An unethical business brokerage tactic for securing clients
Codiligent business brokers strives to maintain the highest level of integrity and ethics, and I am particularly sensitive to this in recognition that many people view our industry as having "used car salesman" practices and ethics. I'll share one of the distasteful practices that give my industry a black eye, and share some tips to help you avoid getting snookered.
The practice I'm referring to is when a business broker calls a business owner and says something like "I know of a business buyer for whom your business would be a good match. He has expressed that if a business like yours were for sale, he'd be interested in buying it." You may be thinking, "what's wrong with that? Isn't that what a business broker is supposed to be doing - helping buyers and sellers find each other?" Here's the problem - more often then not the business broker doesn't have a specific buyer in mind, or if they do - there has been no discussion with that buyer about your particular business, and yet the business broker implies that there have been discussions about your specific business.
The reality is that all of us who have been professionally selling businesses for any length of time have thousands of buyers in our database and the specificity of acquisition criteria vary greatly from buyer to buyer. Right now I could pull dozens to hundreds of buyers’ contact information from my database that have told me they are interested in businesses in a particular industry, but have provided few other criteria other then the general size and location. There’s a good chance that if your business is, for example, a manufacturing company, located in the US, with less than $25 million in revenue, that I have at least a thousand buyers who would technically be a match for your business based on the broad criteria these buyers provided.
Since most relevant information required to make an acquisition decision about a small, closely-held company is private, most prospective buyers simply wouldn’t have enough information to form a strong opinion of whether they would want to acquire your company. So, the idea that the broker has identified a legitimate buyer who is specifically interested in your business, and who has a high probability of completing the deal based on their limited knowledge of your business, is frequently more fiction than reality. Often business brokers who make these types of calls are simply fishing for new seller clients that they hope to contractually bind in an engagement agreement after which they'll worry about trying to find a buyer.
You will never receive a call or email like this from Codiligent, unless there truly is a buyer that has contacted us about your specific business.
Yet, there are times when a business broker really is working with a buyer who made inquiries about your specific business, or one with very similar characteristics. To better discern this I'd suggest asking the broker or investment banker the following questions:
1. Did your buyer ask about my business specifically, or simply businesses that are similar to my business?
2. What exactly is it about my business that is of interest to this buyer?
3. Are you engaged by, and representing the buyer, who is paying your fee, or are you anticipating that I would be signing a contract with you to represent me in exploring this transaction? Most brokers who are legitimately representing a buyer will not require you to sign an engagement agreement or pay their fee, given that dual agency in a business sale is fraught with conflicts of interest.
4. Can you tell me who the buyer is? If the broker is truly engaged by the buyer they usually won't have a problem doing so, although they may require you to sign a Non-Disclosure Agreement, first.
If after you ask these questions you are still uncertain whether the business broker is legitimately representing a buyer interested in your business, you may want to say "I'd be happy to talk with you and your prospective buyer in the future. I'll have my advisor call you when I'm ready to sell." You can then find business broker or investment banker representation that you are comfortable with before exploring a sale.
Integrity is of utmost importance in getting a business successfully sold. If a business broker starts out their relationship with you under false pretense, how will they interact with buyers? Relying on trickery and clever, technically correct, but misleading representations is not a recipe for business sale success.