SMB Newcomers Part 4 - Brokered vs Proprietary Search

For Part 4 of my hashtag#intro to hashtag#smb hashtag#acquisitions we're going to talk about deal flow. You've decided your search method and you're ready to get started. Now, it's time to figure out how to find the right deals for your investment thesis. There are two primary methods for doing this: brokered search and proprietary search

Searching with a focus on brokered deals involves identifying businesses that are currently for sale and represented by sell-side advisors. In this case, the owner is actively looking to sell, and deals can be found through online platforms and by building relationships with business brokers in your areas of interest.

Some advantages to focusing on brokered deals:

• They have semi-reasonable pricing expectations (if working with a good broker)
• They're more likely to have key pieces of information already prepared
• They more emotionally ready to make a deal
• Deals close more often

Some disadvantages to focusing on brokered deals:

• Competition for higher-quality deals
• High variance in broker and deal quality
• Brokers can gatekeep, making it hard for some searchers to gain access to the best deals
• Choppy and imprecise deal discovery (Private Market Labs is working on this point)

Proprietary search involves identifying a larger list of companies that fit a buyer’s investment thesis and then inquiring about whether the owner wants to sell. If a lead is potentially interested in selling, the searcher is responsible for guiding the business owner through the acquisition.

Some advantages to proprietary search:

• More targeted - buyers identify the exact company they want to buy
• Less competition since business isn't listed online (though this is changing)
• Successful buyers build strong relationships with their sellers

Disadvantages to proprietary search:

• Cost - this technique can take longer and require higher-cost sales processes
• Deals less likely to close since the seller is less well-prepared
• Much less available data prior to outreach but larger lists to sort through
• Potential for unrealistic seller expectations

I've heard from many people (and conducted a poll here on @X) that proprietary search is becoming more difficult. There are a lot more searchers in the market and many are cold calling business owners using similar lists. Buyers are less likely to get a response from business owners when many companies are getting more than 10 cold inquiries per week. As a result, the advantages of brokered search are making that strategy more attractive.