Should I make offers on every business that interests me?

June 19, 2023

by a searcher from United States Military Academy in Austin, TX, USA

Here's why I ask.

I am new to searching for a business to buy but I have been investing in SF homes since 2010 as a real estate investor. For a period of many years I worked full time at my corporate job and then in the afternoons I drove around with my realtor and looked at houses to buy. Around 2015 it became extremely difficult to find investment properties that made sense financially in my area. So rather than making a few offers on the rare houses that I felt I could rent for a profit (after mortgage, taxes, insurance, maintenance, etc) I decided on a different strategy. I decided to make an offer on every single property I looked at. I used a spreadsheet to determine my own personal valuation of the property based on rental comps, insurance estimates, and my own experience of the costs of renting houses in the area to come up with my own valuations. Property valuations are, after all, a function of rental values. In the same way a stock price is a function of the dividend it earns. Then I made offers on every house I looked at. Some of those offers were probably insultingly low to the seller but financially they were fair prices based on the economics of the market. I found that it would take between 16 and 20 offers before one of my offers would be accepted but it cost me nothing to make an offer if the seller didn't accept.

I've been listening to many Acquiring Minds podcasts and other acquisition podcasts and talking with other searchers and I've noticed that nobody seems to have my real estate strategy. If they find a business that is profitable but at a price that is too high (maybe it's 8x EBITDA rather than 4x) they simply pass on the deal rather than offering a price that would make more sense economically.

There are obviously some business which will never make sense financially but if a business is profitable there is most likely a valuation at which it make sense to buy that business. It's probably the seller's broker who should be telling the seller what their business is worth but it seems like it wouldn't hurt to make an offer at a valuation that you believe makes sense.

I'd love to hear your thoughts.

Reply by a searcher
from Queen's University in Toronto, ON, Canada

Not speaking from experience here, but I believe that putting an offer forward could net you a decent deal if the seller agrees to oblige you. That being said, since search is a binary outcome game, and a traditional search is definitely time-constrained, I think you might be upping your risk of dealing with a difficult seller. I think a lot has been written about how poor seller character could negatively impact the post-acquisition phase of the search journey. A house generally has little to no post-acquisition dependencies between you and the previous owner.

Reply by a searcher
from University of Texas at Austin in Austin, TX, USA

Differences between SMB and RE is that, in SMB, deal flow is a lot thinner. Also SMB brokers have ways to solicit bids without letting a business hit the market, something RE brokers don't do that much.
So if you're trying to get on the pre-market side of brokers, you don't want to get on their bad side by putting in what they might see as low ball offers. Or worse, a bunch of them.
This can be mitigated by calling them after you send an LOI and offering to talk them through your thinking. They might pass, but you'll come off looking like a person with a strategy and not an LOI machine.

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