Strategic Buyers: Finding the Targets
The Story Unfolds…
Our story involves a buyer north of London who was in search of a business that could be “bolted on” to its existing business. The path the buyer took was unnecessarily circuitous, time-consuming and expensive. (Though they feel they may have saved some money, that might be possible but only if they put no value on their time.)
This buyer, like many buyers, did not understand how important the right advisors are nor how to use them.
The first mistake the buyer made was to start calling around to various business brokerages to see what was listed for sale in the industry the buyer was interested in. This move actually was two mistakes.
First, by not committing to one broker, the buyer did nothing to engender any loyalty with someone that would be a crucial part of the buyer’s plans.
Second, the likelihood that the ideal business was even listed for sale in the first place is slim to none. As such, somebody – a professional business broker – should have been engaged to find that ideal business; because the owner of that ideal business probably hadn’t even thought about selling!
The buyer in this case said he wanted to “save” the broker’s success fee thinking that the seller would be able to sell at a lower price if he didn’t have to pay a broker. But this buyer obviously did not value his time as he later admitted to approaching at least 70 businesses! And he was still unable to find one that he liked. Imagine how much time and work that took! YIKES!
But, unfortunately for our hero, he was not a quick learner. He subsequently partnered with an associate and they redoubled their efforts – only to come to the eventual realization after spending even more time futilely searching, that they were looking for a very specific business. In spite of all this wasted effort over multiple years, the buyer was firm that he wanted to buy a business directly from the owner and not through a broker.
He was quoted as saying, “You need to find a business for sale in the seller’s head, which is not necessarily the same as that of the broker’s. With brokers, there is already a price tag attached to it and they’re normally more interested in making the quickest deal. Whereas with individual sellers, there are no mark-up fees or percentages taken off, so you can deal with the individuals themselves at the heart of the business rather than with a third party.”
This is pure lunacy! And it illustrates the buyer’s unadulterated ignorance of how this works and what a broker’s various roles are.
Mistakes? Let Me List a Few!
First, “…there is already a price tag attached…” to the business only if the business owner engaged the broker to market the business as available. If the owner didn’t, nobody involved has any idea what the “price” should be.
Second, a professional business broker is almost never “…more interested in the quickest deal.” A pro is interested in getting the best deal for his or her client. (More on this in a moment.)
Third, the comment that “…you can deal with the individuals themselves at the heart of the business…” is a classic case of the blind leading the blind. Neither buyer nor seller is likely to have had any experience in the sale of a business, let alone the valuation of one.
There is an expression that I use all the time when training brokers and speaking to groups of business owners. And though it specifically describes the legal profession, it is just as relevant – perhaps even more so – to those of us brokering the sale of businesses: “A lawyer who represents himself has a fool for a client.”
(On a number of occasions, I’ve thought about suggesting to every broker we train that they replace “lawyer” with “business owner” and put the revised expression on the back of their business card!)
Is That Business For Sale?
Like everything else in life, every business is for sale! (Here’s proof.) If that buyer had hired a broker to work for him – a “buyer’s broker” – he would have likely saved hundreds, if not thousands of hours and the tens of thousands of British pounds (or dollars) in lost time, productivity, travel, number-crunching, crummy road food and tire wear (or “tyres” for my readers in the UK and most of its ex-colonies).
The Standard Relationship
But there’s another approach that a buyer might consider: Hiring a broker to find what the buyer wants.
The Better Relationship
When a business is sold, the owners would naturally want a broker in their corner; someone that is working to get the highest price and the best terms – a person or firm that knows the ropes; one that does this for a living. In short, someone to get them the best deal.
One would think that someone on the other side of the deal – a buyer – would want this same arrangement; someone that is working for them, knows what their doing, is familiar with the dance steps that the process entails; someone they can count on to negotiate in their best interest, to get the best price and the best term. In short, someone in their corner, working to get them the best deal.
Many buyers do not think this way and, as a result, waste a lot of time and a lot of money. It doesn’t have to be this way.
Who Ya Gonna Call?
Hiring a broker to find, vet and pursue acquisition targets on a buyer’s behalf has numerous advantages.
- The broker has a fiduciary responsibility to the buyer, not to the seller.
- The broker will look for all companies that meet the criteria of the buyer, not just companies listed for sale.
- The broker will do an initial vetting of the companies that make the list and narrow that list down to the best three or four.
- The broker can perform a valuation of the individual target companies with the buyer’s goals, not the seller’s, in mind.
- The broker will be able to keep the identity of the buyer confidential, usually until the buyer is ready to submit a letter of intent.
- Because the broker will be paid for its work as the search proceeds, the success fee is much lower and less dependent on the purchase price.
- A seller, when learning that the broker works for the buyer and that no fee will come out of the seller’s proceeds at sale, is usually FAR more willing to discuss an exit.
- The broker is incentivized to negotiate for the lowest possible purchase price, not the highest.
- The broker has sources of funding that he or she has worked with that will likely make the funding easier to secure and close.
The Target is Identified. What’s Next?
If the acquiring company engages a broker to find the best targets, the broker should be able to produce an initial list in 30-45 days. This report will include the geographic location of the targets, their reported revenue, number of employees, products or services offered, length of time the targets have been in business and possibly some company history. After consulting with the buyer, this list should be whittled down to a “top three”. The broker now approaches the owners of the top three and gets confidentiality and non-disclosure agreements signed – and the due diligence dance begins.
The Bottom Line
If you are a strategic buyer, you would be wise to engage a professional business broker or M&A specialist. Such a decision will save you tons of time and money.
If you’re a broker who has been approached by a strategic buyer but do not have any listed opportunities that fit the buyer’s need, suggest a “buyer’s broker” relationship using all the benefits listed above. If you’re interested in learning more about this, our upcoming course, The “How To” of Becoming a Business Broker describes how we do it.
Have you tried to buy a business but were unsuccessful? If you’re a broker, have you been approached by a strategic buyer whose needs you couldn’t satisfy? Let me know in the comments section, below. Tell me what happened and I may address it in a special post.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
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