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Business Buyers: Who is advising you?
We are Business Brokers! The reader needs to know that in reading this, from the start.
That being said, we do not believe all business Buyers need a Broker to represent them. And keep in mind that, unless you are clearly told otherwise, THE BROKER REPRESENTS SELLER – NOT YOU! So, in the majority of cases, the Broker with whom you may be working is representing that Seller. In a very few states, the Broker is required to tell you that in writing, and to ask you to sign a disclosure form that verifies you understand that point. If you are uncertain, ask! If you are still uncertain, assume he works for the Seller, which means he does not necessarily work in your best interests.
Regardless, he is obligated to tell you what he absolutely knows about the business, even if there are negative things that might lower the price or cause you to walk away. But that is a key issue: He must tell you things he ABSOLUTELY KNOWS!
For example, suppose you were buying a Gas Station, and a new Interstate Highway has been legally approved and known to be coming close by. Moreover, suppose the new Highway is designed so that the road on which the Gas Station is located is going to end up being dead-ended, reducing traffic that passes by the Station to almost nothing. He should tell you that. He should tell you that the Highway will cause a tremendous reduction in traffic, which is the basis for the Gas Station’s business.
But, if the Highway is not already approved, he may not owe you that kind of explanation. Because he does not know FOR A FACT that the Highway is going to adversely affect the Gas Station. It may be that the Highway will ultimately have an exit that will dump traffic right at the door of that Gas Station, and such an event would actually benefit the Station.
The key is what is known AS A FACT. The Broker does not have to tell you something negative that is not engraved in stone.
Just as importantly, he should be making it clear that the Cash Flow for a given business is based on historical financial information, and that if you replicated all aspects of the Seller’s Income and Expenses, that Cash Flow is what you might experience. He should NOT be telling you or even hinting to you that those earnings are what you will, in fact earn. He cannot promise or guarantee specific earnings. If the market changes, if technology changes, if you (as the new Owner) screw up, earnings could be far lower. If you are a better promoter or manager, if market conditions improve, the earnings may go up. The Broker cannot foresee any of those variables.
We deal in a certain number of Health Care-oriented businesses, and the topic of discussion is always the impact “Obamacare” will have on the business. Frankly, it is a “crap shoot”; no one knows, for certain. We discuss both the PROS and CONS with Buyers, all the time. But we point out variables and openly tell the Buyers, it is up to them to make the ultimate decisions about the risks or opportunities involved in the future of Health Care.
As we frequently say, there are good Auto Mechanics and bad Auto Mechanics; there are good Doctors and bad Doctors; there are good Business Brokers and bad Business Brokers. Some of the most important people in your purchase (or startup) of a business are Attorneys and Accountants. And there are good Attorneys and bad Attorneys; good Accountants and bad Accountants. Beware!
On the whole, our relationship with Attorneys is exceptionally good – we get a lot of our business as referrals from Attorneys. But we have generally had Attorneys tell us that, as a class, they do no wrong. Uh-huh…
We also know that in more than 14 years of being in this business, we have only seen two (2) Buyers lose their deposits on deals from which they wanted to withdraw. In both cases, it was unquestionably their own Attorneys that caused the loss of the deposit money. In another situation, a Buyer’s Attorney sat reading the newspaper while the settlement was going on. There were several changes made to the Contract of Sale at the table, and the Attorney called us back, two days later to ask what had happened. (Keep in mind, he was still charging his Client the normal, hourly rate, all the while the Attorney was reading the newspaper and not even paying attention to the settlement!)
In still another situation, we were working for a Seller, brought her a bona fide Buyer and – at OUR suggestion – she took the Contract of Sale to her long-time Attorney, to have him look it over and offer changes, where necessary. His immediate reaction was to arbitrarily write to us in an attempt to invalidate our Listing Agreement, which would have then invalidated the offer. The business was an extremely difficult one to sell, and it would have put the Seller in a position of holding on to the business for perhaps another year, until an alternative Buyer surfaced. Fortunately, she terminated the services of the Attorney and the deal went smoothly, with another Lawyer.
What were that Attorney’s motivations? He refused to say, other than the offer was not satisfactory. He never offered any detailed explanation – even to his own Client – and though he attempted to invalidate our own Agreement, he never said why he felt that to be necessary, either.
The only thing we could imagine was that he wanted to represent the Seller himself, in brokering the deal. Not that he had any experience in that area! Moreover, Brokers are NORMALLY paid a commission, predicated on a successful sale. Attorneys in these situations are normally paid BY THE HOUR. They really do not have any motivation for seeing a deal through quickly and efficiently; if it is done too quickly, their billable hours are reduced. That is a cynical view, but we have worked with that Attorney before, and there is abundant, though circumstantial evidence that this is his game: To extend the number of hours he can bill, to the detriment of his own Clients.
To be fair, there are unscrupulous Brokers who will push their Seller to accept a low offer, simply so the Broker can get paid quickly. Sellers, beware! Have the Broker talk you through their rationale and make certain such an explanation makes sense.
We volunteer to justify pricing, to all parties. Some Sellers have a Price already in mind and sometimes that Price is unreasonable, for the amount of business they are doing. We will sit and go over the Cash Flow we have determined, we provide them with spreadsheets that illustrate our methods, and we show the Seller how the Buyer’s financial expectations would look, if he replicates the Seller’s own Revenue and general Expenses. Usually that last part of our presentation shows the Seller whether or not we are correct. If, after paying a note, there is insufficient Profit remaining for the Buyer, the Price is too high. No Buyer is going to purchase a business unless he or she has an expectation of a reasonable Profit. But the Sellers – and the Buyers – have a right to know this information, and properly done, it keeps Brokers honest, in relating that information to all parties! We also provide that information to each party’s Accountant, so our numbers can be checked.
Accountants are people with whom we also, normally have very good relations. Again, we obtain a number of referrals from this group, and we rely on them and their advice to their Clients, in order to provide for the best possible transaction, whether we represent a Buyer or a Seller. But they are also not people that are above reproach! Most of our negative dealings have been with Sellers’ Accountants, not their Attorneys. Some seem to deliberately sabotage a deal. As we write this, we are dealing with one such CPA, who seems to delay the most simple requests, for outrageously long periods of time. This has caused tremendous irritation with a particular Buyer, who is ready, willing and able to make the purchase.
In another case, the Accountant told the Seller that the offer we had was too low, despite publicly available documentation that demonstrated that the price we were bringing to the table was, in fact above the norm, for that industry. His motivation? Who knows. But keep in mind that, if the business is sold, the Accountant loses a Client…
In the worst situation we encountered, an Accountant informed the Seller that the price we were suggesting was half of what he – the Accountant – could get for the business. Here was an undeniable case where he wanted the Client to allow him – the Accountant – to broker the deal. Obviously, the Seller knew the Accountant, she did not know us. So, she listened to the Accountant and the business sits with the same ownership, for four (4) years, now. We have gone back to the Seller and asked to represent the sale when her brokerage agreement with her Accountant ends, but he has put the thought of getting huge, unreasonable amounts for the sale, which makes our job incredibly more difficult. Once that thought is in the Seller’s mind, it is difficult to eradicate.
That is a key with any advisor: What is their motivation? The Attorney is trying to generate billable hours. If he represents you on an hourly basis, is his motivation skewed by that issue? We know of one Attorney that routinely turns away several offers, before “allowing” his Clients to accept one. Unquestionably, in one particular situation, the offer he approved was decidedly inferior to the first one that was offered. But he added to his billable hours…how does one explain that kind of rationale, in any other way?
In some circles, Accountants will flatly state that representing the Seller in a brokerage activity is unethical, because it brings into question whose interests the Accountant is actually representing, in such an activity. This is not us, making that kind of statement; that is what was told us by several Accountants with whom we have worked.
Business Brokers are the only people that – theoretically – have a pure interest in simply selling the business. They normally, only receive payment when the deal is actually finalized. But that can make their motives suspect as well, as stated above. There are undoubtedly some circumstances where a Broker has been known to shave the price, in order to get paid more quickly. (Our Broker friends will be all over us, for this!)
As a Buyer or a Seller, you need to understand the issue of motivation. You need to be knowledgable about the buying process, and you need to question all advisors, heavily.
On the whole, our relationships with Accountants and Attorneys are exceptionally good. Problems we have experienced have to do with difficulties with individuals, not with the nature of Accountants and Attorneys, as a whole. We will ALWAYS tell a Buyer to seek legal counsel, and we refuse to write Contracts of Sale ourselves, although we are frequently asked to do so. And we ALWAYS tell the Buyers that our numbers are provided by the Seller, and they should be validated by their own Accounting Professional. This is not the time for a Buyer to “cheap out”, on either of these activities!!!
There are also limitations on specialties Accountants and Attorneys may have. We dealt with one Attorney that specialized in divorces, who tried to write a Contract of Sale for the purchase of a Liquor Store. He knew nothing about Contracts of Sale, much less the issues involved in Liquor Store sales. An Accountant we dealt with was terrific dealing with day-to-day Income and Expenses; but he knew nothing about how to best assist in structuring a business sale, to permit his Client (the Seller) to reduce his Capital Gains Taxes, on the transaction.
With Attorneys, Accountants and Business Brokers, know who you are dealing with. Reference them. Research them. Understand their motivations, their capabilities and their limitations. Remember that YOU are the decision maker. If a Broker tells you he is giving you an opportunity at “below market” rates, tell him to prove that. If an Attorney tells you that a given term in a Contract is not in your best interest, think about why that is the case. What is the level of risk, and how would it affect the rest of the deal. Sometimes, the risk is negligible and does not need to be addressed in a costly manner, causing adverse relations with the Seller and harming other areas of the deal. Attorneys are obligated to tell you that there is a given risk; but they frequently do not tell you the odds of such a risk actually occurring.
They are ADVISING you, and you should listen to them. But YOU are the boss; YOU are the one making the ultimate decisions.
(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .
The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)