Proprietary Outreach and discussions with seller

August 09, 2022

by a searcher from Central Michigan University - College of Business Administration in Grand Rapids, MI, USA

I think we all know some of the upside and downsides of working with sellers who we've garnered via proprietary outreach that don't have a broker or lawyer involved. However - I wondered if anyone had experience approaching the seller with a suggested broker to engage with to discuss valuation expectation, deal flow expectations, and cont.

Have you found success in the above situation? Is it determinant on seller experience?

Please assume I'm looking to pay a fair valuation and need the seller and I to have good rapport as I'll need their skillset/involvement in the beginning months.

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Reply by a searcher
from University of Pennsylvania in Indianapolis, IN, USA

Any broker/intermediary worth their salt is going to get in the seller's ear about running a full process. You have a proprietary deal teed up, so why would you introduced the risk of losing it to an auction?

Both of the above ideas re: third party valuation and M&A attorney are great and much better ideas than introducing a broker.

Also, you could get creative and address any reasonable valuation gap with structure. If it's a reasonable expectation, is it worth losing the deal over and if the deal hinges on not paying a cent above your model is it a good deal?

Thinking way outside the box, you could put in the PA that the seller has 120 days after closing to get a third party valuation at their expense and if the price paid is outside of some range greater than your offer then you can adjust the offer by that amount via earnout/seller note or whatever. You could also put in the PA that the deal goes the other way and if the valuation shows the business is worth less than what's been paid the earnout/seller note will also be adjusted accordingly.

At the end of the day, if you approach the conversation directly with tact and compassion understanding what you've shown here to understand, most sellers will leave the conversation with greater appreciation and respect for you (some will be upset no matter what). Good luck!

Reply by a searcher
from Emory University in Marietta, GA, USA

Blake, I have found this part to be the trickiest of all. If there is no broker, then the complicated conversation has to be had by you. This is where the relationship is crucial. The seller has had a feeling or idea of what they would get when they sell the business. And you have been calculating a "Good Deal" for months to years. So how do you get on the same page? Put yourself in the seller's shoes. They have built something from nothing. That is an infinite growth rate (of undefined), and you are trying to tell them that it is only worth 3-4.5X of EBITDA (Some sellers don't know what EBITDA means.) If you recommend bringing in a broker, it better be someone that the seller trusts, or else the seller may just believe that you brought in an expert to lower their expected price. The most neutral thing you can do is have a formal valuation done by a third party. And I would recommend that you both split that cost. And if you proceed with the sale, you will reimburse the seller for the cost. You have to get them comfortable with you and the Deal, or else bail, and don't waste your time. Then, when the next buyer comes around with the same number, the seller will see that it is all true.

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