Is The Business Broker Making It Up As He Goes Along?
Let's say you haven't used my advice on choosing brokers and you've found a business broker or business transfer agent in Google and believed the broker's claims. Maybe you did worse and didn't find them in Google but, instead, fell innocent victim to a seductive-sounding cold call about eager buyers wanting to buy your business.
Here's what you're likely to hear and here's how to interpret what the broker is really saying.
Further down I offer suggestions on how best to play these situations and come out a winner. (These tips aren't publicly known so they are reserved for subscribers. If you aren't already subscribed to the newsletter you can subscribe for free today).
"We'll advertise your business to the thousands of buyers on our mailing list"
Business owners are suckers for a good story. And the story about having lots of eager buyers is certainly a good story; brokers find that it works well to tempt clients into signing on the dotted line.
But when talking "list of eager buyers", all is not what it seems With most brokers there's a zero chance you'll find a buyer as a result of this mail shot!
So, why make the claim? What's in it for the broker?
The claim gets you in the door - it's rare that a business owner can pass the free offer to advertise their business to "thousands of desperate investors"! Some brokers also benefit from the sign-on fee they charge, yes, but the big reward is the commitment you make to let them market your business for, generally, a year or two ...and all the small print you accept in the process. That allows them to make money from you in a number of different ways.
But surely it's worth your while to give it a shot if it's costing you nothing?
Even if there is no upfront cost - especially if there's no upfront cost (some of the most dangerous brokers work on a no advance fee basis) - you could end up paying dearly.
Competent brokers put a lot of effort into finding you buyers. They research the market, they investigate competitors, they use M&A channels to sniff out who's doing deals in your sector. There's a lot of groundwork involved. These brokers generally don't try to impress you with the "size of their lists" because they know that very few deals, if any, come from buyers on their subscriber list.
So what are you, the business owner, to do if you believe the story of "thousands of eager buyers" and want to access them? I've got a tip for you later on this page covering the smart way to play this card.
"We'll do a free valuation of your business"
Has the broker provided a free valuation, a "guide price", an estimate of the figure you should ask for when you go to market? They do that a lot.
That may be a figure that's completely without merit and your business may not, in reality, be "worth" even a fraction of that price.
You need to know:
Brokers have an incentive to inflate valuations, not unlike estate agents. Except that business brokers can and do exaggerate on a much larger scale. It's not uncommon for them to estimate a business at £500K when it's unlikely to get offers at even £50K!
Here's a particularly egregious example: A caller who got in touch with me in early 2015 had a turnover of £220K and a profit after tax of £70K. He consulted with several brokers and received valuations of between £600K and £2.5m. Yes, £2.5m. He went to market with one of the brokers. He had no enquiries from buyers for over six months. Zero, zilch! He switched to another broker, and over the course of nine months had just one solitary offer ... for £90K. The buyer asked for his latest annual accounts and it transpired his turnover had, in the interim, dropped to £210K. The single buyer promptly revised his offer to £50K. After all that time and energy spent chasing buyers, this vendor decided it wasn't worth selling.
That's the reality in the market.
Some more on valuation myths here.
Any broker who gives you a valuation after a few minutes on the phone ...is not one we'd trust.
If, however, your broker has seen the last few years' worth of your annual accounts and spent some time learning about what makes your business tick, you know that he's at least got the information he needs to make a guesstimate as to the range of prices you might attract if you listed your business for sale.
"Our interests are aligned with yours, we make money only when you do"
All brokers in the UK charge a "success fee" - they take a percentage of the price they achieve for you. So it's the broker's interest to get you the highest price. Stands to reason. (More on business brokers' fees)
But your interests aren't as aligned as you think.
There may be competing offers with more attractive terms - say a buyer who'll let you retain a stake in the company and let you continue to benefit from future profits, another buyer who's willing to structure the deal so you pay less tax or a third buyer who would like to retain you as the MD on a very substantial salary.
Those aren't considerations to some brokers. They want the deal with the highest "headline" price as that's what their commission is going to be based on.
For another reason why his interests aren't aligned with yours, please read our article on the rat trap. In the rat trap your interests aren't aligned with his, they are at opposite ends of the spectrum.
Don't confuse an illusion of alignment with the real thing.
There are ways to align your interests with the broker's, but those are tips and tactics I reserve for clients who hire me to match them with broker services.
"We can sell any business" or "We have a high success rate"
Obviously, this is a claim you can't verify. Without full access to the broker's customer base / client list you can't tell what percentage of businesses he sold and what percentage went unsold.
As we've disclosed in analysing the accounts of the UK's largest business broker, they fail to sell over 90% of the businesses they take on! Those are seriously bad stats.
Brokers will quote all kinds of success rates, but treat those stats with more than a pinch of salt.
There are numerous ways to calculate success rates and and, as unintuitive as it sounds, it's sometimes the case that you're better off with a broker who has a low success rate than one who has a high success rate. Read more about success rates here.