Should a business buyer ALWAYS be represented by a qualified business broker? Here’s what I think and a really dumb thing to do:
I’ve been asked if a buyer should always use a qualified business broker when buying a small business. I used to be a broker so my answer may surprise you. Just please, please, please never make the mistake I describe in my story.
Hello everyone, it’s David Barnett once again and this time I’ve got a viewer question from Yan and Yan wants to know, should a business buyer always be represented by a broker? Honestly, no. They don’t need to be always represented by a broker. What I always advise is that business buyers should surround themselves with several capable advisers. So, people who know what they are doing. An accountant that help people buy businesses before and is familiar with due diligence. A lawyer who has done transactions before and knows what to do.
Now as far as deal making and negotiation; if you have a good friend who is an experienced business owner, who maybe has bought businesses before, that kind of person can help you out. So, no, you don’t always have to be represented by a broker, but having someone who is an experienced business broker to be one of your advisors can certainly be useful.
I’ll tell you what’s really foolish though and I have seen this happen several times is when people actually engage someone who is completely unqualified to help them buy a business when they could have the help of a business broker for free, basically.
Let me tell you a story, happen a few years ago and it was before I was a business broker, it was when I was strictly doing finance brokerage for small businesses and I was approached by some new Canadians who had arrived from Korea. They were looking for help in financing a convenience store purchase. Now, the convenience store was for sale with a business broker who had been around for a long time. I knew of him, many people had known of him. He was experienced, had done lots of transactions and business brokerage is usually done in dual agency, meaning that the broker represents both the buyer and seller and has certain obligations and duties to both of them.
They had become aware of a certain convenience store that was for sale by their realtor who helped them buy a house, and the realtor said to these new Korean people that arrived in Canada; I know of a convenience store that is for sale and then the realtor went to the business broker and said, we are going to represent these buyers in this transaction. The business broker spoke to the buyers and said, these guys are real estate agents, they don’t know what they are doing, if you want to work with them I will split my commission with them but I won’t represent you. I won’t have any duties to you and in my experience, you should be getting advice directly from me.
So being very trusting and the fact that they had already bought a house with the real estate agent, they thought that it would be a good idea to use their realtor to help them buy a business. The problem is of course, the real estate agent didn’t know anything about businesses or how to buy them.
They came to me looking for advice on how to do the financing and I showed them how to structure the deal and it was going to require some vendor financing on the part of the sellers. So the real estate agent promptly wrote up an offer for the price of the business and didn’t put in any detail whatsoever of the vendor take back note. So, the offer was presented and closing day arrived and the lawyer said, where is all the money? The realtor said, well we were going to go through with David’s suggestion about the vendor take back note, but of course, the seller had never been presented that offer, and the seller had never agreed to do the vendor financing.
So, the deal didn’t close and the Korean couple had spend money on their accountant, they had spent money on their lawyer, money on an engineer to look at the structure of the building. They spent close to $20,000 and at the end of the day, didn’t have a business because they chose to go with someone who had absolutely no idea how to buy a business.
When I say you don’t need to be represented by a broker, I mean that honestly, you don’t have to and there are plenty of experienced business people out there who certainly go and negotiate and buy businesses without the help of a broker. If you are able to get an experienced person to help you and in the case of a dual agency arrangement, they are being paid by the seller anyway. You would be foolish not to take advantage of them and sign on as a buyer and be in an agency relationship. It doesn’t bar you from having other advisers around you such as your accountant, lawyer or other business people or people that you know to help you and give opinions on what you are doing.
You should not say no to a qualified adviser because you want to use someone who may be much less than qualified. In my business buyer course which is available at www.businessbuyeradvantage.com. I actually go through at length, there is an entire module about building your team and intermediaries. What to look for in an intermediary, what to look for in an advisor, how to vet them and make sure they really know what they are talking about and they know what they are doing.
The worst thing that can happen if for you to have faith and trust in an advisor and then discover later that they don’t know what they are talking about. There is a funny thing that I see sometime and it’s a mean one on facebook. It says, if you think hiring a professional is expensive, wait until you hire an amateur and I think this is one of those cases. I work with business buyers all the time and end up charging people in the hundreds to low thousands of dollars for advice and help and consulting.
Often times that’s for businesses that are going to cost $200,000; $300,000; $400,000; $500,000. It certainly makes sense in my opinion to spend a few hundred or a couple thousand dollars to get good advice to help you avoid a potentially huge mistake that you might never recover from in your life.
Anyway, so that’s my opinion on whether or not buyers should be represented by business brokers. I look forward to your feedback and comments. As always, if you enjoy my videos, please subscribe to my e-mail list, subscribe to my youtube channel. You’ll make sure that you get all the latest content delivered to your e-mail box every week. If you ever decide that you don’t like the content and want to take yourself off the list, it’s very easy because I use mail chimp.
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