On November 15, 2023, we had the privilege of hosting Sarah Goodman for an engaging discussion on the nuances of working with business brokers and intermediaries. A respected authority in mergers and acquisitions and a longtime friend of Private Market Labs, Sarah previously shared her expertise on our Private Market Insights podcast, a session that can be revisited here.
The event marked a new chapter in our outreach, as we engaged with the dynamic members of Our WAEE (Women’s Acquisition Entrepreneur Empowerment). This partnership is part of our commitment to empowering diverse audiences in the world of business acquisitions. Sarah’s conversation offered fresh perspectives and practical advice, invaluable to anyone stepping into the complexities of small and medium business acquisitions. Below are the five main insights she shared with the group. We hope they’re helpful for you as you navigate your small business acquisitions journey.
Tip 1: A Lack of Balanced Disclosure is a Red Flag
One of the early indicators of a fair and transparent process during a business acquisition is the balance of disclosure between buyers and business brokers. Typically a prospective buyer will inquire about a deal. The intermediary representing that deal will respond by sending a non-disclosure agreement and requesting additional information about the buyer’s investment thesis and financial capacity. Once that information has been provided, the broker is expected to share a confidential information memorandum (CIM), which includes meaningful detailed information about the company for sale. When an intermediary requires a comprehensive NDA and financial disclosure but offers in return only limited information in the CIM, this can be a red flag. In the early stages of a business acquisition, a good faith and balanced disclosure is essential. A lack of disclosure on the sell-side’s part can set the tone for the relationship with the broker and can negatively influence the trajectory of the acquisition process.
Sarah’s shares the following advice – buyers should sign NDAs for a collaborative environment with business brokers. However, when a buyer receives scant details in return, it might be worth moving on. For a more comprehensive understanding of broker NDAs and their complexities, check our resource on Understanding Key Pieces of the Broker NDA, as it uncovers the nuances of NDA terms, guiding buyers on what to expect and how to approach these agreements strategically.
Tip 2: Ensure Deal Feasibility Early On
Deal-making in small business acquisitions got notably more difficult with 2023’s rise in interest rates. This is why Sarah emphasizes that securing deals in the current economic climate requires a strategic approach, making sure that the deal is feasible early in the process, before spending significant time and money in due diligence. Therefore, engage in open discussions with both the broker and capital providers before drafting a Letter of Intent (LOI), aligning expectations regarding the deal’s structure.
From our experience, it’s equally important to involve the lender in these early conversations. The recent changes in Small Business Administration (SBA) policies can help buyers pursue creative deal options, offering more flexibility in structuring deals.
One final tip: in the current market, many transactions may require some level of seller financing; as a buyer, it’s advisable to confirm early in the negotiations whether the seller is open to such arrangements.
Tip 3: Understand the Limited Impact of Lender Letters of Support
Sarah highlights a common misconception in the acquisition process: buyers tend to overestimate the value of lender letters of support. In the context of securing a deal, the ability to structure and close the transaction effectively holds much greater significance.
This perspective is important because there are many high-quality SBA lenders who issue letters of support to a broad spectrum of individuals. This support should not be interpreted as a guarantee of the bank’s ability to finalize the deal. Brokers typically do not view these letters as definitive assurances of a deal’s closure.
Instead, buyers should concentrate on providing detailed information about their transaction plans upfront, an approach that distinguishes a buyer in the eyes of business brokers and also helps identify any structural issues early on, preventing wasted time and resources. This insight aligns with the experiences shared by the successful searcher Bakari Akil in a recent podcast, who insisted on the importance of transparency and detailed plans to build trust and credibility in the acquisition process.
Tip 4: Leverage the Deal Structure for a Competitive Edge
Individual buyers often have trouble competing with private equity firms when it comes to price. However, they have other advantages they can access. An effective strategy for individual buyers lies in their ability to structure deals so that they potentially provide more immediate financial benefits to the seller. This strategy could work even if the overall offer is lower.
Asking questions such as “What form is the payout in? Is it deferred? Subject to what earnouts or conditions?”, can enable individual buyers to present compelling offers that are attractive to sellers. For example, a typical structure might involve the searcher contributing a minor portion of the equity capital, complemented by investor equity and possibly an SBA loan. This layered financing approach allows for a portion of the deal to be financed through debt, potentially increasing the immediate cash available for the seller.
Tip 5: Differentiate Yourself as a Buyer on Multiple Levels
Sarah acknowledges how important it is for searchers to differentiate themselves through specific transferable skills. However, simply presenting a professional image and a dedication to maintaining the business’s “legacy” is not sufficient for searchers to distinguish themselves.
To truly stand out, consider your unique selling points. What specific experiences or skills do you possess that not only resonate with the business’s current operations but also can drive its future growth? How does your background, such as industry expertise, technological know-how, managerial experience, or a combination of various skills, align with the business’s trajectory?
Articulating why you are the right fit for this particular business involves a combination of professional qualifications and personal alignment with the business. This individualized approach not only appeals to the business’s current owners but also sets the stage for a successful transition and future growth under new ownership.