Question:
I want to buy a business that manufactures accessories for trucks/SUV's in the $2-10 Million revenue range. Have not had much luck approaching potential companies that are not on the market. A business buyer representative says he can do this, but charges an upfront fee. I understand the need to do this as he says he will not take on an assignment without a client commitment. Minimum is $5,000 and goes up according to price of acquisition, with a success fee as well. Any thoughts on doing this?
Answer:
I have several specific opinions on your questions. First, I can certainly understand any intermediary requiring upfront money to perform this function. It requires a significant investment of time and money for them to collate the list, solicit the businesses, qualify potential prospects, arrange visits, and put the deal together. Keep in mind, that they can do all of this and should you change your mind about buying a business, they are no further ahead. In fact, it has cost them a lot of money. As such, paying them a fee for the solicitation portion of this service is justified, and $5,000 is not out of line compared to similar companies. What I do not agree with is a tiered fee structure for the solicitation portion dependent upon the deal size. It does not cost them any more or less to solicit a $2 million company than it does a $10 million one.
On the other hand, I am always concerned about what they will deliver, if anything at all. You have two financial obligations to this process. The solicitation cost, and then the success fee. It is clear what they are expected to do for the solicitation part, but then what? Are they YOUR advisor? You need to clearly understand what their role may be and also to be absolutely certain that they are only compensated by you. Conversely, if you do not feel that they can contribute to helping you negotiate a better deal, or putting the deal together, then you need to discuss this with them and arrange a lower success fee, or perhaps just a higher fee for locating the business.
In my experience, these arrangements turn sour because the buyer has unrealistic expectations about what the "advisor" will deliver. That's why it is critical that you do the following:
When all is said and done, given that you're looking at a business in the $2-$10 million range, should they be able to find you the right business, and help you negotiate and close the deal, then their fees are probably insignificant relative to the business you will own.
Question:
The business broker I've been using is also representing the seller. Is this a normal situation and am I responsible for all or part of her commission?
Answer:
This situation does happen quite often but you may need to rephrase your question as the business broker may not be "representing" you at all. Business brokers almost always represent the seller (or the deal if they're in the capacity of a transactional broker). Their fees are paid by the seller so you must have the broker clarify what their role is specifically in this transaction.
If their fiduciary duty is to the seller, they may provide you with some advice/guidance but they will not jeopardize their relationship with the seller. Their mandate is to sell the business for the best price and terms possible, on behalf of the seller. You cannot expect the business broker to be 100% in your corner and while you may not have to be overly concerned that there's just one broker in the deal, ultimately, YOU need to possess the knowledge to negotiate a favorable deal.
On a separate note, some jurisdictions have actually deemed the practice of "dual-representation" to be illegal and personally, I agree with this stance. It is absolutely impossible for anyone to dispense unbiased advice to opposing parties when one side is paying their fees.
Question:
I thought business brokers work like real estate agents and gladly share and cooperate with listings. I'm located in San Diego and brokers tell me they don't work together. Any suggestions? Do I really need a business broker?
Answer:
Seems ridiculous, I know, but not all states have shared listings between brokers. Where I live in Florida, co-brokered deals are the norm and for the most part it leads to just one result: more business sales. Since you won't be able to use a single broker to access all local listings, you should contact several of them and get as many listings as possible from each to compile a solid list of prospects.
You may also want to consider making contact with the brokerages that have the most independent agents working there because they will often work together on inter-office listings. One of the broker's main roles is to provide you with listings. Insofar as "needing" a broker it's always a good idea to have one to do the grunt work and chasing for you.
Many brokers have trained their customers (the sellers) not to deal directly with buyers, (at least at the beginning although my programs teach buyers just the opposite strategy and it works like a charm) so in the initial stages get the broker to chase the seller for information, financials and other data you may need.
Question:
How can you get past a bad, or just plain incompetent, broker? The latest example is waiting for more than 3 weeks for any kind of financial paperwork for a business we were interested in. The broker always has an excuse handy - usually it is the seller's fault - for the delay. We have to go through the broker since the business is listed through them. Since this particular business was already in a decline due to the owner opening another, this delay has killed the deal.
Answer:
I can certainly understand and sense your frustration. While I know you have pinned this on the broker, and there's no doubt that like all industries there are good and bad ones, it just seems bizarre why any broker representing a seller would deliberately delay providing information to a prospective buyer.
There are really only three possibilities here:
While it is possible that the broker is not competent, keep in mind that their entire compensation is performance-based so it simply does not make sense for them to not provide any additional information that is reasonable. In my experience the seller or broker may not always be willing to part with certain financial information unless an offer is on the table. If this is the case then at the very least they should let you know.
If, however, the seller is being lax in getting data to the broker then the broker's hands are tied.
Having said all this, what do you do with this deal or future opportunities when you encounter this situation? My recommendation is that you need to have more direct involvement with the seller. This does not mean circumventing the broker; not at all! In fact, just the opposite may be true. If the seller or broker is not cooperating then arrange a face-to-face meeting (or conference call if necessary) with the seller and broker and let them know point blank what information you expect and question these delays.
It's useless to sit idly by while an opportunity evaporates. However, my gut tells me that in this particular instance, you're simply dealing with an unmotivated seller and perhaps a broker who has not put his seller to the wall in explaining how critical it is to provide enough meaningful data for any prospective buyer to make a decision on the business.
Question:
There seems to be a huge difference from one business broker to another. I have come across a few helpful and knowledgeable ones, but many more who really do not seem to care at all about selling me a business. Do I really need one?
Answer:
One of the most frequent questions I am asked by prospective business buyers is whether or not they should hire a business broker. My initial response is always: "yes...but". The "but" is that you should "use" one, not "hire" one. A business broker can have a very specific and important role in the buying process. The "but" is related to understanding what that role is.
Business brokers almost always represent the seller. The seller pays their commission and even if they are assisting you in the process, they have a fiduciary duty to the seller. This is not to say that they won't provide you with helpful advice.
Why then, you may ask, should you use a broker?
In the past thirteen years, I have personally purchased ten businesses. I have used a business broker in nearly every transaction. Even though I would consider myself a very savvy buyer, there are three things that a business broker can do that are very helpful.
Business For Sale Listings:
They can provide you with access to business for sale listings and details about the business that you may not discover on your own. Although the majority of businesses sold in the U.S. are not done through brokers, some states have a multiple listing service of businesses for sale, similar to residential real estate. In states that do not offer this, brokers will often only show you their own listings. In those cases, you'd have to work with several brokers just to see a variety. You may want to search for your state's "business broker association" and see if such a service exists.
Always Good To Have A Buffer Between You and The Seller:
They can be a conduit to help deliver bad news to the seller. There may be instances where you have to retract or modify an offer and certainly times where you'll need to adopt an aggressive negotiating position. Since you'll most likely need the seller to train you after the purchase, it's not a good idea to aggravate them too severely. As such, let the business broker deliver the bad news.
The Paperwork Is Astounding:
A business purchase, no matter how small, requires a tremendous amount of coordination and document-chasing. The data you'll need from a seller to evaluate a business, the documentation required to close a deal and the overall chasing that must be done between buyer/seller and their professional advisors, can be astounding. A good broker will be an enormous help putting all of it together.
Using The Right One
In addition to being frequently asked by readers of my book about brokers, I also receive the greatest number of complaints from readers, about brokers. While many of these complaints are justified, equal amounts are due to a basic misunderstanding of what a broker can or cannot do.
A business broker cannot help you buy the right business. They can assist you, but ultimately, it is up to you to make that decision. A business broker cannot afford to spend countless unpaid hours searching for the right business for you. The search is something that you must do. They'll provide you with the tools to do it, but it's your responsibility to get the ball rolling. A business broker cannot conduct the investigation for you. They may suggest common things to look for, but they won't be your detective. A business broker cannot negotiate the best deal for you. Most will certainly attempt to bring all parties to a point of understanding, but if you want the best deal, then you must realize that nobody cares more about your investment than you do.
Meet with several until you find one who makes you feel comfortable. In my course, How To Buy A Good Business At A Great Price, there is an entire chapter devoted to using the right broker; however, here are a few questions you should ask them:
Your Presentation Will Determine Everything:
Don't just call or email a broker inquiring about a particular listing. The point of your contact is to first determine how effectively they communicate and how eager they are for good buyer prospects. If they do not reply to your email or return your call within 24 hours, forget them (unless of course their voice mail indicates they're out of town). I've heard some brokers say they're too busy to return buyer emails. Some only reply after they get a second or third inquiry from a buyer. I don't care how flooded the market may be with buyers, or how inundated they are with buyer emails, there is no excuse for not getting back to people in a timely manner.
Help Them To Help You:
Once you begin to speak with a broker, if you feel good about their attitude, follow up and commentary, arrange to meet them. Keep in mind that you want them to keep an eye out for the hottest listings for you. To accomplish that you must convey several things to them:
Much of this information may be confusing to a first-time buyer. It's logical to think that brokers should be falling all over to get your business. Unfortunately, this is not the case. I have always found this a little bizarre. Typically, this is not the philosophy employed by most brokers. This is an inventory business. Brokers make money by having good listings. A lot can be said for that, but let's remember that every seller needs a buyer. If not, no deal! Business brokers have a role to play. Use them effectively and they can be a solid asset to help you complete the deal. Likewise, if they do not demonstrate a serious commitment to follow up on your requests, then get another broker. But remember, no matter how effective a broker is, when all is said and done, the task of buying the right business is ultimately, entirely in your hands!
Question:
I have been looking to buy a business for about 8 months now and very seriously in the last 2-3 months. I have sent in at least ten inquiries to business brokers recently and some owner sellers, and can't even get a reply. In every email I have been so clear. All I have asked is that they forward me the financials to back up what they have put on these Websites before we even go to step two. I would think they'd want to get the financials to as many people as possible if they really want to sell the business. What am I missing here?
Answer:
Sorry, but step one is not about asking for financials…it's not even step two in this process. It may not even be step three.
Step One: The first thing to do in your initial contact, whether dealing with a business broker or seller directly, is to execute a Non-Disclosure Agreement. Your communication with them should outline this, and nothing else. For example, your email can be: "I am interested in this business. Can you please forward me the necessary confidentiality agreement (or Non- Disclosure Agreement) and any other documentation you require from me, so that we can discuss it further." By the way, these agreements are almost all standard and straightforward. As long as you keep the information confidential, and do not circumvent the broker, there's nothing to worry about. If you'd like, have them viewed by an attorney.
Step Two: After signing the NDA have a casual conversation with the broker or seller to discuss the business in general terms, get a good overview of the business, and ask your initial questions.
Step Three: Digest the information, do your initial research, set up a face-to-face meeting to go through the business in greater detail and ask any additional questions.
Step Four: Review the preliminary numbers.
Although the process may be slightly different in some cases, the stages of the business buying timelines will generally follow a specific path. One of the biggest reasons why reviewing the financials at the first stage does not make sense in addition to the confidentiality issue, is because you absolutely need to know first and foremost what is the actual business, how it operates, how long it's been in business, is it growing, does it fit your strengths, and a whole host of other questions. The initial financial review will take care of itself. Numbers don't lie, people do! Making sure that the business you buy fits your skill-set is actually more important than the financials. To put it another way, if the numbers are great but you're the wrong owner, the numbers will be heading downhill pretty fast. If you focus all of your attention on the past numbers, you are sure to bypass the business that ultimately is right for you; and that should be your top priority! On the other hand, if you find a business that fits your greatest strengths, then the financials will become part of the equation, but not the entire basis for your ultimate decision whether to buy it or not.
Question:
I've been having a hard time getting brokers to respond to my inquiries on their listings, and I think it's because I am very young (22) and have never bought a business before. But I am very serious about buying a business and confident I will be able to come up with the money through my family. My question is: how can I present myself better to get the brokers I'm talking with to take me seriously and recognize that I am committed to buying a business?
Answer:
I believe that the issue here is far less related to your age than it is to the financial aspect. Business brokers are typically inundated with inquiries for good businesses. Moreover, the vast majority of people who look to buy a business never do so, for many reasons. That is why it is imperative that you distinguish yourself from the crowd, and your age is not the problem here. Imagine if you were a business broker and received your inquiry. If they do not get a sense that you have the financial ability to complete a transaction, you could not expect them to spend time with you. Whether you subscribe to this philosophy or not, it's reality. Therefore, your best strategy is to take a step back and secure the necessary financing before you dive into this process.
Now, you may be saying: how can I get financing lined up if I don't have a business? And here I am telling you that you probably can't secure a business, or get sellers or brokers to take you seriously, until you get financing. While this may sound like a vicious circle, rest assured that it's not. Wherever you intend to obtain financing, you can "pre-arrange" it, in effect. If, for example, you are planning to get the money through personal relationships, then have those individuals provide you with a letter from their CPA attesting to their net worth, along with a letter confirming that should you secure a business opportunity that meets their criteria, they will be prepared to provide you with up to X dollars in financing. You should be prepared to present this documentation to brokers/sellers when the subject of how you will be able to finance the deal comes up, and it always will.
Furthermore, it simply makes sense from your own perspective to know what you will be able to secure so as to not waste your own time on potential businesses you can't afford. Or worse, to spend your valuable time looking at businesses only to learn that the people you anticipated lending you the money are no longer willing to do so.
I work with many buyers as well as sellers in my business brokerage career, and the two things that I need to understand from the buyers before we get busy are:
While I appreciate your initial comments that you are confident about getting the money, it just makes good sense on every front to know going in what you may have available. Being able to prove that will immediately remove any apathy on the part of any business broker. They want to deal with serious buyers as badly as you want to convey that you are one.
Question:
How should I approach business brokers to really get them to help me and know I am committed to buying a business?
Answer:
It's highly recommended that you enlist the aid of a business broker during the buying process. Keep in mind that a broker generally represents the seller in these transactions, even if you've effectively "hired" them. The two most effective manners in which a broker can be of assistance to a prospective business buyer is to provide you with access to businesses for sale that you may not find on your own and to deliver bad news to the seller.
Business brokers are besieged with buyers; the market is flooded with them. In order for you to get a broker to return your calls, show you businesses and dedicate time to you, you will need to demonstrate to them that you are serious about buying. Nine out of ten "buyers" whom they encounter, never buy a business. Show them that you're committed to this process. How? First, educate yourself about the business buying process. Read the necessary materials to learn what it takes to buy the right business.
Next, prepare a personal listing of the type(s) of business(es) that you're looking for, how much you are prepared to invest, what your time frame is, your background, credit history, etc. The more you tell them about yourself and what you're looking for, the greater their ability to help you. Business brokers are not fortunetellers. They need you to steer them towards the businesses that make sense for you.
As it relates to their input, their role should be to act as a liaison to the seller for you. You'll have to work with a seller for training after the purchase, so if there's any bad news to deliver to the seller during the negotiations, let the broker do the dirty work.
Broker roles vary widely depending upon location. Many areas have a multiple listing of businesses for sale, while others do not. Where an MLS is in place, you can use one or a limited number of business brokers to identify businesses that are "on the market". If there is no such service within your region, then you'll more than likely need to utilize multiple brokers since they may have a tendency to only show you listings that they have, or which are part of their office.
Contact the local business broker association(s). Ask them how brokers work within that region and whether or not they share listings.
Remember: A business broker can help you but they cannot do your work. This is your money, your future and your potential business. Don't shift the responsibility for your success to any third parties. Use a broker to help you, but help them out by making certain that you are well prepared, properly educated, and highly committed to this process
By: Richard Parker: President of The Business Buyer Resource Center and author of How To Buy A Good Business At A Great Price©