Welcome back to Becoming a Better Business Broker in 30 Days!
This concise series title describes exactly what we hope you get out it - becoming a broker that can close more deals with less work.
If you missed out on our last article, make sure to give yesterday's article, Working Effectively with Accountants.
Today we are sitting on the other side of the table and exploring Buy-Side Brokering 101.
Why? Well, to Become a Better Business Broker you need an innate understanding of how a Buyer analyzes a deal. Because there is no worse experience for a sophisticated Buyer than having a Broker hard-sell every deal as a 'perfect fit' for them.
Instead of this "spray & pray" approach - today we're going to explore how to put on a buyer's shoes to understand growing via acquisition.
The Role of Business Acquisitions in Growth Strategies
Understanding the buyer's perspective is crucial for any business broker aiming to close more deals with less work. Today, we dive into the strategic role of business acquisitions and how you, yes you, can align your approach to meet the sophisticated buyer's needs.
Identifying the Right Buyers
The first step in understanding the motivation of a business acquisition is to understand the different Buyer Personas - here's the 101:
- Strategic Buyer: Strategic Buyers care more about the strategic 'fit' of the business. Rather than the financial strength of the target business (within reason). For example, we recently worked on a deal where a custom auto parts online store acquired their manufacturer to increase their margins. This gave them far more leniency on the acquisition price than a standard Financial Buyer.
- Financial Buyer: Speaking of the Devil, these Buyers focus on the cash flow of the business and are typically less concerned with its growth potential or strategic fit. An example of a Financial Buyer is a Private Equity Group.
- Lifestyle Buyer: Often these Buyers are seeking a lifestyle opportunity and transitioning out of a corporate career. Alternatively, these are previously successful Entrepreneurs delusional enough to think they can 'gear down' into retirement.
- Entrepreneurial Buyer: These often consist of previously successful entrepreneurs seeking their next big win. They are growth-focused and want to ensure their purchase allows them to grow the business valuation at exit. A classic example of an Entrepreneurial Buyer is a Search Fund.
When it comes to growing via acquisition - Financial and Entrepreneurial Buyers are the 2 groups where you want to focus your time.
For example, a Lifestyle Buyer is likely not interested (or has the financing) to acquire a $3M+ EBITDA HVAC business that could sell for upwards of $20M. Buuuut, that PE group that has been sending their 'just checking in if you have any deals meeting our criteria' could be the perfect fit. The point is, to allocate your time to each Buyer Persona appropriately.
The Buyer's Due Diligence Process
As a Broker, guiding your Sellers through the Buyer's due diligence process is key. This involves:
- Prepare Robust Confidential Information Memorandums (CIM): Ensure all financial, operational, and legal documents are accurate, up-to-date, and readily available.*
- Understanding the Buyer's Concerns: In our Due Diligence Mastery article, we spoke about anticipating and addressing potential concerns that Buyers may have about the business, from financial risks to integration challenges - before you send the deal to any Buyers.
- Facilitate Deal-Making: Growth-focused acquisition deals typically involve sophisticated Buyers. As such, allow transparent and open communication between the Buyer and Seller to build trust and address any issues promptly. Just be mindful that the Buyer doesn't get overzealous and try to negotiate key terms without you (this can get particularly messy when it comes to determining the working capital peg).
*Pro tip: utilize DealBuilder AI to generate comprehensive CIMs within minutes (watch demo 👀).
Structuring the Deal
Sophisticated buyers often have specific structures in mind for acquisitions. To earn your commission as a Broker, there is no excuse for not understanding the difference between:
- Earn-Outs: Often utilized by Financial Buyers, earn-outs are attractive as they help 'de-risk' part of the purchase price by tying the payout to the future performance of the business.
- Seller Financing: For Entrepreneurial Buyers leveraging the SBA 7(a) program (or Canadian Buyers using the BDC) Seller Financing is a powerful tool for getting a deal done. As a part of your prep work (pre-listing) brief your Seller on Vendor Take Back Notes (VTBs), standard terms, what securitization is available, current interest rates, and possible tax impacts.
- Asset vs. Stock Purchases: Understand the implications of each and guide your Seller on the most advantageous structure based on the Buyer's preferences and tax considerations. In Canada, we often leverage the huge tax advantages of a Share sale (no capital gains) as a negotiation piece. For example, if a Buyer is adamant in an asset sale (reduced corporate liability), then the Seller may need a higher offer price to compensate for the higher tax bill.
Negotiating the Best Terms
Negotiation is where your role as a broker becomes critical. To negotiate the best terms:
- Understand the Buyer's Motivations: Strategic Buyers have vastly different motivations than Financial Buyers. As a result, your Deal Marketing Plan should include a phased outreach process where you first approach Strategic Buyers (who will see the synergies/value fastest) and then Financial Buyers.
- Highlight Synergies: Next, put on that Buyer hat so you can articulate how the acquisition can create value for the Buyer, such as cost savings, market expansion, or enhanced competitive advantage.
- Get Ready to Haggle: Before speaking to any Buyer - make sure your Seller's expectations are realistic. Nothing like burning a bridge with a PE firm because your Seller blurted out, "The asking price is firm at 10x revenue" during your first buyer-seller meeting 🤦♂️. If you understand your Seller's goals you can also get creative in your deal-making abilities to meet the Buyer's needs without compromising on key terms.
Conclusion: Bridging Buyer and Seller Perspectives
The role of business acquisitions in growth strategies is multifaceted and requires a deep understanding of both the Buyer's and Seller's perspectives. By focusing on strategic fit, preparing diligently for due diligence, structuring deals thoughtfully, and negotiating skillfully, you can facilitate successful acquisitions that meet the growth objectives of sophisticated buyers.
Remember, the goal is not just to close a deal but to close the right deal. By putting yourself in the Buyer's shoes, you can become a more effective Broker, guiding both Buyers and Sellers to win-win outcomes.
Join us tomorrow for a spooky topic, Nightmare on Main Street - Clients To Avoid 😱
If you want to learn more about automating your business brokerage with DealBuilder, please visit our site or book a demo here.
