Business Brokers

I want to continue discussing some of the misconceptions and misunderstandings that transpire between business buyers and brokers.

I also want to thank you for the great feedback to last week’s post.

In Diomo’s publishing business, we receive over 2000 emails a month from business buyers. A number of recurring questions and comments come up from buyers regarding business brokers.

Hopefully, any brokers reading this column will be able to provide some additional feedback which I know will prove to be a great help to many buyers.

Keep in mind that in addition to my publishing company, I do business brokerage and so I clearly understand the challenges that brokers face but I am very sensitive to the buyer’s point of view. When issues are raised time and time again, one can only surmise that these buyer challenges are reasonably widespread.

Why Don’t Business Brokers Share Their Listings Like They Do in Residential Real Estate?

One of the most obvious yet confusing practices is that not all business brokers will share their listings and co-broker deals.

This typically differs from state to state. For buyers who are used to dealing with real estate agents, the practice doesn’t make sense. To be frank, I don’t get it either.

In Florida, where I do my business brokerage work, there is co-brokering on listings. While there may be a few shortcomings in the system, on the whole it works incredibly well. I personally endorse the practice with great conviction.

It is a mystery to me why this is not done in every state. I can understand not doing so with out of state brokers and their buyers, but unless I am missing something, it really does seem counter productive.

There are five obvious conclusions one could arrive at why a listing broker would not be willing to cooperate with other brokers:

They do not believe cooperating brokers will share the workload.

They lack confidence in the general business brokerage populace.

They do not want to share commissions.

They feel other brokers will not adequately pre-qualify buyers.

It will simply be more work and not result in any additional sold listings.

Maybe there are some additional reasons and I welcome any feedback. I certainly know that buyers are eager to learn why this is the case in many states.

One has to think that the chances of selling a business would rise when your colleagues can offer these listings to their pool of buyers as well. I have always believed that the business brokerage industry is steeped too deeply in legacy. Old traditions are accepted and not challenged.

According to some industry resources only one in four listed businesses ever sell. That’s craziness. What is more unbelievable is the statistic is accepted and there does not seem to be any effort to understand why.

The logical conclusion is there are either too many listings, or at least too many poor ones being taken by business brokers. One thing is certain; there is no shortage of buyers. Granted, not all are serious, but the critical mass does exist on the buy side.

I have to believe that every broker wants to sell more of their listings. Is it possible that working with other brokers would improve the statistics? I don’t know for certain but on the most basic level one has to believe it would. The math alone would dictate so: if more brokers are “showing” the same listing to more buyers, the numbers have to improve.

Is the feeling that buyers will see the listings anyways so why share the deal with another broker?

If there’s a concern about the other broker’s contribution, then perhaps the commission split should not be equal in all cases. What do you think?

I’m curious to learn if there is a fundamental belief within the business brokerage community that there are simply too many business brokers who cannot bring enough benefits to the transaction that would warrant shared listings? What are your thoughts?

Why Is There Such a Gap in Competency Levels and Procedures Between Business Brokers?

Most brokers will agree that buyers need to be better educated. Your feedback on prior posts is clear. However, there is a general consensus amongst buyers that many business brokers do not contribute positively to the buying process. Maybe I’m being politically correct – the feeling is they are often an impediment. I am not casting judgment either way but perception is reality to most people.

Would the industry be better served if there were specific certifications that business brokers must possess? Or perhaps an educational curriculum they must undergo? Is a Series – 7 type licensing process for new business brokers a reasonable idea? Would that remove the fringe players?

The International Business Broker Association has some excellent continuing education programs and surely they could play a significant role in laying out a national curriculum. Perhaps, it would it make sense for every broker to have to complete a certain number of hours of continuing education or obtain a CBI designation within a certain number of years to retain their license of designation as a business broker.

The comments I have received from brokers is that buyers generally need to be better educated. Does the same hold true for brokers? The buyers seem to think so.

As a both a business buyer and broker, I have met a full spectrum of brokers. While there are some absolutely tremendous people in the field, I must admit that there are far too many who are poorly trained, do not add any value to the deal, and work too hard to sell the deal rather than to facilitate the transaction between the parties.

Additionally, the out dated legacy of retaining a quantity rather than a quality of listings simply does not work. Percentage-wise, there are no more business sales today than twenty years ago. This alone could be part of the reasons for no co-brokering, but again, the issue is why aren’t newcomers better trained and maybe even regulated to some degree?

In some states, one must possess a valid and current real estate salesperson’s license to work as a business broker. There’s no doubt that this alone is insignificant and in fact, it may make the situation worse. After all, if you only need to hold a real estate license to sell a business, it may invite many more incompetent people into the field. My own experience dictates otherwise but the case can be made.

Better yet, I think the lesson here may be that either direct business experience, or a designation and educational requirement focused entirely upon the business broker’s role is warranted for the industry.

Would this work? Is it necessary? Or, does the industry keep doing the same old thing and let the poor performers stay in for a while and then drop out in time?

Buyers Are Frustrated – Brokers Are Overwhelmed. What’s The Answer?

It’s no secret that business buyers often air the comment that brokers are unresponsive. Much of this has to do with buyers being unprepared and brokers being inundated with emails and calls for their listings. What’s the answer?

When a buyer sends you an inquiry, what do you do? Do you answer every email? Do they receive an auto reply? Do you return all buyer calls? Is there a format or procedure you ask them to follow?

I have seen many cases where a broker office replies with a request for the buyer to complete profile or NDA and the response rates I’m told are negligible. If so, what alternate strategies have you implemented to counter this apathy and non-response from the buyer’s side?

To the buyer I ask: what prevents you from completing a Non Disclosure and Personal Profile for the broker? The NDA is a must and the profile can only help. Why aren’t you doing it?

There’s no doubt that inexperienced buyers will send in requests with the wrong expectations. There are thousands of buyers out there firing off emails and calling business brokers about listings without the right information. Lots of them are not qualified but many are. How do you separate the two groups?

There Is So Much Information But Not Necessarily What Is Needed

In my opinion, the Internet has been the greatest blessing and the worst curse for all stakeholders in the business buying process.

For buyers, it has allowed many more people to consider the prospect of, and begin the process to investigate buying a business. That’s both good and bad news. Perhaps it has become too easy for a buyer to simply view listings and submit inquiries without much thought.

For brokers, the Internet has provided a medium to load all of their offerings at a reasonable cost in databases that have become the supreme aggregators for the process. The result is that a broker will generate infinitely more activity than a tiny, yet expensive three line advertisement in the Sunday paper did not too long ago.

For sellers, the benefit has been to “show” their business to many more people. On the other hand, are they potentially missing other potential buyers because it is too easy to just throw a listing online rather than having to conduct a rigid buyer solicitation process?

This leads to the next issue regarding information: the financial data that buyers expect to review. Buyers become terribly frustrated with the information they receive, or lack thereof. I certainly understand any broker refusing to disseminate a seller’s financials until such time as the buyer proves their ability to execute a deal.

Even though I receive a lot of email complaints about this practice, I categorically endorse the broker’s position when a buyer is not financially able to pre-qualify or refuses to do so.

However, what I cannot comprehend is the practice whereby a broker would insist upon receiving a bona fide offer prior to providing any detailed financials on the business even from those buyers they have labeled as “qualified”. I’m told there is one significant group of business brokers that will not, under any conditions whatsoever, release anything other than a one page generic financial summary unless there is a detailed and executed Offer to Purchase Agreement in place. Financials are released in due diligence and that’s their policy. To me, this simply provides a wide open invitation for any deal to fall apart.

The common statistic in the brokerage industry is that fifty percent of all deals fall apart in due diligence.

It’s no surprise. This awful statistic is equally absurd to the number of listed businesses that don’t sell. One would think that this statistic should be dissected and challenged and not accepted.

Nonetheless, it stands to reason that at least half of the deals should die if the parties do not go into an offer let alone the due diligence stage, without adequate information. What I find especially bizarre is a broker’s only real asset is their time. Why waste it? Why would any broker want to even go through the process of soliciting and negotiating offers if the buyers and their advisors have not received adequate information to be reasonably confident that the numbers will be validated?

The other aspect to the Internet is that people expect to have access to volumes of information at the click of a mouse. This leads to buyers going listing to listing without much thought and simply sending in emails. Or, a buyer submits an inquiry and believes that reams of useful data will be returned to them. This is something that the medium itself has created. It has also led to a decline in the pre-qualification steps that a buyer should go through to get information. By not receiving any meaningful data from an inquiring party, how can any broker determine who is on the other end of the email? Some may say it is part of a broker’s job is to find out. To others, the feeling is they cannot effectively weed through all the noise.

I am really curious to know from anyone who has been in business brokerage for over ten years if percentage-wise, based on the number of listings they carry, they personally sell any more businesses today than they did ten or fifteen years ago.

I know from my own experience when I began buying businesses in 1990, the first step was usually a phone conversation or an in person meeting with a broker. They got to know me, they could ask me some the key questions, get a read on my level of interest, and could make a valid determination on whether I was a real buyer and specifically how they could help steer me to the right business. I could do the same with them. That valuable part of the process seems to have disappeared.

I wonder though if the business brokerage community has ineffectively leveraged a lot of the great technology we have available and have simply given themselves more work without the corresponding dividends. With email, Blackberrys, cell phones and the Internet you’re always connected. But are you really connecting with the right buyers?

Maybe the answer lies in providing better tools and information to all stakeholders in the business buying process so everyone can navigate their way more effectively.

Perhaps the answer is even simpler: better educated buyers and brokers may mean more closed deals for sellers. Then, everybody wins.

I eagerly await your comments.


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