When you're ready to sell your business, the last thing you want to do is choose the wrong broker.
We understand that as a business owner, it's easy to let one bad business broker tarnish your view of all brokers.
In our 20+ years in the industry, we have seen it all and heard it all. From business brokers who list a business at whatever price the business owner requests, to brokers who have committed (and been convicted of) loan fraud just to get a deal done.
In this case, a few bad apples don’t spoil the whole bunch. There are many great brokers out there who truly care about the success of their clients and do right by them. To help you decipher the bad from the good, here are a few problems you should watch out for when searching for a business broker.
1. No Proof of Successful Sales
If you speak to a business broker and they have little to no reviews or references, it's not a good sign. A broker who has experience should have multiple reviews and references from happy clients.
When a broker doesn’t have reviews and can’t provide references, it means one of two things:
- They have not sold many businesses, or
- They don’t have many satisfied clients
A good place to start is by checking the broker’s Google reviews. If they don’t have many and you’re considering working with them, as to speak with some of the actual business owners they’ve worked with.
MIDSTREET TIPBe cautious when looking at reviews for business broker franchises. All of the franchise's reviews are usually coupled together and may not be specific to the location or broker you are researching.
2. Unrealistic Value Expectations
We call this "buying the listing". Generally, it goes like this.
Broker: “So, you’re looking to sell the business? Great - what do you think it’s worth?”
Owner: “Well, I’d like to get $4,000,000 for it.”
Broker: “That’s what I was thinking.”
Initially, you may feel validated that they agree with what you think your company is worth, but don't get your hopes up too high.
This generally is a red flag for a lack of experience. Experienced brokers should be able to give you some indication of value based on business valuation methods.
Businesses are valued using a multiple of SDE or EBITDA, not a back-of-the-napkin estimate or gut feeling. If you do not properly value your business, prospective buyers may pass over it and your business could be listed for sale indefinitely.
To avoid brokers who do not set realistic value expectations, learn how brokers value businesses by reading “What is a Business Valuation? (And Which Type Is Right for You).”
3. Little Experience With Companies of Your Size
It may seem obvious, but the knowledge required varies greatly depending on the size of your business.
Main-street businesses - Businesses under $1 million in revenue. Buyers: individual buyers. Level of expertise: Require knowledge and understanding of seller financing.
Mid-street businesses - Businesses between $1 million- $5 million. Buyers: Individuals, Search Funds. Level of expertise: Require knowledge and understanding of SBA 7(a) loan program.
Lower-middle-market businesses - Businesses between $5 million - $25 million. Buyers: Search Funds, Private Equity, Strategic Buyers. Level of expertise: Need experience working with sophisticated investors, earnouts, stock-option programs, equity rollovers, etc.
Who you choose to sell your company should have experience selling businesses of a similar size to yours.
Depending on the value and size of your business, you will encounter different deal structures, different buyers, and different methods of financing. Brokers need specific knowledge and expertise to sell a large company versus a smaller company.
We suggest looking at a broker’s listings if you are considering hiring them. What size of business do they typically list? If most of their listings are on the smaller end, that’s their area of expertise. If most are on the larger side, they’re probably not fit to help you sell your main-street business.
4. Lack of Training or Credentials
In many states, there are no requirements to become a business broker. That means anyone can claim they are a broker without much oversight. However, even though brokers aren’t required to have any type of license, most active and professional firms will have credentials.
NOTEIf you encounter a broker that does not have proof of successful deals and they don't have credentials, that is a major red flag.
By becoming licensed and certified, brokerages communicate their dedication to the craft of successfully selling businesses. Without the proper education and training, M&A firms may not have all of the skills to properly represent you in the sale of your business.
To ensure you hire a credentialed merger and acquisition (M&A) firm, learn how to find a good broker by reading our article “5 Tips to Find the Best Business Broker.”
5. Not Properly Licensed
There are 19 states in the U.S. that require you to have a real estate license to sell a business. If your state is one of them, it’s critical that you find a business broker that also holds a real estate license.
That said, no matter what state you’re in it’s a benefit to have a broker with their real estate license. Real estate often makes t he sale of a business more attractive to buyers, so if your broker can package the opportunity of business + real estate properly, it can provide a lot of value.
In some cases, selling the real estate along with the business can make it easier for a buyer to get approved for a loan to purchase your business through the SBA 7(a) program.
6. Business Brokers Who Don’t Publish Their Pricing
While pricing can vary, a broker should still be able to give you an idea of what they charge for their services. If they do not publish their pricing or they keep it a secret, you should be wary of signing a listing agreement with them.
Knowing what your broker charges can help you prepare for the fees you will have to pay throughout the process. It will also help you know whether or not you will have to pay fees out of pocket before the completion of the sale or if you will be able to use part of your proceeds to pay for the fees.
Most brokers will usually charge a success fee based on the Double Lehman scale. Some brokers may also charge retainers or upfront fees. Regardless of what type of fees a broker has, they should be transparent with you about what type of fees they charge.
7. Past or Pending Litigation
Be wary of the broker you select. Make sure they don’t have a history you’re not aware of.
The types of past or pending litigation you may find on a bad broker include:
- Business loan fraud
- Misrepresentation of facts in a sale
- Violation of fiduciary responsibility to the seller
To find out if a business broker has past or pending litigation against them, you can simply Google their name and see if they come up in any searches or news articles for a pending lawsuit.
8. Brokers Who Push You to Sell
If a broker is trying to convince you to sell right now, it’s usually a bad sign. Deciding to sell your business is highly personal. If you feel your broker is pushing you to sell with fear tactics, steer clear.
Pushy brokers are not operating with your best interest in mind. They’re more concerned with getting a listing than doing what’s best for you.
A good broker will give you the facts, share their professional opinion when necessary, and make sure you’re truly ready to sell before signing a listing agreement. That’s the tone of any quality professional advisor.
9. Brokers Who Minimize Their Financial Risk While Maximizing Yours
As a standard, most business brokers will charge a success fee. But some M&A advisors may also charge additional fees like monthly retainers, upfront fees, or marketing fees. This isn’t necessarily a red flag if working with a reputable company.
There are a few key landmines to avoid, however. Beware of business brokers who charge a flat commission regardless of what you sell your business for. For obvious reasons, they will be less motivated to get you the best price and terms.
Another example is companies (who will remain nameless for litigious reasons) charging a large fee ($30,000+) to provide a simple business valuation.
As a business owner, it’s critical to know there are several M&A companies that will provide a valuation of your business for free. Even companies who provide business valuations for litigation, divorce, or partnership disputes (IRS Revenue Ruling 59-60 compliant) charge less than $2500 for their reports.
The point key here is, some business brokers will minimize their financial risk in a sale while maximizing yours. You will want to find a broker that minimizes your financial risk as much as possible.
10. Business Brokers Who “Rush in”
Let’s say you decide you’re ready to sell and approach a business broker to get their help. Their first response should not be “Great, let’s get you listed up.”
Any experienced business broker or M&A advisor knows selling a company is a huge step. There are several important questions they should be asking before you sign an agreement. Just to name a few…
- What are your reasons for selling?
- What shape are your financials in?
- What are your value expectations?
- Have you spoken with a wealth advisor?
- Have you considered the emotional ramifications of selling?
- What are you planning to do after you sell?
The truth is, now may or may not be the best time for you to sell. Beginning an engagement at the wrong time can cause you and your business significant harm.
Quality brokers know good engagements take time to come to fruition. They proceed with care and put clients' interests ahead of their own. Your broker should be asking a lot of questions prior to taking your listing. If they’re not, it might be a sign of inexperience, or worse.
Hire a Broker You Trust to Sell Your Business
Selling your business is one of the biggest financial transactions of your lifetime. Spend the time necessary to find the one that's right for you.
By knowing the common problems ahead of time, you can ask brokers questions about their history, pricing, and processes to find one you trust to sell your business.
Finding a good business broker or M&A advisor can be tough. To get ideas, read our article “5 Tips to Find the Best Business Broker.”
At MidStreet, we have worked with hundreds of business owners over the years who started with jaded opinions about brokers. If you are skeptical about who to trust, call us for an open conversation on what is and isn’t true.