Does anyone else feel like many brokers are condescending?
August 14, 2024
by a searcher from Columbia University - Columbia Business School in Las Vegas, NV, USA
SF Community,
I have to ask this somewhere and this feels like the best place for it. Does anyone else feel like many brokers are condescending to potential buyers?
I've done dozens of deals institutionally and invested large sums of OPM, but then random brokers of $500K pool deal acts like "Let me help you here since you don't know what you are doing" (actual quote) when in reality they were the ones who were incorrect. It is just shocking to me the lack of decorum. This doesn't apply to all brokers, but the last few I've dealt with have been brutal.
Has anyone else run into this? Its ruined my interest in some deals entirely. More venting than anything else but wanted to know if I'm the only person who feels this way.
from The University of Chicago in Chicago, IL, USA
1) Supply of business for sale has not materially changed over last many decades. Neither has the number of brokers increased materially over that time.
2) The number of buyers has SIGNIFICANTLY increased. This is a result of
2a) the "financial engineering" of ETA enabling low/zero equity acquisition, In the past, brokers sold businesses with 20% equity from ONE buyer in the equity stack, and there were always many buyers to choose from. Today the equity is low and that too with multiple investors making up the equity stack to buy a $5 M business.
2b) SBA reducing required equity to 10% or below. Who would not want to try buying a business for out-of-pocket cash less than buying a $300 k home?
2c) SBA increasing loan size from $2 M to $5 M in###-###-#### This has made it easier to buy larger businesses than before. The buyer for such businesses has more education and experience. Broker community has not materially changed to learn the "English" suitable for such buyers.
2d) With SBA new rules (11/2023) of partial ownership change and allowing one buyer to buy multiple businesses each with $5 M loan cap as long as it is a new industry, will further make matters worse between brokers and searchers. Lenders have started putting minimum time gap between acquisitions.
3) The seller has not changed despite above changes in the eco system. We still get the same questions like... How much money is the buyer putting in? Why should I take a bigger note than buyer equity? I don't; want to sell if the buyer is going to have a lot of debt b/c buyer will not be able to manage ups/downs, etc. And, it is not only sellers, but also seller's attorneys and CPAs who are shocked by searcher engineering. Brokers have to walk a fine line of not taking weak buyers to seller vs. taking some to the seller to educate the seller of new reality.
4) Most searchers are at the top of the game in terms of financial engineering. Their knowledge of acquisition process (not the one taught in B-schools), how to deal with brokers. sellers, CPAs, attorneys, etc. is in low 2 digits. As an example: I get few emails per week from searcher looking for $2+M EBITDA with just first name, a website with no details, and so on. They go into my CRM with a code "do not email". Then there are other searchers with great presentation but during call I find that the outside optics and inside depth do not match. I recognize that everyone, in all professions, has a learning curve, but many, if not most, searchers have a chip on their shoulder b/c they have an MBA.
5) I would also say that there is influx of new brokers driven by increase in buyer inquiry. With no standards, barriers to put on a broker cap are low.
6) In Econ-101, we learn that when demand goes up with limited supply, prices go up. So, with so many buyers (searchers) one would think business price would go up. But here we have the opposite. Why? Searcher's low equity, taught in ETA, increases debt-service. This is addressed by lowering the price. In Finance-101 we learn that value is determined by cash flow and IRR. I have not seen expected IRR discussion here on SF. Why? Because price is determined by debt-service and capital availability rather than IRR. ETA programs are not addressing this effect of low equity on market prices.
So, it is unfortunate that experienced buyers like ^redacted get caught in the mismatch and busy broker shops.
Suffice to say, that % of good/bad searchers is in low single digit.
from University of Pennsylvania in San Francisco, CA, USA
One thing I will say is that on Main Street, searchers sometimes have a reputation for overcomplicating smaller deals. Remember, brokers are always trying to gauge one thing - what is the likelihood this buyer can and will close on this deal?
With that in mind, some advice for searchers if feasible in your circumstances:
1) DON'T describe yourself as a searcher or make yourself look like a PE fund. Instead, be a very well-organized, responsive, professional "buyer".
2) DO have a packet ready describing your background, interest in and timeline for buying a business, and the information brokers usually ask for in a buyer profile.
3) DO provide proof of funds in that packet if you can.
4) DO convey that you'd like to do a normal deal with a normal, but suitably protective structure, not mimic that last $250M deal you worked on at the PE fund.
5) DO convey that you're the type of person who understands the industry and is practical and responsible - the type of person the seller can trust her customers and employees with post-closing.
Also, keep in mind brokers can catch a lot of grief from sellers from bringing what the seller views as unsuitable buyers to the table.
That said, I want as many buyers as possible and there's simply no excuse for being rude. There are 100% some bad brokers out there.