BizQuest's Business for Sale Blog

What Frustrates & Confuses Many Buyers About Brokers

I want to continue discussing some of the misconceptions and misunderstandings that transpire between business buyers and brokers. I also want to thank you for the great feedback to last week’s post.

In Diomo's publishing business, we receive over 2000 emails a month from business buyers. A number of recurring questions and comments come up from buyers regarding business brokers

Hopefully, any brokers reading this column will be able to provide some additional feedback which I know will prove to be a great help to many buyers.

Keep in mind that in addition to my publishing company, I do business brokerage and so I clearly understand the challenges that brokers face but I am very sensitive to the buyer’s point of view. When issues are raised time and time again, one can only surmise that these buyer challenges are reasonably widespread.

Why Don’t Business Brokers Share Their Listings Like They Do in Residential Real Estate?

One of the most obvious yet confusing practices is that not all business brokers will share their listings and co-broker deals. This typically differs from state to state. For buyers who are used to dealing with real estate agents, the practice doesn’t make sense. To be frank, I don’t get it either.

In Florida, where I do my business brokerage work, there is co-brokering on listings. While there may be a few shortcomings in the system, on the whole it works incredibly well. I personally endorse the practice with great conviction.

It is a mystery to me why this is not done in every state. I can understand not doing so with out of state brokers and their buyers, but unless I am missing something, it really does seem counter productive.

There are five obvious conclusions one could arrive at why a listing broker would not be willing to cooperate with other brokers:

They do not believe cooperating brokers will share the workload

They lack confidence in the general business brokerage populace

They do not want to share commissions

They feel other brokers will not adequately pre-qualify buyers

It will simply be more work and not result in any additional sold listings.

Maybe there are some additional reasons and I welcome any feedback. I certainly know that buyers are eager to learn why this is the case in many states.

One has to think that the chances of selling a business would rise when your colleagues can offer these listings to their pool of buyers as well. I have always believed that the business brokerage industry is steeped too deeply in legacy. Old traditions are accepted and not challenged.

According to some industry resources only one in four listed businesses ever sell. That's craziness. What is more unbelievable is the statistic is accepted and there does not seem to be any effort to understand why.

The logical conclusion is there are either too many listings, or at least too many poor ones being taken by business brokers. One thing is certain; there is no shortage of buyers. Granted, not all are serious, but the critical mass does exist on the buy side.

I have to believe that every broker wants to sell more of their listings. Is it possible that working with other brokers would improve the statistics? I don't know for certain but on the most basic level one has to believe it would. The math alone would dictate so: if more brokers are "showing" the same listing to more buyers, the numbers have to improve.

Is the feeling that buyers will see the listings anyways so why share the deal with another broker?

If there's a concern about the other broker's contribution, then perhaps the commission split should not be equal in all cases. What do you think?

I'm curious to learn if there is a fundamental belief within the business brokerage community that there are simply too many business brokers who cannot bring enough benefits to the transaction that would warrant shared listings? What are your thoughts?

Why Is There Such a Gap in Competency Levels and Procedures Between Business Brokers?

Most brokers will agree that buyers need to be better educated. Your feedback on prior posts is clear. However, there is a general consensus amongst buyers that many business brokers do not contribute positively to the buying process. Maybe I’m being politically correct – the feeling is they are often an impediment. I am not casting judgment either way but perception is reality to most people.

Would the industry be better served if there were specific certifications that business brokers must possess? Or perhaps an educational curriculum they must undergo? Is a Series - 7 type licensing process for new business brokers a reasonable idea? Would that remove the fringe players?

The International Business Broker Association has some excellent continuing education programs and surely they could play a significant role in laying out a national curriculum. Perhaps, it would it make sense for every broker to have to complete a certain number of hours of continuing education or obtain a CBI designation within a certain number of years to retain their license of designation as a business broker.

The comments I have received from brokers is that buyers generally need to be better educated. Does the same hold true for brokers? The buyers seem to think so.

As a both a business buyer and broker, I have met a full spectrum of brokers. While there are some absolutely tremendous people in the field, I must admit that there are far too many who are poorly trained, do not add any value to the deal, and work too hard to sell the deal rather than to facilitate the transaction between the parties.

Additionally, the out dated legacy of retaining a quantity rather than a quality of listings simply does not work. Percentage-wise, there are no more business sales today than twenty years ago. This alone could be part of the reasons for no co-brokering, but again, the issue is why aren't newcomers better trained and maybe even regulated to some degree?

In some states, one must possess a valid and current real estate salesperson's license to work as a business broker. There's no doubt that this alone is insignificant and in fact, it may make the situation worse. After all, if you only need to hold a real estate license to sell a business, it may invite many more incompetent people into the field. My own experience dictates otherwise but the case can be made.

Better yet, I think the lesson here may be that either direct business experience, or a designation and educational requirement focused entirely upon the business broker's role is warranted for the industry.

Would this work? Is it necessary? Or, does the industry keep doing the same old thing and let the poor performers stay in for a while and then drop out in time?

Buyers Are Frustrated - Brokers Are Overwhelmed. What's The Answer?

It's no secret that business buyers often air the comment that brokers are unresponsive. Much of this has to do with buyers being unprepared and brokers being inundated with emails and calls for their listings. What's the answer?

When a buyer sends you an inquiry, what do you do? Do you answer every email? Do they receive an auto reply? Do you return all buyer calls? Is there a format or procedure you ask them to follow?

I have seen many cases where a broker office replies with a request for the buyer to complete profile or NDA and the response rates I’m told are negligible. If so, what alternate strategies have you implemented to counter this apathy and non-response from the buyer’s side?

To the buyer I ask: what prevents you from completing a Non Disclosure and Personal Profile for the broker? The NDA is a must and the profile can only help. Why aren’t you doing it?

There’s no doubt that inexperienced buyers will send in requests with the wrong expectations. There are thousands of buyers out there firing off emails and calling business brokers about listings without the right information. Lots of them are not qualified but many are. How do you separate the two groups?

There Is So Much Information But Not Necessarily What Is Needed

In my opinion, the Internet has been the greatest blessing and the worst curse for all stakeholders in the business buying process.

For buyers, it has allowed many more people to consider the prospect of, and begin the process to investigate buying a business. That's both good and bad news. Perhaps it has become too easy for a buyer to simply view listings and submit inquiries without much thought.

For brokers, the Internet has provided a medium to load all of their offerings at a reasonable cost in databases that have become the supreme aggregators for the process. The result is that a broker will generate infinitely more activity than a tiny, yet expensive three line advertisement in the Sunday paper did not too long ago.

For sellers, the benefit has been to "show" their business to many more people. On the other hand, are they potentially missing other potential buyers because it is too easy to just throw a listing online rather than having to conduct a rigid buyer solicitation process?

This leads to the next issue regarding information: the financial data that buyers expect to review. Buyers become terribly frustrated with the information they receive, or lack thereof. I certainly understand any broker refusing to disseminate a seller's financials until such time as the buyer proves their ability to execute a deal.

Even though I receive a lot of email complaints about this practice, I categorically endorse the broker's position when a buyer is not financially able to pre-qualify or refuses to do so.

However, what I cannot comprehend is the practice whereby a broker would insist upon receiving a bona fide offer prior to providing any detailed financials on the business even from those buyers they have labeled as "qualified". I'm told there is one significant group of business brokers that will not, under any conditions whatsoever, release anything other than a one page generic financial summary unless there is a detailed and executed Offer to Purchase Agreement in place. Financials are released in due diligence and that’s their policy. To me, this simply provides a wide open invitation for any deal to fall apart.

The common statistic in the brokerage industry is that fifty percent of all deals fall apart in due diligence. It’s no surprise. This awful statistic is equally absurd to the number of listed businesses that don't sell. One would think that this statistic should be dissected and challenged and not accepted.

Nonetheless, it stands to reason that at least half of the deals should die if the parties do not go into an offer let alone the due diligence stage, without adequate information. What I find especially bizarre is a broker’s only real asset is their time. Why waste it? Why would any broker want to even go through the process of soliciting and negotiating offers if the buyers and their advisors have not received adequate information to be reasonably confident that the numbers will be validated?

The other aspect to the Internet is that people expect to have access to volumes of information at the click of a mouse. This leads to buyers going listing to listing without much thought and simply sending in emails. Or, a buyer submits an inquiry and believes that reams of useful data will be returned to them. This is something that the medium itself has created. It has also led to a decline in the pre-qualification steps that a buyer should go through to get information. By not receiving any meaningful data from an inquiring party, how can any broker determine who is on the other end of the email? Some may say it is part of a broker's job is to find out. To others, the feeling is they cannot effectively weed through all the noise.

I am really curious to know from anyone who has been in business brokerage for over ten years if percentage-wise, based on the number of listings they carry, they personally sell any more businesses today than they did ten or fifteen years ago.

I know from my own experience when I began buying businesses in 1990, the first step was usually a phone conversation or an in person meeting with a broker. They got to know me, they could ask me some the key questions, get a read on my level of interest, and could make a valid determination on whether I was a real buyer and specifically how they could help steer me to the right business. I could do the same with them. That valuable part of the process seems to have disappeared.

I wonder though if the business brokerage community has ineffectively leveraged a lot of the great technology we have available and have simply given themselves more work without the corresponding dividends. With email, Blackberrys, cell phones and the Internet you’re always connected. But are you really connecting with the right buyers?

Maybe the answer lies in providing better tools and information to all stakeholders in the business buying process so everyone can navigate their way more effectively.

Perhaps the answer is even simpler: better educated buyers and brokers may mean more closed deals for sellers. Then, everybody wins.

I eagerly await your comments.

Hey Buyers and Brokers - Can't You Guys Get Along?

The the last few weeks I have received an unusually high volume of comments from business buyers and brokers. I thank you for all of your comments; that is what makes a great online community.

Nevertheless, I am disturbed by what appears to be two drastically different opinions between the two groups. Buyers slamming business brokers and brokers claiming the buyers are all wrong. Guess what - you're both right and both wrong! Although I never like to draw any general conclusions, there is clearly a miscommunication here of grand proportions.

I am certain that my comments today will please some and irritate others. I welcome any constructive comments.

First, let me state I’ve seen the business buying space from all sides. I’ve purchased ten businesses myself, sold nine of them, written seven books on the subject, I’ve worked as a buyer’s representative and I still do mid market business brokerage.

I remain astounded by the sheer numbers of emails I get from business buyers that literally trash the business brokerage community. I am not going to defend brokers. I will say though that over the years I have met, worked with and spoken to hundreds of terrific brokers. They are smart, successful, know how to get a deal done and they take countless courses to improve. However; just like any other professions that survive strictly on performance, there are always going to be good ones and bad ones. Unfortunately, like other "similar" fields (real estate, insurance) with thousands of brokers, the numbers of true professionals may be the smaller of the two groups. I also know that it is understandable that after dealing with vast numbers of prospects that never buy, it is easy (but not right) for any business broker to become disenfranchised.

Personally, I don’t agree all of the philosophies or methodologies that I hear some business brokers practice but as a buyer you really should not pay too much attention to it. It just doesn’t matter. This is where I think some business buyers completely miss the mark.

Buyers get too hung up on the broker’s role and forget what their goal is in the process.

The business buying process has plenty of blemishes, of that there is no doubt. Anyone who disagrees has their head in the sand. However, I am convinced that a fundamental misunderstanding of how this process is "supposed" to work is at the core of what causes the friction and lack of communication between buyers and brokers.

Let me first address prospective business buyers and provide you with some insight to business brokers. I will touch on a few points that are basic yet fundamental reasons that cause a lot of wasted time and misunderstanding. I am also going to discuss some issues related to business brokers and their world in the next newsletter which will clearly help anyone who is buying a business understand this process better.

First, most business buyers begin the process thinking that business brokers operate like residential estate sales people. You figure they’ll respond to every inquiry with rapid fire speed, they’ll show you tons of businesses and take as much time as you need to find the "perfect" business. Unfortunately, that’s not the way it works.

The only common thread between business brokers and real estate agents is that they are both paid on commission – end of story. Real estate sales people will generally work more favorably with buyers and there are a number of perfectly good reasons why this happens.

I once read a statistic that said any individual or couple that contacts a real estate person will likely purchase a property within twelve months, seventy percent of the time. Contrast that to a prospective business buyer whereas over ninety percent will never buy a business. That alone could cause some business brokers to proceed cautiously before becoming too involved with any buyer. I know I do. Wouldn’t you agree?

To further complicate matters, the market is absolutely flooded with buyers; always is; always will be. Unless you separate yourself from the crowd, you are simply in a pool of tons of others who, in the minds of sellers and brokers will probably never buy. Here’s a great article on how to separate yourself from the crowd .

Since business brokers are not going to take you to see countless businesses for sale listings, a good part of the search falls to you. Now, this does not mean there’s any excuse for a broker to not return your calls or emails when you inquire about a business (a frequent complaint) and I know how aggravating that can be. On the other hand, if you are able to search more effectively, and ask the right questions (especially in the first contact) you will be miles ahead of the other buyers. Business brokers are not going to do your work. Don't expect them to.

Second, the misconception exists that banks have their vaults open ready to lend money to small business buyers – not true! And so, many inexperienced buyers who simply do not have the financial resources to complete a transaction go down the wrong path thinking that every business listed for sale is within their reach. Unfortunately, that is not the case.

Financing a business is not as simple as getting a mortgage on a home. While there are many options available to finance a business, you certainly want to understand these early on so that you don’t chase the wrong deals. If not, the only result will be wasted time and frustration. If you do not have the financial resources to execute a sale, a business broker is not going to indiscriminately distribute a company’s financials to you. The lesson is simple - know what you can afford. Be prepared to share your financial information with a broker and provide them with the proof they need to deem you qualified for a particular listing.

Third, learn the business buying process. If you’re really serious about buying a business, then don’t become a "looker". Educate yourself, hone into a few businesses, present yourself properly, ask the right questions, do your research, and be prepared to make offers. It's quite simple and the only way to get any deal done.

I know these few points sound relatively simple, and perhaps even obvious. I also know and hear first-hand how frustrating it can be to work with an uncooperative business broker. Yes, those situations do arise. Yet, one thing is certain: every single business broker wants to sell you a business. If not, they don’t eat. They will help you. They will move the deal along. But they are not going to do your work nor will they spend time with you on listings they know you cannot execute.

The business buying process is not perfect; far from it. However; the blame can not rest solely with brokers. I know there are plenty in the profession who should not be there. Chances are that they won’t be in twelve months. Nevertheless, you cannot possibly rely on a business broker to dictate your success and whether or not you complete a transaction.

Brokers have their role but deals get done between buyers and sellers. Placing your destiny in this process in the hands of a broker and then becoming discouraged or worse yet, aborting the project because of their inefficiencies simply does not make sense. That would be like you deciding to take the bus and not buy a car because you did not like the salesman at a particular dealership.

The bottom line here is that business brokers will not pay any attention whatsoever to unqualified buyers. I’m not saying that their methods for qualifying a buyer are always right by any means. However, if you truly want to get the level of cooperation you believe that should be bestowed upon you by a business broker, then you need only follow a few simple steps.

Come to grips with whether you have a real need to buy a business or you are just looking. When you arrive at the former, you’ll be successful.

Get a handle on how much you are prepared to invest of your own money. Buying a business is not like the "no money down" real estate infomercials. Be willing to share this information with business brokers. They will help steer you to businesses they know you will be able to purchase.

Be prepared. I don’t care how smart you are, or what your prior business experience may be, those are attributes that will help you AFTER you buy a business. You absolutely need to educate yourself. In my publishing business where we offer how-to guides on buying a business ( www.diomo.com ), I like to ask prospective clients the following questions (think about this for a second): If you are going to invest your money to buy a business, and especially if you have never bought one before, shouldn’t you first learn how to buy the right one? If not, that would be like your college bound child telling you that they want to become a doctor but they aren’t going to buy any of the books or even attend most of their classes. How would you respond? Buying a good business is well within your reach. We are not talking about sending men to the moon. However, if you fail to prepare; prepare to fail.

So here’s your homework:

1. Compile your personal financial statement and be prepared to provide it to brokers.

2. On your next inquiry to a business broker follow the steps we discussed in the article separate yourself from the crowd .

3. Commit to buying and not looking.

4. Get hold of the materials you need to learn how to become a savvy buyer

5. If you can’t make headway with a certain broker, move to the next one.

Good luck and please send me your thoughts.

Richard Parker

Think Before You Walk From A Deal

I received an interesting question this week and felt it would be helpful to discuss it on the blog in case you run into a similar situation.

The lesson here is that a good buyer always plays "what if" and exhausts all possible options when a roadblock comes up in your deal 9and rest assred that they will - it's all part of the process).

Question: I am in the midst of a deal and have run into a major problem. The company provides medical supplies and the majority of its clients go through Medicare and Medicaid. After reading your program and being warned about company contracts that may not be transferable I approached the seller. He first said it was not a problem but after pressing him a bit (and thanks to your book), we reviewed the licenses and sure enough, none of the government related contracts/licenses can be transferred or assigned. I like this business. It passes all of the ten commandments in your materials and the deal is fair. The seller and I have met several times and get along well. But I don't know what I can do now. Is this something that should make me walk from the deal? Please help.

Answer: Let me answer your last question first: NO, you should not walk from the deal.

The good news is that there is a very viable option. The bad news is that your attorney and accountant may initially object but once you layout the deal parameters they can construct it to provide you with the protection you need.

While the preference for a buyer is to almost always have an asset purchase (and it's the norm in small business purchases), the most viable option is to set up this transaction as a stock purchase so as to avoid having any license transfer issues altogether.

Let's explore the stock sale option.

By purchasing the company stock, nothing should change in the "eyes" of the license issuer. However, you will want to double check that there are no other conditions to the license related to a change in ownership. In other words, verify the contract to be certain there are no other conditions on a sale.

The downside is that by acquiring the stock and not the assets, you effectively assume all of the liabilities past, present and future. This is where your attorney will surely disagree. You may also lose some potential tax savings and this what your accountant may disagree about.

On the legal side, you can include certain protections to mitigate, but not completely eliminate, your liability/risk by having the following in place:

Ensure that the sales agreement provides you with bulletproof indemnification by the seller for any potential liabilities that may have occurred during their ownership but only surface after you close the deal.

Include a significant amount of either seller financing or a holdback in the deal so that you will have adequate leverage to make a claim against the seller in the event any are made against the business. If you don't, you could be faced with defending the claim and also having to go after the seller in a separate suit and when transactions get litigious it is always expensive and never pretty.

Any note or holdback should have a right of set off which allows you to use those funds to settle any claims if the seller does not defend them or provide adequate proof of not being liable.

From a financial perspective you should be aware of the following:

A stock sale is generally better for the seller from a tax perspective as well, while an asset purchase generally favors to the buyer. This is specifically related to restrictions you will incur on deducting future depreciation expense.

I would suggest that you have your accountant run the numbers of the business under both a stock and asset sale scenario with the goal of outlining what tax consequences you will incur and where the seller may benefit. This can provide you with some additional leverage on the purchase price as well. After all, if a stock sale is the only way the business will likely transfer to a new owner, and doing so will not only add some legal exposure and potential tax losses to you, the seller may have to readjust their thinking on the terms and make some accommodations given the advantages they are gaining. If not, they will likely have a difficult time selling the business to any buyer who does not already have the necessary licenses to operate the business.

Also, the possibility exists for you to acquire both the assets of the company and the stock (which will include the licenses). I would suggest that you have your attorney outline the options on this front as well.

So there you have it - the deal is not dead. There are options available - there always are. Sure it is possible that an agreement may not be reached but you must exhaust the alternatives. The key is for you and the seller to have a meeting of the minds of getting a deal done and to both make accommodations to achieve that result.

It is especially important that you get your attorney and accountant involved in the discussion and explain that your goal is to find a solution if possible and not to simply broad-brush a stock sale as a "deal killer".

Naturally, neither party should put themselves in a vulnerable position but with the right mechanisms in place, you can both be adequately protected and not have any reckless exposure.

Read more about deal structures at: http://www.diomo.com/-Deal_StructureQA