Red Flags When Working with a Business Broker

This article was originally written by Melanie for BizBuySell.

If you’ve worked with a business broker before, you’re familiar with the process and what to expect. If not, here’s a brief synopsis of what that collaboration looks like: A business broker’s role is to assist both buyers and sellers in the purchase and sale of a business. It’s similar to what a Realtor® does for someone buying a house, only a lot more complex.

Business brokers guide clients from beginning to end, establishing a likely selling price, finding buyers, handling negotiations, due diligence, escrow, and closing paperwork. A transaction broker doesn’t represent the buy side or the sell side; their job is to get the deal across the finish line successfully for all parties. We’ve written in the past about what you should expect when you sign a listing agreement with a business broker (minus all the legal talk) but it’s equally important to understand that not all business brokers are the same. Unfortunately, business brokerage can be a sharky industry so it’s important to understand what to watch out for when you sign on with a business broker.

Retainers or Upfront Fees

It is reasonable for brokers to charge for certain services (like valuations) that help accurately set the sale price of the business or for buyer searches but be wary if you start to see high retainers or upfront fees for selling a “Main Street” business. Retainers are more common in mergers & acquisitions, where revenue ranges from $5 million to $50 million and there is more complexity in the business structure/operations.

Lack of Transparency

A quality business broker should ensure their client understands the process of selling a business and the duties the broker will perform. This needs to happen before you sign an agreement. Any vagueness should be a cause for pause until you feel confident in the process.

Overpromising

Be wary of brokers who promise to get you a high sale price or a fast sale without first doing a thorough analysis of the business. Sadly, some brokers just want listings (and will say anything to get them) without first examining financial records, the business’s market position, and other relevant factors. Without a realistic selling price, your business will likely sit on the market until it’s negotiated down to less than what it may be worth. That wastes time and leaves money on the table for everyone involved.

Unwilling to Co-broke

In short, co-brokering is when two brokers agree to work together to sell a business and split the commission. While it’s not unethical, a broker who is unwilling to co-broke is not acting in the best interest of their client. This can limit the buyer pool and lengthen the sale process.

Professional Credentials

Make sure your broker is credentialed or, under the supervision of a seasoned broker, to become credentialed. Professional credentials, board certification, and being a member of industry associations like the International Business Brokers Association (IBBA) indicate a commitment to ethical standards and ongoing education in the field.

Marketing Approach

Selling a business should be done discreetly to avoid rumors or misinformation that would give competitors a leg up. Check to see how the broker plans to market your business to reach a wide pool of buyers. If their plan includes openly marketing the business (sharing information or images that identify your exact business) that could harm the bottom line of the business, the salability, and the sale price.

Pressure Tactics

Be cautious of brokers who pressure you to sign a contract quickly without giving you time to review it or consult with financial or legal advisors. A reputable broker should be fully invested in helping you understand the terms of your agreement. Any hesitation in letting you examine your contract or inability to provide references is a red flag.

Once you’ve made the decision to sell your business, figuring out who will best guide you through this process is the next step. When you’re interviewing a broker, ask them questions about their process, if there are upfront fees involved, and ultimately how they will help you achieve your goals. Be prepared that a quality broker will be interviewing you too. Remember, most don’t get paid until the business sells, and a lot of work goes into that process. An experienced and professional broker doesn’t want to waste time working with someone who isn’t motivated or fights them every step of the way. This collaboration is about more than just a sale; it's about working together with someone who is competent and can provide you with clarity and confidence toward your next adventure.