The Invest Local Book Blog.: [VIEWER QUESTION] If a business broker is paid by the seller, how can the buyer trust his advice?
A great question this week about business brokers. Phil wants to know how its possible to trust a broker's advice if he's buying a business when its actually the seller that pays the broker.
Let's learn about an important lesson when it comes to building your business-buying team.
Hello it is David Barnett once again and with another viewer question; this time about buying a business and using a business broker. And the question that Phil asked is if business brokers are paid by sellers how then can I trust their advice to me? What a great question. And quite frankly, it depends on the kind of business broker that you are using. Business brokers are paid by sellers and in most places they act in a dual agency role; meaning they have both responsibilities to the buyer and the seller. So that duty or that responsibility means that they are supposed to give good advice to both parties. But come on let’s be honest; if a business broker is starving and is absolutely desperate to close a deal that person might say or do anything in order to entice a buyer to enter into a deal. So how do you then protect yourself or off set yourself against an unscrupulous broker who may act unethically?
The answer to that question is by building out the rest of your team. So, on your team you have got the broker but you also have a lawyer an accountant and you need to make sure these people are familiar with business transactions. You are also going to be able to get certain partnership type advice out of people like a banker for instance who is going to look at your deal. If the banker isn't going to make the loan and thinks it’s a bad deal he is going to tell you. Now let’s get back to the broker, if the broker knows that you are no dummy and you have a field of advisors that are going to give you good advice. Then he knows that he is not going to be able to pull the wool over your eyes and trick you into buying a business that you shouldn't buy. So, ultimately the reason that a business broker, a good one, is going to give you reliable advice is because they know if they try to do something unethical, unscrupulous they ultimately will end up wasting their time because they deal won't close; that's that.
I learned very quickly when I was a business broker that if the buyer wasn’t right for the business or the business wasn't right for the buyer or there was something fishy going on with the seller. That, I just didn't want to invest any of my time in trying to work on the deal because I knew that ultimately it wouldn't end up happening. So, most buyers have this team of people; the lawyer, the accountant, the banker, etcetera. All these people looking out for their little piece of the overall deal, offering advice to the buyer.
So, who then, can fall victim to an unscrupulous broker who may be acting unethically? It is the all-cash buyer; and I saw this several times with new immigrants from Asia. They came into town with a whole bunch of money, didn't pay or didn't want or didn't know how to find good advice. And ended up dealing with intermediaries who weren't fully qualified to sell businesses. People like real estate agents or some other kind of intermediary who was just trying to play match maker. And because these people were paying all cash, there was no buffer; no other person who could interject and stop the deal from happening. No banker that you will that would say no to an advancing the loan.
I actually know of several deals that were really bad deals; and the reason they got done is because the buyer had a million dollars in the bank. You don't want to put yourself in a position where you are using all of your own money to pay for a business. You need to use vendor financing. I made several videos on this channel about why vendor is a critical component in controlling risk in buying a business. And you need to make sure that you have your own field of team members and advisors aside from the broker. Now if you are dealing with a good business broker; I would say yeah, you can rely on their advice especially if they are a person who does a lot of deals. Because, doing a lot of deals means they are going to have money in the bank; a lack of money in my experience is the biggest motivator that people have to do things that they wouldn't normally do, unethical things.
So a busy broker with money in the bank is going to be less motivated to do something unethical and they are going to have a greater appreciation for their own time. And they are going to realize that a bad deal just doesn't get done. So, Phil I hope that that answers your question and as always if you enjoy my videos and like my stuff please like and share that is how I grow my audience. Thanks and I will talk to you soon.