March 29, 2024

Creating Value: When Your Broker Doesn’t Really Represent Your Interests

Creating Value

Are you getting the most out of your business?

As I explained in my last post, Holly Hunter’s first try at selling her business didn’t work out. The second time around she decided to hire a seasoned company that specializes in selling small financial services businesses. This broker had great public relations and a history of having sold many businesses.

What Ms. Hunter did not fully understand was that when you sell a business you essentially enter an alternate universe. It can be a confusing and scary place. For one thing, there are different types of brokers, and some of them get paid to represent the buyer and the seller. The was the case with the broker Ms. Hunter hired.

She would soon discover that brokers who represent both parties often don’t really work for either party. And in her case, it ended up looking as if the firm was working mostly in its own interest. This eventually left the buyer and seller with a disaster on their hands.

Another problem that often arises in the selling of a business is that sellers tend to put pressure on themselves to get a deal done. This can lead them to do things they would not ordinarily do. Good brokers understand this and prepare their clients for the process, offering steadying advice as the deal unfolds. But when the broker advises both parties, there is an unavoidable conflict of interest, and that means that one or even both parties may not get the best advice.

After Ms. Hunter listed her business for sale, her broker told her that 60 parties had expressed interest. The broker whittled the group down to 12 potential buyers it considered realistic. If Ms. Hunter’s broker had been working only for her — and not for both parties — it most likely would have set up what is known as a structured auction to sell the business.

The auction process would have narrowed the buyers from 12 to about five, and then the broker would have gone back and forth among the five buyers to produce the best deal for Ms. Hunter. Not only didn’t the broker use this avenue to sell the business, it never informed Ms. Hunter that using a structured auction was an option.

Instead, Ms. Hunter’s broker put together a negotiated deal. The buyer the broker negotiated with agreed to pay Ms. Hunter one third of her purchase price immediately and two thirds as a seller’s note over five years. Ms. Hunter thought this was a good deal, in part because she thought that the entire payment was guaranteed

Ms. Hunter’s buyer was a 40-year-old certified financial planner. Ms. Hunter obtained a personal guarantee from the buyer and his wife, but it wasn’t until more than a year after the sale was complete that she learned that a personal guarantee needs to have assets behind it to have any value. And that was a problem. While Ms. Hunter’s buyer owned a house, he had very little equity in the house.

Before her sale closed, Ms. Hunter hired a lawyer who had a good reputation within her industry but little experience in mergers and acquisitions. She probably would have been better off hiring a lawyer who specialized in helping business owners buy and sell businesses. Ms. Hunter’s lawyer used specimen documents — sample documents that are used as a model — that were provided by her broker. Such documents can save the client time and money, but there is often reason to be wary of them, and they are a long way from best practices in the industry.

The lawyer did recommend that Ms. Hunter get a personal guarantee from the buyer. The broker assured her that, even though the buyer had no real financial assets, she would be covered because he was a certified financial planner and the clients he was buying from her would be plenty of collateral. When you sell your business and provide financing, you essentially become the bank for your buyer. That means you must act like a bank. And no bank — not even one with Small Business Administration backing — would have made a loan based on that collateral.

Three weeks before closing, the waters were muddied even further. The buyer informed Ms. Hunter that he had a new silent partner. This silent partner was a wealthy person who could have offered the security that Ms. Hunter or any bank would require as part of a deal, but he refused to provide his personal guarantee. At this point, Ms. Hunter felt she was too far down the road of selling her business and couldn’t back out. I’ve been in that position, and I know how she felt. Once you are that close to selling, it takes herculean effort to back out.

The deal closed, and for a year everything seemed to go well. Then, disaster struck. An employee left the buyer’s practice — taking staff and clients. Suddenly, there was no business, and Ms. Hunter learned the hard way that there were no assets backing up the personal guarantee she had obtained. She ended up being unable to collect most of what she was owed by the seller.

In my next post, we’ll look at how seemingly minor details in a transaction, if not handled properly,  can make your life miserable.

Do you have any cautions you would like to share about how to hire someone to sell a business? Were you ever involved in a situation like this? How did it turn out?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2012/12/19/does-your-broker-really-represent-your-interests/?partner=rss&emc=rss

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