As we’ve discussed in other posts, there are two primary ways to source an acquisition: 1) proprietary or direct deals, where an interested buyer approaches the business directly (without a middleman involved) and 2) brokered deals sourced through a business broker, bank, or other intermediary who represents and advises the seller of the business. But which way is better?
Historically, many funds have focused on proprietary deals, because there is an impression that a better price can be had without a broker involved. On its website, deal sourcing platform Cyndx sums up this view by referring to such off-market acquisitions as the “Holy Grail” of private equity opportunities, characterized by “less competition, better prices, closer relationships, and quicker closing.” The ability to find proprietary deals can also give sponsors a differentiating edge to sell to potential LPs.
That said, a growing proportion of PE deals today, even those at smaller transaction sizes, are happening through brokers, not least because of growth in the lower middle market—where brokers are common—and the rise of online platforms like Axial and BizBuySell, which brokers use heavily. According to a 2023 study by Search Investment Group (SIG), 54% of successful self-funded searchers found their acquisition through a transaction intermediary, compared to only 25% through proprietary outreach (https://sigpartners.com/study).
Transaction intermediary, of course, can mean a lot of different things. At the lower end of the spectrum, a small business owner might simply rely on an accountant, lawyer, or even real estate agent they’re familiar with to solicit offers and negotiate a deal for their company. In the middle market, business brokers tend to become more specialized and knowledgeable and, depending on the state, may have a formal license. For acquisitions involving companies with revenues of, say, $10 million and above, intermediation is more likely to come through an M&A advisor or a full-scale investment bank with the expertise to handle the transaction complexities of a large deal.
Regardless of the exact type of intermediary involved, let’s try to understand more about the pros and cons—from the buyer’s perspective—of this approach to acquiring a business. In a future post, we’ll explore this same topic from the perspective of a seller, although the insights of both posts will serve the purposes of anyone who wants to understand the brokered deal process better.
Pros of Brokered Deals
Easy Access to a Broader Network of Deals: For individual searchers as well as smaller private equity firms with limited manpower, compiling a list of potential acquisitions to approach out of the blue is not only a daunting prospect but a labor intensive one. The proliferation of business brokers with online platforms offers buyers the chance to skip much of this drawn-out, upfront work. The buyer finds a pre-populated list of a large swath of potential acquisitions, the owners of which do not have to be convinced to sell, because they already want to. In some cases, these sellers might not have been responsive to direct outreach from a buyer, particularly one affiliated with private equity. But an at least seemingly successful business broker offering to take an owner to lunch, while educating them on what they could get for their company, can sometimes be just the thing to put them in a selling mood.
Streamlined Deal Process: The majority of owners selling a business are doing so for the very first time. A good broker, on the other hand, may handle dozens of sales each year. This familiarity with the process means that the logistical aspects of diligence (getting data together, arranging meetings, etc.) may move quicker and more smoothly than in a proprietary transaction. And a reputable broker provides a second set of eyes in ensuring the seller is presenting information accurately and in a usable format. Furthermore, when an outside advisor such as a lawyer, accountant, or consultant is needed to help prep the business for sale, the broker will typically have existing relationships to leverage, plugging in such professionals quickly to speed the process along.
Greater Certainty of Close: Brokered deals tend to have a much higher close rate than proprietary deals because, left to their own devices, sellers may lack urgency, have unrealistic expectations, or simply struggle to assemble the required materials. For all those reasons, time invested in brokered deals is more likely to end with a successful acquisition. I have heard unofficial statements of close rates at least 20% higher for brokered deals. And in the SIG study, 55% of self-funded searchers who completed a purchase through a transaction intermediary had a deal done less than a year from the beginning of their search. Among those who acquired a business through a proprietary deal, this figure was only 44%.
For buyers, a higher close rate helps minimize “dead deal” expenses, which the SIG study found amounted to over $25,000 for some searchers (a number that would likely be significantly higher on the private equity side, given greater overhead costs and diligence requirements). And for those buyers planning to acquire more than one business, the improved prospects of a close when working with a broker compound, since an established relationship with a good broker can result in a steady stream of add-on acquisitions later.
Sector Expertise & Experience: Many brokers, particularly more sophisticated ones, focus on a certain sector (e.g., healthcare, enterprise software, etc.) and build valuable expertise over time. This can make them a one-stop-shop for quality, available deals in the sector a given buyer is targeting, as well as leads for management team additions, potential business model expansions, etc. Building relationships with such brokers can also give you insight into the latest sector-specific business conditions and market trends. You should always view this, and any other, information from brokers (or sellers) with healthy skepticism, but a trusted broker can be a valuable initial screen for quality businesses and opportunities within their field of expertise.
More Financing Possibilities: Brokers affiliated with a bank, in particular, may be able to offer financing options or help manage financial structuring in creative ways (https://www.asimplemodel.com/insights/balancing-debt-equity-in-your-business). This can be especially helpful in mid- to larger-size transactions. For buyers who want to close a deal but lack the time to raise traditional debt (or see that the market for such debt is not presently advantageous), having a broker involved, one with a vested interest in seeing the deal through, can make the difference between a completed deal and a dead one.
Cons of Brokered Deals
Cost & Competition: Unfortunately, business brokers are not in the habit of working for free. While there is no one standard fee structure, a success fee of 10% or more would be fairly typical for completed transactions below $10 million, falling to as low as 3-5% for deals over $10 million, depending on their complexity (and reaching 1-2% in the billion dollar range). Retainers, upfront cash minimums, and sliding scale percentages are also sometimes charged, as are extra amounts for rendering of marketing, due diligence or capital markets services. Very low sale prices, say low- to mid- six figures or below, often involve a flat fee rather than a percentage.
Regardless, since brokers are normally retained by the seller (we briefly discuss exceptions to this below), the seller bears the explicit cost. But it is reasonable to expect that some of this will be implicitly passed along to the buyer through a higher price. Furthermore, simply having a broker—who is presumably a skilled and experienced negotiator—in the seller’s ear before and during the sales process may act to drive the price beyond what a seller would have asked for on their own, particularly because the broker may well have secured the job representing the owner by implying a relatively high valuation for the firm. Finally, a brokered sale will often have multiple competing offers, whereas proprietary deals may only have one, which typically results in a higher ultimate sale price.
Lack of Direct Access to Seller: A proprietary deal process allows you to nurture a true human relationship with the seller, one that may help you gain a discount by understanding and speaking to the owner’s softer motivations for selling the business (if they view you as a friend/good steward of their company, their team likes you, etc.). That is much harder to do with a middleman standing in the way, especially one who is compensated based on the transaction amount. In some instances, having to communicate through a broker can also result in an overly-rosy picture of the business being communicated to you, while adding an additional layer of complexity to the process.
Lack of Process Control: In a proprietary deal, the buyer and seller can set terms and timelines for the process in a way that best fits their mutual needs. In an intermediated deal, the broker will often impose deadlines and diligence restrictions that reflect a standard template they are accustomed to applying from one deal to the next, and which may not be the best fit for a given buyer and seller. For example, a broker may minimize the allowed number of management meetings, or radically compress diligence timelines, both to limit the risk of unfavorable information leaking to buyers and to make their own lives easier.
Conflicts of Interest: As a buyer, you are the one who will stay with the business after a transaction goes through, while the broker and seller move on to other things (unless the seller is retained by the business in some ongoing way). Being paid on commission, brokers have a vested interest in making a deal happen as quickly as possible at the highest price possible, regardless of whether the valuation is reasonable or the business is a good fit for you. This is just a reminder to ensure that you are the final driver of any deal, not the broker. Remember, it’s your money that’s making it happen, and if things don’t feel right, it’s always better to walk away and wait for the next one than to end up saddled with a bad deal.
It’s worth noting that, in some cases (particularly at larger transaction sizes), buyers will engage intermediaries of their own to help source and negotiate a transaction with the seller’s broker (though this is less common than it used to be and typically occurs primarily when the intermediary is also going to be involved in financing the transaction). Dueling intermediaries add yet another level of complexity to the process, and at the end of the day, all are biased towards a transaction occurring, since they often don’t get paid otherwise. In unusual cases, one intermediary may even represent (and earn a commission from) both the buyer and seller, in which case you have to be especially attuned to potential conflicts of interest and whether the broker is subtly favoring the interests of one side over the other.
Variability in Quality: Transaction intermediaries vary radically in credentials, experience, and skill level, from investment bankers at Morgan Stanley or Goldman Sachs, to specialized M&A advisories, to single-office business brokerages, to someone who operates from their basement posting listings on BizBuySell. At any level, but especially on the smaller side, you can encounter dubious actors using shady techniques to pawn low-quality businesses off on gullible buyers. High pressure tactics and a resistance to scrutiny are a dead giveaway of these operators, and while they are not per se the norm, it remains important to be skeptical of any unknown broker, and, to be frank, any information coming from any broker period.
Conclusion: A Hybrid Search is Usually Best
Having considered the pros and cons of brokered versus proprietary deals, I don’t want to give the impression that you can plug them into a cost-benefit equation that will tell you which to orient your sourcing process towards exclusively. Generally speaking, you shouldn’t restrict yourself to one or the other, since great deals are found both ways. But for most independent sponsors and private equity firms, the vast majority of deals they look at will be brokered. That’s just where the market is today for most transactions of size. In addition, many self-funded searchers will not have the money or time needed to support a drawn-out, proprietary-only search process. So learning to work with intermediaries is a critical skill to develop, one we plan to explore in more detail in a future post. By way of a preview, just know that embracing the potential value-add of brokers is important, especially if you want to work with them again. Treating a broker as a partner rather than an adversary in getting a deal done can be the difference between deals that pay off and those you miss out on, especially in highly competitive processes involving a coveted target. Always maintain, of course, a healthy dose of skepticism. Stay tuned for more on this subject.