Is your business broker charging you for "research" that he's not really doing?
Note: Only part of this article is available to non-subscribers
Subscribers to my newsletter know I advocate avoiding business brokers who take businesses on, email their details to a database, post them for sale online ... and sit back.
That's not how you find the keenest buyers, the strategic buyers, the buyers who stand to gain the most from acquiring your business (and can therefore justify paying a higher price).
Running a "passive" sale process attracts only those buyers who are eagerly browsing business-for-sale listings looking for a bargain.
Keen bargain hunters are, by definition, not people who'll pay full market price let alone the "premium" to market price that you're hoping to get.
So what does get you the best buyers?
Business brokers worth their salt run extensive research operations to identify those organisations likely to see an outsized increase in shareholder value from acquiring your business. These are the organisation that can bear the highest price.
Research like this costs money, big money. It takes teams of staff. Staff have to sift though large volumes of data and Companies House records, make thousands of phone calls etc. etc.
Or so your broker would have you believe.
In a different post where I explain broker fees, with specific examples of various UK business brokers and how much they charge, you'll notice that some brokers think nothing of billing you in the region of £30K - £50K (plus VAT, of course). The fees are this high largely because research is expensive ...or so the claim goes.
Is it worth paying a large upfront fee?
Of course it's worth spending £50K on research if you get an additional £500K in price.
The question is ... will you get that higher price?
As a business owner you have no way of assessing value for money prior to making payment. You're trusting the broker to do the research. You're taking the broker's word on the quality and value of that research. You're hoping that research will unveil a super buyer.
But that's no way to take a business decision involving tens of thousands of pounds!
Brokers will point to their excellent "success rate" with selling businesses as evidence that their research is worth every penny. Be careful of such "evidence". Without full access to the broker's books you have no way of knowing how accurate those figures are, what percentage of businesses on their books end up sold and what value the broker's research added to the deal.
There are other reasons why you should not rely on success rates.
Brokers will also claim that the proof of the pudding is in the eating. Nice line. Except that, unlike with puddings you enjoy in restaurants, this one is paid for in advance with no refund options.
And it ain't no cheap pudding neither.
Here's the little secret: 100% of the research some brokers do can be done for next to zero pounds!
First, let me say this doesn't apply to all brokers. Some do indeed put in a lot of work to ferret out premium buyers. And the value these brokers add to the deal is many, many multiples of what they are charging you.
But many put in hardly any effort at all and you're none the wiser because they still come up with a list of prospective buyers, a list as long as your arm and a list that, from all appearances, could only have been compiled from a proper research exercise.
How do they do it?
Below, in the subscriber section, I describe the UK (and international) Mergers & Acquisitions (M&A) databases. These are databases of corporates, institutions, private equity (PE) firms, family offices, high net worth (HNW) individuals and others who have registered their interest with deal databases and specified the type of businesses they want to buy. Anyone with access to those databases can compile a list of prospective buyers.
Sadly, it's easy for business sellers who don't know about these databases to be impressed enough with the "prospective buyers" list to consider their £50,000 advance fee well spent.
One of the services I provide business sellers is guiding them through tricky broker decisions, helping them choose a broker and helping them get a fair deal. Get in touch if you'd like to know some more.
Below: More on the M&A databases and how to ensure you're not paying for weeks' or months' worth of "research" only for the broker to give you something he has spent a few minutes extracting from the databases.