the best buyers are quick ‘nos’; have capital accessible; and executable criteria.”
This means that brokers prefer dealing with decisive buyers who are ready and able to close deals efficiently.
Further, don’t “ghost” brokers. Tell them when it’s a no!
According to Clint, “[y]ou can really stand out with a polite e-mail the moment you decide to pass letting [the broker] know you will not be pursuing and why, and thanking them for the information. This saves the broker time, gives them valuable feedback, and moves you up their mental list as a quality, honest Buyer to work with.”
The best way to establish credibility with a broker, according to Ed? Send them a deal tombstone, as this will demonstrate prior deals and your capacity to transact.
Step Three: Be Diplomatic
Treat the broker with respect. Be mindful of their time. Remember, bees like honey!
According to Ed, brokers aren’t created equally. Many deserve the criticism they receive. However, like any professional, do everything you can to avoid embarrassing them in front of their client. Use phrases like “I could see why you would do it that way, but when I do it …” to push back with brokers.
Clint further emphasizes that there are many types of business brokers, including franchise brokers, independent brokers, ones that work on smaller deals vs larger deals, varying levels of experience, age differences, real estate agents masquerading as business brokers, those with financial vs sales backgrounds, etc.
All of these things can create vastly different processes and experiences.
Adapt to your circumstances.
For example, with older brokers, you may want to pick up the phone or go meet them in person as quickly as possible. Whereas, younger brokers might be okay with text, zoom, and other electronic communications.
Pro Tip: Real estate agents often attempt to sell businesses or dabble as business brokers. If you see they also represent commercial or residential real estate, you will want to assume they might not have the financial vocabulary (e.g., SDE, EBITDA), and that they’ll prefer real-estate-style purchase contracts to LOIs. This can mean a headache for a buyer, especially one experienced with M&A.
Additionally, brokers that work smaller deals often want to use templates for everything while ones that work larger deals expect you to draft your own LOI and purchase agreement with proper M&A legal counsel. Look at their other listings for clues!
According to Clint, “there’s a lot of ways business brokers play this game, and for the best odds of success as a buyer, you need to be able to play their way.”
Don’t butcher the NDA. We’ll cover NDAs later, but in short, there are only a few key areas in an NDA that really matter. The rest is simple: only use the confidential information you receive for the purposes of the transaction. Don’t shoot yourself in the foot with the broker by looking like a pain to deal with by fighting excessively over the NDA.
Review the CIM carefully. Brokers make mistakes. But be tactful in how you ask questions. Remember, the CIM is their work product!
Don’t treat the broker like an obstacle. According to Clint, many buyers treat the broker like a “useless middle man” and try to go around them to the seller.
This is a great way to anger both the seller and the broker, especially if it’s regarding price and other negotiation conversations.
Further, if you do get the Seller’s contact information in the process and permission to contact them, try to only talk to them about operations, and run the price, terms and structuring negotiations through the broker.
Pro Tip: Make friends with the broker and use them to help you get the deal done!
Try to get on the broker’s proprietary list of buyers. According to Clint, the following are some great questions to ask the broker:
“Do you have anything else coming down the pipe that’s not on your website yet that might be a fit for me?”
“How can I be sure I see new stuff you have coming to market as early as possible?”
“Do you have an early notification list?”
If you’ve done well following the tips here and gained favor and rapport with a broker, even if you’re passing on a deal, be sure to leverage that working relationship to get some hints, previews, and early access to future deals from them.
Most brokers will have a system or process for this, or some hip-pocket listings not on their website you may be able to get in on.
Step Four: Search Intelligently
Most brokerages keep robust statistics on buyers.
They know that local searchers are more likely to close on a transaction than a “geographically agnostic” searcher.
Look at the two charts below provided by Ed.
Question: If you were a broker, how would you think about searchers based on these charts?
Chart One: Geography
Chart Two: Size of Target Business
Conclusions? The low-hanging fruit is, to have a successful search, you should buy a business in a location that makes sense, and in a size that is reasonable based on your experience and financial capacity. Brokers are less likely to take you seriously if you’re an outlier!
Reading Between the Lines:
Not all listings are created equally and brokers will sometimes signal issues in the subject business by omitting key information.
Clint emphasizes the importance of reading between the lines when considering listings.
The absence of certain information, such as asking price, EBITDA figures, or reasons for sale, can signal potential issues that need to be addressed.
Buyers should not shy away from asking direct questions to fill these information gaps.
Here are some examples:
No asking price on a <$5M revenue SMB can be code for extremely unrealistic valuation expectations.
Sales numbers but no EBITDA, SDE, or cash flow numbers can be code for a distressed situation or extremely low earnings.
No listed or obvious reason for the sale can be code for a distressed Seller (think divorce, health or other issues).
No breakdown of customer concentration in the CIM or CBR could mean there’s concentration issues.
According to Clint, “[l]ook for glaring omissions and quickly, bluntly ask the broker for answers. If they’re not forthcoming, or the answer is a deal-breaker, that’s good! It lets you know it’s time to move on without further wasting everyone’s time. So look for what’s NOT said immediately and you’ll avoid a lot of heartache later.”
To wrap up, here’s your game plan for building successful relationships with brokers:
Step One - identify the right brokers
Step Two - be clear about your search criteria and demonstrate your ability to seal the deal
Step Three - cultivate rapport and respect, and
Step Four - engage in smart, targeted searching
By adopting these strategies, you can gain brokers’ respect and receive priority outreach when attractive new businesses go to market.
Now for a few required disclaimers. Sorry in advance!
This course is being presented strictly for educational and informational purposes, and not for the purpose of marketing any legal services or seeking legal employment and is not motivated by pecuniary gain.
The opinions stated in this course from the authors represent the opinions of such individual author and not the opinions of any other person or organization.
Nothing contained in this course or otherwise from the authors hereof is to be interpreted as legal, financial, tax, investment and/or any other form of advice. Please consult your own legal, financial, tax, investment and/or other advisors.
The authors are not your lawyer, and no information provided in the course of this class or otherwise has the affect of forming an attorney-client relationship between you and the authors. In short, get your own lawyer!
This course is being presented by The SMB Center LLC and has no affiliation or relationship SMB Law Group LLP.
About the Authors
The authors have worked for some of the most elite law firms in the world.
During their time in BigLaw, they regularly worked on transactions in the hundreds of millions to billion dollar plus range for some of the most recognizable companies in the world and have extensive experience with M&A.
The authors have since begun investing in select SMB acquisitions and have co-founded an SMB-focused law firm where they’ve collectively worked on hundreds of millions of dollars in SMB-focused M&A.