IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post content from professionals on the IBA team with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Vishal Punj of IBA. Mr. Punj is a successful entrepreneur, MBA degreed professional who combines his corporate, academic, and personal business experience to provide quality representation with superior customer service to his business sale clients.

Search Fund Buyer Recommendations – A Business Brokerage Perspective

Attention Search Fund Buyers!  Does this look familiar?

• Size: Cash flow range between $750K and $2.25M.
• Location: Anywhere in the contiguous US as long as it is within an hour’s drive from a city.
• Business characteristics:
  • 50%+ recurring/repeating revenue (as opposed to project-based revenue)
  • Established history of at least 5 years.
  • Low customer concentration with no customer contributing greater than 20% of revenue
  • Valuation multiple in the range of 2.5X to 6X of cash flows
  • Industry: Industry agnostic, but
  • We have a special focus on:
    • B2B services and manufacturing
    • B2C services
  • o We are not interested in:
    • street level retail or e-commerce
    • food-related businesses
    • distributorship
    • project-based construction
    • Our approach: We will personally manage and handle the daily operations of the business. If the company already has a manager, we will retain the manager. We are not a private equity firm.

I cut and pasted the above message from my inbox last Friday.  As the Searcher ecosystem has exploded, I’ve seen my inbox with this exact message go from a couple of inquiries a month to sometimes a dozen in a week or more.  While I’m thrilled to see the level of interest our world has experienced in the past few years in terms of motivated parties, I’ve found myself having the same conversations over and over with Searchers.  At the risk of sounding like I’m pontificating, below are four observations that the aspiring Searcher should consider if they are interested in winning deals from the perspective of someone who’s sold to Searchers as well as PE/Strategic Acquirers.

• Cash Flow: If the project you’re looking at has $750k+ in SDE and is in a major metro, assume you’re competing against other Searchers as well as PE/Strategics.

I get it – with interest rates where they are, for you to leave your professional job and maintain a certain lifestyle (especially if you have a family), after SBA debt service you need a certain amount of cash left over to make sure you and the family can pay the bills.  The reason why the PE/Strategics like this number is that at $750k+, there is usually enough cash flow to allow for at least a single layer of management to help run the business which allows them to do what they do best, that being capital allocation.   As of late I’ve noticed PE/Strategics will go even lower and look at projects with cash flow of $500k+, if it is a bolt on acquisition to a platform.

• Capital Injection: Just because the SBA will fund a project with as little as a 10% cash injection doesn’t mean that’s what you should do.

You don’t have to be a finance wizard to understand that leverage can amplify your returns.  The opposite is also true.  Buying a business is not without risk, and when you compound leverage on top of that you can have an explosive recipe for disaster if things don’t go as planned.  This is purely anecdotal, but whenever I’ve asked Strategics/PE folks how they intend to finance the project, lately I’ve been hearing 40%-50% debt to equity.  If you’re a Searcher and your competition is putting in 40% while you’re only putting in 10%, that sends a powerful message to the Seller about the level of risk you’re adding to the project vs. others.

• Seller Note: Don’t spend your negotiating capital on getting the best possible terms on a Seller Note.

The good news here is that good M&A intermediaries will have already done the heavy lifting for you in educating the Seller on the need for a Seller Note.  However, far too often I see Searchers chip away at their negotiating capital by pushing hard on terms.  If a Seller is offering a 10% Seller Note at a reasonable interest rate, the Searcher should take that deal and run.  Going back to risk mentioned above, if you’re new to the industry (which tends to be the case with most Searchers) you must both learn the business upon transition and continue to steer the ship after close, both of which are hard to do.  The risk to the Seller is that the 10% Seller Note might not get paid.  That risk is mitigated with a Strategic Acquirer/PE Firm, as they usually have specific expertise in that industry as well as the bank roll to deal with any problems that arise after the sale.

• Narrative: Have a clear narrative on why you are the ideal acquirer for the business.

By and large, I’ve been pleasantly surprised by the sophistication and business acumen many Searchers bring to the table.  The problem is, I’ve found that only a select few have been able to translate that business acumen and sophistication into a clear narrative as to why they should be the acquirer over others.  For a Strategic Acquirer/PE Firm, that narrative is clear.  They already know the business and have the resources to simply add it to their portfolio, and can point to successes in roll-ups they’ve already done in the past in that industry.  It’s plug and play for them.  If you’re a Searcher, any engagement with an M&A intermediary and/or the Seller should be viewed as a job interview, because if you can’t win the deal on economics alone (see points 1-3 above), narrative is the only arrow in your quiver you’ll really have to win the deal.

To be clear, I love working with Searchers.  Many M&A intermediaries like myself are former small business owners, and so we can often see a bit of ourselves in the Searcher and can empathize with what they are trying to accomplish.  But it’s also important to understand that for our clients, the proceeds from the sale of their life’s work are usually all that they have to sustain them until the end of their days.  That puts the onus on us to educate and mitigate risk as much as we can.

If you have questions relating to the content of this article or selling a privately held company or family business, Vishal Punj would welcome the opportunity to talk with you.  Mr. Punj can be reached at (425) 454-3052 or vishal@ibainc.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, legal, and accounting communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.