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Warning Signs —Brokers to Avoid
A broker that routinely charges large upfront fees
Some companies make their money by charging fees before your business is sold. They often justify these fees as needed to "prepare marketing materials" or to "find hidden value in your business". In fact, many brokers make a comfortable living on the upfront fees without closing many sales.
The best brokers charge only a performance based commission. They get paid upon closing of a sale. Usually the seller pays the fees, but in some cases the buyer pays the commission. There are instances when a broker must charge a fee (for example to find an acquisition target overseas, if your business is very small or particularly complex) but the fees are structured in a way that you know that the fees are for producing results.
As brokers, we sometimes charge an up front fee of $1,000 to $3,000 when we believe that a prospect is not serious. The fee is not large enough to cover our expenses on a sale but is large enough to send a business owner who is only curious running.
A Large Book of Business
If you ask to see a brokers current listings and he pulls out a book with dozens of listings, how much time and attention can each listing be getting? Selling a business successfully requires a lot of work, if it is done properly.
There are circumstances in which a large book of business might be OK. If the broker works in an office with tens of other brokers, the listing book may be all of the listings for the entire office. If the broker has a very well defined niche of businesses that are all very similar (such as Dental Practices in Wichita) the broker may be able to handle more listings. However, in most cases a good intermediary works on two or three deals at a time, never more than four, so each deal can get very intense and personal attention.
A promise to unlock the "hidden" value of your business
The story some brokers tell is a very seductive one. They say that most brokers value businesses based only on "conventional" or "traditional" valuation methodologies.
Instead, they promise to find synergies with potential acquirers and project future growth so that you can realize a fantastic price. We have seen them talk to people in industries where the typical multiple was four times EBITDA and promise a sales price of ten times EBITDA. Be skeptical. A buyer is looking for a return on investment, not some new method of valuation.
Before falling for this line ask yourself and them a couple of key questions:
- Why would a buyer be interested in my company at say 15 times earnings, when there are other companies in my industry selling for 4 or 5 times earnings? Regardless of the method of valuation, we operate in a free market system, and the rules of principles of free market competition prevail. Aren't there lots of other companies for sale that have synergies with a large buyer?
- If they are going to project huge increases in sales and profits, how will an acquirer view those projections?
- If the broker is projecting a multiple that approaches (or even exceeds) the multiple of publicly traded OTC companies, why wouldn't an acquirer buy the listed companies and gain the advantages of decreased risk and enhanced liquidity?
- What are the potential costs and risks involved in merging in my operations?
We have buyers just waiting to buy your company (typically foreign buyers)
"We have buyers who just can't wait to buy your business at a very good price— just sign here..." While this may be true, more likely it is just a device to get you to sign an exclusive agreement. Be skeptical. Offer to sign an agreement for a very short period of time, say 10 days. That should give the broker adequate time to contact that buyer who just can't wait to buy your company.
One obvious red flag is if the broker with the hot prospect asks you to sign a fee agreement. If the broker's prospect is really that eager to buy businesses he will have already agreed to pay the fee. It is easy for a broker to call ten business owners and offer to bring each one prospective acquisition candidates. If no commitment is required, one of the buyers will say "Sure, if you have a seller of a business in my industry I'll take a look at it." Getting a fee agreement signed is not that much more difficult, but at least requires something more than a desire to get the broker off the phone.
Agreements That Require a Sale
Some brokers will say "If we agree that your business is worth $5,000,000 and I bring you a bona fide offer for $5,000,000 I have done my job and I should get paidâ" However, the offer is unlikely to be for $5,000,000 cash at close. Even if it is you could have legitimate reasons for rejecting it. Perhaps you believe that the buyer is unlikely to be able to get financing and so you do not want to spend the effort required to complete due diligence and tie up your business. Perhaps you got a major new contract and the value of your business increased 20%. It is even possible that you will reject an offer that is perfectly adequate in every way as a negotiating tactic, because you believe that doing so will result in a better deal. The broker's job is to bring you an offer that makes you happy on the day he presents it, not to bring an offer that would have made you happy the day that you signed the listing agreement.
Conclusion
The brokers that play these tricks often have huge sales forces. They invite clients to free seminars that are very polished. I have signed listing agreements to sell numerous clients that paid tens of thousands of dollars for marketing materials that were on fancy paper, but otherwise had little value. A fair broker will assess the value and the strengths of your company accurately, not tell you that their method will make buyers pay triple to ten times market rates.
There is nothing wrong with paying a reasonable fee for a service, but the fee should be comensurate with the amount of effort required, and not based on a promise that somehow your business won't be subect to the same laws of supply and demand that determine normal pricing in our economic system. If you want to buy services, we can provide the most commonly requested services used when selling a business at fixed prices.
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