CHAPTER 8

Sourcing Prospects Using Brokers

In December 2009, Patrick Dickinson and Michael Weiner closed on their $9.6 million purchase of Castronics, Inc., an oilfield services provider based in Kimball, Nebraska. Neither of them had ever been to Kimball; Patrick had grown up in Pittsburgh, and Michael in a Cleveland suburb. Both came from families that were not involved in business or entrepreneurship. Patrick’s father was a doctor, his mother a homemaker. Michael’s father operated a law and accounting practice, and his mother was a speech therapist. The two young men became friends in their first class as undergraduates at Duke University but went their separate ways professionally after graduation. Michael worked for a large bank and later returned to Cleveland, joining a firm that invested in small and midsize businesses. Meanwhile, Patrick worked for an investment group that was acquiring and operating waste management companies across the United States.

In 2008, Patrick and Michael’s ongoing discussions led them to partner in searching for a small firm to buy. With each partner quitting his job and living off personal savings, they began an energetic search across the country to acquire a small firm as quickly as possible, and in about six months, they acquired Castronics. They attribute their quick success to their exclusive reliance on sourcing prospects through brokers and thus owners who, in Patrick’s words, “were really serious about selling their companies.”

We agree. Sourcing through brokers is the most successful approach to overcome the problems presented by uncommitted first-time sellers. Brokers also provide organized information about the companies for sale, making it easier for searchers to quickly apply initial and deeper filters to prospects.

Good brokers are much more than just a listing service of businesses for sale. A great business broker will provide critical information about the seller’s commitment to sell and background about the company. Moreover, brokers help manage the seller, organize the sales process, and help resolve disagreements between the buyer and seller. Brokers also are helpful coaches to first-time sellers, guiding them through each step of the sale. When the buyer asks for more details about the historical financial results of a company, a good broker is there to explain to the seller that the buyer is not accusing the seller of being dishonest and that testing results and assumptions is simply part of the buyer’s quest to learn more about the business. By acting as an intermediary, a broker will dampen the emotional ups and downs that come with selling a business and will help make the sales process more orderly. A good broker might make the difference between a successful acquisition and one that collapses.

Finding Business Brokers

There are approximately 3,000 to 4,000 business brokers in the United States. Some sell very small enterprises like pizzerias and gas stations while others focus on businesses valued at up to $20.0 million. Some brokers specialize in a particular industry, although most will represent almost any business. All brokers work on a commission that is paid by the seller. Sometimes there is a monthly retainer, but most of the fee is paid when a transaction closes.

Brokers are not hard to find; in fact, they want to be found. Most are members of the International Business Brokers Association (www.ibba.org), the Association for Corporate Growth (www.acg.org), the Alliance of Merger & Acquisition Advisors (www.amaaonline.com) or the Association of Professional Merger & Acquisition Advisors (www.apmaa.com) and these membership lists are easily accessible. Brokers that specialize in a particular industry usually advertise on that industry association’s website or in its publications. Most brokers can also be identified by searching the web for “business broker,” “merger and acquisition advisors,” or “buying and selling businesses.” Many searchers find the online system Axial (www.axialmarket.com) useful, because brokers can use it to find likely buyers and can send them potential deals based on the characteristics the searchers identify.

Introducing Yourself to a Business Broker

You should expect to call hundreds of brokers as Patrick and Michael did during their search. When you introduce yourself to a business broker, these are the most important things to communicate:

  You have access to the capital to acquire a business.

  You are determined to buy a company and expect to complete an acquisition soon.

  You are a professional and a credible business buyer.

  You are looking for a specific type of company to buy (describe the size, industry, and type of business such as manufacturer, distributor, or services provider).

Marketing yourself to brokers is an important part of your communication with them. As Patrick recalled, “They get a lot of calls from tire kickers, so we have a short pitch we make about how we have the determination, expertise, and capital to close on a company.”

Rod Robertson is the managing partner of Briggs Capital, a mergers and acquisitions advisor that brokers small- to medium-size privately held businesses. He confirms the importance of presenting yourself well to a broker. Rod receives about 100 contacts a year from individuals interested in acquiring a business. When he talks to prospective buyers, he is evaluating them on behalf of his clients: “I’m eventually going to present a handful of potential buyers to my client, who is the business owner. I want that client to feel like I’ve done a good job selecting folks who are highly professional, present themselves well, and could credibly buy and run the seller’s business.”

“Tell me about your financing,” Rod likes to ask buyers who contact him. “That scares off about a third of them.” As a prospective purchaser moves further along in the process, Rod probes their funding further: “If you’ve got investors interested in backing your acquisition, I want to speak to a couple of them to make sure they’re serious. I don’t want someone getting to the finish line and scrambling to raise their equity.”

Evaluating Businesses Presented by Brokers

If your initial outreach is successful, the broker will send you information about businesses, usually by sending a teaser. As described earlier in the book, a teaser is a one-page summary that usually describes the business and gives an overview of the prospect’s financial performance.

The teaser

Teasers provide enough information to apply your initial filters—basic information about the business, its general location, and its financial performance. That information will allow you to filter out about 80% of the teasers you receive. At this stage, you are looking for reasons to say no. You’ll probably review a lot of teasers, spending on average 10 to 15 minutes on each document. Patrick and Michael, for example, reviewed about 750 teasers.

Because brokers place low priority on keeping track of searchers interested in buying a business, they won’t remember you unless you work at it. Once brokers start sending you teasers, stay in touch. Call them periodically to see if they have any new companies for sale and to remind them of your areas of interest. Also, take the time to explain why you have rejected particular companies they offered you—it will help educate them about the type of business you are looking for and communicates that you are reviewing their offerings seriously.

As you review teasers, evaluate not only the companies they describe but also the quality of the materials themselves. Since anyone can become a business broker, there is a wide range in their capabilities. While you should look at all of the teasers you receive, you should give more attention to material from brokers you’ve already identified as better. Often, it becomes clear that some brokers are a better fit for you simply because they are more productive in highlighting businesses you find attractive. Perhaps they focus either on industries or regions in which you are most interested, or maybe you have established a good rapport with them and they are especially helpful as you follow up with questions. Increase your frequency of communication with these brokers. But at the same time, keep your broker network broad; any individual broker only markets a handful of companies each year, and it is impossible to predict which broker will be the source of the prospect you eventually acquire.

The sidebar “Example of a Teaser Offered by a Business Broker” contains one of the hundreds of teasers that Randy Shayler reviewed in 2012 during his search for a business to buy. The teaser is representative of the kind that might pass your own initial filters. First, as the teaser shows, the company was consistently profitable, with profits dipping slightly between 2009 and 2010 but then growing substantially between 2010 and 2011. (The teaser’s projections for 2012 and 2013 showed this profitability persisting and expanding slowly, but you should be skeptical about the reliability of those forecasts.) Second, the prospect was an established business roughly in the size range that Randy was interested in; a purchase at 4x 2011 EBITDA would be $4.0 million, an amount he believed he could finance with a combination of bank debt, seller debt, and investors’ equity. He liked the idea of living in the Northeast, although he would need to know the company’s precise location to be sure. He also thought he could manage the business and, in fact, was intrigued by rental businesses generally. As for lifestyle concerns, Randy liked the connection to education and anticipated working long hours at whichever business he purchased.

For prospects that pass the initial filters you applied to the information in the teaser, recontact the broker to request more information, which is typically contained in a confidential information memorandum (CIM). This document is much longer than a teaser and will give you more information about the company and its industry, facilities, products, customers, and financial results. Because the CIM contains confidential information, you’ll probably need to execute a nondisclosure agreement before the broker will send it to you. When Randy had some questions for the broker about how the business worked, he signed the required confidentiality agreement and then received the CIM.

The confidential information memorandum (CIM)

The CIM is the broker’s major work product. These memos are generally about 40 pages long. For example, the CIM Randy received for Zeswitz Music was 50 pages long (we don’t reproduce it here because of its length and confidentiality). Going far beyond the teaser, a CIM offers a detailed description of the company’s business activities, assets, employees, customers, competitors, historical financial results, and future projections. While a CIM provides a very useful overview of a business, it is also important to recognize that the document is a marketing tool prepared by brokers who generally do not confirm the accuracy of the financials or other company information presented. When filtering prospects, however, you can assume that all of the rosy assessments and descriptions in the CIM are accurate and, in light of this information, evaluate the company using your deeper filters (you will do more due diligence later). At this stage, you are looking for some indication that the business is enduringly profitable and that the owner is committed to selling. We’ll explain how to apply those deeper filters in later chapters. Because the CIM emphasizes the most favorable characteristics of the business and the owner, if the business doesn’t meet your deeper filters according to its CIM, you know it’s time to move on.

Further conversations with the broker

If the prospect survives the deeper filters in light of the information in the CIM, contact the broker to get more information, particularly around areas where you have the most concern about the memo’s accuracy or completeness. Here too, try to find reasons to say no. Michael Weiner described the process he and Patrick Dickinson used: “We would prepare five to ten questions from the CIM and interview by telephone the broker or, if possible, the seller themselves. We were aggressive about killing deals.” Sometimes the broker will be able to answer your questions directly; sometimes they will go back and forth, acting as a conduit between you and the owner, and sometimes they will arrange a telephone interview for you with the seller.

The conversations between Randy and Zeswitz’s financial advisor, Sharif Tanamli, confirmed many of Randy’s initial impressions from the teaser and the CIM. He learned the name of the company, Zeswitz Music, and its exact location—Reading, Pennsylvania, about 60 miles from Philadelphia. Randy’s wife was a college administrator, and the proximity to Philadelphia made Reading an attractive location because of the nearby schools. He also learned that the company was a well-established business—it had been in operation since 1923 and was the second-largest musical instrument rental company in Pennsylvania.

Overall, the information he collected convinced Randy that Zeswitz Music met all his initial filters. He also believed that he could use the information in the CIM, together with conversations with the broker and the owner, to apply the deeper filters about enduring profitability and the owner’s commitment to sell.

Next Steps

Randy found Zeswitz through a broker. The other way to find potential acquisitions is by directly contacting company owners. We turn to that approach in the next chapter.

Ultimately, no matter how you find prospects for acquisition, you’ll need to apply the two deeper filters: enduring profitability and owner willingness to sell. The remainder of part III will examine these two steps in detail.