There are some truly dismal statistics in the business for sale industry. While the figures vary between sources, the general consensus is that over ninety percent of the people who start out looking for a business never buy one, and only twenty percent of all businesses listed for sale ever get sold. Pretty awful isn't it?
It would be easy to simply conclude that these two statistics are inter-woven. With 8 out of 10 businesses not being saleable, prospective buyers can argue they cannot possibly find and buy one from what is on the market. While there is some validity to that claim, the issue goes deeper, and leads into what I want to discuss this week.
Although I am a huge fan of the online business for sale databases, your search may have to go beyond what is on the open-market with some direct solicitations to businesses. You will find some companies that offer this service and while their rates vary considerably, unless they are ridiculous, it is usually a reasonable fee if you can locate the right business through this initiative.
If you are going to go the route of a direct solicitation, there are a few things to keep in mind:
A Laser Beam Is Better Than A Spray Can
The more targeted your solicitation, the more effective it will be. In other words, you want to focus on specific business types, and not just set general parameters. Using criteria such as years in business and certain revenue/profit levels are good sub-sets to the industry, but the most important issues is to target a list of specific business types that make sense for you.
Conducting a direct solicitation is usually best after you have had the opportunity to analyze businesses on the open-market. If anything, you will at least be able to get educated about the particular industry. A good way to accomplish this early in your search when the typical buyer has no clue what they want is to pick out a few industry sectors. Search online and find 3-4 potential listings in each sector. Speak to the seller/broker, meet the owner, ask your questions, and do your research and analysis. From this list, pare down the industries to two or three where you can see yourself in that field, and run through the exercise again. Your goal is to narrow down the industry type to one or two that fits your strengths and won't suffer from your weaknesses.
Then, you can consider going about a direct solicitation.
Use A Firm That Specializes In Searching Not Listing
As a business buyer, you want to surround yourself with specialists in all areas of this process. That is why you must use an attorney who is an expert in small business transactions and not your cousin's ex-brother-in-law the patent lawyer. It's also why you use an accountant who is well versed in the financial review of similar businesses you wish to buy, and not just someone you know whose practice is geared solely to asset protection or estate planning. It is therefore also the reason to use a firm that specializes in the search process.
Use a company that can help you identify the right targets, and has a track record of success finding potential opportunities for other buyers. Have them provide you with references of people who used them in the past and contact them. Speak with those who were successful and ones that weren't in order to get a true sense of how effective the company was on their behalf.
A good firm will be patient. Unless you are looking for a perfect business that doesn't exist, they will provide you with a steady flow of potential candidates.
You may come across some business brokers that also offer search services. While it is fine to use a broker, I do have one fundamental issue with some who offer this service. They will conduct a campaign on behalf of a buyer with the understanding that they can solicit a listing for any of the businesses the buyer disregards. Personally, I think that is ridiculous (and yes, I eagerly await all the flame-throwers that will surely tell me I am talking out of my rear-end on this point). I can just hear some brokers saying "Why not? If the buyer doesn't want them, why can't I try to get the listing?" Well, because if you do, your agenda from the onset is not unequivocally geared towards the buyer's best interest; that's why! Furthermore, in the eyes of an astute buyer, you are using their fees to cover your marketing costs. Any business broker can certainly pursue listings and also provide search services, but if you truly want to serve the buyer then the two they must be completely independent activities.
How Do They Find Them and Once They Do What Happens?
There are no standard procedures and so you need to know in advance how they work specifically and make sure their service fit your needs.
It is important to understand what their services include beyond simply sending out letters (on this note, make sure they send out letters or conduct phone calls and not just fax blast and email businesses). You need to know exactly how they conduct their search. You certainly don't need them to scour the Internet. Do they send out letters, and to whom? How do they get their lists? How many businesses do they contact? Is there a limit?
What happens when a business owner responds to their inquiry? Do they pre-qualify them further, or just hand over the names to you? Will they potentially act as an intermediary on your behalf, or are you on your own?
Do It On Your Own
I have long believed that every business is for sale; some owners just don't know it yet. After all, who wouldn't sell their business if the deal and timing are right? You can always contact companies on your own using a well scripted letter. In fact, we have a sample in our guide that some clients have experienced up to 40% response rates when sent out to the right market. If you decide to solicit businesses on your own, it is best to have your attorney send out the letter for you (everyone opens a lawyer's letter) and let them just defer all the responses to you directly.
Although you can get some great results on your own, it does take work. It can be a good first step you wish to test and if you do not get stellar results, then hire a firm to do it for you. And remember, whatever amount you have to potentially pay for a search, if it results in you finding the right business, the cost is meaningless compared to what you stand to gain as the owner of a good business.
Having said all this, do not just toss aside searching online. First, it is a very important first step. Second, there are plenty of good businesses available. It's just like the farmer who found his son digging in a 10-foot high pile of cow manure. When asked what he was doing, the boy explained: "there must be a pony in here somewhere!" So despite the awful industry statistics, rest assured there are some tremendous gems in the mix as long as you are prepared for the hunting.
Have a great week!
Richard:
This is just to let you know that at least one Business Broker is not going to flame you for your comment about using buyer searches as listing and marketing tools. I agree with you.
I tell everybody that we are not generally in the buyer broker business, but that if a buyer meets certain criteria I will work for them. That criteria involves their knowing what they want and being willing to pay for my services to get it, and my feeling that we have the resources to carry out the assignment.
If they go through a process like you describe using us or any other brokerage and have decided on what they want, understand the kind of business, and if they are financially qualified and psychologically ready to do a deal, I have no problem helping them, for a fee. BUT I also will NOT accept an assignment that we are not qualified to carry out.
Leon
Posted by: Leon Parker | May 26, 2009 at 01:54 PM