Buying a business that doesn't have a broker
February 02, 2023
by a searcher from INSEAD in New York, NY, USA
Hi all,
Young searcher here. I'm curious to hear people's experiences buying a business that you found off market, or one that does not have broker representation. Will they eventually need to find one to get the deal completed properly? And what things should I look out for in getting all my ducks in order? Ofc I will get QoE and lawyers to look at it, but what else should I be aware of. It was found through a personal connection so there is a relationship with the seller.
Thanks for all the feedback and thoughts in advance!
from University of Virginia in Phoenix, AZ, USA
(A) PPP loan forgiveness and covid employee retention credits included as ordinary income in an attempt to boost EBITDA or SDE. (as a buyer we can accept that 2020 was a down year and make appropriate adjustments, but expecting a multiple of 2021 and 2022 earnings that include one-time credits looks dishonest at worst and incompetent at best, scaring potential buyers from wanting to pursue the deal).
(B) Refusal to disclose financials prior to 2020, saying that only 3 years are necessary to finance the deal or that the seller has only been preparing to sell since 2020 so the prior books are not accurate. (Sellers can make the case that financials prior to 2020 are not representative of the current business because the business changed during covid, but failure to provide them leads the buyer to assume that pre-covid numbers are low and the covid numbers may have been temporarily inflated so are not sustainable.)
(C) Q1 2023 numbers that are annualized to show EBITDA or SDE, and stating that Q2 and Q3 2023 are not yet available. (This is especially hard to believe when it is clear the seller is using quickbooks or some software that could produce the financials in a few minutes. It gives the buyer the impression that the numbers for Q2 and Q3 are down but the seller has a fixed number that the seller will not move from.)
(D) Financials that inconsistently use a mixture of cash accounting and accrual accounting, with asterisks denoting which items are each. (Buyers understand that cash accounting can provide some big swings on an annual basis and that sellers want to tell a story of levelized earnings over a few years, but it would be better to provide a set of financials using cash accounting and a set using accrual accounting, in addition to the set used to create the story, so that the buyer can verify that nothing is double counted. It would be best to provide monthly statements so buyers can look at rolling averages.)
It can be hard to know if a broker represents a seller who has a "make me retire" valuation rather than a realistic valuation or if the seller is adamant that the brokers present the information as it was presented, but in all the examples above the brokers tried to tell me that the above were common practices, making me think the brokers did not fully understand key M&A metrics. I understand the brokers don't want to throw their seller clients under the bus, but a simple "that's how the seller sees it" would build the broker's credibility a lot more than stating that the above are common practices. Again, I could have just had bad luck with a series of brokers so will still look at some brokered deals, but the fact I have seen this in the small sample of deals I have looked at makes me pause.
from Tufts University in Jersey City, NJ, USA
There are also some really crummy brokers out there who either don't want to put the work in to add value for their client, are unreasonable on terms, or simply inject a bad/combative personality into the process. Good brokers are diplomats who understand the give-and-take of negotiations and keep the "big picture" in mind if things ever get hung up, just as good buyers and sellers also bring a constructive and compromise-minded approach to the table.
tl;dr A good broker adds value to the process even from the buyer side, but I'd much rather deal with no broker than a bad broker. An unsophisticated seller without guidance can be a headache in terms of actually getting to close, but that's no different with a bad broker. Any broker creates another mouth to feed and ultimately drives up valuation, so I wouldn't go out of your way to push a seller to get broker representation unless you're confident the broker they bring in will actually improve the process. Definitely push the seller to get a good M&A lawyer. No family lawyers or "my friend who is an attorney" BS. That's a one-way ticket to headaches.