I read an interesting article online last week regarding the use of a business broker when buying a business which I believe was very misleading. For any of you who have read any of my guides, articles or blogs over the past decade, you know that I have a very black and white view about using business brokers, whether as a buyer or seller.
Whenever I am asked by a buyer or seller if they should use a business broker, my reply is always: “yes..but”, with the “but” being mostly related to using the right one. While that is a fairly open-ended statement and one that merits greater dialogue, it is not the subject matter for today, so back to the article I referenced earlier.
In it, the author pinpoints how a business broker can help a buyer avoid making any errors during their review of the business, will help in structuring a deal so the buyer is properly protected, will offer valuation services, can be an extra set of eyes during due diligence on behalf of the buyer, and will steer the buyer away from bad businesses and insure they buy the right one. While some of this guidance may be provided if a buyer hires an intermediary/advisor/business broker and pays them directly, buyers who anticipate this to be the job of a broker are in for quite a shock. This is not the guidance that a broker can nor should offer to a prospective buyer and certainly not if the broker’s fees are paid by the seller, which is most often the case within the small business for sale arena.
A good broker will help a buyer gain access to businesses for sale, they will act as a needed buffer between the parties, and since they have gone through this process before, they serve a valuable function to keep the deal moving along and to get it to the closing table. They may provide some quasi consultative services but they will not make decisions for the buyer.
Brokers are not going to tell a buyer whether or not they should buy a specific business, nor will they work on their behalf to dissect financials, conduct due diligence or approve agreements. That is not their role.
While there is a wide degree between brokers of what they will do to assist buyers, their role is far more of a deal facilitator and that is a crucial function is this process Buyers often times become agitated dealing with brokers (which we have discussed ad nauseum in prior posts so no need to regurgitate why this happens) although certainly there is blame to be laid on both parties for these complaints.
Much of that frustration could be eliminated if a prospective business buyer garners a clear understanding of what a business broker can and cannot do for them. It is paramount for the buyer to never assume that certain functions are automatically part of a broker’s role or responsibility.
I have used a broker in nearly every one of my own businesses that I have sold and there has been a broker involved in most that I have bought. Some of been great, others terrible, but I made sure I knew exactly what I was dealing with early on so there was no confusion later.
Since there is no standard practice in place that all brokers adhere to, a buyer is well advised to simply ask every broker upfront to specifically outline their function so there is no ambiguity. Once done, the buyer will have accurate expectations set and can thereafter work within those parameters. By doing so, the buyer will experience how the buying process can be enhanced with the involvement of a good business broker and will not be derailed when a less qualified broker is part of the potential transaction. Ultimately however, the broker’s influence on the buyer is limited and they do not make the final decision on any matter. It is always up to the buyer to do so.
Have a great week.
Richard Parker - diomo.com