In Defense of Business Brokers
“Do You Need a Business Broker?” One reader asked after a rather strong argument that many brokers are charging outrageous commissions for little service.
The reader, whom Norm calls “Peggy,” has a question about buying a business.
One of her main concerns is that the business broker representing her found a suitable business but then told her she would need to pay a 25-percent commission. Peggy had misgivings and eventually walked away from the deal.
Let me start by saying that I consider Mr. Brodsky’s series of columns titled “The Offer” — which chronicles the sale of his document-storage business to a private equity group — required reading for business owners. His recent article, however, left many brokers crying foul in that it read to some as a blanket dismissal of business brokers.
Regarding Peggy and her problem, we learn few details about her, the business she considered purchasing, its asking price and deal structure, or the broker she was working with. In fact, after reading the description of her situation several times, I was left with more questions than answers.
What follows are a few thoughts on Mr. Brodsky’s main points — that the 25-percent commission was unconscionable, that most business brokers are generalists and claim to know more than they really do, and that a lot of brokers are unethical.
Charging a 25 percent commission is “unconscionable.”
Without more detail about the conversation – including the broker’s side of the story – it’s hard to know whether the commission was appropriate. On the face of it, 25 percent does seem ridiculously high: The typical success fee is 10 percent of the final sales price. However, a comment from Greg Dupuis, president of Bridge Ventures – a mergers and acquisition firm based in Tampa, Fla. – illustrates how many variables can affect the broker’s compensation:
“Is there a chance the broker said that the seller wanted a 25-percent premium because it was an unsolicited offer and Peggy misunderstood the statement? Was the broker working on a success fee only? What dollar amount did the 25 percent translate into? Was it 25 percent of the total deal consideration or the selling price? Was there a substantial earn-out component of the transaction that the broker was not getting any commission on? Was debt being assumed and hence the selling price was low? Was there a minimum fee clause in the adviser agreement that Peggy signed?”
I don’t want to blame the victim, but we know nothing about Peggy’s experience level as a buyer. Buying a business takes a tremendous amount of dedication and a thorough understanding of the process, including how to work with business brokers.
According to industry statistics, 90 percent of those who begin the search to buy a business never complete a transaction. The truth of the matter is that some people are simply not meant to buy a business. Peggy may have been one of them.
Most business brokers are generalists.
Mr. Brodsky writes, “Most business brokers are generalists. In other words, they claim to be so knowledgeable about business in general that they are able to do a good job advising any buyer or seller on any type of transaction in any industry. That’s baloney on the face of it.” He adds that the best brokers tend to be industry specialists.
Mr. Brodsky and I might agree on one thing: There is a scarcity of good business brokers out there. But if all of the good brokers were to focus on just one industry, business owners would find even fewer options. While industry specialists are fine, my experience is that they are neither more nor less competent than those of us who are generalists.
In order to survive, they need to either be located in a large metropolitan area or have enough professional clout to work with clients on a national level.
One analogy that occurred to me, as well as another commenter, is that of a family practice physician. Is he or she a generalist? Yes. Can this person make you well when you are sick? Yes. It’s likely that the family physician will need to pull in specialists from time to time, but your overall goal of wellness should be achieved.
Similarly, there is always a team involved in selling – or buying – a business. The good generalist/broker knows when to pull in technical experts to achieve the overall goal of getting your business sold.
I’m not saying they’re all crooks.
I spent years considering law school and a career as a lawyer. Instead, I chose to pursue business at the graduate level. If I’d chosen the legal path, I’d be in the same boat I’m in now, fighting perceptions that lawyers are unethical, greedy and self-serving and that they don’t really care about their clients. Some lawyers do fall into that category, but certainly not all. And so it is with business brokers, or any other professional service provider for that matter. Finding a good one depends largely on how hard you look.
In the past, I’ve offered a few pointers on how to choose a good business broker, as well as how to determine what kind of professional you may need. Above all, the best thing you can do is to get referrals.
The people to ask include accountants; lawyers, especially those with practice specialties that include corporate transactions, tax and estate planning; lenders, including commercial loan officers (particularly those who handle Small Business Administration loans); certified business appraisers (look for those with the designation of A.S.A. or C.B.A.);certified exit planners (look for those with the designation of C.B.E.C., C.E.P.A.or C.Ex.P.).
You might also check out the profiles of my followers and the people I follow back on my Twitter account: @SynergyBizNWA. Many of them are the best in the business!