Why Use a Buyer Broker?
While common in real estate, few business brokerage firms practice buyer side representation. Specifically I am addressing buyer agency where the broker legally represents a buyer but is compensated via the sell side success fee. Maine Business Brokers does not practice this type of buyer side brokerage for a number of reasons. While we do offer fee based consulting and valuation services for buyers, we feel that there are intrinsic conflicts of interest in representing a buyer in a business sale under a seller side commission payment arrangement.
• First, there is an obvious financial incentive to push a buyer towards a close, any close, even in if they are not financially or operationally qualified to own a business.
• Second, commissions are driven by the price, thus a higher sale price equals a higher commission for the brokers. This creates tension in the buyer broker relationship and could create doubt that the buyer broker is negotiating the best possible deal for his client.
In short, since buyer brokers are being paid by the seller there is a natural misalignment of fiduciary responsibility.
So why do buyers use buyer brokers?
• Assurance. Often buyers want an advisor that gives them a sense of confidence in their decision, but since the broker wants a sale he may not be as objective or unbiased as required. Also, brokers may be excellent negotiators and salesmen but have little real life experience in running or analyzing a business. The skills required to sell a business are different than the skills needed to run one.
• Finding a business. The most obvious function of a buyer broker is helping in finding the right business. Unfortunately, many brokerage firms do not cooperate or co-broke so a buyer broker may not be showing you all the available listings—just his firms listings or those of firms that will pay him a commission. Also, a broker should be able to understand your strengths, weaknesses and interests to find a business that is not only in your price range, but one that you’ll enjoy operating.
• Negotiating. A buyer broker can help you negotiate the deal—but again, if they are being paid via the listing agent than they are dis-incentivized by a lower price.
• Valuation. A buyer broker can help value and evaluate a business opportunity, but they need to have the appropriate experience to do so effectively. Do they understand the business enough to assess the intangible value and risks associated with the industry?
• Manage the process. Buying a business can be a long involved process. A buyer broker can help you navigate the steps, keep an acquisition on track and avoid a lot of pitfalls.
For inexperienced or first time buyers, having a buyer broker may give them confidence about moving forward on a business deal. Buyers should make sure they have the right broker representing them: buyer side brokerage is VERY different than seller brokerage. Seller side brokers’ job and fiduciary responsibility is clear to all parties: their job is to package, market and sell the business for the best terms agreeable to the seller. It may appear that a buyer broker is acting as the counter point but just be aware that you may be asking them for expertise beyond their skill set or creating a conflict of interest between their benefits and your needs.
To avoid these problems:
1. Find a broker that clearly understands the industry or business that interests you. Applicable business experience or consulting background aren’t helpful, they are required!
2. Compensate the broker via an hourly consulting fee or a buyer side fee upon a successful closing. If you are paying him(and not the seller) it’s clear who he’s working for!
3. If you do choose to sign an “Exclusive” buyer agreement with a broker, make sure you understand what you’re signing. An exclusive agreement could limit your options and legally tie you up for 6 months to year with the wrong broker.
