Buyer Competition with Brokers Representing 1-2 Million EBITDA Businesses
April 26, 2021
by a searcher from Duke University in Tulsa, OK, USA
I am noticing some recent behavior from business brokers representing 1-2 million EBITDA opportunities I found odd and I wanted to share for feedback. As soon as a broker lists an opportunity on various listing sites with strong financials I quickly contact them for more information. They quickly inform me that within days they already have multiple full price offers which surprises me that someone would submit a LOI so quickly with little more than the broker business summary to form their evaluation. I can only think of three reasons why this would happen.
Option 1, is the broker doesn't believe I am a serious buyer and tells me this so that I stop contacting them for information.
Option 2, other potential buyers are submitting full price LOI's even if the valuation multiple is higher than typical and with little to no information.
Option 3, the broker doesn't have any offers and is telling me this so that I submit a full price offer.
I am inclined to believe option 2 is true because the listings disappear a few weeks later.
In option 2, is it possible people are submitting LOI's just to lock up an exclusive negotiation period and then renegotiating the EEV or EBITDA multiple in due diligence? For instance telling the seller yes we agreed on a multiple of 5 times but upon further review we believe a multiple of 4 is more appropriate for your business. Would this be a normal situation or expectation of the buying process?
In my personal life when I was selling my house I had someone try option 2 on me and felt it was very unethical and poor taste.
I am looking forward to hearing other searcher's experiences and opinions so I can decide best how to proceed the next time I see what looks like a great broker opportunity.
from University of Southern California in North Palm Beach, FL, USA
Sellers have the most influence and control over buyer behavior before the buyer submits a letter of intent or offer to purchase. Buyers excited about their first impression of the seller and the company can be susceptible to following the seller’s or the broker’s lead when it comes to the content and timing of the LOI or purchase offer. And that can be a big mistake for the buyer.
Sellers want the buyer to (at least tentatively) commit to a time table for deal completion, the purchase price and terms, and numerous other things that may not seem important to the buyer. In reality, it is not possible for buyers to make informed decisions about the deal until they complete certain parts of due diligence, such as verifying and understanding the firm’s methods of accounting and financial reporting.
Unless you, the potential buyer, are certain that legitimate, capable and motivated buyer competition exists, it is usually not in your self-interest to be too definitive early in your dealmaking. You simply do not know enough about the business. And if there is serious buyer competition, you should ask yourself why you should not move on to another deal where you can be first on scene, which puts you in control so long as you behave fairly and expeditiously process the pending transaction.
As for the LOI, your dealmaking team can make it like glue so the seller wants to give you the first shot at a done deal. You can deploy a LOI so it works like peeling an onion; make limited commitments subject to seeing limited information about the business, and if you, the buyer, likes what the business discloses, repeat the process, drilling ever more down into the business and making commitments to the seller accordingly. This way the buyer does not fly blindly into a business acquisition, which is how most buyers proceed, and then suffer disappointment when the deal falls through or, worse, when they regret their acquisition.
Useful?
from Villanova University in Greenwood Village, CO, USA
If you are concerned about the broker's credibility ask some probing questions about non-financial terms that were attractive or unpalatable to the seller. Transition period, training period, seller note, etc. Also ask them what types of buyers -have submitted. National or regional strategic / local competitor / independent sponsor / career switcher / searchfunder / employee, etc. and also how those bids are financed. The idea is they should be willing to a conversation about specific, non-financial terms. You'll be able to sniff out the honesty depending on the specificity vs. vagueness of their answers.
Also, ask them if the seller paid a retainer. If so, I find that is a good indicator both the seller and the broker are acting in good faith.