Welcome to the Kumo Origin Series, where our founders share stories and lessons learned from buying, operating, and selling businesses — and how it all comes together into their vision for building Kumo.

In the process of selling our SaaS business in 2021, we had the opportunity to work with several brokers to shop our deal. We quickly came to the realization that not all brokers are created equal: doing some research to fully understand the various brokers out there can help speed up your search.

(To read about how we sold and acquired our most recent business, click here.)

Here are the top four red flags to look out for when working with brokers:

1. They don’t truly understand the expertise required to steward a business

Many brokers are looking for a great deal match regarding financing and multiples, but few are also willing to dive deeper into understanding why a buyer may or may not be the right fit for the business, separately from financing. A good broker should have a clear vetting process for how they source both buyers and sellers, to ensure a good match.

Some of the buyers that the brokers brought to us weren’t qualified to take on our business (a SaaS with a specific tech stack), even though we (as sellers) had specified otherwise. It wasn’t enough that the buyer had money and experience running companies: they needed to have managed a similar software business, or know the language, or understand how APIs worked (a core component of our business). 90% of the work behind our specific deal was about maintaining the software, but many of the buyers suggested by the brokers were pure operators who lacked the technical background to hire the requisite engineers.

When a broker doesn’t understand the business needs and can’t match you appropriately to the right business, you end up wasting time: one would-be buyer even flew out to see us, despite a clear mismatch.

A great broker will spend time understanding the needs of the business and exploring what kinds of buyer skillsets are compatible with those needs. Not every business can be solved with better operations or some paid marketing; a great broker knows that, and will vet accordingly.

2. They don’t have experience selling similar companies

One of the brokers we worked with had never sold a SaaS business before, but was eager to shop our deal. They ended up introducing us to a buyer and assuring us we had a great deal, but ultimately we ended up getting much better terms when working with brokers who had sold software businesses before. The broker was unable to tell us where the deal lay on the spectrum of possible outcomes.

When searching for a broker, be sure to ask: can the broker explain to you the business valuation clearly? Have they sold businesses like yours? When they tell you a market multiple, you should feel confident that its accurate for your specific industry and not just industry-adjacent businesses. A great broker will be able to articulate the lay of the land and why a valuation is or is not on the mark.

3. They have competing interests that may be undercutting your deal flow

One brokerage we spoke to as sellers spoke positively about our business, but a red flag we saw immediately was that the first offer they brought to us ended up being their own SaaS fund, aka the acquisition arm of their company. The firm was giving themselves the benefit of the early deal knowledge long before any other qualified buyers had heard about our business, which both undercut buyers from seeing a great business in their deal flow, and sellers from getting great offers from other buyers. We hadn’t even seen any other offers yet, and it felt like they were forcing our hand to take their deal first.

This red flag is tough to spot as a buyer, but understanding that brokerages may have their own interests lining up ahead of any outside buyers is crucial. Do your research on the brokerage, and see if they have a great track record of lining up multiple offers for businesses.

4. They don’t give you confidence that they’re going to find you the best deal

One of the brokerages we spoke to was based in the same city as us. In our conversations with them, we came away with so little confidence about their ability to find us the best deal that we actually never even ended up trying to meet them in person, even though it would have been fairly convenient.

We sensed throughout our communications that it was a very transactional experience to them, and that there was an underlying mismatch in values between what we were searching for (great stewardship from a motivated searcher) vs. what they were ready to offer (anyone with a vague promise of financing.)

They also lacked enthusiasm during our conversations: we knew that we were likely not the biggest deal they were handling, but after conversations with them we did not feel like there was going to be a reasonable output of effort from their team to make the deals happen. Ultimately, we had very little trust that they would handle us with integrity.

A great broker should inspire confidence that they are actively handling sales and eager to match together great buyers and sellers. An excellent broker should have good communication and relational skills (for both buyers and sellers) and be motivated and trustworthy throughout the process.

Love what you read here? Subscribe to our Substack to get insights on deal sourcing and updates on product features, or sign up for our closed beta (coming soon!) at withkumo.com. All images in post are sourced via Icons8.

‍