Business Brokers: Mistakes to Avoid
Like any other industry, ours presents many opportunities to make mistakes. The results of such missteps by a business broker can range from mild embarrassment to ruinous lawsuits.
Business brokers can avoid many of these issues simply by paying attention; making sure that your processes are clearly defined and understood, and that all your “T”s are crossed and “I”s dotted. This requires a modicum of focus and, most importantly, not starting on one task until the one you’re working on is completed.
This post is about a business broker that put in one hell of a lot of work to get a deal finalized only to be stiffed on his fee simply because he was “too busy” to focus on some seemingly inconsequential details.
Unless the seller wants to offer the business at a price that is below what we feel its value is AND we have one or more likely buyers in our database, we never accept an engagement with a term shorter than 12 months. Many clients are surprised by this. As I mentioned, they’re more familiar with a listing agreement with a realtor to sell a house.
But whenever we get any push-back, we explain the time generally needed to find a buyer, negotiate a purchase agreement, conduct the due diligence, arrange for the financing and finally get the deal closed is very likely to exceed six months – and that we need time to do our work.
Well, the business broker in question is not a dumb guy and his office is attentive to Lesson #1. His engagement terms are 12 months.
So, where does the need to pay attention come in? Generally in month 12. Here’s what happened.
Things Come Undone
The business broker and the owner developed a friendly and cordial relationship and the broker continued to work on the seller’s behalf even after the engagement term expired and was eventually able to get a purchase agreement negotiated with a ready, willing and able buyer.
The negotiations got a little tense, however, and the owner began to feel – without any legitimate reason – that the business broker was trying to coerce the seller into accepting an inferior deal even though the broker had just spent more than a year marketing the business and doing everything he could reasonably be expected to do to get a buyer.
In the end, when the time came to close the transaction, the seller balked at paying the business broker’s commission. The justification was that the engagement term had expired before the broker brought the buyer and the seller was no longer obligated to pay the broker.
This was not a small deal and, thus, the commission earned by the broker was not insignificant. Needless to say, everybody lawyered up, headed to court and the predictable fireworks ensued.
The Bottom Line
Unscrupulous sellers – a topic of two previous and widely-shared posts (here and here) – are out there and professional business brokers must be cognizant that, no matter how cordial your relationship with a client becomes, business is business. And when money is concerned, “business” can get ruthless and relationships can fracture swiftly and permanently.
In the story detailed above, two other lessons were learned that the broker subsequently put into place to reduce the chance of such unpleasantness happening in the future. I’ll tackle one of them in next week’s post.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week!