Big Deal Small Business: Becoming a Worthy Buyer
September 30, 2021 | Issue #44
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I’ve previously written about how to use the first seller meeting to learn about the business and complete an initial assessment.
The three foundational questions I try to answer in those meetings are:
How does the business make money?
How complicated is the business to run?
Do I get along with the owner?
What that post ignores, however, is what the seller is trying to get out of that first meeting.
I view sellers as having two primary questions:
Can this person complete an acquisition? (The broker cares about this too)
Do I want to pass my legacy on to this person?
Both those questions can be boiled down to “Are you a worthy buyer?”
Today’s post explores how to hit both those points if you are, like me, a relatively young person who has never owned & operated a business before (i.e. not someone who seems like a worthy buyer).
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Can this person complete an acquisition?
A seller usually has never been through a transaction, but they have been through the pain & annoyance of somebody not paying them a bill.
Unless you’re dealing with an experienced seller who has completed multiple sales or acquisitions, they are focused on one thing — do you have money?
They don’t realize that for a good deal, capital is often the easiest part of a transaction. The hardest part is getting through diligence & documentation.
As a result, I focus on what matters to them. I explain that I plan to use an SBA loan to help finance the acquisition (most of them expect this if it is a brokered deal).
In talking about debt, I note that I plan to put plenty of cash on the balance sheet at start, so as not to put the business in a precarious position.
When it comes to SBA, I explain that I’ve been through the SBA process before and was approved for a $3.7 million loan, but the seller walked away from the deal.
I’ll usually insert some kind of joke here about how complicated or grueling the SBA process is, heavy-handedly implying that I know how to handle it whereas other buyers may not.
Then I’ll talk about equity. I start by highlighting that I’ll be putting my own savings into the business and will be the largest owner.
I don’t want to get into searcher/investors governance with a Seller obviously, but I think it’s helpful to establish myself as the decisionmaker.
Then I’ll say something with a bit of bravado — something like “Look, most of my former bosses & colleagues are professional investors. They’re accredited, they know how private deals work, and they’re dying to put money into great businesses like this one.”
In practice, equity fundraising isn’t that simple of course. I’d also never show prospective investors a deal that I didn’t think was a good deal for them.
But I think a show of confidence on equity fundraise is an important signal to the Seller. They likely expect a bank to underwrite their business, but they have no idea how equity fundraising works and how easy or hard that is.
Do I want to pass my legacy on to this person?
Not all sellers will care about this question — as long as you can close the deal, they’re optimizing for total purchase price and cash at closing. The reality is I probably can’t win auctions for those businesses anyway.
But most sellers do care about their legacy to at least some degree.
While I handle the “close an acquisition” question with a bit of bravado & self-confidence, I like to handle the legacy issue with humility.
I’ll usually say something like, “My plan is to come in and take a year or two to get my sea legs. From there, I’ll start to grow it. That’s why I’m looking for a business that’s stable and has been well-run — I need something that won’t break while I learn how to run it.”
I’ll also turn the question to the seller by asking them what an ideal transition period looks like to them. I’ll contextualize the question by saying, “I talk to some folks that want to stay with the business for 5 years, and some that want to move to Hawaii the day after closing. The reality is I need some training initially, so I want to understand where you are on that spectrum?”
The Seller will usually laugh and say they understand several months of training & transition is necessary, and we move on.
The other question I’ll ask the Seller is about employees. I’ll say something like, “Do you expect all your employees to stay? Obviously I’m not coming in with a full team, so retaining everyone and probably hiring some more people is important to me.”
These questions are important for my own diligence & business planning process obviously, but you get limited use from their responses in the first meeting — seller commitment and employee retainment will require more creative diligence in the future.
The primary purpose is actually to show the Seller that I’m thinking about the right things. I’m trying to stress to the Seller that I:
Understand that running their business is not easy
Don’t plan to rock the boat immediately
If a buyer gets those two points, then most Sellers take the view that the buyer will be a safe pair of hands for their legacy so long as they are reasonably tenacious and hard-working.
Conclusion
Proving yourself to be a worthy buyer is an important element of SMB searching. We do it in private equity in other ways — we talk about how well we know the industry, our plans to grow the business, etc. And we have a fund, so have the money to close the deal.
But in SMB, especially for a younger searcher like me, the issue is more foundational. The capital & acquisition question is a bit more straightforward, but not easy.
The legacy question is even harder, but offers an opportunity to start building a rapport with the Seller. By asking what their ideal transition looks like, you’re moving the conversation into a business partnership discussion, as opposed to a buyer-seller discussion.
Anyway, you’ll have to piece together your own answers to these questions obviously, but I think it’s helpful to think through a plan in advance of a Seller call.
If you have other strategies for proving yourself to Sellers, I’d love to hear them. Hit reply to this email or post/DM me on Twitter.
Would love your feedback on this post as always, as well as ideas for future posts.
Thanks,
Guesswork Investing
P.S. I’d always appreciate introductions to potential acquisition targets or brokers (primarily targeting $750K-$1.5M+ of SDE or EBITDA, located in Seattle or the Bay Area).
Becoming a Worthy Buyer
How much personal capital or salary do you need to qualify for a $3.7m SBA loan?