Top 10 Reasons to be Wary of Some Business Brokers
With our year’s of extensive deal experience, we have come across a few good business brokers. Unfortunately, we have also come across far more who are less than capable, and here we will highlight to business sellers the reasons why they need to be wary. Let’s face it, selling a business is often the most important deal a business owner will ever be involved with, so it’s vital to get the right support to achieve a successful outcome.
1. Will you be Paying Twice?
Be careful when comparing the cost of a business broker with the cost of a corporate transactions advisor. The scope of work is usually very different. A business broker’s work is usually limited to finding a buyer and agreeing a deal in principle. A corporate transactions advisor can do all of this, but as a qualified accountant, they can also handle due diligence enquiries, provide tax planning services, review financial and tax aspects of the final sale agreement, prepare and review completion accounts and much, much more. You’re unlikely to be comparing “apples with apples”, and if you instruct a business broker, you may well incur significant additional costs with your accountants to cover this additional work to get the deal done.
2. Sector Specialist Brokers – Where do their long-term loyalties really lie?
Many sellers seek out brokers who specialise in their sector as they feel they should be best placed to find suitable buyers and secure the best price. This sounds entirely logical, however, in practice, we’ve found some specialist brokers embedded in their sector for the long term, who are often much more focused on protecting and maintaining their relationship with the buyers, particularly repeat buyers, rather than with the sellers. On one occasion, we were asked by a seller to represent them in negotiations as they had lost faith in their broker. When we spoke with the broker to talk tactics to increase the price, he replied, “but we can’t afford to pay any more”…
3. Watch out for “No Win, No Fee”
The attractions of “no win, no fee” are clear. It means less financial risk for the business seller as they only pay if the business is sold. The downside is that the broker will want a premium to reflect their cost exposure if it doesn’t sell. However, there are other important factors that are easily ignored until it’s too late. For instance, if the broker is willing to offer those terms then they’re either confident it will sell, in which case you’re needlessly paying a premium for their services, or they’re desperate for new work, in which case they probably aren’t very good at what they do! Also, will they really be motivated to negotiate the best deal for you if it means potentially jeopardising a deal and missing out on their success fee?
4. How Long Will you be Locked in?
We have seen terms and conditions that have locked clients in to their broker for two or more years and, thereafter, an ongoing success fee is still due to the broker if the business is sold to anyone at any point in the future, regardless of whether they were introduced during the exclusivity period. Be careful of the small print!
5. Is Their Valuation Realistic?
Just as in a house sale, brokers give away valuations to prospective clients. From what I can see, very little research is undertaken and the underlying assumptions are often highly optimistic. When delivered with confidence it can be very tempting for business sellers who are sucked in to paying large upfront fees. However, in the long run, it sets high expectations, which are rarely matched by the bids received. We recently saw a deal where the final sales price was just 20% (yes, 20%!) of the original valuation given by the broker when quoting for the work. The true test is to ask the broker to structure their success fee on achieving the valuation they’ve given.
6. Who Will you Actually be Dealing With?
The larger business brokers often have slick sales teams to win new clients, but separate teams to actually undertake the client work. Make sure you know who will be working on your case. You need to check they have the necessary skills and experience to represent you successfully, and that they will be easily accessible during the whole process.
7. Why is Their Approach Going to be More Successful?
Brokers often brag about the number of buyers they know that are interested in your business, yet they also talk about large sales funnels and the importance of spreading the net as far and wide as possible. We’ve seen instances where 200 or more buyers have been approached, without success. In our experience, if you’re getting anywhere close to that sort of number of approaches then you’re either approaching the wrong buyers or, sadly, you don’t really have a business worth selling.
8. Do They Understand Tax?
Business brokers are often specialists in sales, but have very little related financial, legal or tax knowledge. Indeed, at the most basic level, we have come across brokers who haven’t heard of Entrepreneurs’ Relief, a well publicised capital gains tax relief that reduces the tax rate on a sale to 10%. If they haven’t heard of things like this, and don’t understand them, how can they possibly negotiate the best deal for you?
9. Will They Attend Meetings With Buyers?
When acting for buyers, we have often found a reluctance from business brokers to join us at meetings with their clients. We are not entirely sure why that is, but can only speculate that it’s down to geographical distance, limited resources and/or a desire to keep their costs down to a minimum. This leaves the sellers hugely vulnerable to critical conversations, with buyers and their professional advisors, on things like price.
10. Don’t Fall Prey to Flattery!
Some business brokers try to gain potential clients by sending a flattering letter offering their services. We also receive these types of letters. It’s likely that the letter is simply part of a blanket marketing exercise to find more clients.
If you have any questions or if you would like to explore the potential sale of your business, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Corporate Finance team.
This article originally appeared on the blog of our member firm, Larking Gowen.