When you are looking for a business to buy, the easiest deal flow comes from reaching out to brokers – it’s a one-to-many strategy. This gets a lot of deal flow quickly from sellers who are ready to transact and typically have a pretty clear number in mind. So it’s a great way to buy a business quickly.
One of the downsides of working with listings that come from brokers is that there tends to be a lot more buyer competition, because it’s up for and potentially getting traffic. And if that broker is doing their job right, there’s going to be multiple buyers.
Here are two things you need to know as a buyer to stand out as a sophisticated and able buyer.
(2) Speed to closing
Let me tell you a story of the absolute worst buyer that I’ve worked with.
I’m going to put on my broker hat for a minute. Talking with a seller recently who asked me how many deals I’ve done in my broker role. I came up with 60 and this is the worst buyer that I’ve ever experienced.
You might think that it’s the buyer that put our listing under offer and then went on a cruise but didn’t buy the internet package and didn’t even tell us they were leaving so they just disappeared.
That’s pretty bad.
But that’s not it.
In fact, it’s quite the opposite.
It’s someone who came at us with a very high level of integrity and urgency to get this deal done. Then he dragged the seller through the mud. Dragged me through the mud. Dragged the lender through the mud.
He was very demanding – multiple email chains going on all at the same time. Simultaneous competing mail chains going on through diligence and all the rest of it. Although he was hyper, he seemed to be working with a sense of urgency but then halfway through he started becoming emotionally volatile.
While I was able to manage it, any time he would lose the reasoning of what he was trying to do, I was able to help talk them through it. I’m never here to sell somebody a business that they don’t want or need, but rather raised the concern that he seemed to be losing the confidence of wanting to close on this specific big deal.
Although, he put in an LOI and fully intended to buy a company, halfway into the process some things came into focus. Keep in mind it was nothing new. He freaked himself out and overthought a lot of little things that tripped them up. I was able to talk him through a lot of these things ultimately delaying the closing by a week.
About four days before closing, he called and said that he told his employer when he signed the original LOI that he was under LOI to buy a business. I’m certainly not going to tell you to not alert your employer, but in my experience, that was a bit odd. Most people don’t say, “Hey, employer, I’m going to go buy a company” because that is a conflict of interest with the employer. They will be thinking that you’re going to leave or that you’ve got other interests and would be losing their control as an employer.
Four days to go, the buyer calls and this is the conversation:
“Walker, my employer just came in and said there’s a conflict of interest. I can’t close on the deal.”
“Okay, what are you going to do?”
“I’m going to stick with my employer.”
“But you’re buying a business. It generates millions in revenue with seven figures in earnings. Why?”
He just couldn’t do it. This was an external variable – out of everyone’s control. The issue is he waited up until the bitter end to shut it down.
When you put in a letter of intent (LOI) to buy a company, you’re basically asking someone to be engaged and to get married. So, for you to sort of take that seller, make them sign an exclusivity period with you, run them through the mud. And then ultimately not have confidence in what you’re doing. It’s a huge waste of everybody’s time.
I can tell you that this was not the first time this buyer had done it.
I’d figured that out. And now I know multiple lenders that will not work with this individual. I know over a dozen brokers that refuse to work with this individual because he is a massive timewaster and someone who will tie up sellers for 60 to 90 days, which is not acceptable.
It comes down to having confidence in speed to closing.
The thing that made this particular buyer the worst ever was that he was high maintenance, which is fine in and of itself, assuming you’re going to close – he was not.
He came in with confidence and speed because he had already worked with a deal. He sold me on the fact that the other deal didn’t close because issues with the seller came up which is now questionable.
Since he was working through the previous deal, he was partially through the process with a lender so that gave him an edge in terms of speed to closing. He was able to get a loan faster than any other buyer.
Now, there were two other offers on the table.
Let’s say the first two offers were for $4.5 million.
This guy came in and said “I want this business. This is what I want to do with my life. My offer is 4.7, but only if he signs today because I cannot live with this going into the weekend. I got to have it.”
So… this gave us speed to closing.
He was passionate.
He worked with a sense of urgency: he made very clear that this is what he wanted and he was willing to pay for it.
To make matters more interesting once he got emotionally volatile, he asked for a seller note on the $200,000 that was over the other two offers. He started changing the deal.
How do you get confidence in speed of closing as buyers?
(1) Have your finances in order.
Complete your personal financial statement and meet with banks. Understand what you can afford and understand that there’s going to be a lot of paperwork to get you to closing that you need to be ready for in terms to execute.
(2) Be certain on what you’re looking for.
No one likes a tire kicker. Ultimately, you want to be able to decide on a real yes, a real no, or real next steps quickly. At every step in the process, if it’s not going to work for you, kill it fast, stop wasting everybody’s time. Don’t make a bad name for yourself.
(3) Be confident in the acquisition entrepreneurship business model.
Understand that you’re using leverage to buy these companies so that you can get the equity buildup. Understand that you’re buying a business that’s going to have a cashflow that should generate say 20 to 35% cash on cash return coming out of the gate on the first day. You’re buying a business and it has a higher appreciation value than a building, which is going to grow it 2 to 3% a year in appreciation value. This is a business something you can put your back into. This is active investing. A company that you can lead and grow to a new net worth beyond what it is today.
(4) The magic is not in the de-risking of the asset.
The magic is in your ability to grow it. Your ability to transform it. Your ability to deliver value to the customers. Your ability to deliver value to the employees. Your ability to create something absolutely awesome. This is simply a stepping stone. It’s getting on base in your startup. It’s addressing the revenue and the cashflow and the infrastructure and the customers first. Then you get to iterate from there. Be confident in the model. The magic is not in the de-risking. Don’t try to de-risk the whole darn business during due diligence because there’s no way to do it.
There’s no perfect business out there. Don’t freak yourself out. Like our buyer example, make quick decisions confidently – real yes, no, or next steps.
What we had with that buyer was “let’s pretend” and he played let’s pretend with everybody for a long time. He did it a couple of times and now he can’t work with anybody.
Don’t be that guy.
All of these things together is how you make confident and quick decisions which allow you to work with speed. Be decisive for speed. Be passionate about what it is that you’re acquiring and why, and work with urgency. Over communicate to the broker and the seller. Over communicate every step of the way. Be transparent. Work with urgency.
The biggest thing to have speed to closing is having your money lined up. Whether that be an SBA loan requiring you to get pre-qualified or taking a loan on equities or other real estate, get it lined up ahead of time. If you are doing a search fund, have all of your investors ready to go. If you’re an independent sponsor, have proof of those backers ready to back you in that acquisition.
Ultimately when you work with brokers, there’s always going to be competition, especially for good or great businesses. Having speed and confidence to closing is the best thing that you have to not only fit in as a competent buyer but stand out as the one that should buy this company and lead it as CEO.
If you want to buy a business in the next 12 months, I’ve spent 17 years acquiring companies totaling $16.5 million dollars in revenue across seven companies. Over 10 years, I’ve helped dozens of entrepreneurs exit. I’ve sold my own companies. I’ve bought my own companies. I’ve brokered companies. I’ve been licensed by the SEC. We created the Acquisition Lab to be a world-class program for you to be able to learn work with a vetted cohort of people, get access to a suite of tools and have a live coaching program for 12 months that allows you access to me and my team of advisors in a do-it-with-you program to help you find and buy a business on your terms.