What you need to be cautious about when hiring a business broker

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4. Business brokers' claims of eager buyers / large database of buyers

<< This is a continuation of our article from here

Who can resist this? Business brokers often go to clients with with claims that they have hundreds of eager buyers on their books desperate to acquire businesses. It looks like a slam dunk deal. All you’ve got to do is sign the broker contract and you can consider your business sold!

Except that’s not how it works. The quality of your broker’s list is what matters, and that’s not something you have any way of verifying.

What happens after you sign is that the broker emails details to his list and one of three things happens:

1. He gets several eager and qualified buyers – buyers with both intent and means – getting back to sign the Non-Disclosure Agreement;

2. He gets responses from time wasters who don’t have the finances in place but are hoping for a naive seller who’ll hand the business over for free. They ask for 100% or near 100% “seller financing”… which is simply a promise of future payment (if the business continues to make a profit); or

3. He gets no responses at all.

As a seller you are given to expect that the first option is the most likely outcome. However, (2) and (3) are far more common. It’s not till after you’ve signed the broker contract and spent several weeks waiting for responses that you realise whether the list was any good to start with.

But by then it’s too late, you’re committed!

To convince you to sign, the broker may point to some industry stats about M&A activity or evidence of mountains of dry powder (cash at private equity firms looking for an investment).

He may quote case studies demonstrating how successful he was with past clients. You can be sure this won't be a complete record that allows you to ascertain the percentage of businesses on his books that are successfully sold.

Brokers try to impress upon you that there’s keen demand for businesses like yours and that they can provide access to buyers who are desperate to make an acquisition.

As a business owner you need to separate the two! Keen demand may exist, but the broker’s “list” may be worthless.

Amazingly, in a recent survey of businesses owners, Biz BuySell, an online marketing engine for businesses being sold, 47 percent of business owners signed up with a broker largely because of what they believed was the broker’s “network”!

Fifty years ago, and prior to the internet, a broker’s contacts did indeed count and the brokers with the best contacts had the highest success rates. But not so any more. Investors looking to acquire a business start their search at the many online portals, not by speaking with a broker at the local golf club.

Whatever the market conditions, the broker knows one thing: You have no way of verifying the number of “eager buyers” on his books or, in fact, the freshness of the list. The list could be names of investors he purchased from a cold calling firm or data peddler. It could be a list extracted from a directory of investors. It could be investors who registered on the broker’s site ten years ago and who’ve moved on now (or long since acquired the business they were looking for). Lists often contain low quality prospects who are very highly unlikely to be actively looking for businesses in your industry, at your price and with the qualities your business possesses.

To add insult to injury, some brokers charge a retainer of several thousand pounds for what the vendor thinks is access to a bank of ready buyers.

Remember that anybody can start a business brokerage tomorrow – the barrier to entry is incredibly low. You need capital of just about £80 to buy a list of “10,000+ investors” and you're in business.

Moral: Don’t be impressed by that which you can’t verify. Don’t sign up with a broker on the strength of this unseen investor list.

That said, some brokers do have many active investors looking for businesses like yours! And there’s a way to test the quality of a broker’s list before making a long term commitment. But that’s a topic for another day.

The other warnings, #5 and #6, are covered below.