CASTING THE NET FOR BUSINESS LEADS: 6th article in the series on M&A

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You might just stumble upon the business of your future at a cocktail party or through a friend or family contact. This happens. But statistically, this does not happen very frequently.  The majority of successful business purchases are found by culling dozens, if not hundreds of business opportunities. And those business opportunities flow from a broad network of sources.      This chapter describes the means by which you develop your lead flow, an essential step in finding the right business to buy.


To find the ideal company to purchase, you may need to look at hundreds of prospects on paper.  You whittle these down to the few you see in person, to a smaller number that you negotiate and then finally to that one that you buy. You are not going to amass these leads all at once.  It is more constructive to think of this process as a lead flow.  You can create this flow by developing a network of brokers and other business contacts that feed you leads over time.  Then, over time, you review leads as they come to you.   To find the ideal company, you want to keep the lead flow going until your sale is closed.  You might find a company far more suited to your needs than the one you are currently negotiating, and it is important not to get locked into the final sale any time before you actually close the deal.



You can obtain leads from many different sources.  Some may come from friends and family. In the well organized search, most are likely to come from brokers whose livelihood is the identification of businesses for sale.  These brokers cannot be found in the Yellow Pages and vary in sophistication.  Most first-time buyers will need about ten active finders–those sending you leads on a regular basis, to obtain the necessary lead flow.  Over time you can build up your contacts.  More experienced buyers may eventually accumulate a list of several hundred finders but even so may have about a dozen finders actively sending leads for them at any one time.  However, the group changes constantly.  To assure a continuous flow of leads, you need to keep up your contacts with existing finders while adding new finders to your list throughout the search process.




Most business brokers you will encounter fit into one of two broad categories–the investment banker, who is usually paid by and represents the seller directly, and the finder, a broker, who seeks out or “finds” prospects for individuals interested in buying a company. The finder is also referred to as an “intermediary” —  a  “go-between”  between buyer and seller.

There are both similarities and differences in working with the various types of business brokers.  Your credibility is key to any broker.  Few brokers will waste their time sending you leads if they have doubts about your knowledge and ability to make a deal, since they almost all operate on a commission paid either by the seller or the buyer, if the deal is closed.  The broker will do a lot of work for you once he or she perceives that you are a live candidate, however, with the knowledge, ability and desire to close.

Public companies divesting a division are apt to hire an investment banker as are larger companies, typically of at least $50 million in sales. The investment banker provides expert valuation and greater credibility to a board of directors that a fair deal has taken place.  However, investment bankers are costly to the seller and furthermore, often will not bother with small to medium sized companies, even many of those operating at levels of  $20 million in sales or more.  Thus, you are likely to locate most small to medium sized businesses, other than divisions of larger companies with the aid of a finder.

You are also likely to encounter differences in the expectations, legal documents and procedures among different types of brokers. The next section describes the experiences you are likely to encounter with different types of brokers.


The investment banker

The investment banker is the most sophisticated type of broker.  If you encounter an investment banker managed deal, you can expect fairly similar procedures.  Investment bankers are retained by a prospective seller in this situation.  Thus, when the source of your lead is an investment banker, you can safely assume that you are dealing with a committed seller.  The seller has already incurred considerable expense and time with the investment banker to have a “book” assembled, and would not likely go to such expense unless he or she was serious about selling the company. A “book” is a report prepared by the investment banker which contains fairly detailed historical and financial information about the company, market information and other background information about the company being sold.  This book is prepared before anyone is even contacted that the company is for sale.  Considerable time is spent in polishing  the financial statements, adjusting the extraordinary expenses, such as excess salaries for the owner or above market rents for leased property, to show a normalized profit and loss statement.

As a prospective buyer, you cannot automatically receive the book about a company for sale.  Regardless of who contacts you, the initial information you receive is likely to be rather limited and general. If the investment banker is already aware of your interest in buying similar companies, he or she may contact you directly by phone or letter. Or you may receive a one page description of the company from another broker.    This one-page description may identify the location, type of industry and size in rather general terms, e.g. a Midwest manufacturer of gaskets supplying the auto industry, between 10 and 20 million dollars in revenues.   The name of the company and precise descriptions are not given, to avoid gossip.  To receive “the book,” you will be required to sign and return a confidentiality agreement.

When dealing with a lead from an investment banker, you will have to sign a letter of interest, which includes an estimate of the price you are willing to pay, before you are allowed to meet the seller and visit the company for sale. The letter of interest is used by the investment banker to screen out the people who are going to offer too low a price or who aren’t going to be able to make the deal.  It is almost like a bidding auction. Typically, only about six or seven buyers are invited to meet with the seller and the setting is much more formal than with other types of leads.  When dealing with a lead from an investment banker, you can also  expect that the investment banker will want to stay heavily involved with the transaction throughout the deal process. This can be somewhat problematic, because both successful evaluation and negotiation of a deal depend upon extensive contact with the seller.  The seller will often reveal information that you cannot obtain in reports or from other people.  However, be persistent in seeking out opportunities to meet with the seller, preferably directly and alone, and you will find them, even when the investment banker is involved with the deal.


The finder

Unlike investment bankers, among finders you are likely to encounter much more variation in the process.  Finders may have a full time service business or may be a semi-retired executive working out of his or her home. Although it is probably more accurate to view these finders along a continuum, for the sake of discussion, we will divide finders into two subclassifications–the professional broker and the informal intermediary, to point out some typical differences you might encounter working with various brokers.

Almost all finders require that a fee agreement be signed before they send you any leads. A fee agreement is an agreement between buyer and broker where the buyer agrees to pay a fee contingent on the closing of a deal.  No expense is incurred otherwise.

The professional broker Somewhere between the very informal intermediary and the sophisticated investment broker is the professional intermediary broker.  This type of finder usually has an office outside the home and one or more employees assisting him or her.  In spite of their more formal status, these people are still not easy to identify.  They are not licensed in most states.  They are not listed in the Yellow Pages.  However, as a group, they also  account for a significant proportion of the leads that actually get executed into sales.

You can expect the professional intermediary to gather a fair amount of information for you once he or she has a fee agreement with you.  You can expect to receive financial statements, product literature and a two or three page summary of the business before visiting the company up for sale.  You can expect leads from this source to be screened by the finder so that the company is actually for sale. By contrast, among the more informal intermediaries, often what you get is little more than a lead that you have to invest time exploring further.

Once you make contact with the seller, however, the professional broker tends to take a back seat to the process, unlike the investment banker. Most of them would prefer to spend their time looking for another deal hoping nevertheless that one day they will receive a check for their matchmaking efforts.  This is actually quite helpful because it allows easier access between buyer and seller during the evaluation and negotiation process than when the broker remains involved.

The informal intermediary At the other end of the spectrum is the informal intermediary, another type of finder that works for the buyer.   The informal intermediary may only close one or two companies per year.

Some informal intermediaries bring you leads on the basis of a telephone conversation with the prospective seller or on the basis of a seller’s response to a finder’s letter.  Or he may drive around town, making cold calls to business owners.  Again, though, expect to sign a fee agreement before the intermediary does much work for you.

Your first contact from the informal intermediary is likely to be a phone call rather than a letter or other written information.   The finder may not even know whether or not the company is really for sale but is calling to find out whether the particular company is the sort you might be interested in.  When the lead is first generated, the informal intermediary usually has much less information available to both himself and to the buyer than other brokers might.  He probably has an estimate of total revenues, and whether or not the company is profitable.  If he has actually visited the company, he may also have a brief description of the site.  There is no book or organized gathering of information.   The finder is not likely to tell you even where the company is located until you have signed a fee agreement and a confidentiality agreement.  Don’t be surprised however if the finder asks you to provide your own form for the confidentiality agreement.  Some finders do not always keep such forms on hand.

If the lead meets your initial broad criteria then you should indicate a possible interest.Once you have expressed initial interest, typically, this type of finder will want to set up a face to face meeting with the owner before providing you with detailed information. This is very different from the investment banker, that will only present a limited number of buyers to the seller, based on a letter of interest.  In this situation, the intermediary might not even be present at the first meeting between buyer and seller.  At that first meeting, the buyer should not be surprised to discover that the seller is not interested in selling his company after all!  But it would be a mistake to exclude review of such leads because many sales are consummated from just such informal contacts made by such brokers.

Though to some extent true of all brokers, the informal intermediary is quite likely to lose interest very quickly without continuing contact and feedback from the buyer.  He or she might make a few phone contacts and forget about you unless you keep reminding him of your interest.  The simplest approach is to set up a database from which you can send a regular mailing to all brokers on your list to keep them aware of your current interests.  It may seem like a lot of effort, but it is important to keep in mind that many good deals often arise from this source.

As quirky as some of them are at times, these informal intermediaries are your bread and butter. The investment banker may never have heard of the companies that your finders uncover. If the finder knows you’re committed, that you have the money and the know-how to do a deal, he will go out and work for you.

Other types of business brokers


Whereas finders are hired by the buyer, some business brokers other than investment bankers are hired by the seller.  Other brokers may alternately work for either a buyer or seller over time.


Although in our view, the best and most plentiful source of leads will be derived from your broker network, you may also want to explore some other sources of leads.  Some buyers learn about businesses for sale through their network of bankers, attorneys and accountants. But these are often weak business prospects.  In the banker’s case,  you must beware that the bank may be trying to sell the company in order to retrieve its own assets.  The bank may not get paid unless the company is sold.

A more productive way of viewing alternative sources of leads is as a means of tracking down business brokers.  This idea is explained further in the next section.



Many investment bankers are well known and can be easily identified.  Finding the intermediary or finder requires far greater effort because they do not generally advertise their services nor are they listed in the Yellow Pages.  This section describes some ways you can begin to develop your own list.

Locating business brokers through other business professionals Your own attorney, accountant or banker might not be the best or most direct source of qualified leads, but he or she may have the names of some finders that you can contact.  Try to locate other professional support people in your community who are involved with acquisition activity. They are quite likely to have names of at least a few finders from their own past dealings.

Responding to newspaper ads One of the most useful ways to identify brokers is to respond to an ad in the Wall Street Journal for a company that is for sale.  Quite often you will get an intermediary’s name.  Then you can add that broker’s name to the list even if you are not interested in the particular company being advertised.


Placing an ad in a business newspaper Though more expensive, you can also locate brokers by placing your own ad in the Wall Street Journal, New York Times or the business section of your regional newspaper, expressing your interest in acquiring a company.  The ad might read like this:

“Acquisition wanted in the computer services business; sales up to $10 million, located preferably in ___(location), financing available (if it is). Please contact ABC company, Mr. ___, (your telephone number), (your fax).”

With this type of ad, you are not likely to get responses from owners.  But you are likely to be contacted by brokers who might otherwise be difficult to ferret out.  When brokers respond, they usually tell you more about themselves, and you can tell them more about what you are looking for.  In our experience at JPE, when running an ad in the Wall Street Journal about nine out of 10 responses will be intermediaries.

Contacting a professional association of brokers A growing number of business intermediaries belong to a professional association.  The Association for Corporate Growth, one such organization, is a  national organization whose members are involved primarily with corporate growth via acquisition.  Many of its members are intermediaries. Such organizations may provide you with a list of finders and brokers.


Several factors contribute to your credibility with the broker, regardless of his or her sophistication. The most important are as follows:

1)     You are clear about what you are looking for. Ideally, you should have acquisition criteria that are written and spelled out.

2)     You understand and are committed to the buying process.

3)     You have the financial capability to close.

4)     Credibility is critical in the buyer-broker relationship because without it, the broker is not likely to bother to provide you with leads.


Once you identify the name of a business broker, you can contact him either by telephone to tell him who you are and what you are looking for.  It is helpful to acknowledge up front that there will be a mutually agreed fee and that you are looking forward to his input.   Subsequently, whenever a finder sends you a lead, it is important to respond quickly and courteously or he will stop contacting you. Your response should indicate whether or not a lead meets your criteria, your appreciation for the time taken to send you the lead even if it doesn’t fit your needs, and finally, an indication that you hope the broker will continue to send you leads in the future. In the event that the initial information you receive from a broker is too sketchy to make a decision, request additional information rather than reject the lead out of hand.

Remember that most brokers work on commission. They will spend time on their most likely prospects.  They are not obligated to serve you.  You must stay in frequent contact with a finder, if you expect him or her to keep looking.  If you follow the recommended guidelines, a finder is more likely to continue sending you prospects even though you may not buy anything from him or her for several months or even years.   But if he gets the impression that you never get in touch with him, he will question the worth of investing his time or money on you.  A finder knows that you are not going to buy a company from every finder but if they feel you are a serious buyer, that you behave professionally and  that occasionally you buy a company, the finder will remain in touch over a long period of time.

In addition to responding to particular leads, you should keep in touch with your broker network through regular mailings, phone contacts and, for some of the more active finders, an occasional lunch.  For instance, JPE sends its brokers press releases on a regular basis, and otherwise keeps them abreast of what JPE is doing. At any given time,  you may only have a dozen intermediaries actively looking for you, but the particular group contacting you changes over time.  A company representative also maintains more direct contact with the most promising of these brokers, by calling them periodically and even taking them out to lunch, activities which help to keep them fired up and enthusiastic.


Although you try to cast as wide a net as possible in the beginning, once your leads really begin to flow, you will need to filter out unwanted leads —  and brokers that appear to waste your time on a chronic basis. Due to confidentiality concerns, most leads first arrive to you with very limited information.  Initially, you try to use your acquisition criteria to select the leads you want to pursue. But as mentioned, you may have to invest additional time in gathering information before you even have enough information to compare with your initial screening criteria.           In order to make most efficient use of your own time, you may find that some brokers should be dropped from your list because they are wasting your time.  Two common problems to alert yourself to are the brokers who (1) keeps sending you irrelevant leads; (2) keeps sending you poorly qualified leads.

The broker who sends irrelevant leads Some brokers do not take the time or interest to understand the criteria that you have set up.  Of course, if you do not clearly communicate your own needs in the beginning, you cannot expect all the leads a broker sends to be appropriate to your needs.  But if you have outlined your needs, say for instance, you are seeking a manufacturing firm, and your broker keeps sending you leads in retail and service areas, he or she is wasting your valuable time.  A good broker will take the time to learn about your needs, and pre-screen the leads he or she receives, only sending you the relevant ones.

The broker who sends poorly qualified leads Poor qualification of leads is a second common problem, especially among the informal intermediaries.  These finders may be on a “fishing expedition,” with the seller, and may even send you leads from owners who have no intention at all of selling their companies.  They may send you a lead to determine the type of business you are interested in, and then try to interest the seller in meeting with you.  This type of broker isn’t as problematic as the first, unless the intermediary involves you in the process, having you meet with the owner  only to find out that he or she is not interested in selling, at least not for a reasonable price.  One way to spot this type of finder is if he has a hard time providing you with any information about the company before your first meeting with the seller.

Learning who your credible brokers are, the ones who send you helpful leads, is especially important in determining follow-up of leads that are very limited in initial information.  For instance, a broker may contact you with a lead in the appropriate size and profit range but you have no idea what industry it is in or what products it makes.  If the broker says that this is something he thinks you would be interested in, you have to evaluate the source.  Is this a serious broker that knows your criteria and is there some reason for them not to tell you what it is, or is this a broker who is just wasting your time?  One way to respond, if you are not sure about the broker, is to provide the following answer:

“Thank you for sending us this brief description of the prospect that you represent.  It certainly meets our sales and profitability criteria, but before we go any further we would like to know what products they have or what industry they are in.”

You may not get an answer to this query without being asked to sign a confidentiality agreement and a fee agreement. At that point, you have to decide whether or not you are dealing with a serious finder.  For instance, has this person sent you good leads before?  Or if its someone new, has he sent you a nicely put together document for the confidentiality agreement or is it on a handwritten piece of paper?

One thing to keep in mind is that you will be dealing with a lot of volume as your lead flow begins to build. Along the way you will make mistakes but you shouldn’t worry about it.  You may turn off a deal that could be great but at the same time, you don’t want to go too far because you don’t have enough information.

If you do keep getting irrelevant leads from a particular broker, you don’t really want to tell him directly that you don’t want to deal with him unless he has done something unethical.   Once you stop communicating with him, he will gradually stop contacting you anyway.  Conversely, as we mentioned before, you need to maintain on-going contact with brokers who are sending you helpful leads, or they will stop sending you leads as well.


As you start to build up your network of intermediaries, you will typically begin to get leads in one of three ways:

1) You may receive a phone call from an investment bankers or intermediary. You should tell the broker then and there whether or not you have interest in pursuing it any further.

2) You may receive a one page executive summary in the mail.  It is important to respond to these leads.  For leads you are not interested in, you should write the broker and tell him or her why the lead doesn’t fit your criteria, if you would like that broker to continue sending you leads. You might be able to let some of these slip by without replying but the more you communicate, the better off you are.

3) Finally, you might receive a list of companies.  For example, you may get a booklet with 100-150 companies for sale around the country from Geneva, a national organization, ranging from a drug store chain to hopefully something that is relevant.

Especially if you include the booklets of leads, once you start gathering leads, you may have quite limited information on literally thousands of leads.  Thus, it is important to keep your key criteria clearly in mind and only pursue those leads that fit your needs.  Otherwise, you will get distracted by leads that are not likely to meet your needs.  It is worth asking for follow-up information for those leads that meet your initial criteria for revenues, product information and profitability. You are likely to have to sign a confidentiality agreement in order to receive any additional information.


As you uncover leads that might be worthwhile, you should keep a record of each lead as long as it remains in your active file. You are likely to receive pieces of information about the company over time, perhaps some facts via a written letter, and additional information by telephone or from an initial visit with the owner.  Even before embarking on your preliminary due diligence, it is useful to maintain a file for each lead so that you do not lose track of any opportunities.

One rule of thumb is to keep a file on any lead for which you have signed a confidentiality agreement and have not yet rejected.  These leads are likely to be in varying stages of evaluation and negotiation, anything from those for which you have just signed a confidentiality agreement and have little more than a name, to those in advanced stages of discussion for which you are carrying out formal due diligence.

A sample summary sheet, similar to the one used at JPE, Inc, is shown in exhibit 6.1.  You may want to design your own worksheet or develop some other database model. What is important is that you do not lose track of viable leads. Those leads are expensive to obtain and you don’t want to make the mistake of misplacing important information. You may want to develop clear rules for keeping a lead in the active file.  For instance, JPE, Inc. maintains a company in the active file from the point a confidentiality agreement is signed until JPE, inc. is no longer interested in the company (or has bought the company). There are usually about fifteen to twenty-five active companies tracked at any one time, and perhaps as many as fifty companies that become part of the active file for each company eventually purchased.


Although most books on buying a company list a long list of sources for business leads, your best approach is to develop a list of finders or intermediaries who will do your searching for you.  To avoid a deluge of leads, you need to be sure you have clarified your acquisition criteria and communicated these criteria to these finders clearly.  If you are looking for larger companies, you are more apt to benefit from contacting investment bankers as well.  If you pursue the suggestions we have made, it won’t take long before you have ten or fifteen finders on your list.  It is hard to estimate how many finders you will need. Even a large company such as JPE probably only has about five or ten finders actively sending it leads at any one time, but this is generating from staying in contact, via mailings and phone calls, with several hundred brokers and investment bankers over time.  Realize however that the active list of ten rotates among the different brokers.  Thus you are wise to maintain contact with everyone on the list, unless you have dropped a particular broker for the reasons listed earlier.

If you are getting a steady stream of viable leads that fit your initial criteria, you probably have enough leads. If you are not obtaining enough leads to keep your search active, you may want to review the tips from this section and spend more effort in identifying additional intermediaries.


Similar to real estate transactions, one or more brokers typically receive a commission in exchange for bringing the buyer and seller together. Technically speaking, in the case of the investment banker, the seller pays the fee.  In the case of the finder, the buyer pays.  The agreement establishes the amount and conditions upon which a fee is paid.  Generally a fee is paid only if a finder provides a prospect that leads to a sale.   Although the broker often desires a blanket agreement, it is advisable to obtain a fee agreement that pertains to each particular lead.  This reduces the chance of misunderstandings later about who is owed a commission for which leads.

Though not always agreed upon, some variation of the standard Lehman formula often forms the basis of the commission.  Although the exact figures vary, the idea behind the formula is that the commission is based on a percentage of the total price of the transaction, and that percentage slides downward as the price increases.  Thus, based on one variant of the formula, the buyer may pay 5% for up to   the  first million dollars of the price, 4% on the second million dollars, 3% on the third million, 2% on the fourth million and 1% for everything above that. Sometimes brokers may try to ask for a higher commission, for instance, 5% on the first two million dollars of the transaction.  Others may give a price break for amounts above $5 million.

One might debate who really pays the fee. Whether an investment banker or intermediary helped with the deal, the fee has to be taken out of the transaction.  Since the seller has a certain expectation of how much he wants to make on the deal the fee often gets added into the final price of the deal even when the seller pays the commission up front.  For instance, the buyer may agree to pay for an agreed upon amount of liabilities for “putting the corporation into condition to sell the stock.”  This is a subtle way of saying the buyer will pay for the investment bankers’ fees.  Such an agreement is typically included in a letter of intent, and subsequently, in the purchase agreement.

In negotiating finder fees, it is helpful to clarify the role that a finder plays in the deal.  For instance, one finder may search the bushes to find a company, while another learns that a company is available for sale from an investment banker.  The first broker has put a lot more effort into the sale, and may deserve a larger commission.  It is helpful, therefore to ask whether or not another investment broker is involved.  If so, you might want to negotiate a finder’s fee rate rather than a full commission if another broker is involved.  This is not merely an issue of matching effort to reward, on the part of the broker.  As described above, if another broker is involved, you may indirectly end up paying that fee as well, even though officially it is paid by the seller.

Finder’s fees can  vary but it is not unusual to negotiate a flat rate such as 1% to 2% of the total price, rather than the full Lehman formula, and it depends on the size of the deal.  But there is no real standard in the industry. However, if the person has actually gone out and beat on doors looking for a prospective seller it is reasonable to pay the standard Lehman formula.

Sometimes people question the amount of money a finder might make on any one deal.  People sometimes ignore the amount of time and effort a finder puts in before a deal actually closes.  The finder may send your company leads for years without getting paid.  The good finder has obtained these leads by actually going out and looking for opportunities.  He has to feel that he is going to score big because most of the time he does not.  The informal intermediary may feel he or she is doing pretty well to close two or three deals per year.

Reference: “How to Acquire the Right Business”

John Psarouthakis & Lorraine Uhlaner

Published by Xlibris, 2009




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