Generating Deal Flow: Brokers vs. Direct Outreach

February 21, 2019

by a searcher from University of Pennsylvania - The Wharton School in New York, NY, USA

I understand the trade-off here in theory: brokers add an understanding of pricing / the transaction process and an increased likelihood of a deal closing, while direct outreach offers the prospect of lighter competition.

In practice, which of these approaches produces better results? How did you pick which one to pursue, or are you using both?

Thanks.

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Reply by an member
from Georgia Institute of Technology in San Francisco, CA, USA

Hey Ross. I can speak a bit to the broker channel. In our case, we used primarily brokers. In doing so, we got a lot of what you would imagine; lots of noise and overpriced deals that institutional firms were dipping their toes in. To manage that, we used a strict filter to weed out deals it wouldn't be worth our time to pursue. For the ones that did get through, we immediately tried to establish an advantage on the deal. Typically, this meant trying to establish a personal relationship with the owner or identifying a challenge in the deal that we could overcome. Per the owner relationship, this was important for family owned businesses who are very particular about who they pass the business to. We could establish some good will by meeting with the family and understanding how they see the business continuing and providing assurances. Per unique challenges to the deal, this typically manifested itself in managing "difficult" previous business owners. In our particular case, the previous business owner was very particular about patents and sales rights to secondary product lines. This behavior scared away potential institutional buyers who didn't want to deal with it. For us, it was another opportunity to build a relationship and see if the situation was amenable. We found out that it was, and we went through with the purchase! In all, I'd say that with the broker channel, have your filters on strong and look out for potential differentiating factors that may move the price on an overpriced deal or give you a unique advantage.

Reply by an investor
from University of Canberra in Perth WA 6000, Australia

Hi Ross. I’d ascribe to an “and” strategy vs. an “or” one. It’s all about channel management And brokers are just one channel. Have you developed channel partners? The trick is (and I’m assuming the broker community is more sophisticated than the one in Australia) to work with a few brokers who understand the Search model and will get the philosophy of backing the person first and finding the deal later. If I use an analogy from real estate - it took my wife and I 3 years to find the location of where we live now. We had a real estate agent who understood our needs, knew we were in no rush to clamour for a deal, and so he steadily kept his eye out for us. We were in touch regularly (him to ensure our parameters were still understood etc, and also to assure us he hadn’t forgotten us). Other agents in his area only ever contacted us with “a deal” - none were ever appropriate.
Now after we purchased the house guess who we refer friends and contacts to for their house hunting? The broker who understands that its a relationship and not a transaction will be the best source (in that channel). So far in my part of the world I’ve only had one broker who gets our model and actually calls us to chat regularly. We are having coffee next week to see how both our businesses could actually collaborate in using interns.

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