Upstream of the Deal Flow?

Looking back at my search, one of the mistakes I made was my broker outreach effort. This has become all the more apparent as more time passes and those brokers that I was reached through this method continue to send me their listings.

As described in these posts Broker Outreach, Broker Flyer, Email It’s Harder than It Looks, Emails are Flying, and Email Report Card, I wanted to get upstream of the deal flow so that I was not competing against as many other buyers. This concept was described in Buy Then Build, and seems ideal. Who wouldn’t want to get the first look at an opportunity?

To achieve this, I tried several methods, first I tried replicating what the Search Investment Group does by reaching out to brokers in an automated CRM system and provide them with a one-page search criteria/sales pitch sheet. As documented, I spent a ton of time putting together my one-pager, email signature, and staying out of the spam filter. Additionally, setting up an automated drip campaign was no small effort.

What did all that gain me? After several hundred emails went out, I made contact with many of those brokers. Most wanted to offer me buy side services, aka help me search. This is an expensive option and one I deemed unlikely to yield a great result unless my search criteria was super narrow. In hindsight, I should have included a line in my email stating that I was not looking for buy side services.

Additionally, I got on a dozen or so email distributions for new listings. This was precisely what I was seeking, or so I thought. One of my posts on Searchfunder was about my cold broker outreach tactics, and I received a few warnings on this tactic. One of those warnings was essentially that I better be careful what I wished for because I might get on too many non-specific lists.

Well, this turned out to be true as every email distribution that I am on, is one in which every business is listed for 4x to 10x its market value, even before looking under the hood. This not only didn’t get me upstream, but also doesn’t help narrow the funnel, as it resulted in more time being spent on unproductive email filtering.

Another method I tried was joining an expensive club that guaranteed pre-market deals at a stated rate of one every couple of weeks. This club is Probably a Good Deal by Clint Fiore and is a marvelous concept. I was one of the initial members when it started. This club seemed to be precisely what I was looking for, and my wife convinced me to pony up the $100/month to have these first look opportunities. There were only a few dozen members when I joined, so it seemed like I would have less competition.

Several months of this club, and what was the outcome? Did I get juicy opportunities before most others? Did I buy a business from this club? How could I not find a good deal, since a good broker was pre-vetting these deals?

The rate of deals was a dribble, with one time over 5 weeks passing between receiving a new deal. Further, the deals were all over the map, literally and figuratively. Maybe because the club was trying to cater to such a wide audience, or perhaps because the club was so new and not fully flushed out.

One of the pre-market deals from this club had 4 owners, 3 of which wanted to stay in business and comprised the entire management team of the business. The soon-to-be listing broker agreed with my assessment that this was likely only sellable to a Private Equity Firm or Family Office, as the SBA won’t allow a former owner to stay on past 1 year, and the size of the deal was borderline for conventional financing.

This club might now be much more valuable, and is probably worth considering, but it is also not likely a silver bullet.

So, how to go about connecting and getting pre-market listings? Is it even possible without proprietary outreach, aka reaching out to business owners that don’t have their business for sale directly? I would like to think so, and the strongest relationships with brokers that I achieved were the ones in which I found their listings and reach out to based on that listing. Then I was able to make a much stronger case for why I was worth their time, and able to much more efficiently evaluate their honesty, integrity, or whether they were on some kind of mind-altering substance.

How was I able to make efficient evaluations on the brokers? First, if the stated cashflow was in the ballpark of that provided in the CIM. How is it possible they wouldn’t match? Many of them listed the revenue as the cashflow, some listed the cashflow with dozens or even hundreds of add-backs, and yet others listed projected cashflows. This made evaluating the broker quick because if they played these games, I moved on.

If the listing and the CIM jived on major points, but I was no longer interested in the business, I let the broker know that I was not interested and exactly why. Many thanked me for this feedback. While, I tried to remain professional, there were a few times when I got quite flippant with a broker.

In one instance, a broker had me on a CRM email drip campaign. I had signed an NDA and reviewed the CIM, before I asked questions, as I was seriously considering the business. After 4 attempts to get the broker to respond over a couple of weeks, while, he kept sending me emails to “gauge my interest in the business”, I became quite flippant. I told him flat out his CRM was broke and that I would not be interested in any business he listed because I had seen his level of competence.

If I had more questions for the broker, I tried to make them concise and ensure that they were not already answered in the CIM. Then I endeavored to set up a meeting with the owner as quickly as possible. Again, once I had decided the opportunity wasn’t for me, I let the broker know specifically why I was no longer interested.

This method of developing a relationship with the good brokers worked well, and even though I might have passed on many of their listings, these brokers understood what I was looking for and that I was a serious, competent, and committed buyer. This method of looking at listed business was what in the end worked to conclude my search successfully, and when I have the bandwidth to search again it will be my method of choice.