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 or the deal in a transactional role. The seller pays their commission and even if they are assisting you in the process, they may in fact 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?
Keep in mind that business brokers do not work like real estate agents in every sense. Often, they will not share listings within a certain area and only sell the business that they (or their own offices) have listed.
In the past fifteen years, I have personally purchased ten businesses and have sold nine of them. 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.
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 finding and using the right broker, however, here are a few questions you should ask them:
- How experienced are they?
- How many transactions have they been involved with?
- Have they ever owned their own business?
- Do they specialize in a particular business type?
- What references can they provide?
- How many clients are they working with presently?
- How many agents work in their office?
- Do they share/co-broker listings with other offices? If yes, of the total number of businesses they've sold in the past year, how many were their own listings and how many belonged to other agents? (this will indicate their willingness to suggest businesses to you based upon your needs, not simply because it's their listing as long as there is sharing of listings between brokers).
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 to get the dialogue going.
In your first contact, don't ask for three years of financials or other confidential information. Simply express your interest and request that they send you a standard non-disclosure document to execute so they will be able to tell you more about the business.
Help Them to Help You
Once you begin to speak with a broker, if you feel good about their attitude, follow up and 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:
- Show them you're serious. A business broker wants to be sure that if the right opportunity comes along, you'll be ready to buy!
- Prepare a laundry list of the types of businesses you're interested in purchasing
- Present them with your personal financial statement
- Tell them precisely how much money you have to invest
- Ask them for suggestions as to how you should conduct your search
- Ask them to show you how to best navigate the Internet
- Call them regularly, at least once a week.
- For the first couple of businesses that you locate on your own, ask them to check them out. See how long it takes for them to give you data or follow up with you. If it's more than a couple of days, use someone else.
Much of this information may be confusing for 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 remembers 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!
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