Providing Startup Financing Solutions Since 2001

The first reader question  asked “should I use a broker to help me find a business to purchase?”

Having gotten my broker’s license back 2000, I’m reasonably qualified to answer this one. The best answer is “it all depends on your situation.” Let me elaborate. If you contact a broker about a listing he has keep in mind that he always represents the seller’s best interests. He is legally obligated to do so. If you decide to conduct due diligence on a listing, you will find yourself in constant contact with the broker. Over time you may begin to feel that he’s an objective and impartial intermediary between the seller and yourself. While he’s most likely to be objective, he’s never impartial as his responsibility lies in representing the seller’s interests not yours. Never forget that. So don’t make the mistake of confiding in him. If you do it will all get back to the seller.

If you’re a first time buyer without a strong personal or business financial statement (which the broker uses to screen out buyers who don’t appear to have the financial resources to buy the listing), stay away from deals listed with brokers and use other methods to contact business owners. If you’re new to business buying but have enough business experience to come across as credible buyer, it’s best to create situations where you’re dealing directly with the seller and no go-between is involved.

How do you create such a situation? Simple: contact business owners with a letter (i.e., the old snail mail kind, not email) asking them to contact you if they are seriously interested in selling their business.

The down-side to not having a broker involved is that there’s no one to talk some sense into the seller if he’s badly deluded about how much his business is worth. This is often the case. Even a broker considering representing a seller will first determine if the seller is realistic about price and terms. If he isn’t, the broker will pass on the listing as there’s no point in wasting time on a deal that won’t sell.

It’s also possible to retain a broker to work on “the buy-side.” This means that he works for you by searching for and identifying potential acquisitions. He will then usually handle the valuation and negotiations as well. This all sounds great but it comes at a price. You will be expected to put up a retainer for this type of service. Brokers quickly learn that about 99 out of every 100 buyers are are little more than window-shoppers. On average only 1 in 100 buyers actually has the nerve to pull the trigger at the end and actually buy a business. So you can’t blame brokers for using retainers to screen out the not-so-serious from the serious.

If you have a question about buying or selling a business, please feel free to email it to me. See the About page at top left for contact details.

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