The 7 habits of a high volume broker office
The 3rd habit
Knowing when to say when!
By Stephen Mariani
How killing a deal quickly will make you more money this year
If you’re like us then you spend too much time on deals that don’t close, it comes with the job. Our goal is to monitor this and keep it to an absolute minimum. Today we will explain the way many brokers stop the process and how to decide where the turning point is. A quick death, although painful, is typically in everyone’s best interest.
The year was 1996 and I was still new in the business when I can remember arguing with a lender to please fund a transaction. Little did I know back then that all I was really doing was losing my credibility with the lender and costing both of us valuable time. As with most things in life, knowing when to move on is a very valuable lesson that costs countless hours to learn.
So, how should you know when to move to the next buyer or seller? Well, I believe it all begins with proper screening and expectation setting. What we typically focus on here at Diamond is addressing the biggest concerns first and working our way to the smaller ones. An example would be to determine a borrower’s credit right up front. These days with short sales and bankruptcies lingering from the 2009 to 2012 era, we strive to completely understand the credit of our buyer in the early stages. For many items it is not so cut and dry and even bad credit has some opportunities in our world right now. It’s easy to determine if a buyer cannot purchase a particular business if multiple items don’t fit. He has no experience in this industry at all or no down payment whatsoever, but what about the grey areas? He almost has the down payment and his resume’ could use a little work but could possibly fit? This is where the expertise of the professional comes into play. Screening this candidate with the appropriate source or sources soon as possible could be your answer. If your top three lending sources tell you no then this would be a sign to release this buyer. In this case this is your “cut bait” moment. What we tell our clients is that if we are not going to be able to provide financing for your project, you will know within 48 hours. The real reason being that using experienced professionals (in any industry) usually gets you to the answer quickly. No one wants to spend time on a deal that will never happen and unless you use this as a learning tool, the time to move on should come early in the process. What we do is try to provide advice to clients that cannot qualify at the present time by explaining what is preventing them from qualifying and what they can possibly correct moving forward.
So your buyer has great credit and the cash down payment but does this mean he is a perfect fit and the deal will close? Not really. Next is the level of attorney and advisors they bring into the mix that you may have to answer to. Although the experienced professionals may be difficult at times, they usually get the job done and done correctly. Being pro-deal is always a great trait to see in any buyers advising people. The problem comes in when you start receiving email requests for irrelevant items and you realize this buyer has just searched the web for a due diligence list to send you with no understanding behind it. I have seen items on it such as requesting the seller’s personal tax returns, vendor credit reports and other, non-relevant things that only increase the tension between buyer and seller. This is where the broker typically advisors the buyer what the seller will and will not provide and tries to walk them through the items he should be reviewing, BUT, keep in mind the broker works for the enemy (in the buyers mind). At some point these two parties will find a level of information that satisfies both or not. The true hope is this happens sooner rather than later and again everyone can move on.
Have you ever had to read a 50 page purchase agreement for a 200 thousand dollar transaction? I have and what these typically include is the buyers concerns about the business that would be better served during his due diligence research. Learning about the business and creating a lasting relationship with the seller is so much more valuable than being sure the seller is leaving the refrigerator in the break room (which I have seen written in a purchase agreement).
Over these last few months we have discussed many habits of the high volume offices and by now it should be clear that the customer (buyer) may NOT always be right. Although this is not what you’re taught in marketing 101, if paying your bills and valuing your time matters, it may just be correct.
What most intermediaries look for are the red flags. Here are an initial few flags that we see cause the deal to stall or even end.
- A potential buyer’s lack of urgency. The buyers that stay focused and demand responses to their questions are usually serious. By asking the right questions and continuing to pursue the broker and the deal typically means they are working toward the finish line and committed to the transaction. If it takes days to receive an email response from a potential buyer then they may not be as committed as they originally claimed.
- Every little item is a concern. Ever see a buyer request a “guarantee” of business moving forward? We have and it typically means this buyer may be a tire kicker and not serious about buying any business. It’s the little things we see questioned on Monday mornings as the buyer thinks over the weekend or maybe even gets some advice at the family Sunday dinner on how to buy a business.
- No financing option is every good enough. The potential buyer just continues to shop for financing and no lender offer is ever as good as he thinks it should be. They continue their financing search until the LOI or offer expires with nothing that meets their criteria.
The way we see many brokers handle the above may surprise you or may be things your office does instinctively already, if so, great. The first is to set an expected timeline of the process and hold to it. A lack of buyer response to an email or VM after an accepted offer is just not tolerable. I’m sure they expect the seller to jump through hoops when it comes to the due diligence items, demand the same from them on buyer side items. In this case, no news is typically bad news and you need to find out the intensions on the buyer sooner rather than later.
You can require financing submission within x amount of days of offer acceptance. This would be the first “out of contract” item that determines the borrowers level of commitment. A serious buyer wants to know quickly if he can secure the funds needed to make the deal happen. If 3 weeks have past and they have not lined up their financing by now, chances are they never will. The next frustrating thing we see is that many offers outline a closing date somewhere between 60 and 90 days from seller acceptance. The problem here is that if a buyer doesn’t have to report on his financing and maybe even cannot be approved, this business is off the market for 3 months. The solution is again, the time line of milestones. We always recommend the offer contract include 30 days to secure financing. Our reasoning is simple and considers all parties involved. If the buyer cannot secure the funding within 30 days then the broker and seller have the option to either re-list it and accept other offers or continue with this buyer because you recognize they are doing all they can to move forward in the transaction and just require more time.
If the potential buyer begins demanding items not relevant to the cash flow of the business and focuses on the smaller, insignificant items, they may be heading in the wrong direction. Many times they are receiving bad advice. I will never forget the one buyer we worked with that put his CPA in charge of determining the cash flow of the business. The CPA only requested the balance sheets to conduct his due diligence. His only concern was with what the sellers did with the money in the previous 3 years as opposed to how much the business actually earned. It took about 3 hours of our time to turn him around. The good news, he listened.
The above flags are to help you recognize what high volume offices watch for along the way and how they keep buyers and sellers committed. Many times it just takes a call or email to bring a buyer back into focus on what is important in the transaction and reminding them why they considered this business in the first place. Keeping everyone on track and focused may seem like a waste of time but the alternative is costing you more money then you may think.
AskDiamond@easysba.com is always available for. specific questions regarding this or other SBA rules