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Pocket Listings - Vast Hidden Market Or Myth?

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Comments & Replies: 10     Views: 4728     Posted By: Peter Siegel MBA  Peter Siegel MBA: BizBen Founder, ProBuy/ProSell Program Director

Topics: Business Brokerage, Buying A Business     Tags: broker cooperation, business brokers, buying a business, pocket listings, selling a business

My specialty is selling restaurants and bars. I have been involved in selling these types of properties exclusively for the past 30 years in Northern California. Naturally, I have met owners who have said to me if the right buyer comes along, I would be interested in selling and this would be considered a “pocket listing”. Usually I have done deals with these people and they know and trust me – but with that said, it would represent a very small percentage of my overall business. I also have clients who tell me exactly what they are looking for and the specific area they are interested in.

The key to working this type of deal is to have an exclusive relationship with the buyer so that I can afford to spend time researching a specific area for them. Recently I was told by a client that they wanted to be in a specific suburban town. It was basically only two streets that had many restaurants. I walked the streets introducing myself to the owners and leaving my card for follow up. I actually got a listing by doing this and sold the restaurant but not to the specific client I was working for. After about 9 months I was able to put a deal together for the client who initiated the process and the restaurant I sold was never on the market.

The best advice I can give is to develop a relationship of trust with a broker who specializes in the type of business you are interested in and give that broker some exclusivity to find exactly what you are looking for.

Contributor: Business Appraisals, Valuations Advisor

I spent over 20 years selling businesses and I never had a so called pocket listing. I knew of businesses owners that might want to sell their businesses but they had unrealistic expectations on selling price and unless they would sign a listing agreement I would never waste my time with them. I never kept track of any numbers so I have no data to provide you.

Contributor: Business Broker - Preschool Specialist

I have had business owners whose relationship with me falls into the category of "pocket listing." As far as percentages of businesses that sell, it is hard to determine, but if we are talking about small to medium sized businesses, the percentages could be anywhere from 5 to 25 percent, more or less.

Since pocket listings, according to my definition, by their nature are off-the-market, almost private, transactions where brokers brings buyers and sellers together without advertising, the percentage of listings advertised that are pocket listings are 0, technically.

My take on this is that pocket listings may work out fine, and are convenient for brokers because they do not have to go to the trouble and expense of advertising, and fielding dozens of inquiries about the business for sale. However, I think businesses owners could be doing themselves a dis-service with a pocket listing. It is the same way with other types of real estate transactions, residential and commercial. When you expose a property or a business to the open market you have to know that the chances of getting a better price for what you are selling goes up dramatically.

Of course, if a business or property owner insists on doing it this way, that is their choice and a broker should be willing to assist, but I think businesses owners should consider what the wider exposure of a market listing can do for them in selling their business.

Contributor: Transactional Attorney

There are a number of ways to discover a business that is not on the market but that could be for sale at the right terms and price:

1. Financial, Legal, and Real Estate Professionals: CPAs, bankers, financial advisors, attorneys, and real estate brokers will frequently know when a client might be interested in selling a business before it's listed.

Fortunately these are professions that tend to rely on referrals and networking for business. In many communities it is relatively easy to get to know people in these circles-- particularly those who work with small businesses.

You can start with your own CPA, banker, etc. and if you don't already know which networking events to attend or which local groups to join you can ask them for their suggestions.

If you do go this route it's important to have a clear idea of the type of business you're looking for, what your realistic price range is, and what you are looking for in terms of adjusted net.

People are much more likely to remember you and take you seriously if they know you are looking for a transaction in a specific industry with a specific price range.

2. Direct Mail: Another option is to identify a relatively narrow range of businesses in the industry you're looking at and send all of them an old-fashioned letter.

Because you're sending your letters to business owners who are presumably not already immediately in a selling mind set I'd suggest that you avoid sending a generic form letter. Those can come off as being just a "fishing expedition" without a real buyer behind them. But having been on the receiving side of interest letters a few times as a business owner I can tell you personally that if they're well written and specific enough they can definitely get the attention of a potential seller.

At one company I was a partner in we responded to an unsolicited interest letter and came fairly close to completing a transaction that just a few months previously we would never have contemplated. At the end of the day we could not get close enough on purchase price, which I believe would have been different had we listed the business rather than having the buyer approach us.

My experience illustrates that on the one hand you may have a real opportunity to reach sellers before a business comes to market but on the other hand it can be more difficult to actually close those transactions than when a seller has already publicly committed to sell. It also illustrates that buyers may have less negotiation leverage if they're the one who has initiated the transaction process rather than the seller.

This is a good reason for Buyers to establish a relationship with the broker they choose to work with. Pocket listings are often times the best listings. These can include businesses where the sellers are very private and do not want the business listed. In other cases it might be a business where the owner wants to sell but is on the fence about the idea and needs a detailed offer in order to decide.

For myself, I would say that 1/2 of the laundries I sell are in this category. A client asked recently how I decide who to contact when I have a laundry come available. I told him the client that was the most ready. More specifically, ready to perform, who's interest matched the model, price and income of the business. Actually, it all has more to do with a buyer/client being ready. When I have a ready Client, I will consider the businesses I know fit in this category that might be ready and also fit the buyers needs, and contact them.

Knowing the sellers that are ready is critical. When I identify these sellers I work closely enough with them to best assure I will get the sale when the time comes. Pocket listings require a relationship between the seller and the broker. In some cases the seller is very reluctant and nervous about listing the business and having people find out they are selling or often reluctant having people looking the business and documents over. In other cases the seller isn't comfortable with the price he believes he/she can get for the business. If I have a ready buyer and I believe the fit is right I will take the steps necessary in order to put the transaction together.

In my experience, a “pocket listing” is a business that is probably for sale to the right party but is not being advertised. One or more business intermediaries may know about that opportunity for a buyer, but since the business owner does not want to formally list the company for sale, the broker or agent will only be able to help generate a successful transaction by having the business in mind when talking to buyers. Perhaps one of the buyer clients will seem a good match for that business.

A business intermediary may have one “pocket listing” in mind for every two or three regular offerings that are represented with a written listing agreement. But some sales professionals are hesitant to offer an opportunity that they are not contractually authorized to sell. If a transaction results from a buyer being introduced to the seller of a so-called “pocket listing, the intermediary who initiated the introduction and helped to create a deal has to be very careful about the way the buyer/seller match is handled. Otherwise, he or she may do a great deal of work without a contract and receive an inexpensive thank-you gift from the seller rather than a sales commission. There also is the danger that the seller will change his or her mind about selling after much broker work is invested trying to complete a deal.

The smart way for a business sales professional to handle a “pocket listing” is to obtain a single party listing which commits the seller to go through with a deal if the buyer named in the agreement offers the price and terms specified in writing. Actually, the seller may not be obligated to sell at those terms, but he will be obligated to pay a commission to the broker who meets the terms of the “single party” listing.

It is not a myth. After a great deal of time in a business a broker gets to know a lot of business owners who, under the right circumstances would like to sell their business. For myself, I am not anxious to take these listings until the seller has a true incentive to sell. If I am going to be responsible to each selling client it will require a great deal of time and continuous updates. However, sometimes that right Buyer comes along that causes me to recall the business and I will contact the seller to see if he is interested. I would estimate that more than 1/2 of my sales come this way.

In my experience, a "pocket listing" is a rare occurrence ... and should be so. First, the seller is not served by a situation in which the only prospects for a sale will be those randomly encountered by a particular broker.
Second, without a formal agreement between the broker and seller the business cannot be fairly or appropriately represented. And, third, such an informal arrangement is a legal minefield just waiting for one mis-step. And to avoid any misunderstanding, there should be a clear distinction between a pocket listing and a search by a broker for businesses not currently on the market that may fit the "wanted to buy" requirements of a prospective buyer.

I've found that when someone offers a broker a pocket listing then they are not really serious about selling their business. A pocket listing is kind of the equivalent of saying "broker, bring me a buyer and maybe I'll sell." Without advertising the seller would be doing himself a major disservice. Business brokers need a constant flow of new buyers who are inquiring about businesses for sale, and yes, sometimes a buyer will call on one business but end going to see another that the broker suggests, but since the vast number of businesses advertised end up not selling, and the high number of buyers who call end up not buying, the numbers just aren't there for a pocket listing to successful sell.

In my experience, "pocket listings" are a waste of time, energy, and opportunity.

"If you find a buyer, I might sell my business." "When you have a buyer, then ask me about selling my business, but not before." "See my business, but don't let anyone know that you have a business for sale."

Does any of that make any common sense at all? Once in a great while, every business broker receives an inquiry from a buyer about the business they might want to buy. These are mass-mailed to hundreds of brokers ... and they end up in the circular file. A serious buyer is going to look at the inventory on the market on platforms like; and they may place a listing on the BizBen "Wanted to Buy" area.

So, my only advice for business sellers who want to sell their business but don't want to market their business is to look at the "Wanted to Buy" section and see if there just might be a connection. However, if that is all you are doing to sell your business, you'll have a long wait.

Want to sell your business? Consult with a business broker to handle the whole thing, or a business marketing consultant to at least handle the details for you.

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