Top broker sharp practices that business sellers need to watch out for
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If you're selling a business and intend using a broker, you need to know that not all you see in the press about brokers & Business Transfer Agents is true. We have some excellent brokers in the UK.
We do, however, also have the other type. This is a sector that's not regulated and has attracted far too many very unsavoury characters.
There are six sharp practices that can cost you a lot of money or lose you a lot of sleep. Or both! Numerous negative posts you may have read in the press about business brokers are about brokers using one of more of these "techniques".
Their tactics, and what you can do to protect against them, are explained below.
Summary of this article:
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- They'll use the "Rat Trap" (i.e. charge you nothing upfront, but trap you into large fees - tens of thousands of pounds - to be paid even if your business doesn't sell).
- They'll give you whatever valuation they feel will persuade you to sign up with them.
- They'll give you the impression that no upfront fees means you risk nothing (but there's a real and very considerable danger to your business that they won't disclose).
- They will claim to have a large database of eager buyers or one buyer looking urgently for a business just like yours (both of which claims they know you can't verify).
- They'll play a Go Bust, Rinse & Repeat game to swindle vendors out of very large sums.
- They'll take a high retainer / upfront fee that ends up not buying you very much at all.
What's Sometimes Called "The Rat Trap"
That this sneaky practice often catches vendors out is evidenced by the thousands of real life examples around. Read some harrowing stories from business owners who've been taken to the cleaners by business brokers. (If you're a subscriber to my newsletter you should see related links in the right column of this page. Note also links related to the so called "trade bodies" for brokers).
This is how it works: The broker signs you up but with no real expectation of selling your business. The end goal for the broker is not the selling of the business, it is getting you to sign the contract. To that end, he’ll go all out. He’ll wine and dine you and make you feel important. He’ll flatter you with an almost unbelieveable valuation figure and come up with some very credible reasons why he can sell your business at that price. He wants you salivating at the mouth and planning that holiday of a lifetime. That prospect of a lottery jackpot grade payoff is the cheese for his bait.
You’ll sign the contract which states either directly, or indirectly (via pointing to further terms on the website or elsewhere), that the broker’s commission is payable in full on certain conditions arising.
So far, so good. But examining the small print in the off-page clauses discloses that the conditions under which the broker’s commission become payable are several and some quite trivial. For example, if the business appoints a new director or changes shareholders – say husband transferring some of the shares to his wife for tax planning purposes – it triggers the broker’s commission clause!
What’s worse, the commission payable to the broker on such eventualities is the whole amount of 10% (or agreed rate) of the original value placed on the business. In the past, owners have ended up having to re-mortgage their houses to pay tens of thousands of pounds in commissions to brokers simply because the owners made a minor change in how they ran their business. Examples.
Often the early termination of the contract – if you change your mind about selling – also triggers the broker commission clause!
Brokers using this modus operandi sign clients up and sit back to monitor for conditions that trigger the commission. They have no interest in selling your business; they have a different route to their commission. They are watching Companies House records for changes to your company shareholding and director appointments. They aren't out there looking for buyers.
Possible example case?