The Importance of Business Brokers

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How Important are Business Brokers?

How important are business brokers? If you’re still wondering, this post ought to dispel any lingering questions.

This is a true story that I am personally familiar with. It involves a business owner that hired a residential real estate agent to sell their business and a buyer that hired a divorce attorney – attorneys are all the same, right? – to handle the purchase; the usual suspects in the “crime” of murdering a business transfer.

If you’ve been following this blog for any length of time, your stomach muscles are probably starting to tighten as you begin to imagine the circus that began to unfold shortly after this cast of characters was assembled. And suffice it to say that the two main characters – the seller and the buyer – ended up with more headaches – and less money – than necessary. But the real estate agent and attorney got paid their full freight.

The Background

The business in question is a specialty retail operation. It occupies a free-standing building with highway frontage. The real estate is owned by the business owners and is to be sold with the business.

The seller lives out of the area and owns other real estate but closer to where she lives. The real estate agent is well-experienced – in selling residential real estate, an occupation in which she is seasoned and competent and for which she was trained. (See “Working With Real Estate Agents“.) The attorney specializes in real estate closings, the low-hanging fruit of the lawyer-ing profession. Nobody involved had ever had even the most remote relationship with the purchase or sale of a business.

But that didn’t dissuade any of the participants. In the tradition of Admiral Farragut, it was “Damn the torpedoes. Full speed ahead!”

The ensuing carnage was spread far and wide – and iss too extensive to describe fully in this post but here is a synopsis of the resulting damage that could have been avoided if a professional business broker – or even a transaction attorney – had been hired.

Inventory

Inventory was never counted. Believe it!

The seller said there was $350,000 and that was the number assumed by the buyers that would transfer with the business. But once the purchase agreement was signed, the seller kept on selling – but somehow “forgot” to replace a lot of what was sold.

To compound this problem, there was no clause in the purchase agreement that described how the the inventory was to be handled and accounted for.

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For instance, would anyone be charged with verifying the value of the inventory? If so, who?

And what about outdated inventory? Anything that has been sitting unsold for four of five months is unlikely to ever sell. A buyer that is represented by someone that knows what he or she is doing would refuse to accept out-dated inventory; or accept it at a steep discount, at best.

Real Estate

The buyers’ attorney apparently gave no thought to how to handle the overall transaction so as to best protect his clients. He saw nothing wrong with the buyers acquiring the whole enchilada – the business and the real estate – in their personal names.

Prior to closing, this issue was raised by the closing agent for the seller. The attorney said, “what’s wrong with that?”

Well, a lot.

Acquiring assets in that manner limited the buyers’ options when they eventually sell – and they will! If the buyers took title to the business in one entity – say, Our Business, LLC – and the real estate in another – such as Our Real Estate, LLC – they would be able to sell either at anytime rather than having to sell the whole package at once.

I’ve done a couple of posts earlier that address in detail how to handle real estate to position your buyer for the most options and best returns. I’ve also described the true story of the terrible outcome suffered by two owners who did not get this advice.

The final indignity connected to the real estate is that no one involved thought to assign a value to business resulting in both a larger transfer tax due at sale and a continuing higher annual real estate tax liability for the buyers.

And none of this even touches on the inevitable tax consequences at the national level.

Business Operations

How important are business brokers? Well, apparently, no one considered any of the aspects of the business that had to be transferred.

It’s easy to say “we’re going to transfer ownership of the business” but unless the myriad aspects of the business are addressed, the buyers are in for a rough time.

Example #1: A list of vendors. Where does the inventory come from? Who are the suppliers? What is their contact information? What do they supply? What are their terms? How do they prefer to receive orders? Etcetera…

Example #2: Credit card account. In this instance, no one suggested to the buyers that they needed to set up a credit card account so that they could take credit cards, the preferred method of paying for nearly everything these days, including the millions of criminally over-priced chocolate-caramel-macchiato-with-half-cream-and-half-milk-and-a-pinch-of-cinammon drinks served daily by baristas at Moonbucks around the globe. Fifteen minutes after opening up on their first day of ownership, this little omission hit the proud new owners where it hurts. A $600 sale, down the toilet.

Example #3: Other parties in possession. This is a list of any other parties that might have some claim, large or small, to the assets and a copy of any such claims. For example, if the business leases any equipment, such leases should be provided during due diligence for the buyers to review and approve. In this instance, the property was large enough so that the sellers offered space for recreational boaters to store their boats. This fact came up two days before closing – and only because one of the closing agency’s employees drove by the business the day before and noticed a dozen boats and two travel trailers parked there.

Example #4: Payables. A list outstanding debts – or an affidavit by the sellers that there are none. Have all the vendors been paid? If a vendors list had been provided, this would have been a pretty easy question to answer. Have all sales taxes been submitted? Are employment taxes current?

There are dozens of other examples I could list but you get the point (I hope).

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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

In this true story, the buyers were the ones that suffered the most given lost sales due to no credit card account, higher real estate taxes because the assets were not separated, less inventory at transfer than had been promised and a half-dozen other issues. But the seller was not unscathed.

She hired a residential real estate agent, remember? The transaction totaled $1 million. A commission of 6% meant the seller paid the agent $60,000. But $350,000 was (supposedly) inventory and inventory is almost always excluded from the commission calculations. The price of a business should always be calculated without any consideration to the value of the inventory if for no other reason than that the inventory fluctuates day to day. This mistake cost the seller $21,000.

How important are business brokers? Professional business brokers and transaction attorneys would have significantly reduced the cost, the drama, the last minute panic and the time it took to get this deal across the finish line. We could fault the seller and the buyer for not choosing the right trained professionals but the real culprits in this unpleasant saga are the professionals that were involved; the real estate agent and the inexperienced attorney. They’re professionals, yes, but trained in professions that are totally unrelated to the business at hand.

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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