Broker Questions
Big Deal Small Business: Broker Questions
The broker is the first gatekeeper you must bypass to look at a deal.
Today, I want to detail the FAQs you’ll receive from brokers and how I answer them. These are specific to me and my experience, but hopefully gets you thinking about how to craft your story.
There is one goal – convince the broker that you can credibly buy the business.
Question: How are you going to finance the transaction?
Answer: I will use a mix of my savings, a few investors, and an SBA 7(a) loan. Given my background, I have a lot of folks in my network that are private company investors by training, so I’m not worried about raising the equity. I’ve also built relationships with a few strong SBA lenders, so I know how to get through the 7(a) process and get to the finish line.
That said, I will likely want the seller to hold a note for at least 10% of the transaction value – this isn’t a financing issue given 7(a) debt is cheaper than the seller note, but I feel strongly about the seller having skin in the game for the transition.
Context: The “proof of funds” question is a matter of confidence – I attack it directly and without hesitation. It’s a judgement call for the broker, so make their lives easier. I’ve only had a few continue to demand a proof of funds in the form of a personal financial statement for myself and investors.
That being said, many will require a proof of funds of some sort, but I usually would add in the margins some information about access to investors.
Further, transparency is king when it comes to deal structure – I don’t want any surprises around the need to use 7(a) debt or my desire to have a seller note. If that’s going to be an issue, better to figure it out upfront.
Q: What is your diligence process?
A: I have a deep background in M&A so can move through diligence efficiently. I have my key advisors (QoE and lawyers) in place, so can get them spun up as soon as we dive into diligence. That said, I’m a bit more painful than the average buyer because I will want to do a quality of earnings and spend a lot of time understanding the business with the owner.
Context: Transparency reigns supreme again. Let them know that I can move quickly, but also make clear that I will be doing real diligence to avoid surprises later.
Trusted Deal Team: Here’s a link to the team I recommend for your search process.
Q: What kind of industries are you looking for?
A: I’m open-minded on industry other than very complex operations like heavy manufacturing. I’m focused on the characteristics of the business and confirming it has a high-quality business model. The key risk is always the transition period, so I’m focused on finding a business that has stable cash flows to get me through that learning process.
Context: I don’t want brokers to act as a filter for me. I want to convince them I’m a good buyer who’s worth sending listings. The reality is that I’m not a “great” buyer because I don’t have a fund or existing company, so it’s unlikely I’ll convince them to give me true first looks by pretending to be more specialized.
So even if there are industries that are a bad fit for me, I’d rather get the teaser/listing sent to me and make the decision for myself.
Q: Are you going to run the business or hire a GM?
A: I’m going to move to the location and run the business full-time. That said, I’m not looking for a business where the owner provides the actual product/service, such as sprinkler business where the owner installs sprinklers himself. The business needs to have enough infrastructure where the owner is more focused on operations management, financial management, and so on.
Context: I start by reiterating that I’m a serious buyer willing to uproot my life and move to the company. After that, I want to qualify the lead by confirming the business has enough “there” there to be a good fit for me.
(Joke is on me, I ended up buying a business with heavy owner dependence in actual service provision.)
Q: How do you think about valuation?
A: It depends on the quality of business. I’m more focused on finding a business I want to own – that’s the threshold issue. If we pass that hurdle, I’m not going to fight over every last nickel or dime because I know that’s not important in the long-term and hurts the odds we get a deal done.
Context: This is an accurate depiction of how I think about valuation. If I’ve decided I like a business enough to dedicate the next 5+ years of my life to it, then I won’t allow small value differences to derail the transaction.
The equity return math will always work if you’re paying <5x multiples and using leverage. The reality is that time is your enemy.
Say you pass on a business at 5x because you wanted to buy it for 4.5x. If it takes you another year to find that perfect 4.5x deal, you should have just bought the original business for 5x and generated 1x of earnings over the course of the year.
You’d be sitting at a creation multiple well below 4.5x on the day you find your perfect 4.5x deal.
I won’t overpay for a business, but I’m also commercial and focused on getting a deal done, not winning a theoretical value argument.
That covers the key questions most brokers have asked me. I’m always open to feedback if you think my answers are sending the wrong / unintended messages, so let me know! Just hit reply to this email or comment/DM me on Twitter.
Thanks,
Guesswork Investing
I know this is old, but a question I often grapple with - how do you avoid "overpay[ing] for a business" while still being "focused on getting a deal done, not winning a theoretical value argument?"
I often feel the loudest twitter voices are those telling searchers to slow down and "DON'T OVERPAY" - but if I can service debt at reasonable risk, what does that even mean?
Just out of curiosity, how do you go about getting approved for a $3.7mm SBA loan prior to finding a deal? Thanks for the post btw—awesome content.