Brokers vs Proprietary

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November 29, 2020

by an investor from The University of Chicago - Booth School of Business in Louisville, KY, USA

What is the view on sourcing deals through brokers vs proprietary/direct? Seems to be widely divergent opinions based on what I have read elsewhere.

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Reply by a searcher
from University of Pennsylvania in Chicago, IL, USA
Both sources should be sought out - I have successfully acquired businesses using both channels and what I will say (my opinion) is that the market for small businesses is so inefficient that “alpha” can be unlocked in so many diverse ways that the idea that proprietary sourcing has higher investment returns per se seems like an oversimplification. There are thousands of listed opportunities that don’t sell and others that sit for years. To say that this is the work of a rational, efficient market (because the assets are always bad) is a neoclassical economics bedtime story. Here is an example from my personal experience. A commercial real estate asset (grocery store) had sat on the market for over a year.. 3 offers had all fallen through. I had an agreement to acquire at it 6.1mn in early###-###-#### I was unable to raise the equity needed and had to back out. It sat another year and closed recently for $8mn! Listed or unlisted... doesn’t matter. There are incredible opportunities almost everywhere you look. Far more sellers than buyers of small businesses. Good luck!
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Reply by an intermediary
from Indiana University at Bloomington in Carmel, IN, USA
While it may be easier and faster to buy a listed business, per the comments above, for over 15 years I have specialized in finding and closing lower middle market non-listed deals for my clients and have found that the very best businesses for sale are on the "hidden" market, those not listed with a broker. Over 80% of the these businesses that sell are never listed. Why? They are scared to death of confidentiality issues and don't want to pay a 8-10% fee. And the ones that have been listed for over a year, usually have more than a price issue. Most business owners will never talk to the many, many letters/emails/phone calls from individuals (such as SearchFunders) for the very same reasons, as most are tire kickers and end up wasting their time. Most if not all of my clients have either been involved in business transactions or have "searched" for 6-8 months and realize the best way to buy a business is to be the only buyer in the deal with a truly motivated and realistic business owner. Reach out if you want to know more and talk to the many satisfied clients that I have.
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