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There are a number of warning signs or indicators that a broker should not be used. Here are some of the most frequently encountered of the red flags:
A broker that routinely charges large upfront fees
Some companies make their money by charging fees before your business is sold. They often justify these fees as needed to "prepare marketing materials" or to "find hidden value in your business". In fact, many brokers make a comfortable living on the upfront fees without closing many sales.
The best brokers charge only a performance based commission. They get paid upon closing of a sale. Usually the fees are paid by the seller, but in some cases the buyer pays the commission. There are instances when a broker must charge a fee (for example to find an acquisition target overseas) but the fees are structured in a way that you know that the fees are for producing results.
A Large Book of Business
If you ask to see a brokers current listings and he pulls out a book with dozens of listings, how much time and attention can each listing be getting? Selling a business successfully requires a lot of work, if it is done properly.
A good intermediary works on two or three deals at a time, never more than four, so each deal can get very intense and personal attention.
A promise to unlock the "hidden" value of your business
The story some brokers tell is a very seductive one. They say that most brokers value businesses based only on "conventional" or "traditional" valuation methodologies.
Instead, they promise to find synergies with potential acquirers and project future growth so that you can realize a fantastic price. We have seen them talk to people in industries where the typical multiple was four times EBITDA and promise a sales price of ten times EBITDA. Be skeptical. A buyer is looking for a return on investment, not some new method of valuation.
Before falling for this line ask yourself and them a couple of key questions:
- Why would a buyer be interested in my company at say 15 times earnings, when there are other companies in my industry selling for 4 or 5 times earnings? Regardless of the method of valuation, we operate in a free market system, and the rules of principles of free market competition prevail.
- If they are going to project huge increases in sales and profits, how will an acquirer view those projections?
- If the broker is projecting a multiple that approaches (or even exceeds) the multiple of publicly traded OTC companies, why wouldn't an acquirer buy the listed companies and gain the advantages of decreased risk and enhanced liquidity?
We have buyers just waiting to buy your company (typically foreign buyers)
"We have buyers who just can't wait to buy your business at a very good price–just sign here..." While this may be true, more likely it is just a device to get you to sign an exclusive agreement. Be skeptical. Offer to sign an agreement for a very short period of time, say 10 days. That should give the broker adequate time to contact that buyer who just can't wait to buy your company.
A fair broker will assess the value and the strengths of your company accurately. |
