Finding Qualified Help to Buy a Business

The fees and risks of using brokers to help buy businesses

Q.  I just spent a year trying to acquire a business. The seller was ready to sign until a publicly-held company offered him about 2 1/2 times more than my offer. Losing this deal was emotionally draining. Should I work with a business broker the next time I try to buy a business? What is your opinion of brokers and what are their fees?

A.   Right up front, I'm going to apologize to my loyal readers. Usually I like to write straightforward columns with a single point of view. But today's question calls for some double talk.

First, I'm sure every reader can understand your disappointment. You worked hard only to be outbid at the finish. But, did you really lose? I don't think so. Sometimes in the buyout world, you win by losing.

The supreme maestro of business buying, of course is Berkshire Hathaway Chairman Warren Buffett. He doesn't participate in multiple bidder auctions because they drive up purchase prices above reason. He knows as prices rocket upward, his chances of making money as the new owner spiral downward.

Because you didn't "fall in love" with the business at any price, you demonstrated the discipline of a winning business buyer. Congratulations!

Now here's my double talk: Selling business owners should appeal to as many corporate and financial buyers as possible. Frequently corporations, also known as "strategic" buyers, can rationalize paying more because they can find other ways to make money on their investment. They may be able to use patents for other purposes or consolidate facilities for more profitable overall operations. Financial buyers like you don't have these synergistic benefits.

Now, here are a few words about business brokers and their fees. Much like real estate brokers, NASD licensed business brokers charge sellers 4% to 8% of the total transaction price. When you think about it, this fee is reasonable when compared to the 5% to 6% commission rates for house sales. In addition, more reputable "higher market" investment banking firms with established contacts into corporations and private equity buyout funds will also charge a monthly retainer to the selling company.

Can a business broker help you buy value? Possibly, but in the small business acquisition market, the rule is buyer beware.

Commission-based brokers are not going to look too hard for information about a business that would discourage buyers from paying top dollar. In fact, you can't assume the "numbers" (a company's financial records) are real because sleek national small business brokerage firms often "re-cast" financial statements to make businesses appear more profitable than they really are.

And if brokers are doing their best job for a seller, they will likely push for a fast closing and a low escrow. You, on the other hand, will want ample time to thoroughly investigate the business' operations, pay only a small cash fee at closing and have the right to recover undisclosed liabilities later through a fat "over funded" escrow. You see the inherent conflict in interests?

If you don't want to rely on business brokers for "deal flow," get to know regional private equity firms that buy majority stakes in revenue generating businesses. Deals they turn down may be perfect for you.

Also, let corporate and estate attorneys around town know your business-buying goals. Lawyers know when companies are heading for sale sometimes long before owners approach business brokers.

No one is going to watch out for your money better than you. Smart business buying requires patience and the determination to walk away when someone is selling the equivalent of used VW at a new Corvette price. Yes, you want wheels, but not at any price.

Take Command Action Step

Visit http://www.takecommand.org/special_main.htm for a comprehensive free list of questions you should ask before bidding to buy a business. Careful research is the best way to avoid the gut-wrenching malady called "buyers remorse."