There Are Sharks in the Water

Business brokerage can be a “sharky” industry. When business owners are approaching retirement age, people come out of the woodwork offering to help you value or sell your business and not all of them have integrity. This month we’re talking about the worst of the worst in our industry because they’re coming to a city near you, and we want you to be prepared.

Here is how it works: You get an invitation to an “event” for people who want to learn about selling their business. A company representative will pre-qualify you to attend this free event where they propose to educate you about how you can get an unusually large amount of money for selling your business. There will be about 20-30 businesses in attendance and it’s usually in a hotel ballroom.

Once you get there, they will have a presenter walk you through the “typical broker model” for selling businesses and why your business is better than that. They will work very hard to convince you that their buyer pool is superior to all other platforms for attracting buyers because they have access to strategic buyers and investors. Here is the best part: They convince you that your business could be worth the same multiple of earnings that big tech companies in California and New York are getting. Like any good ruse, it sounds so believable because there is a grain of truth in it. Some companies do sell for crazy high multiples in the investment banking world, but the sellers in the audience are generally owner operators that don’t meet that criteria.

So, let’s do a bit of quick math: Let’s say you own a small midwestern distribution company. You’re doing $2 million in sales and you’re putting $250,000 on the bottom line. This is a nice, strong business, but they’ll have you thinking they can sell your business for $2.5 million! Somewhere in the back of your mind, you know that YOU wouldn’t pay $2.5 million for $250,000 of annual cash flow (and no bank would finance it for a buyer)…but you’re feeling hopeful and they make it all sound very reasonable.

Here’s what makes us rage: They are going to charge you $30,000 – $70,000 upfront to overvalue your business (setting very unrealistic expectations) and develop a marketing package. Then they will market your business for sale, but only on their website with other overvalued businesses. They won’t bring you any actual buyers since savvy buyers will be able to tell the business is worth much less. They’ll also make you sign a multi-year agreement with them. So if anyone approaches you about selling your business in the coming years, you must pay them a percent of the deal. They’ve essentially locked up your business for years giving you false hope about what you might get for it; preventing you from retiring and feeling duped when you realize that the multiple of earnings buyers will realistically pay is based on market multiples and bankability.

These events feel like a high-pressure timeshare presentation and prospective sellers allow their ears to be tickled and sign on the dotted line. They want the big payout. Don’t we all? But in the coming months and years, they realize they’ve been scammed out of a large up front fee and their business can’t really be sold for the same multiple as deals that are worth a write up in the Wall Street Journal. These same sellers end up calling us and asking about their options and, unfortunately, we simply have to refer them to their attorney to try and negotiate their way out of the agreement. It’s a very expensive and time consuming mistake.

What can you do to avoid this scam and sell your business well? Work with a business broker who has integrity, will set realistic expectations about price and structure, and if you get an invitation for an “event” like this, throw it in the trash. When the time is right, reach out to us for a free, confidential consultation about what your business is truly worth and how it can actually be sold.