Business brokerages are no different than any other businesses – there are good firms and there are bad firms. So how do you determine a bad business broker from a good one? First, don’t confuse a broker’s personality with his/her business practices. There can be very poor business brokers with likable personalities, so it’s important not to choose a broker just because you like the individual – you really need to understand if you’re dealing with a good firm.
When it comes to signs you should be looking for that point to a bad business broker, here are some important things to consider.
You might be dealing with a bad business broker if…
You’re having difficulty getting references quickly
When you ask for references, you should expect to get a minimum of three names, and you should expect to get that information immediately. A good business broker has numerous references at his/her fingertips, and doesn’t need time to look for people who will give a good recommendation.
In addition, don’t just limit yourself to references the broker provides you. See if the broker has any Google reviews, or check the specific agent’s LinkedIn account to see what people have said about him/her. Even a bad business broker can scrounge up a decent referral or two, so don’t just count on what a reference says. Take the time to do a little digging on your own also.
The broker charges upfront fees
First, a disclaimer about upfront fees: Just because a business broker charges upfront fees does not mean it’s a bad firm. With that said, if a broker is asking for money upfront, you certainly need to do your homework and understand why.
Are upfront fees typically required by brokers in your area? In some parts of the country just about every broker requires fees upfront, while in other areas most reputable brokers don’t charge anything upfront. Do enough research to know what’s standard in your market.
Does the broker apply all of your fees to the final commission at closing? You want to make sure that if you are paying a fee upfront that those dollars will be applied to the broker’s final commission. If you pay $25,000 upfront and the broker’s commission ends up being $100,000 after the sale, you should only owe him/her $75,000 at closing.
What is the broker’s “pitch?” Be leery of why a broker is asking for a fee upfront. He/she should be able to give you a clear explanation as to why a fee is justified, what it covers and how the amount is determined.
You don’t understand the marketing plan
Effectively marketing a business for sale is not easy. So it stands to reason that any good business broker will have a defined program he/she employs on every single business listing. This plan should not be a mystery to you – the broker should be able to explain his/her marketing program so that you can understand what will be done.
A bad business broker won’t have a defined and thoughtful marketing plan, or he/she won’t be able to explain the plan to you. There is a major difference between “hoping” a business sells and “selling” a business. A bad business broker hopes listings will sell and has no real plan to overcome difficulties in the process, while a good business broker knows the likelihood of selling every listing is extremely high because of the system he/she has in place to market the business.
The broker lets the buyer dictate the process
How does a buyer actually buy a business? If you’ve been involved in a business acquisition before, then you know there are literally hundreds of steps and details that need to be handled in order to close a transaction. Bad business brokers leave this process up to the buyer and allow the buyer to take charge.
Your broker needs to be the authority in this process, and should be able to walk you through how he/she manages buyers and the buying process. A good business broker provides a buyer with a detailed, step-by-step plan that guides the buyer through the entire gauntlet of the acquisition, and then works with the buyer to make sure all his/her needs are being met and questions are being addressed along the way.
Having a clear buyer plan is also imperative in order for the broker to provide adequate protection for you. By letting a buyer dictate the process, you are running a huge risk. Without proper oversight, buyers could unintentionally damage your business simply because the broker is not there to guide them.
The broker doesn’t provide you with a detailed business valuation
Anyone can quote you a value for your business. Some brokers might actually be willing to give you an estimate over the phone after asking a few simple questions, while others might look over your financial statements for a day and then give you a verbal estimate, and some may even just email you a number. These are all signs of bad business brokers.
You deserve much more than a “back-of-the-napkin” estimate when it comes to determining your business’ value – you certainly didn’t put years of blood, sweat and tears into your business only to have it reduced to a number a bad business broker spends an hour “calculating.”
You should expect a business broker to provide you with a comprehensive, detailed, written business valuation report. A good business broker should not only explain the “what,” but also the “why,” “when,” “who” and “how.” While you may not agree with the valuation you get from a broker, you should at least be able to respect the process the broker went through and the effort he/she put into the analysis.
Also, be on the lookout for a broker who gives you a high value without supporting it. Bad business brokers are notorious for presenting you with unrealistic values to get you excited so you’ll list your business with them. Their hope is that when offers start to come in at a lower, more realistic price, that you’ll break down and accept it. This is a tactic called “seller’s fatigue” and bad business brokers will use it.
The broker doesn’t seem that interested in you or your business
At its core, a business acquisition is pretty basic – one party buying something from another party. That’s exactly how a bad business broker looks at your deal. It’s just a transaction and a commission.
How can a broker effectively represent your business if he/she hasn’t taken the time to really dive in, ask the tough questions and ultimately understand what makes your business unique and valuable? Furthermore, how can a broker expect to represent you if he/she hasn’t made the effort to understand your motivations for selling and what’s truly important for you to accomplish after the sale?
Your broker should be passionate about your business and your goals, otherwise he/she should never accept your listing.
You haven’t heard anything negative about your business
There is no perfect business. Period. Every business has problems and challenges that will make it difficult to sell. Some of these issues are quite serious, while others are minor – but in either case your broker should be discussing these topics with you and offering solutions on how to overcome them.
A bad business broker either ignores a business’ problems or chooses to avoid discussing those problems with you for fear of losing the listing. If you haven’t heard any concerns coming from a broker who is evaluating your business, that should be a major red flag. A good broker will discuss challenging aspects of your business with you, making sure you understand his/her concern.
At the end of the day, choosing a business broker is a life-changing decision because selling your business is a life-changing event. While you want to avoid “analysis paralysis,” it’s in your best interests to take the extra time to ensure that the business broker you are choosing to handle the most important transaction of your life is not only someone you can trust and feel comfortable with, but is also someone who avoids the bad business broker red flags outlined above.
Scot Cockroft is the Owner & President of the #1 ranked Business Brokerage, Business sales and M&A firm in Texas. Scot has been named Named Deal Maker of the Year by Dallas Business Journal.
He is committed to a “different” type of business brokerage firm, one that is NOT about a sales pitch but, rather, results! In short, a business brokerage firm that is committed to performance-based compensation. Scot believes in these principles as well as a candid honesty with clients. His candid style often takes buyers and sellers by surprise, but is often what assures successful connections between the two.
Feel free to reach out!