- What off-market deal sourcing is
- How Acquisition Entrepreneurs can use off-market sourcing to get better terms
- How Acquira’s team calls hundreds of businesses every day
- Why avoiding traditional brokers is an advantage
One of the biggest hurdles that any Acquisition Entrepreneur will encounter is the business broker.
These people are the gatekeepers of business deals and, perhaps most importantly, brokers are paid through commissions based on the percentage of the proceeds gained through the sale of the business.
Brokers decide what businesses get listed and they almost invariably have a list of preferred buyers who see those businesses first. This means that by the time those listings make it to the general public, the best investments have already been picked over.
In some cases, we recommend striking up a good relationship with brokers so you can get on their “preferred buyers list,” but what if there was a way to circumvent the broker entirely?
What Is Off-Market Deal Sourcing?
That’s where off-market sourcing comes in.
The concept of off-market real estate deals has been popular for some time but has gone largely unnoticed in the world of business acquisitions.
In real estate, a “true” off-market deal is when a homebuyer is aware of a potential sale without any competition from other buyers. In this case, the buyer and seller of the property can agree upon a price while largely avoiding paying any additional transaction fees. The advantage to the seller is that they usually enjoy the speediness of the deal and the fact that there aren’t any headaches. It’s quick and simple. For the buyer, it avoids potential bidding wars.
However, these “true” off-market deals are usually very rare and commonly deals that are considered “off-market” have still been advertised to a small pool of potential buyers. But even in these cases, off-market deals can still offer lucrative buying opportunities in the real estate game: the overall price tag will still be lower with less competition, there will be less stress, and with buyers able to make more measured and informed decisions they inevitably end up with a better purchase.
Many of these same principles apply to off-market business acquisitions. They result in favorable prices and less competition. These factors also produce deals that are more aligned with an Acquisition Entrepreneur’s investment thesis, given that there is more time to search and less pressure to buy in order to fend off any competition.
How Do You Find Off-Market Deals?
An individual business buyer, who wants to access off-market deals, must put in a lot of time and hard work. Not to mention some skills with a spreadsheet. It usually involves scraping online resources like Yelp or Google Maps to create a list of individual businesses within a certain area and business sector, creating a list of phone numbers, hoping you can connect those numbers with an owner’s name, and then dialing each person individually.
Assuming you can get them on the phone on the first call, you then need to explain who you are, ask them if they’re interested in selling their business, and answer any of their follow-up questions. If you’re unable to get ahold of them, you need to call them back, possibly multiple times. And you need to keep careful track of each interaction.
Another option is you could hire someone to do it for you. Acquira’s Search Partnership Program offers this exact service, allowing the Acquisition Entrepreneur to concentrate on their day job or work on their overall business plan as a list of qualified acquisitions is assembled for them. We’ll discuss that in greater detail below.
Getting Better Terms
While off-market business sourcing has some similar benefits to the real estate market, there are some specific benefits that any business buyer should understand.
Just like in real estate, an off-market deal means there are fewer other buyers to compete with. Without competition, you avoid bidding wars and the escalating price tag that can appear any time a particularly attractive investment opportunity appears on the market and people get invested in buying it.
More Targeted Businesses
If you don’t live in a major urban center, it’s difficult to find businesses in the right industry close to your primary business. Off-market deal sourcing can allow you to find great deals within a few hours’ drive from your home. This is especially useful for business owners with strong roots in an area who don’t want to pick up and move in order to acquire a business.
More Seller Financing
Seller financing is when the previous owner of the business finances the purchase of the business for the buyer. Put another way: the business seller becomes the lender.
If the seller is already financially stable, it becomes easier for them to finance the entire acquisition for the Acquisition Entrepreneur. The buyer repays the seller by making payments from the cash flow of the business. These are typically short-term loans that are usually repaid within five years.
When reaching out to business owners directly, especially those who have yet to list their business for sale, it’s more common to be able to negotiate a seller-financed deal. These sellers are obviously under less pressure to sell their business, given the fact that they haven’t listed it yet. That means they’re not in dire need of cash and are more willing to entertain the idea of receiving payment spread out over a period of time.
An earnout is a provision within a contract that says the seller of a business will receive additional compensation in the future if the business reaches certain financial targets.
These targets are often stated as a percentage of gross sales or earnings.
Earnouts are often a way for buyers to acquire a business at a lower price. If the asking price is higher than the buyer is willing to pay, they may opt for an earnout provision. These also help remove uncertainty for the Acquisition Entrepreneur given that the payments are tied to future financial performance of the business.
Business EBITDA = $500,000
Valuation = 3x
Business Price = $1.5 millionEarnout Deal = $1 million + 3% of revenue over the next five years.
In the above example, the buyer pays some of the price tag upfront, with the remainder of the cost dependent on how well the business performs in the future. Various financial targets can be used to set the terms of an earnout, including revenue or net income.
Deals like the above are much harder to negotiate when there’s a broker involved in the transaction (more on that in a minute).
In many cases, the business seller is the one person in an organization with the most knowledge of how things are done. Losing that person on the first day of buying a business can be an incredible loss and difficult to make up for in the short term.
When a deal is sourced off-market, it’s very common to negotiate for the seller to stay on board for at least a year to help with the transition period.
The Personal Touch
Whether you’re reaching out to sellers yourself, or someone other than a broker is reaching out to them on your behalf, it’s simply easier to create a personal relationship with the seller. You have your investment criteria, your business plan, and your life story that can be shared with the seller. This is information that can just as easily be shared by an intermediary but would be unlikely to reach the seller if a broker were involved.
The personal approach goes a long way with business sellers. After all, these people built these businesses from the ground up and want to see their legacy maintained. If you can position yourself as a buyer who will help guard that legacy, they are often more likely to make a deal with you.
The Advantage of Not Having a Broker in the Room
As we said earlier, business brokers’ commission is tied to a percentage of the proceeds they see from any transactions they help arrange or oversee.
That means that it’s in the interest of any broker to drive the price of a business as high as possible through various machinations like add-backs.
It’s in the interest of any broker to drive the price of a business as high as possible.
What Is An Add-Back?
As stated in a previous article, “Add-backs are business expenses on the financial statement that the seller says will essentially ‘go away’ when the business is sold and the buyer takes possession.
In that way, it’s an attempt by the seller to show what the actual profitability and consequent value of the company is when certain expenses are removed. In the eyes of the seller, those expenses are either not “real” company expenses or are related to the current owner and will not transfer to the buyer. Or they were one-time expenses that the new owner will not incur.
By accepting an add-back, the buyer should know that these expenses will not be included in the free cash flow calculation after they buy the business. This can be a real detriment if it turns out that these expenses actually were necessary.
Cash flow add-backs can be especially tricky when dealing with brokers. Cash flow add-backs are expenses that will not be included in the buyer’s future income statement. Those expenses are added back to the profits of the company in order to improve the financial appearance of the business.
This can increase the valuation–and the amount the buyer would need to pay–of a business exponentially because brokers will attach a multiple to the add-back. For example, if an owner’s annual travel expenses were listed as $100,000 and the company is valued at 3x, that add-back is equal to $300,000 in increased valuation.
You may also see “Owner's benefit” listed as:
- Seller's discretionary earnings (SDE)
- Adjusted cash flow
- Seller's cash flow
Holdbacks are similar to earnouts, only they are payments that are held back based on mitigating a specified key risk.
Some examples might include a key employee getting their master license or a key customer staying on for 12 months after the purchase. If these conditions occur, then the buyer will pay a pre-determined amount upon their occurrence.
Holdbacks are generally seen as buyer-favored because they allow the buyer to negotiate a lower price. If those key risks end up being avoided, then it’s simply a boon for the business and the payment is justified.
However, holdbacks are often discouraged by brokers and are much easier to negotiate through an off-market deal.
Access To Staff
The lack of a broker typically allows you more access to a business’ staff as well. This is important when trying to determine the cultural value of a company. A company with no culture or a negative culture will not be able to support the systematization necessary to grow a business.
Brokers will typically prevent buyers from dealing with any employees because it may risk ruining a deal, and thus their commission (remember, we did call them the “gatekeepers”). However, when doing off-market sourcing, this barrier is usually reduced, allowing the buyer to discuss the company with key employees (often initially introduced as a potential investor), ensuring that they’ll stay on board after the deal closes. This is also the best way of understanding the company’s culture.
How Acquira's Team Calls Hundreds of Businesses Every Day
As we mentioned at the top of this article, finding off-market deals is a very time-consuming process for any individual. It requires extreme organization and patience, as well as a huge time commitment.
That’s why more and more Acquisition Entrepreneurs are turning to Acquira and our Search Partnership Program to help them find deals. As part of the program, we partner with Acquisition Entrepreneurs to find businesses that fit their acquisition criteria by sourcing off-market deals and gathering data for you to review. Our team systematically scrapes the internet for different types of businesses in all regions of the country and makes hundreds of calls each day in order to find owners interested in selling.
Once the Acquisition Entrepreneur provides us with their investment thesis, our team uses that information to generate a list of businesses in the target geographical region (often cities within two to three hours drive of an Acquisition Entrepreneur’s primary residence).
At that point, the Acquisition Entrepreneur is assigned a dedicated Business Development Representative (BDR) who manages our multi-channel outreach campaigns. They generate multiple leads of business owners that are interested in selling, collect their tax returns and P&L statements, and pass this information on to the Acquisition Entrepreneur.
We typically make a list of 2000 businesses to call for any given partner and that list is called over a period of three months. This generally results in multiple businesses that match the buyer’s criteria. The AE can then decide whether or not they’d like to pursue any of the deals and begin undertaking their own due diligence process, while the BDR continues contacting businesses on the generated list.
It’s a service that drastically reduces the time investment necessary from the Acquisition Entrepreneur so that they can refine their due diligence and deal-vetting processes (things we teach in our training, which begins with our Acceleration Gauntlet.)
Acquiring a business is a huge undertaking regardless of where you find the deals. Unfortunately, the role of brokers is usually to help drive up prices for the seller rather than reach an equitable deal for all parties.
Off-market sourcing allows business buyers to avoid many of the pitfalls that come along with publicly listed business deals.
To learn more about our Search Partnership Program, schedule a call with us today.
If you’ve had any particularly bad experiences with finding publicly-listed deals, let us know in the comments below. It can only serve to help other business buyers on their own journey.
- Publicly-listed businesses are often picked over by brokers’ “preferred buyers.”
- Brokers are the “gatekeepers” of business deals who will work to increase the price of the businesses they’re selling.
- Finding off-market deals allows you to avoid the pitfalls of working with a traditional broker.
- Off-market deals offer additional benefits like more access to seller financing, earnouts, and seller retention, while providing a personal touch.
- You can find more specifically targeted businesses that fit your investment criteria and are close to your primary residence.
- You also gain access to staff in order to appraise the company’s existing culture.
Acquira is a business acquisition in a box service. We help entrepreneurs buy businesses and we invest in them and their chosen businesses. We are here to help ensure that each business we work with is posed to make the biggest positive impact possible for its owners, employees, and community.