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Session #5: Proprietary Search (Guest Edition!)
How to Find a Business to Acquire that is not Listed for Sale
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Want to buy a great business at a discount?
Well then you might need to bypass business brokers and go directly to the source of great businesses: their owners.
But prospective business buyers beware! So-called “proprietary” searching is not for the faint of heart.
And getting an unbrokered transaction across the finish line can be significantly more difficult than acquiring a brokered business.
For most buyers, especially first-timers, conducting a proprietary search should not be a complete substitute to on-market listed businesses. You can, and should, do both!
But many businesses sell off-market. And to give you and your search the best odds of success, there’s no harm in taking an “all of the above” approach.
Our goal in today's session is to offer you a peek into how other successful business buyers are running proprietary searches, supplying you with insights, tools, and strategies required to source premium, off-market businesses.
And to accomplish this, we’ll hear directly from two seasoned proprietary search veterans: Matthew Hinson and Justin Vogt.
Welcome to the fifth session of this free business buying masterclass.
Thanks for stopping by!
Matt Hinson specializes in sourcing, negotiating, and closing transactions for private equity portfolio companies. He personally invests in and advises on micro-private equity deals. Find him on Twitter @matthewghinson.
Justin Vogt, the CEO and Co-Founder of Evermore Industries, a holding company that invests in and operates lower middle market maintenance and repair businesses across the United States, is a seasoned investor, entrepreneur and successful proprietary searcher. Find him on Twitter at @J_M_Vogt.
A Guide to Proprietary Search
Believe it or not, there are a lot of business owners who are ready to sell, but for one reason or another haven’t (yet!) contacted a broker or otherwise listed or marketed their business for sale.
This should come as little surprise to you if you’ve spent any time around the typical business owner—they are extremely busy, often stubborn and inexperienced with the business buying or selling process.
They can also be skeptical of brokers and believe they can save money by selling the business themselves (and this might, sometimes, be true).
The good news is, as a result of these factors, if you hustle, you can get in front of them and potentially make a deal happen!
According to veteran business buyer Justin Vogt: you need to “approach the goal of buying a business as you would building a sales organization.”
So how does one build a sales operation designed to acquire an off-market business?
Below is a general framework taken from the approaches recommended by Matt and Justin.
Remember, however, that there is no one universally accepted approach to searching for an off-market business.
What works for Matt or Justin, might not work for you. And that’s okay!
Do what works for you, your personality, your preferences, and what you believe will be successful based on your specific situation and search thesis.
Step One: Getting Organized
The initial phase of your proprietary search is all about immersion and identification.
Identify All Target Companies
The first order of business is identifying every company that fits your search criteria.
You should include on your list competitors, publicly traded comparable companies, and any other relevant businesses.
In a nutshell, your goal is to immerse yourself in and deepen your understanding of the target company’s industry.
Pro Tip: The Securities Exchange Commission (“SEC”) reporting that public companies are required to complete can be a wealth of information. In particular, the SEC requires public companies to list Risk Factors for both the listed company and its industry. This will tell you a lot about the competitive landscape. Public filings can be found at https://www.sec.gov/edgar/search/ or you can Google “[Company Name] Form 10-K” to find a public company’s most recent Annual Report.
This task requires extensive research within the industry you’re considering. It might also involve collecting relevant SIC or NAICS codes, which are used to classify different industry sectors.
A simple Google search pairing your target industry with “SIC Code” or “NAICS Code” can guide you to these essential numbers.
Once you’ve listed the codes related to your target criteria, you can purchase leads based on those codes with specialized lead generation services like Hand Pick Lead (https://handpickleads.com/).
You can also supplement this initial research by hiring a freelancer from a platform such as Upwork (you can task them with performing location-specific Google searches for the selected industry using key phrases pertinent to your investment criteria).
The combination of these methods will ensure you have a deep list of all possible acquisition targets.
You can also outsource this task to buy-side search consultants. We recommend you always ask them for references!
After identifying the universe of companies, the next step is finding their contact information. Services like Hand Pick Leads typically provide such information.
But for data not included in these lists or for companies discovered via other methods, there are multiple resources at your disposal.
Paid services such as Grata or Data Axle can supply contact details, and Secretary of State websites often publicize the registered agents and ownership details of businesses incorporated within their state.
The Initial Tech Stack
Keep in mind, starting off, you don’t need an expensive setup. A simple website, an email address and Google Sheets can power your initial search efforts.
As you’re getting your search organized, start formulating your outreach strategies and identifying what would make for a successful first call with a business owner.
Once you feel comfortable with your process, consider investing in a Customer Relationship Management (CRM) system and an email campaign manager (such as Constant Contact), and think about hiring interns or virtual assistants to support you.
An excellent Standard Operating Procedure (SOP) can help you delegate a considerable portion of the sourcing process, making it scalable.
Pro Tip: Develop an SOP for evaluating the quality of potential targets within each industry based solely on their website. Establish criteria for what makes a business bad, good, or great. This will empower you to outsource the task of browsing through each website to determine whether a particular company is worth pursuing or not.
The key when organizing your search is to be thorough, systematic, and adaptable.
Starting with a clear and concise understanding of the marketplace you wish to invest in will set a solid foundation for your journey to acquiring a business.
Step Two: Taking Action
At the beginning of your search, your goal is to reach as many business owners as possible, creating a high volume of potential leads.
The two primary methods of broad outreach are:
Start by creating an account on an email service like Constant Contact, which can manage your email blasts, capture metrics, and prevent your messages from being flagged as spam.
With your list of potential leads at the ready, initiate an email campaign tailored to different industries and their specific response habits.
Remember, response rates can vary dramatically depending on the industry.
For example, physicians may prefer reading emails over the weekend, while trade professionals might catch up on their inboxes on Tuesday mornings.
Run multiple beta tests to determine optimal send times, subject lines, and headings.
In situations where emails bounce or remain unopened, direct mail can serve as an effective backup.
Compile a list of non-responders and send them a one-page letter—preferably hand-signed—detailing your intent.
For an added professional touch, include an overview presentation in the package, and opt for a FedEx envelope with delivery receipt.
This physical outreach can be beneficial not only for potential sellers but also brokers and others in the industry.
As your search progresses, and assuming your broad outreach has failed to yield your desired results, you’ll want to take a more targeted search approach, including:
Telephone outreach can be used for two kinds of leads: those who are more reachable by phone than email, and those who have been unresponsive to previous outreach efforts.
During these calls, aim for a brief yet impactful introduction and try to secure a follow-up call.
Pro Tip: Once you’ve secured a follow-up call, it’s smart to end the conversation to avoid potential missteps!
If digital and telephonic approaches don’t work, consider making in-person visits.
This approach will require you to step out of your comfort zone (which, frankly, might not be a good idea for everyone!), but it can be surprisingly effective, as most buyers are hesitant to take this approach.
Remember, during your search, comfort in discomfort can be a competitive advantage.
Testing and Iterating: Finding What Works
As your search progresses, you’ll want to continue to analyze your search methods.
Run A/B tests on your emails, add in cold calls to high-value prospects, and experiment in new industries.
Personalizing your outreach can set you apart in a crowded business buying landscape. For example, adding a truly personalized P.S. in your emails can dramatically improve response rates.
Network Building: Leveraging Conferences
Building meaningful relationships with potential sellers is crucial.
Attending industry conferences provides an excellent opportunity for this.
Take this chance to meet people, ask for introductions, and spread the word about your intent to buy a business. Don’t miss the opportunity to network with recently retired attendees; they are often eager to help newcomers enter their industry.
Maintaining a Full Funnel: Keeping Options Open
By building a big funnel of proprietary deals, you ensure you have options.
This makes it easier to reject unfavorable deals without feeling like you’re compromising your search.
Automation, especially for follow-up emails, can ensure a consistent stream of outreach over several months. You might be surprised how often positive responses come from the 10th through 20th email.
Take action in your proprietary search with these strategies in mind, and remember: success in this process comes from perseverance, a willingness to adapt, and the courage to step out of your comfort.
The following are some miscellaneous yet crucial considerations that can make a considerable difference in the outcome of your proprietary search.
Preparation is Key
Always be ready to advance the ball with the seller when any of the methods above succeed.
If you’re unprepared to provide the seller with an NDA, document request list or LOI, you will have introduced unnecessary latency or time into their deal.
Time kills deals!
Spend the time now to prep all templates, lists, form documents, etc. so that you’re prepared to immediately send that NDA or request list across when the seller is ready.
Create Serendipitous Opportunities
As humans, we’re more receptive to conversations and meetings when we feel like there is some serendipity involved.
For example, a seller might be more willing to accept a meeting with you when they believe you just happen to be in town “for a few days.”
You might email a seller letting them know you’re coming to town and ask if they would meet with you while you’re in the area.
It doesn’t matter if you’re going to be there or not. Believe it or not, this will improve your hit rate.
If they accept, buy the flight, and take the meeting. If they say no, then nothing is lost.
Perfect vs. Shipped
Avoid striving for absolute perfection when it comes to outreach.
Instead, prioritize sending out emails or making those calls.
A well-crafted yet simple message sent to 200 prospects is likely to yield better results than a perfect message that is never sent.
Persistence is Crucial
Remember that proprietary searching is a numbers game. While refining your approach is important, the sheer volume of outreach can often be the determinant of success.
Therefore, consistently send emails, make calls, and touch base with potential sellers to increase your chances of landing a deal.
Ensure there’s minimal to no downtime in your outreach efforts.
If you’re ever in a dilemma about what to do next, go back to your outreach activities - making phone calls or sending emails.
Consistent activity not only keeps you in the loop but also increases the likelihood of encountering a promising lead.
Conducting a successful proprietary search might mean the opportunity to acquire a better business at a lower valuation.
It’s not, however, for the faint of heart and will take skill, time, perseverance and a little bit of luck.
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.