Business Brokers, A Necessary Evil: How to Get Deals Done With Bad Brokers

I'm excited to be here. I'm one of you in a way, because I'm trying to build my little SMB investment empire. I wanted to come to this event but couldn't afford a ticket, so I just got to speak. Pro tip: if you ever want to go to expensive events, get a speaking gig.

We're talking about business brokers, a necessary evil, today. But before that, since I'm the first speaker, Matt wanted me to get weird. So we're going to get weird and wild and make everybody uncomfortable.

My business is Bison Business. We do buy-side and sell-side M&A advisory. So when I introduce myself at parties, I'm in the business business.

I'm comfortable public speaking because for a brief period of time I was a public speaker, and I've done the hardest public speaking you can do. I spoke at middle schools and high schools in school assemblies. If you've done that, you cannot hurt me. That is seriously the scariest thing ever, an auditorium of thousands of kids.

I was telling the story of a girl named Rachel Scott. Rachel was killed in Columbine. She was the first girl killed in a shooting that changed my childhood. Her brother Craig became a dear friend of mine.

I had a roundabout way I got to small business. I was in school to be a pro pilot at Embry-Riddle. About midway through school, I was in a plane crash and started second-guessing my career aspirations. Right around my senior year, I really felt like God spoke to me and said, I don't want you to apply for jobs like everyone else is. I'm going to open your next door after you graduate. I hated that because I like opening my own doors. I'm a planner and a goal setter, but I felt that's what I was supposed to do.

After I graduated, my phone rang and it was the Scott family. I had met them before and heard Rachel's story, and it really impacted my life. They had decided they wanted to take her story to middle schools and high schools, and I was the second person they hired outside the family to share her story.

Rachel has almost become like an Anne Frank type of character because she left behind a series of diaries that became New York Times bestsellers. When she died, her funeral was the biggest viewing audience in CNN history at the time. People came out of the woodwork that she did small acts of kindness for, and she never knew how it changed their lives.

One of her famous quotes is: I have this theory that if one person can go out of their way to show compassion, it will start a chain reaction of the same. People will never know how far little kindness can go. She didn't just write about it, she lived it.

There was a girl planning to take her life who was being ignored at her school. She had her goodbye note written and pills laid out by her bed. The day she planned to do it, she was sitting alone at her lunch table. Rachel just stepped into her life and said, do you mind if I sit here? They spent an hour laughing, joking, being friendly. The girl said by the time she finished lunch with Rachel, she decided not to take her own life.

I worked for that family for three years. We went from startup to the largest school program in the country. My last year there we reached over 3 million students in live audiences. I was mainly doing marketing, but as we added speakers they asked me to speak. I told Rachel's story in about 25 states to several hundred thousand students. We had 13 documented school shootings avoided where kids had hit lists and plans and changed their minds after hearing this story. We had hundreds of stories of suicides prevented. It was all about kindness and compassion and starting a chain reaction.

I'm telling you this for a reason because I think this applies to you. I want you to start thinking about your business empire differently.

There's a book called Rachel's Tears with her diaries and her family's comments. Her family was moving a dresser out of her room about eight years after she died. When they moved the dresser, they found an outline of her hands she had traced on the back when she was around 10 or 12. Inside her hands she had written: these hands belong to Rachel Joy Scott and will someday touch millions of people's hearts. By the time they found that, it had already come true.

Eleven and a half months before she died, she wrote her shortest diary entry ever. She said: this will be my last year. I've gotten what I can. Thank you.

A little about me. I was raised in SMB. I was raised mostly by a single mom. We had a nursery garden center business, which is a very difficult small business. All I knew about small business is I didn't want to do it. My mom worked seven days a week and was all about, go to school, get an education, get a stable job, don't follow in my footsteps. It's ironic because I came full circle back to small business.

I trained to be a pilot, decided not to be a pro pilot, went into aviation insurance after my time at the nonprofit Rachel's Challenge, and then had entrepreneurial spasms. I got bored in the corporate world reading business books. I didn't know ETA existed. I didn't know this world existed. All I knew was if you wanted to go into business, you had to start a business.

So I did the craziest kind possible. I did an angel-backed manufacturing startup, which is dumb. That was extremely difficult, but I lucked out and ended up selling it to private equity two years later. I got diluted along the way in fundraising and had a minority stake, but I sold it for enough that I didn't have to retreat back to insurance. I had a little capital and knew I didn't want to go back to a job. So I started searching.

I didn't know the word search. I didn't know business brokers were a thing. I didn't know M&A was a thing. I just knew I had done a couple of startups, and that was fun, but I was married and have kids. The drama of the startup fundraise, losing money, the burn rate, the rollercoaster, I was like, I just want a business that already makes money. That sounds better for this season of my life.

That's when I ran into business brokers for the first time, and they sucked. I really didn't enjoy most of the encounters I had with business brokers. I was striking out on my search. I spent about a year in my pajamas searching from my ping pong table, trying to buy something, couldn't get calls back, couldn't get taken seriously. I finally gave up and said, I'm just going to build what I wish existed for me. So I broke my own rule and went back to a startup and said, I'm going to build a modern, better business brokerage. I didn't know how hard it was going to be.

I've been doing this for eight years. Personally, I've brokered about 50 sell-side deals, and my team has done more than that. I've got a team of seven, based in Texas. Along the way I've done four SMB investments. I liked Kevin's word, business bouquet. I don't have a holdco, I have a business bouquet. It's all been opportunistic. I'm here because I want to get more strategic and serious and learn how you smart people who were doing this from the beginning do it.

This is what I made in my manufacturing startup: a giant fake tree that you hide inside. Hunters open the door and go into that. I built a company with friends that manufactured those behemoth fake trees.

This is my family. That was me earlier this year at the zoo with some of my nieces, nephews, and kiddos. To me, business is about freedom, being able to design the life you want. I decided I didn't want to be a pro pilot, but I have my own little flying minivan. I take my crew of six (I've got four kids) and we fit perfectly in the little Bonanza for trips. That's a great encapsulation of what small business means to me. My dad blew it with my family, and I'm there for my kids. My wife is able to be a mom and a homeschool teacher. It's a way we've been able to have the family I wish I had as a kid. It's all because of lifestyle design through small business.

A business is a group of people and systems organized to create a better life for the owners and their employees by helping other people get what they want in life. That's my own definition. When you're searching and buying companies, never forget this. It's someone's life story. It's someone's baby. Someone built this business and owned it 20 or 30 years. They put their kids through school with this business. When you're talking to a seller, realize you're standing on holy ground. It's a sacred thing to take over these systems.

Before we jump into the marketplace, calibrate yourself. Think of your why. Why are you doing this? There are easier ways to make money. Finding and buying companies is hard. Operating companies is harder. You've got to have a why bigger than the dollars.

I think the reason Craig and I clicked and became really good friends is we both had this extreme life-changing near-death experience. That's the biggest blessing you can get. It's the biggest clarity thing that can ever happen.

Mine was, I flew a plane into a mountain. I got stuck in a canyon and had no way out and ended up flying into a canyon wall. There's no way I should have survived. I miraculously survived. The plane crash completely destroyed the plane around me. The crazier part was the next four hours. I was stuck on the side of a mountain in the middle of nowhere. It looked like Mars. I climbed to the top of the peak and looked 360 degrees and there wasn't a sign of civilization, no road, no water source. It was the high desert, November 29, 2003.

I was pretty sure I was going to die, but I was unharmed physically from the crash. I sat on that mountain writing goodbye letters to my family. I was so grateful I was alive because I realized I had never told the people closest to me how I felt about them. That's my challenge to you. Even if you're taking notes, think of the five people closest to you and write them a legacy letter. Make sure you communicate.

I was so grateful I survived the crash because I got to at least say what I never said. I made a commitment that they were going to find those letters when they found my body, but if I make it back, I'm not going to keep this inside anymore. And I gave those letters to all the people I wrote them to when I got plucked off the side of the mountain right at dark by a helicopter that found me. Spoiler alert, I lived.

I came from an emotionally distant family. The Henshaw family wasn't much of a hugger. Now I get up here and cry and share. When you are almost dead, you realize all the money stuff we're going to talk about, you cannot take it with you. The only thing that mattered when the veil's torn away and you're looking at death is God and people. Business is a people thing. You have an opportunity to touch hundreds of thousands of lives through what you're doing with your holdcos, your businesses, your advisory businesses. You're doing it at a vulnerable time when people are buying or selling businesses. It's emotional, difficult, vulnerable. You have a chance to touch lots of hearts.

Now let's get into the real stuff. We're in the United States and there are a lot of businesses, but not a lot you guys want to buy. When you hear stats thrown out, there are 30 million small businesses in the United States. Most at the bottom tier are unsellable. They're just people with an entity who are self-employed but don't have a transferable earning stream. Then you get to Main Street, where there are about 12 million firms with employees and payroll. Probably 80% of those are not interesting to you because they're too small. It's self-employment with ribbons around it.

Where I play is at the very top of Main Street and the bottom of the lower middle market. Around $500K is the smallest deals our firm does, up to maybe $20 million. The bulk of deals I've done have been the $1 million to $5 million, $1 million to $10 million, seven-figure deals. That's been my specialty. If you're a middle market person doing $50 million deals, that's not where I play.

I like to visualize it as two bodies of water meeting. Under $1 million enterprise value (not EBITDA, deal size enterprise value) is solidly Main Street. Over $10 million is solidly lower middle market. There's a mixing of waters between $1 million and $10 million that I love. The best deals are in this world. To navigate it, you have to understand the language, vocabulary, and creatures in these deals.

I made a little whale icon and a little shark icon. I think of sharks as entrepreneur, hands-on owners and whales as more institutional buyers buying management teams intact.

On the left side (Main Street), you typically have asking prices, SDE valuations, no working capital, mostly all-asset deals. The SBA is king. You have to know their rules. You can't have earnouts. There's very little creativity in deal structure. You're a slave to the SBA math on valuations. It's templatized. Buyers and sellers try to spend as little money as possible on due diligence and lawyers. Sometimes they share one closing attorney. It's wild west. It's a hands-on owner operator, and the buyer fills their shoes. I say fish for buyers because most brokers put nets out on BizBuySell and hope a good buyer swims into the net.

In middle market, you typically have no asking prices, EBITDA or DCF valuations, working capital is a major conversation, could be asset or stock deal. You're typically too big to have SBA involved, so you don't have any of those rules. You can be super creative in deal structuring, no templates, lawyers on each side doing custom work. You often have quality of earnings reports and heavyweight due diligence. You're usually buying management in place. Brokers in this space hunt you. They're building a list of buyers they want to market to and running a closed auction process.

In the mixing waters, you often have the sophisticated buyer and an unsophisticated seller. I'm looking at probably this room as the sophisticated buyer part. You must be bilingual to navigate these waters. You have to speak Main Street and middle market. I call serial buyers in this world whale sharks. Read my Twitter thread about that. You're a deal person and a finance person, but you're also an operator. That's a shark that behaves like a whale.

Two myths to break. When you encounter a bad broker, that means the business probably sucks. Sometimes, but generally false. If you see a business that's been on the market for a while, that deal probably sucks. Big-time false.

Let's talk about the difference between good and bad business brokers. This is from Eric at SMB Attorney. He posted a meme of how he saw business brokers, with the podium as buyers, attorneys, and business brokers in third place celebrating. I clapped back: this is how I view attorneys. There's the attorney, then the buyer, the seller, the business broker, the CPA, the diligence team, the insurance broker, the wealth manager, the landlord, the pond scum, the attorney, and the bank. Sorry, banks. All our bank sponsors, appreciate it.

There are great brokers out there, but like anything, they're few and far between. The reason people have a low opinion of business brokers is they rarely encounter business brokers. I've been doing this as a career, and I'm usually the only one people know. There are maybe 3,000 in the United States who are full-time and serious. Just in Texas, we have 250,000 real estate agents. Business brokers: 3,000 nationwide across all 50 states. There aren't many of us. The 80/20 rule applies. 20% are good and do the majority of deals, 80% are stinking it up. I'm going to teach you how to deal with them and get good business deals done with bad brokers.

When you get a good one, they're worth their weight in gold. Kevin just did a deal with one of my friends, a good broker, and that deal doesn't get done right without a good broker.

What do great brokers do? We help your deals go smoothly. We set realistic expectations. This is the number one thing. When you're doing off-market stuff, popping the value bubble is the hardest part. Every business owner, 99 out of 100, thinks their business is worth way more than it's worth. We are the bad guy for you. We pop that bubble and introduce them to reality so you don't have to. You don't want to start the relationship by beating up their baby. With a professionally represented deal with a good broker, they've already set realistic expectations.

We can influence and persuade the seller. You get to be the friendly, good buyer and gripe to me about the things you're frustrated with the seller about. Then I can tactfully influence them to a more realistic expectation. We help drive the process, crack the whip, get it done.

Part of that is solving problems like a ninja. Anybody who's a professional deal maker has done more deals than you've done as a buyer. We have a playbook. We've seen a few things. Where we earn our money is not just packaging and marketing the deal and getting the LOI negotiated, it's saving the deal. You've got to talk the seller off the ledge so many times. As the buyer, if there's not a good broker involved, you've got to be that person. A lot of your deals get broken from LOI to closing because you don't have someone in there saving it. We're 80% to 90% close rate from LOI to closing. A lot of it is because we have skilled hands holding it together, helping with due diligence, landlords, CPAs, attorneys, and all the third parties.

This is me on the stage at IBBA, the Chairman's Circle Awards winners of International Business Brokers Association. Sometimes I do dress up. That stage is the cream of the crop, the minority getting it done at high volume. Kevin's broker was on that stage, the dapper gentleman in the tan suit, Adam Petroff, VR Charlotte, good guy.

How do you find us? Look at the market leader brokers in your market for deals first. If you get them, they're going to do all those good things and help you get your deal done. Look for these letters: CBI (Certified Business Intermediary) is the IBBA's certification. M&AMI is M&A Source's certification. I have all these. I collected letters like infinity stones, mainly because I was insecure and thought people would care, and they don't. Look for those letters. It means they're investing in their education in deal making and taking it seriously as a profession. They're going to conferences and learning how you think and how to get deals done with you.

This may be wrong, but I think four to 12 companies for sale is a good green flag. If you don't know if a broker is good, if they have 50 businesses for sale, how are they doing good work for that many? If they only have one, they're probably dabbling. There's a sweet spot of a professional full-time broker who usually has about that many deals going.

They're not a CPA and a business broker, real estate agent and a business broker, this or that and a business broker. The best ones only do M&A or business brokering. Those other ones are typically not very good.

Do they have a staff? I'm hard to get ahold of because I'm here today, so if my phone rings urgent stuff on a deal, I have a team answering my phone right now. A lot of brokers are one-person operations without staff. If you go to their website and see they have a few people working with them and they answer their phone, you're probably dealing with a good one.

Now let's get to the fun part: the 80% sucky.

First, the old guy who never calls me back. I'm modeling this after a Texas broker. When I was first getting started, I thought I needed a gray-haired partner because I had hair at the time and looked too young. This industry ages you really quick. Most of these guys did something else for their whole career, then do brokerage as their sunset career. They don't want overhead or an office. They're usually pretty smart. Some are CPAs or lawyers. The stereotype: hard to reach, but okay once you get them, terrible with technology, set in their ways. They think freshly minted MBA searchers are the devil.

I had a guy with an impressive resume who wanted to take me on as a 50/50 partner. I was teaching him about electronic signatures instead of fax, and CRM. This was eight years ago when hardly any brokers used CRM. It was going to be too hard to marry my philosophy of a high-tech, modern brokerage with this guy. We're still friends. I didn't end up becoming his partner, but for a brief period I was in his office training with him.

Understand his process so you know why you never get called back. He's one guy, his overhead is nothing, and he doesn't need the deals to close. He gets a small retainer from each one. As long as his retainers are enough that he can golf, he's okay. He tries to get deals done and means well, but he thinks buyers are tire kickers. He can't field hundreds of phone calls. He puts an ad on BizBuySell, hundreds of people respond because he gets pretty good listings. He had one deal in San Antonio that had been sitting over a year, and I asked why hasn't this sold? It looks like a great business. He didn't have a process to handle leads. He'd send a template email: fill out this personal financial statement, print it, wet-ink sign it, fax it back. Hundreds of people would just give the email and not bother. I called those people and found out they were serious, but his process was so bad they didn't bother to jump through his hoops.

To deal with these people: be the squeaky wheel. Their love language is obedience. Follow their process. You may get a good deal by being the one buyer who bothers to do things their way. Show them you have money. They are attracted to cash. Get in person or on the phone and out from behind email as quickly as possible. Don't try to text or Zoom them.

Next, the meek broker. Too many listings, all moderately overpriced. Thin on information, no idea what they're doing, playing a numbers game, often a franchise broker. There are some good franchise brokers, so I don't want to throw them all under the bus, but a lot of the best franchise brokers own the franchise and recruit heavily, with a revolving door of younger brokers and huge churn. They're usually great people but don't have adequate training. They're listing anything they can.

When dealing with a meek broker: follow the process, then escalate to the owner. Speak Main Street to them because that's the language they know. Keep things simple. Get to LOI. Stay on top of their list. Have empathy because they're learning. The ones that make it turn into good brokers eventually. There's a season where they're drowning without good training and doing their best.

Then you have the real estate broker who dabbles. The keyword is real estate. You see that on their website and cards. They put the business on LoopNet. They screw up confidentiality. They get all the financial terminology wrong. Their CIMs have pretty pictures but don't tell you what you want to know. They don't have a good recast. They're obscenely mispriced, often in either direction. Sometimes they underprice. They'll often overprice the real estate and underprice the business because they don't know goodwill value. Sometimes they'll run the entire earning stream through a cap rate and quadruple-overprice the whole thing. They hate LOIs. They think that's not a real offer. They live in real estate, which is contracts.

When dealing with that person: make an offer. That's their love language. Make me an offer, but make it look real. Get to a real estate contract as quickly as possible to do the APA later. Once you get it accepted, just take over the process. They don't know how to run the process. Make their life easy and they'll let you run it. They want to feel like you're a real buyer with a real offer. Take it over but keep them in the loop and be respectful. Don't try to dunk on them. That will backfire.

Finally, there are a few big names with predatory business models. I'm not going to say who, but they make their money by overpromising sellers at big seminars. They're really good salesmen, but they make their money at $30,000, $40,000, $50,000 upfront chunks. They're hyper-aggressive on marketing and look slick and fancy. These people give us the worst names. When dealing with these shops, learn who they are. Generally avoid them. Make friends. They usually have one closer in the whole shop. Most of their best salespeople are upfront listing people you want to avoid because they're the shysters. If you find out who the closer is, make friends with them. The best thing is to circle back one to three years later because their businesses don't sell. Once the market beats them up, you can come back.

That's all I needed to say. I appreciate y'all so much for having me here. I'm available for questions later. Thank you.