Targeting Prospects Online when Buying a Business
“Kissing a Lot of Toads”
Recently I heard the process of finding good target prospects described as kissing a lot of toads. I think that’s a reasonable and accurate description of the typical process or targeting prospect companies online when buying a business. But if you’re prepared to make the right kind and amount of investment, you may not kiss more than a few before you find the right one. The key is in the type and manner of investment in the process you make.
The Challenges of Online Business Searches
There is an abundance of resources to find businesses online today. A quick Google search will turn up dozens of site directories listing businesses for sale. These are all right at your finger tips. For each site that lists companies for sale, there may be dozens or even hundreds that are listed on each site. But as one of the most knowledgeable advisors in the space told me recently, “85% of all companies listed for sale on the web do not sell while their listing is live.”[i]
If he’s correct, you have to ask yourself why. The simple answer is that most listed companies have not been prepared for sale and they cannot justify a saleable proposition at the price point they’re seeking. With the M&A market as hot as it’s been, the few that will sell are generally being courted by dozens of buyers at the same time. Some sites, like Buyer Seller Match have elevated the search process to a new level of refinement, making it much easier as a buyer to narrow down the targets you’re seeking and to be sure you’re looking at quality companies on the other side. But these sites are new on the scene and it will take time for them to build the audience and high quality listings you’re seeking. So, at least right now, if you’re spending your time calling on brokers or companies that are listed online, you are setting yourself up to kiss a lot of toads.
Other Options For Finding Prospects Can be Even More Difficult
But there is little you can do on your own to search for companies except by using online resources. Cold calling and door knocking may actually present viable opportunities, but you have to be willing and able to set aside the time to do it and even then, you also need to know who it is you want to target and where you can find them.
Using a Third Party to Conduct the Search for Prospects
The other alternative is to use a third party advisory firm to do the search work for you. This option has some key advantages for you. First, you no longer have to commit the time to a search it otherwise takes to find a viable target. Second, the expertise, experience and tools the advisor has at his disposal will help narrow down your search quickly and simply. Third, the advisor’s expertise goes beyond the search and he will help you be sure to be buying a company with the quality of earnings that enables your success once it is yours. The last advantage is perhaps the most important reason to bring on an advisor for your deal.
But it doesn’t come without cost. When working on buy side opportunities, an advisor is just a broker, not working for you, until and unless he is on retainer. The upfront work and commitment of exclusivity to your needs forces the issue. He has to be working for you, and not for anyone else on the same type of deal. The good news is that, after retainers are paid, buy side advisors typically work for 50-75% of the success fee percentages brokers charge, almost always reduce that fee by the amount of retainer paid and generally have much higher rates of success (70-90%), than brokers do. In fact, they succeed as often as brokers typically fail.
How Much Should it Cost to Use a Buyers’ Advisor?
Starting with the overall success fee that will have to be paid on completion of a deal, the “Lehman Scale” provides a starting point for the level of Success Fee your advisor will charge. After a minimum fee, the Lehman Scale simply charges a reducing percentage fee based on the total acquisition price, i.e. 5- 4-3%, etc. for each $1,000,000 of deal size. Most good buy side advisors flatten the fee to around 2.5-3% for larger deals over $5,000,000. Thus, if you were buying a small trucking company for $3.5 million, you might pay a total success fee that works out to $135,000 or 3.86% of the total on a Lehman scale calculation. On the other hand, if you’re buying a platform IT company for $7,000,000, you might expect to pay a fee of $210,000 to the advisor for that deal.
The normal practice is to reduce the fee for the amount that has been paid to the advisor on retainer. Retainers will typically run between $15-30K, often depending on the deal size, in order to get the front end leg work needed to make the deal work. So, on the first deal, if you paid the advisor a fee of $15,000 over three months for the initial search work, the net fee would be $120,000. On the second deal, if you paid $30,000 to the Advisor over six months, you would owe a net fee of $180,000 when the deal closes.
Finding the “Handsome Prince”
There are many ways to go about finding a seller to acquire. The most efficient and effective means of doing this is to retain an advisor who is skilled and experienced in the realm of buying businesses. Landmark Advisors is one of the few and most experienced advisors on the buy side of deals you can find. Schedule a time today to discuss how Landmark can help you find the ideal company to match your needs.
[i] Jeff Smith, long time buy-side advisor from Indianapolis.
