Probability theory is the mathematical framework that allows individuals to analyze chance events in a logically sound manner. The probability of an event is a number indicating how likely that event will occur. This number is always between 0 and 1, where 0 indicates impossibility and 1 indicates certainty.

IBA, the oldest & largest business brokerage firm in the Pacific Northwest, has successfully sold more than 4400 privately held companies and family businesses. This transactional history has created for our firm a proprietary data resource for use in pricing businesses and assessing the probability of potential outcomes in negotiation and deal facilitation situations.  As an example, if we are assessing a situation with a client where a potential buyer is trying to obtain a Small Business Administration backed loan to support an acquisition with a debt service coverage ratio (DSCR) of 1.15, the lowest acceptable ratio to secure a SBA guarantee (https://www.chase.com/business/knowledge-center/start/what-is-the-debt-service-coverage-ratio) we know the probability of success in their pursuit is very low.  However, if the same buyer increases their capital injection into the transaction and the DSCR ratio becomes 1.35 then the probability of receiving loan support for an acquisition increases dramatically.

Weekly IBA is approached by numerous parties seeking business acquisitions in the Pacific Northwest.  These potential business buyers seek to gain information about the businesses IBA represents for sale as early in their sale process as possible.  They commonly recognize, often because they were referred to IBA from their attorneys, accountants, and bankers who previously were involved in successful transactions with IBA, that businesses represented by IBA for sale traditionally are only on the market from a few weeks to a few months because they are mature, profitable companies that have been priced correctly. 20 – 25% of IBA’s business sales annually involve participants in our Buyer Database Program.  Some of the companies sold to these parties were never publicly advertised.  Buyers seeking acquisition opportunities in industry sectors such as manufacturing, technology, and education will generally only be successful acquiring businesses through IBA if they participate in our Buyer Database Program.  The documentation necessary to participate in that program is available through DocuSign on this page of our website:  https://ibainc.com/buy-a-business/.

Returning to probability theory, IBA, based on our body of successful work as business sale intermediaries, is able to convey the five elements that will determine which business a buyer will ultimately acquire.  All five elements do not need to be present for a transaction to be completed, but the more of them that are present the better the business fit and likelihood of post-acquisition success.

1. Geography – The most limiting factor on what a buyer will purchase frequently has to do with its location. Business buyers who plan to be the executive leader of their acquisition target with employed spouses, children in school, owned residences, and strong family & friend connections traditionally will reduce their search area to what can be reached with a reasonable commute time. Buyers planning to put executive management in place and manage the operation remotely or retain existing management are less impacted by this element.  It should be noted that there is generally nothing a business broker can do to convince someone a 2 ½ hour commute daily one way is beneficial.  The decision to take on an excessive commute or live remote from family for a period of time is only a decision a buyer can make on their own.
2. Industry – The least restrictive of the five elements influencing a purchase decision is often which industry it operates in as a company. Many buyers are industry agnostic seeking quality, mature, profitable companies with growth potential.  These parties can and should evaluate as much deal flow as possible.  Alternatively, buyers looking to grow by acquisition in a specific space or leverage off of their relevant knowledge & experience will often dial in a much smaller group of potential industries for potential acquisitions.
3. Relevant Experience – Relevant experience matters.  It matters to SBA lenders, who use it as an approval criterion in underwriting.  It matters to business sellers, who want to put the helm of their businesses in the hands of people that will be successful and take care of their employees and customers in the future.  It matters to landlords, customers, and vendors, who have the ability to be detrimentally impacted by post sale performance of the buyer.
4. Liquid Capital – Banks will commonly want to see a buyer injection of capital into an acquisition equal to 10 – 25% of the purchase price. No different than sitting at a poker table without sufficient chips to win, a buyer who does not have the capital to get a deal done will either fail to gain the confidence of a seller necessary to reach agreement on a Letter of Intent or be put in scramble situation post LOI where they may have overpromised, are forced to underdeliver, and are required to try to renegotiate or lose the acquisition opportunity.
5. Signature Power – The importance of signature power (Net Worth) is often the element business buyers underestimate the importance of in getting to “YES” with a business owner and completing a transaction. The asset base behind a buyer matters because it will impact the ability to get a bank loan, lease, and operate the business post-acquisition if it hits turbulence.  In addition, it is a fact that legal counsel on the seller side will look at seller financing in a negative light.  They will share stories with their client about business owners not getting paid when they finance a portion of the sale.  They will look at the net worth of a buyer after the acquisition and reference buyer personal guarantees with superior position on assets.  The stronger the asset base of the buyer the less this issue will be a concern.  It should never be forgotten that in all transactions the parties will look after their own self interest, be they a landlord, a buyer, or seller.

The best decisions are made from a foundation of knowledge.  At IBA, it is our objective to facilitate all transactions in an environment of full disclosure with transparency employing best practices.  Business sellers are encouraged to provide buyers with sufficient information to acquire companies with “open eyes”. Business buyers should provide sellers with enough information to assess them critically against alternative sale options.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family 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”.