Things I've noticed as a searcher

April 11, 2024

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

I've noticed a few things after being a searcher for months and looking at many companies:

-Seller Brokers are not doing their job. They are not explaining the sales process to the sellers and/or managing expectations. Most sellers have an understandable over-valuation of their business. It is perfectly reasonable for a Seller to believe their business is worth a lot more than it is because they built it. I can't tell you how many sellers found a 3-5x EBITDA valuation to be insultingly low, even though that is the standard. 3x EBITDA means that if the seller kept the business they could make the sale price of the business in 3 years. So it's weird how many sellers, during negotiations, have said to me "hell, if I just kept the business I could make that in 3 years!" Yes that's correct but that's the reality of the situation and valuation of a business...

-Seller Brokers are not explaining the entire process of selling to someone like me who is using an SBA loan. Many sellers think selling their business can be done in a weekend. I've had two sellers argue that due diligence shouldn't take more than a week! I don't blame the seller I blame the broker for not managing that expectation. Meanwhile during due diligence it has taken me over a week just to get the financials/bank statements/tax filings/leases/etc. So yes it takes several weeks to do due diligence and even longer if you need to hire people for QoEs.

-I've also had difficulty getting sellers not to do major changes to the company after LOI has been signed. Including hiring new employees, leases expiring and needing to move the company location during due diligence, etc.

-Bottom line is I've had a lot of experiences with sellers who don't seem to understand the selling process and I think the seller brokers are to blame. Let me know if this is what you've experienced or if I've just had bad luck.

Reply by a searcher
from Colorado State University in Centennial, CO, USA

Your frustrations are common and, in my mind, this barely scratches the surface. I was a commercial real estate investment broker for 15 years before leaving brokerage to invest on my own and then searching for businesses outside real estate. In the beginning of my career it was very frustrating to me that many principals didn't have much respect for brokers. After many years in the business and then moving over to the equity side, it became clear to me why. Whether its real estate or biz, the game is exactly the same and the issues are as well. The barriers to entry are very low. The training is usually slim to none and ultimately the talent pool is pretty shallow. The typical broker spends their time marketing for listings. That's it. They do the minimum to know their client and they do the minimum to know their clients business before putting it out there. They don't have the tough conversations up front, they don't know how the lending world works and what add backs are acceptable to an underwriter. They don't think that is their job. They are simply there to find a buyer for their seller. Once the LOI is signed, they step aside and cross their fingers. Its about getting listings. and its competitive so they are often stuck promising the sun, moon and stars to get said listing. Then its time to throw shit against the wall and hope something sticks. This may shock you but many of them can't even read financials. I was talking to a couple of newer Transworld brokers this last week who each own different territories. They are guys in their 50's who have been at it a couple of years. They have spent their lives in sales. They have never run a business. They don't have any idea what they are doing and they aren't getting the training they need so this will go on for years as they stumble their way through the scene, slowly learning deal by deal. Its really unfortunate and its really common. Your pain is REAL. There are some good advisors out there and once you find one, they are very valuable.

Reply by an intermediary
from Pepperdine University in Portland, OR, USA

Patrick, I've been focused on selling small to lower-mid-market businesses for over 20 years after about a decade of relevant experience before starting my firm, and, unfortunately, I've found that there are many brokers who probably shouldn't be doing this type of work because they lack sufficient knowledge and experience.

However, 3x EBITDA is very low pricing for quality businesses with $1-5 million in EBITDA (the range in which many searchers focus on)..

For example, if you look at DealStats sold comparables and do a sort for manufacturing companies with $1 - 5 million of EBITDA you'll find that for the 772 datapoints the median multiple paid was 7.4x.

Change the industry to Services with the same EBITDA range and there are 825 datapoints with the median EBITDA multiple being 9.1x.

In fact, if you select "all industries" and $1-5 million of EBITDA the median multiple for the 2,735 data points is 7.7x. If you look at businesses with less than $500k of EBITDA then the median multiple will be lower, but that's not really the type of businesses most searchers are targeting.

I suspect that there's some bias in the data as a result of some lower quality businesses or quality businesses that sold for lower prices and don't end up getting reported which is why I tend to also look at a DCF approach, which also allows modeling the company-specific performance, growth opportunities, and risk factors, but when I encounter buyers who think they are going to get a quality business for a price of less than 4x EBITDA all I can think is "good luck with that" - not to say that it never happens but you'll have more success if you are open to pricing in the 4-6x range. It's like Warren Buffet says, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

I can't recall ever selling a business for only 3x EBITDA, and very few for less than 4.25x.

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