When to Walk Away
As professional business brokers, we have only two things to sell: our time and our expertise. It’s important to avoid selling either too cheaply but, with regard to your time, you’ve got to be able to tell as early as possible when you should walk away from a deal – from a seller or a buyer.
What do I mean by that? Well, in a nutshell, you need to be able to tell when a potential seller will never be more than “potential” and when a potential buyer is nothing more than a tire-kicker.
Selling a business takes time. From the initial meetings with the owners, the gathering and review of data, the valuation, the establishment of a target price, the development of the marketing program and materials, the development of the offering memorandum – all of which is done before any actual marketing begins – you will spend a lot of time getting ready to bring the business to market. There are only so many hours in a week and we must spend them in the most efficient and productive way possible.
This means that you must be able to identify deals that are likely to be “real”. Time cannot be wasted on deals that might never materialize or, worse, are unlikely to sell even if you do take the listing!
Just Getting Started as a Broker?
Back in 2001 when I first got started, I took pretty much any listing that came along. I wanted – in fact, I needed – listings. I thought that if I wanted to be taken seriously by buyers and other sellers, I needed to have something to sell – whether it was sell-able or not. But having something to sell and having something sell-able are two completely different concepts. If you take a listing engagement, it is critical that you have some sense that there is a reasonable chance that the business will sell.
You’ve got to want the listing because you believe you can sell it – not “need” the listing and hope that someone with more money than sense comes along.
Whatever the condition of your pipeline, you must come across to your potential clients as a broker that does not “need” their listing; that you’ll take only those listings that you feel you can sell. Your potential clients will be able to sense whether you want or need their deal. If it’s the latter, the relationship will be one of you “working for” rather than “working with” them.
Taking a listing that you are not reasonably confident can be sold will almost always be a big mistake. If you think upfront that a potential listing may be nearly impossible to sell – because the seller is unreasonable, the price is too high, there are environmental or legal issues, the seller is a jerk or any other reason – what good does it do to have it? More importantly, what harm can it do?
Well, it can harm your reputation, Bucko.
How? The most immediate way is that the seller, particularly if he or she falls into the jerk category, is unlikely to say nice things about you and the way you conduct your business. When speaking to other business owners, your seller is sure to say that you were unable to sell their business. When asked why, they will tick off a number of ephemeral reasons, none of which will specifically state what you did or didn’t do. But you can be sure that they’ll omit the fact that they wanted $4 million for a $2 million business.
But arguably more importantly, you’ll get a reputation with other brokers as one who brings businesses to market at unrealistic prices.
But Others Do It!
True. Even experienced brokers sometime take a listing that will never sell. Why? Well, sometimes they look at the size of the deal and see the potential for a big commission and they fall for the illusion of a major “pop” in their bank balance.
For example, if you meet with the owner of a multi-million business and learn that he or she is interested in selling, you do a little quick math and realize that 10% or 12% of the sale would mean a very handsome payday. But you’ve got to be realistic, first with yourself and then with your potential client. If the seller wants an unrealistic price for the business, no matter how large the fictional commission is, you know deep down that it’s fictional; it won’t sell and you’ll spend a year of your time dealing with an increasingly unpleasant seller and countless potential buyers that will pass on the opportunity.
If you take the listing at the seller’s price, you’re not only wasting your time but you’re doing the seller a disservice. To do the right thing by the seller, you would tell him or her that, if the number they want to sell their business for is the number they need, they should continue to build the business and gets its value up to something close to that number. Trying to sell anything – a house, a boat or a pound of tomatoes – for more than the market suggests it’s worth will naturally lead to hard feelings between the seller and the broker, and the business may suffer in both its sales and its local market reputation. And other business brokers, with whom you have hopefully developed referral relationships with, could start to view the business as damaged goods further damaging the business’ prospects of selling even if the price is reduced.
The First Step: Identify a “Sell-Able” Business
One of the most important aspects of your relationship with a potential seller is establishing a realistic number as the business’ value. With smaller, Main Street businesses, this is where we usually find the first speed bump. We are almost always the bearers of bad news.
In the Main Street market segment, business owners almost always have an exaggerated view of the value of their business. I’ve written before about the experience of delivering a valuation to a seller who is obviously disappointed – and sometimes shocked – by the number. We see this less often with the owners of larger businesses – in the Middle Market – who generally seem a bit more knowledgeable about what is going on in their industry or market segment. But in either case, an estimate of the business’ value must be established so that you and the seller are on the same page – or so you can tell upfront that this might be one to walk away from.
In my opinion, you MUST perform a valuation of any business you consider listing. Without that, neither you nor your client will have any idea what the market suggests the business is worth and either the business will never sell because it’s overpriced or, if it’s priced too low, a knowledgeable buyer will take you and your client to the proverbial cleaners.
And, when doing the valuation, you must be honest with yourself. I go back to the “want” versus “need” argument. You have to want the listing because it has a reasonable chance of selling, not because you just “need” to have some listings. Don’t fudge the numbers up simply to satisfy the seller’s randomly hoped-for figure. Know your numbers, defend your numbers and walk away if the seller tries to get you to take the listing at a number that you are pretty sure will result in a complete waste of your time for the next eight months or so. And don’t hesitate to use the Ultimate Question approach described in this post.
We advise all potential clients that we never take a selling engagement without having a valuation done. And we always charge for our valuations.
The Bottom Line
Some clients simply cost too much. Too much time, too much money and too much aggravation. You’ve got to know when to walk away. I know of one broker whose office turns away three out of every four engagement opportunities. Now THAT’S picky! But I believe he has one the highest closing ratios in the industry because he takes only those assignments that he is also certain can be sold.
So, here are four reasons to walk away from a listing assignment. We’ll discuss more in the next couple of weeks.
- If you’re not qualified. Know your own limitations. If you’ve got no experience in selling a $10 million business, you’ve got no business taking a listing for one. Refer it to a broker that can better serve the business owner. You’ll get a handsome referral fee from that broker when the business sells and you may develop a nice working relationship with that broker.
- If the business is not sell-able. If you’ve valued the business at $2 million and the seller wants $4 million, you’re guaranteed to be wasting your time because you’ll never get paid. If, in spite of not being able to dispute your numbers, the seller needs $4 million to live, advise the seller to continue building the business until it reaches the necessary value. You will be respected for your honesty.
- If the seller is unreasonable – or, worse, a jerk. No need to elaborate too much here but, aside from the price, the seller has to be willing to cooperate with the buyers that you bring. You’ve got to feel that you can have a good working relationship with any seller you work with. If that feeling is missing at the outset, once you get into the process, things are likely to get worse. Life’s too short, as they say.
- If the owner is not committed. If you leave a meeting with the business owners and one of them says, “let me think about it”, there is no deal to be had. Don’t waste time following up. (This is the same with buyers. Many of us spend hours “following up” with people who have no intention of buying. If you’ve presented the relevant data to a potential buyer and there is no response, that person is not a buyer. Period.)
If you’re interested in becoming a business broker – or in learning more about some of the challenges a broker encounters – our upcoming course, The “How To” of Becoming a Business Broker describes how we address these and other issues of business brokering.
So, what does all this have to do with poker? As Kenny Rogers lamented, we’ve “…got to know when to hold ’em and know when to fold ’em.” And to paraphrase his next advise, “…you never count your money when you’re sitting at the table. There’ll be time enough for counting when the deal is done.” It’s no different in our industry.
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 with another post on when to walk away. In the meantime, I hope you have a profitable week!
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