Broker vs. Proprietary

Intermediated/brokered search: a deal sourcing strategy that relies on introductions from business brokers, M&A advisors, attorneys, accountants, and other professional advisors for introductions

Proprietary search: a deal sourcing strategy that relies primarily on direct outreach to potential acquisition targets and networking

Whether to conduct a proprietary search or a brokered/intermediated search is a go-to topic of discussion at search fund conferences, in social media forums, and offline in search fund circles.

The answer in these venues is typically some version of “there’s no right answer” or “do both.” Here’s my take.

The “easy” path to acquisition

Finding an opportunity through a broker is fairly easy. Find a broker’s website, and browse the listings page. Choose your favorite, and request a teaser. If you like what the teaser tells you, submit an NDA and receive a confidential information memorandum (CIM), or simply an information memorandum (IM) or “book.”

The book will present an overview of the business and may be anywhere from 5 pages in length to 100 or more, depending on the style and diligence level of the broker. If the broker has done her job, most of your big questions should be answered in this book, and many of the other questions you have on the deal should come as no surprise to the broker, who will provide prepared responses.

The motivation of the seller is generally of little concern in a brokered deal. She has actively hired a broker to put her company on the market for sale, and has agreed to pay the broker a hefty sum for her services. A good broker will have educated the seller on the process, minimizing the chance of surprise and disappointment, which could otherwise derail the deal.

A good broker will also serve as a buffer between you and the seller when emotions run high. The broker can serve as a source of calm and education throughout the deal making process.

And because brokers are often compensated as a percentage of the final sale price, the formula for winning a brokered deal is also often fairly straightforward - offer the highest price.

For these reasons, nearly every searcher kicks off the search with broker outreach. Evaluating marketed listings is a quick and easy way to get your sea legs in the search process. It allows you to “get your reps,” as some in the search fund world like to say. You can quickly evaluate an opportunity, get your questions answered, and make an offer.

If the process proceeds to closing, it may well have been less painful and fraught with fits and starts than a proprietary deal. Sounds pretty good, right?

The fine print

But take heed, dear searcher. The intermediated sourcing channel is not all rainbows and rabbits.

First of all, not all brokers are good. Frankly, in my experience, most add negative value and can make your deal more difficult than it would have been without them. Much like the real estate brokerage industry (in which I participated once upon a time), the barriers to entry in the small business brokerage world are few. If you find a good one, consider yourself lucky.

Second, your story is best told one-on-one with the owner, not through the filter of a broker. When you go through a broker, your offer will be placed in a spreadsheet alongside several other offers, and your story is reduced to numbers. Your personal story is lost, and with it your ability to differentiate yourself from other buyers.

Which brings me to my next point - other buyers! A broker is commissioned to bring in multiple offers, and if that broker succeeds in this most basic element of her job, you will almost never be a lone bidder. In fact, you may be just a stalking horse used to push the seller toward another buyer, wasting your time and toying with your emotions.

Finally, a broker is more interested in speaking with a buyer who aims to do a number of deals over the coming years than a searcher who is looking to do just one deal now. For the former buyer profile, the broker can invest time to understand the buyer’s criteria and preferences, so that even if what she has available at the moment is not a fit, she can present the buyer other opportunities as they arise in the future. Such a relationship is not as fruitful with a search fund entrepreneur.

Similarly, it is generally not a great use of the searcher’s time to network and build relationships with brokers when that searcher wants to make one acquisition now. Relationship-based sourcing methods are more effective in developing residual deal flow over the span of years, and these relationships can take time to become productive at all. A searcher, by contrast, needs one opportunity now.

Off-market

In a proprietary deal, it is not uncommon for the searcher to be the sole buyer, allowing you to develop that personal relationship with the business owner, sell your story, and set the groundwork for a longer-term working relationship.

Even when a broker brings you an “off-market” opportunity, that doesn’t make it proprietary. You can be sure she’s bringing that same opportunity to other buyers, even if she isn’t posting it on the website.

Our approach

At SMEVentures, we keep both channels open, but we place a heavy emphasis on the proprietary channel.

Brokers are willing to invest time in getting to know us because we will be active buyers for years to come, and we do actively look at brokered deals. We’ve made several offers on brokered deals since we started.

However, the bulk of our efforts are aimed at generating high-quality proprietary opportunities. Somewhat counterintuitively, we find this channel to be a more predictable source of deal flow. The pace is completely within our control, and we are unreliant on the processes, limits, and timelines of a third-party broker. Also, our searchers are able to develop that one-on-one seller relationship from the first conversation, already establishing a foundation for future negotiations and collaborations.

The upshot

From my experience, if you’re a searcher working outside the umbrella of a platform, accelerator, or some other institution with long-term broker relationships, you would be better off practicing on a few brokered deals before quickly switching to a 100% proprietary sourcing process.

As it turns out, this is the advice you hear most commonly at the search fund conferences anyway. Sorry for the anticlimax.