7 RISKS OF USING A BUSINESS BROKER (PLUS 1 BONUS RISK)
While utilizing a business broker offers numerous benefits, it's essential to consider potential risks and disadvantages as well. Being aware of these challenges allows you to make informed decisions and mitigate any associated drawbacks. This short articles address several risks that a small business owner should consider before engaging a business broker and manage if she or he does engage a broker.
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While there are a number of advantages and benefits that business brokers bring to the table for the seller of a business, there are at least 5 key, associated risks and disadvantages to look out for.
Engaging a business broker comes at a cost. Brokers typically charge a commission based on the final sale price of the business. While this commission incentivizes brokers to maximize the sale value, it's crucial to assess whether the benefits they bring outweigh the financial implications. Evaluate the potential return on investment in relation to your business's size, market conditions, and the complexity of the transaction.
2. Lack of Control
Hiring a business broker means relinquishing some control over the selling process. While brokers act on your behalf and represent your interests, they make decisions and negotiate deals based on their expertise and experience. If maintaining full control over the sale is a priority, using a broker may not align with your preferences.
3. Conflicts of Interest
Conflicts of Interest can arise in two ways. First, business brokers work on a commission basis, which means they have a vested interest in closing the deal quickly. This can potentially create conflicts of interest if a broker prioritizes a fast sale over achieving the best possible terms for you. To address this concern, carefully select a reputable and trustworthy broker who demonstrates a commitment to acting in your best interest throughout the transaction. Second, unless your engagement contract with your broker is properly crafted to prohibit the broker from jointly representing the buyer, you may end up using a broker who represents the buyer as well.
4. Compatibility and Understanding
It's essential to find a business broker who understands your industry, market dynamics, and unique aspects of your business. Without a solid understanding of your business's intricacies, a broker may struggle to effectively market your business or negotiate suitable terms. Take the time to ensure your broker has the necessary expertise and experience in your specific industry to increase the chances of a successful transaction.
5. Lack of Alignment and Understanding
There is a risk of misalignment or a lack of understanding between you and the business broker. It's crucial to ensure that the broker comprehends your specific goals, priorities, and expectations for the sale. If there is a disconnect or a lack of effective communication, it can hinder the broker's ability to represent your interests accurately, potentially leading to unfavorable outcomes or misunderstandings throughout the process.
6. Confidentiality Concerns
While a good business broker engagement agreement will include a confidentiality provision, there is nonetheless the risk of limited control over the broker's compliance. You may have specific preferences or concerns about the disclosure of sensitive business information (including key deal points you don't want the buyer to know -- see Conflicts of Interest section above). It's essential to clearly communicate your requirements and expectations regarding marketing efforts and confidentiality measures to ensure they align with your needs and protect your business's reputation.
7. Dependency on Broker Performance
Engaging a business broker means placing a level of dependency on their skills, efforts, and performance. While a reputable broker should have the experience and knowledge to guide you through the selling process, there is always a risk of a broker not meeting expectations or of an inadvertent miscommunication. This could include inadequate marketing efforts, a lack of qualified buyer leads, or subpar negotiation skills. It's crucial to thoroughly research and vet potential brokers, seeking referrals and checking their track record to mitigate this risk.
8. BONUS RISK: Poorly Written Broker Contract
Having an inferior (from the view of the seller-client) business broker contract can pose significant risks to the seller. The contract's terms and conditions, if unfavorable or unclear, can lead to misunderstandings, financial implications, and even potential legal issues. A poorly drafted contract may result in a lack of representation, permit conflicts of interest, provide for a too-lengthy exclusivity period, limit your control over the selling process, require to you pay excessive fees, or excuse inadequate performance by the broker. It is crucial for sellers to thoroughly review and negotiate the contract to protect their interests, ensuring that the terms align with their goals and expectations, and seeking professional advice when needed. Pro Tip: hire an M&A lawyer before you hire a business broker to help you understand (and, if needed, negotiate) your business broker engagement agreement.
While there are potential risks and disadvantages associated with using a business broker to sell your business, being aware of these factors can help you make informed decisions and mitigate any potential downsides. Careful selection of a reputable broker, clear communication, and regular updates throughout the process can help ensure that you and the broker remain aligned and minimize potential risks. Additionally, maintaining a level of involvement in process and seeking legal counsel when necessary can provide an extra layer of protection. Remember, selecting the right business broker, maintaining open communication, and setting clear expectations can significantly minimize risks and ensure a successful sale that aligns with your goals and objectives.
I would love the chance to get to know you and your business, for you to consider me a professional resource to help you negotiate and structure the sale, acquisition, or merger of business interests. Click here to make an appointment now for a free consultation, or call me at 310-567-5966 (California), 212-414-5966 (NYC) or 888-774-1474 (Toll Free) to schedule a Free Consultation.
I have become very impressed with the efficiency possibilities of AI. So, I gave ChatGPT a try. I generated this text in part with GPT-3, OpenAI's large-scale language-generation model. After it generated its own draft language, I reviewed, edited, revised, and expanded on it to my own liking and to ensure accuracy in all material respects. WLF takes ultimate responsibility for the content of this article.
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