We often hear from owners who think they have the buyer for their business in hand. It might be someone they know, maybe a long-time friend, an employee, a friendly competitor, or the outreach might have come from out of the blue.
Yes – the buyer on your radar could indeed be “the” buyer.
That said, odds are overwhelming that the buyer on your radar will not be “the” buyer.
Let’s unpack this.
The friendly competitor offer
The very first owner we helped, Daniel Wright, in Lynnwood, Washington, reached out to us with an offer from a friendly competitor operating in the same business park. He had known this other owner for years. The adult children of the owner were concerned that their dad was getting taken advantage of, so they reached out.
Guess what? The terms of the offer were utterly terrible. It started with the headline transaction price, which was hundreds of thousands of dollars below market value. But that was only the start..
The other owner offered to buy the business using seller financing – over 7 years – and wanted to put only 10% down. It gets worse. The buyer wanted to keep the $300,000+ in the business checking account as working capital. In other words, the buyer was offering to “pay 10% down” with the cash already in the business checking account. And the final blow? Requiring the 66yo seller, a hardworking owner very ready to retire, to stay on for 6 more months after a sale.
To say the least, the offer was atrocious.
This seller became our first client as we walked through the cash at close and seller net math – detailing how we could do so much better by confidentially taking the business to market and running a deal process.
The outcome? 70+ buyers inquired, and the seller walked away with over $500,000 more, AFTER paying our success fee, than they would have otherwise. He received 90% in cash at close and agreed to rollover 10% equity with the buyer. It was a homerun outcome.
Other owners in the space, and the grizzled business coach who Daniel had been working with for years, were impressed. That business coach referred another owner in the same owners group to us – and guess what – we sold that business too.
Selling to an employee
Can it happen? Yes.
Does it happen? Almost never.
This is the dream scenario for most owners. Selling to a long-time employee that they implicitly trust, maybe who they even think of as family.
Anytime an employee buying the business is on the table, we immediately connect the employee to a commercial lender and share insight on market multiples. This is where a potential deal often breaks down – as the employee may not have the capital required for a down payment or qualify for a business loan.
It goes beyond this though – as all owners can tell you, there is a major difference between being an employee, even a key employee, vs the role of an owner. As an owner, you are sweating payroll, cash flow, licensing, competition, pricing, inventory, equipment, and on and on.
Some employees realize they do not want to be an owner after all once they start thinking about the practicalities on a weekly basis. After all, I do now know many owners who enjoy logging into the Washington Dept of Revenue or Bellevue tax portals each quarter. The paperwork and administrative minutiae can be daunting.
Finally, provided an employee has the capital for a down payment and qualifies for financing, there is the employee’s spouse to consider. The employee + spouse can be surprised that a bank will require them to sign a personal guarantee for a business loan and have to put up their home as collateral. It is quite a leap for many employees to make.
Getting approached out of the blue
As of today, Google says there are 11,000+ US-based private equity and alternative investment groups. They have all sorts of names – strategics, PE shops, family offices, hold companies, etc.
I was in sunny Phoenix recently for a dealmaker conference. A private equity firm was bragging about a Southeast company they “prop sourced”..meaning they sourced it directly from proprietary (direct) outreach. The PE associate I spoke with could not believe how cheaply they got the business for.
Folks, these are sophisticated transaction experts who are doing 30 – 200 deals / year. As a business owner, ask yourself.. Do you think you are evenly matched in a direct negotiation with this type of buyer? Do you want to be the seller that is known for giving away their business?
One rollup we know in the Pacific Northwest has purchased over 40 trades businesses in the last 5 years. If you sell direct to one of these groups and do not run a proper M&A process…I can essentially guarantee your business is being STOLEN.
Often, cold outreach buyers, like a PE firm, have been doing deals like yours for years. They know exactly how agreements are structured. They know exactly where to build in protection for themselves. And they know that a seller without experienced representation is far more likely to sign something they don’t fully understand.
You might be wondering how a success fee, or commission, works when a seller brings a buyer, or buyers, to the table.
Discounting a success fee for a named buyer
Every seller has the ability to include up to three named buyers directly in our Engagement Agreement. In the event one of these three buyers ends up being “the buyer” we agree to a 20% success fee (or commission) discount.
By partnering with an M&A Advisor or Business Broker, you ensure a deal gets done. They create urgency, set expectations, and generate competition.
Importantly, the advisor only gets paid when a deal closes.
Bringing it all together
Tread cautiously with buyer in your network. Ask for proof of funds. Ask for documentation from the lender helping your buyer. Have a frank discussion about business valuation, deal structure, market multiples, and transaction price.
That is it for today – more to come in a future post. Please forward or share this content if you find it valuable. As always, thank you for reading!
At Washington Business Brokers we are experts in valuation, optimizing a business for sale, buyer identification and qualification, negotiation, deal structuring, and closing.
We proudly represent businesses with revenue of $2M – $30M across many industries. While most businesses are in the Pacific Northwest, we work with owners across the country. Ideal prospective sellers have 10+ employees and $2M+ in sales.
Washington Business Brokers is the only firm in Washington & Oregon to be recognized nationally for 4 years running by M&A Source and the International Business Brokers Association for verified transactions – including the prestigious Chairman’s Circle award again in 2025.
When the time is right for you, we will be proud to partner and advise on your fair deal.
If you would like to better understand the value of your business or learn more about the process of confidentially selling:
call or text 206.703.3555
email info@wabusinessbrokers.com
or schedule time for an exploratory, free chat
Conversations are always confidential and there is no commitment.
Are you an owner / future seller? Check out our Seller Guide for what to expect
Are you a prospective buyer? Do not miss Straight Talk for Buyers
