Buyers Need Brokers, Too. A True Story

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Buyers Need Brokers, Too!

Drafting a ContractWhen people think of business brokers, they generally associate them with business owners that want to sell. But buyers need brokers, too. Don’t believe me? You will after you read this.

This is a true story of the epic collapse of a deal at the last minute when two parties – a seller and a buyer – tried to finalize the transfer of ownership of a business without a professional business broker being anywhere even remotely in the vicinity of the deal. It is a cautionary tale for buyers. It is also a story that can be used by brokers when they are talking to buyers.

The Background

The business in question is a restaurant located in a nice waterfront town roughly in the center of the U.S. East Coast. The owner of the restaurant also owned the real estate it was in but, as I have long advised, held that real estate in a different entity. Therefore, the business could be sold with or without the real estate.

A broker in one of our offices was contacted by the owner about selling the restaurant. As is our rule, the broker insisted that a valuation be done prior to accepting an assignment to sell the business and the broker proceeded to gather the necessary data from the owner and to perform a valuation.

The Bearers of Bad News

As I have written before, we are generally the bearers of bad news. This is particularly true when we are dealing with owners of Main Street and lower Middle Market businesses. That’s because many owners of such businesses have an exaggerated opinion of their business’ value.

(Being the bearer of bad news is a condition that professional business brokers encounter all the time. How you deal with the seller’s response will determine how successful you’re business brokerage will be.)

Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.

Become a Professional Business Broker…

According to the seller, the business was doing about $800,000 in revenue but about $150,000 was in cash, most of which was being pocketed by the owner and not making it on to the books, a disastrous situation when it comes to value (as explained here). Discounting the seller’s claim of cash, the broker’s calculations resulted in a value of roughly $300,000.

Sure enough, when the broker finished the valuation and he met with the seller to review it, the seller’s response was, essentially, “I need more than that. In fact, I need at least $500,000.” Our broker explained how the valuation was arrived at and clearly justified his results but to no avail. In the end, the broker had to walk away.

For the next 10 years – that’s right, TEN YEARS! – the owner tried to sell the business himself with no success; until early 2019 when he found a buyer – in Chicago, of all places. The buyer was looking for a change (and warmer winters!) and decided this restaurant offered the right vehicle.

Neither party was represented by a broker and, from the final result, I assume that neither party, in direct contravention to how this should have been handled, was represented by anyone; broker, attorney, accountant or even the local Little League baseball coach! And though the parties didn’t realize it at the time, this is where the deal began to crumble.

Buyers Need Brokers

The parties came to a general understanding and shook hands on the deal. The buyer promptly sold his home in Chicago, packed up all his stuff and headed East for a new life in warmer weather. But they forgot one – and arguably the most important – thing: a comprehensive purchase agreement.

Now, I don’t know all the terms of the deal they hammered out before they shook hands but what I do know is this: about a week before the business was to change hands, the seller decided to call the deal off.

Without a comprehensive purchase agreement, the buyer was up the proverbial creek. Even a basic agreement would include sections covering default by either of the parties, what remedies were permitted, what actions the buyer could take and, most importantly in this case, the possibility of seeking “specific performance” by the seller.

As you might imagine, the buyer was stunned! He found himself in a new part of the country with no business, no job and a really rotten taste in his mouth. But what he did next speaks volumes about determination and resiliency – to say nothing of vengeance. He leased space down the street from the restaurant he was going to buy and opened his own restaurant to compete with the would-be seller!

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Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.

Become a Professional Business Broker…

The Bottom Line

Buyers need brokers. Buying a business – large or small – is no simple matter and, unless a buyer is experienced – the proverbial serial entrepreneur – a buyer needs guidance. A professional business broker is where to start.

Granted, the business the buyer wants may not be listed by a broker and the seller may refuse to pay a broker’s commission. But the buyer needs the broker working on his (the buyer’s) behalf and, as such, the buyer should expect to pay the broker. If the buyer in this story had hired a broker, the buyer would have benefited in two ways: 1), for $1,500, the broker could have done a valuation allowing the buyer to know what the business was worth; 2), for a fee of 4% or 5%, the buyer would have had an experienced negotiator and an iron-clad contract that would have saved time, money and an untold amount of aggravation and drama.

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 profitable week!

Joe

#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions

The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at joe@WorldwideBusinessBlog.com

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