Do You Need a Buyer’s Broker When Buying A Business?

There is a huge misconception amongst buyers regarding the role of a business broker. I will not dwell on points we have covered in past newsletters however, it is important to understand that unless a buyer has engaged the services of a broker and is compensating them directly, the broker does not represent the buyer, either legally, or practically. Do not expect them to provide you with unbiased advice, or do anything that could jeopardize the deal if they are being paid by the seller. To state this another way: If you’re not paying them, they don’t work for you!

Interestingly enough, I have seen a significant increase lately in brokers offering their services as a “buyer’s broker” whereby they will actually represent the buyer in the deal. I am not certain if these are simply business brokers that have not been successful in a traditional role, or they see a true niche, or perhaps their agenda is to sincerely help people. Regardless of their motives, I think this is a very interesting shift, and I am very pleased to see it happening.

The unfortunate part is that many of these individuals are not qualified for the job and will likely end up misleading the buyers into the wrong deals. Although the Internet is a wonderful tool, it is very easy to design a slick website, add some compelling sales copy, and try to pass yourself off as an expert. Don’t be fooled – be diligent in your selection.

If you wish to hire a buy-side broker, their fees cannot be predicated solely upon the size deal you do, or whether or not you do a deal altogether. Now, there can be some additional form of compensation for a closed deal, but not related to the actual price because in back of your mind there will be a lingering thought that they are steering you towards a particular transaction because of the size, instead of the fit.

To hire a buyer’s broker, you will want to learn a number of things:

• Have them provide you with references of other buyers they have worked with in the past, and contact them. You will mainly want to know if the buyers were satisfied with the work and whether they believe they truly helped them in all phases of the process.
• Understand their process and services. Don’t make any assumptions. A good buyer’s broker will outline the exact services they will and will not provide at every stage. Some buyers assume the broker will devote endless hours scouring listings on their behalf, which in some cases may not even be part of their services. Others will only provide advice on businesses you locate. Some may attend meetings; others charge additional fees for it. Some will perform valuations while others will have you defer it to an accountant. As such, get a detailed “scope of work” that articulates their role.
• Do they represent sellers? This is a personal choice but in my opinion if you want to hire your own broker, use one that works exclusively with buyers. If that is what they do everyday then they will clearly be better versed in their specialty. By the same token, I do believe it is extremely helpful when these individuals have prior experience as a seller’s broker as well because they will better understand the deal mechanics and help you to think about the deal from the seller’s perspective.
• A good buyer’s broker should prove themselves to you first. They should offer an initial consultation and in that discussion they should delve into your expectations regarding the size business you can purchase given your financial situation, what your expectations are, your timeline to buy a business, who else is involved in the decision, what the current market conditions are, how deals typically unfold, some of their past experiences, etc.
• Work with a local advisor. Although email is a phenomenal tool, you will undoubtedly establish a more meaningful relationship with someone whom you can work with face-to-face.
• Be prepared to pay them well. Any good consultant commands a lucrative hourly fee.
• Leave yourself an out – do not lock yourself into a long-term agreement. After thirty to sixty days you want to have the right to back out of the agreement if they are not delivering what was promised or for any reason at all.
• Work with someone you like and trust. If you do not get a “warm and fuzzy” feeling from them, chances are your gut is right so follow your instincts.

Above all, you have to realize that they are not going to do your work nor are they going to make your decisions. A good buyer’s broker can be a tremendous addition to your team, and they can offer a wealth of helpful advice, but at the end of the day, you have to make the final decisions.

Have a great week!

Comments

[Leon Parker]

Richard:

While we usually work only as sellers agents I have in the past worked as a buyers broker, understand how to do it, and basically agree with the advice you offer in this piece. I only represent buyers when they know what they want and are ready to buy, and are willing to pay for my services.

There is one bit of advice I would add. I would suggest that buyers be skeptical of brokers who tell them that they will represent them and that the sellers agents are always going to pay for it. We are not dealing with residential real estate where that is common. We have had some individuals in our area who have sold themselves on that basis. They are not individuals we care to do business with, or who represent anyone but themselves in a deal, and we refuse to pay them, causing a very difficult situation.

With reputable buyers brokers, who we have experience with and know we can trust, we are willing to share commission with them but would rather have the buyer pay them, and we will make the adjustment in our commission on the sellers side to make the deal work. I am of the old school and think that we should be paid by the people we are working for.

It has always seemed incongruous to me for a buyers broker to be paid a commission based on a percentage of the sale. That seems to work against their trying to get the best price. But in those cases where a fixed price success fee can't be negotiated I have not found a better alternative.

Leon

[Independent Computer Consultant]

Good tips as usual. Thank you for sharing.

[Ted Leverette]

Richard:

As the creator of the consulting niche known as “Business Buyer Advocate,” I admire your courage shown in your article, “Do You Need a Buyer’s Broker When Buying A Business?”

You dispel some of the myths and you encourage business buyers to seek guidance from people whose sole loyalty is to the buyer.

The specter of conflict of interest has plagued business brokers for decades; your article can help them better serve the sellers they represent.

The Code of Ethics in use by the Business Buyer Advocates at “Partner” On-Call Network can help the advisors to buyers govern themselves and can serve as guidelines for your readers who want to select the best advisor for business buying.

Ted Leverette, president, “Partner” On-Call Network LLC
Link to Code of Ethics: http://partneroncall.com/index.php?id=21,0,0,1,0,0

[David Newport]

Hi Richard,

Nice work. I linked this posting to my Blog last week. Mine was related to Business purchasing their competition in this recession and thought you explained the Buyers Broker concept really well. My blog got published in our National Paper the NZ Herald and they published your link.

Thanks again.

Dave Newport
switchbusiness.co.nz