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 lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I have run into some searchers who make quite a few offers and try to make something stick. I think the biggest issue in that approach is the amount of time it takes to due diligence a business versus a home. There is a tremendous amount of data and resources that allow someone to value out a single family investment property rather quickly. But there are a lot more nuances to each particular business and it is much harder to find resources to support a valuation. I think you run the risk that you are going to have to spend a tremendous amount of time doing due diligence on a bunch of companies up front, or risk making offers without much due diligence in which case it is highly likely your offers might change dramatically once you complete due diligence, in which case many of those LOI's you have made might blow up when the seller does not want to adapt to the change. Just food for thought from my end. Happy to discuss at redacted Good luck.

Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

IMHO, not a strategy that you would want to follow on the business side. As mentioned above, preserving seller relationship and due diligence time and effort are important considerations. Further, unlike real estate, the contracts here are not as cookie cutter. Also, unlike real estate where you can ostensibly be under contract, close, and run multiple purchases, that isn't likely to be the case with business purchases (there was a good thread a couple months ago on the ethics of being under multiple LOIs at the same time when you weren't planning on closing all of them), and it's a small deal community and this approach will like result in not being a favored buyer.

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