What I've Learned: Business Brokers
This is the first of several posts about what I've learned searching. First up is business brokers. I've got a bone to pick with them and I explain why and give you some tips on working with them.
If you’re buying a business, especially a small one (sub-$5m purchase price), you’re probably going to spend a lot of time working with brokers. I’ve reached out to hundreds and spoken with dozens over the past few months.
At this point, I’m ambivalent toward the profession. A few have been generous with their time and knowledge, even when it doesn’t immediately benefit them. They have shared information freely and connected me to high quality brokers.
But…
The world of small business brokerage as a whole feels like a clown show.
As you can see, I’ve got a bone to pick with the broker community. But the purpose of this post isn’t to complain. I’m writing to reflect on what I’ve learned, share my honest (often critical) opinions, and leave you with a couple of takeaways that might help you avoid some of my pitfalls.
I’m about to start painting with a broad brush, so keep in mind as you read that there have been some notable exceptions to the following.
My experience
Two things stand out about interacting with brokers. Many are poor communicators and some employ business tactics that give salespeople a bad name.
Whenever I request information on a business listed for sale, I include a link to my Buyer Profile. This is the same buyer profile that several brokers have said is the most professional buyer outreach they’ve seen — it immediately established me as a qualified buyer with whom they want to speak.
I hear back maybe 30% of the time. When I do get a response, it’s not uncommon for it to show up 2+ weeks after the initial request. Here’s one example
Many of the responses are terse to the point of being rude. The following is an example of a response I got from a broker to whom I was introduced on a phone call. He has a business listed that another broker felt might be a fit for me:
Ongoing communications can be challenging, too. Recently it took a broker multiple days to forward an email from a seller to me, based on the timestamps in email threads.
Usually, once I’m qualified as a serious potential buyer, everything changes. Brokers become responsive and friendly. But this is where I’ve seen a more concerning pattern emerge.
In three of the four deals I’ve explored deeply, brokers have employed scummy tactics ranging from questionable claims about competing offers being imminent (annoying) to omitting financial data from disclosures (should be illegal).
The worst example of slippery behavior is a broker who went to great lengths to conceal the fact that 2023 is shaping up to be a bad year relative to 2022 and their expectations. The CIM (a document with private business info, including financials, that you receive after signing an NDA) used a 2023 pro forma to explain the price tag. The problem is that I received the CIM in September, when the pro-forma should have been replaced with actuals.
I initially assumed this was an innocent error, but soon ran into more issues. The broker sent updated financials to their preferred SBA lender instead of directly to me (I assume because they get a referral fee). The lender began by telling me that the business easily meets their debt service coverage minimum and looks like a great fit for their SBA 7a loan.
A few minutes into exploring the financials, I realized that the 2023 actuals were missing nearly a million dollars of expenses compared to the previous year. I let the broker know that the financials seemed inaccurate and never heard back.
This feels like the sort of thing that would come out in due diligence even if we got an LOI signed, so I’m confused as to whether this is a harebrained tactic or incompetence.
This leads me to a key learning that I try to keep top of mind in every interaction with a broker:
Buyers are the product, not the customer. Sellers are the more valuable side of the market, so they get all of the attention early in the process. Buyers are a dime a dozen and come out of the woodwork for a good deal, so brokers simply don’t have to treat them well.
My theory
The problem with business brokers in general is that there are no external forces pushing brokers to be better.
Here are a few facts that I believe shape (or enable) brokers’ behavior as a group:
Demand far outpaces supply, thanks in large part to the Silver Tsunami. “Census Bureau data indicates that in 2018, 51% of business owners in the U.S. were age 55 or older, which means the “silver tsunami” of retiring workers is also bringing a wave of businesses for sale” (Forbes, 2021). Compare this stat to the fact that, in 2023, there are fewer than 20,000 people “employed as business brokers” (IBIS World).
No certification is required to work as a business broker. While there are countless associations and optional certifications, anyone reading this can legally hang a shingle as a business broker. The only exception is if the transaction includes real estate, which is why many business brokers are also realtors.
Most brokers work on commission, meaning they only make money when a sale happens. Fewer than half of all businesses that are listed actually sell (20-30% is a common estimate). Their world is full of tire-kickers, so being defensive of their time is a must.
The market is frothy. There are scores of fresh MBAs, PE firms, and regular people like me — all on the hunt for small businesses. Buying is so in style that there are new names for things that have existed for centuries (searcher, independent sponsor, Etc). Brokers don’t need to court buyers or network with them; just listing a quality deal is enough.
A friend recently said that it’s better to be a C player in an A market than an A player in a C market. The fact that business brokers can make a good living without adhering to basic business best practices seems like good evidence of this.
Moving forward
Given what I’ve learned, there are some things I will do differently in the future. If you’re just getting started, I suggest the following:
Focus on brokers who have chosen to seek professional certifications and are members of reputable associations, like TABB (Texas Association of Business Brokers).
Build a network vs relying exclusively on cold outreach. My network expanded quickly after meeting a couple of super-connectors who introduced me to the best local brokers. While warm intros weren’t always well received (see above), it has been a better way to build a network.
If I ever decide to sell a business, secret shop any potential listing brokers by pretending first to be a buyer interested in one of their deals to gauge their level of urgency and how they treat buyers.
Taft - would you consider expanding Iceberg through acquisition as opposed to acquiring a company in an industry you’re not as familiar with?