What exactly are the duties and practices of a business broker?

My opinion:

As with many other professions there are basics that must be met, physicians must ‘do no harm.’  Perhaps in business brokering, the basic is ‘fair and honest.’ Usually the broker has a specific duty to either the buyer or seller, whomever they represent.  However, the morality piece for me is being fair and honest must apply to all.

In a recent transaction, while speaking with a prospective buyer, it became clear that when they spoke of the price or value of a business, they were speaking in different terminology than I.

They said:  ‘businesses do not sell for more than 1.5 to 2 times cash flow.’  This was just after my mantra ‘businesses rarely sell for more than three times cash flow.’

I thought ‘wow, this is a huge difference’.  This is a big regional difference.  What I learned later is that neither of us was specifying what is included in our multiple.  In his statement, he left off ‘plus inventory but including furniture, fixtures, and equipment.’ In my statement, I left off  ‘including inventory, furniture, fixtures and equipment.’

So, perhaps, one of the first duties of a broker is clarity.  This is so hard.  A business can have so many details, nuances.

In this same conversation, the buyer said his broker prepares for the buyer a binder with all the pertinent due diligence information.  I have never done this.  Perhaps I should.

My practice includes preparing a marketing package that will help the prospective buyer understand the business he has just inquired about and signed a confidentiality, do no harm agreement for.  Other brokers do not do this.  It is not necessary but helpful.

If the broker wants to be successful, they will be helpful to the buyer in gathering the right information to make a decision.  In my book of practices, the broker will not do this without the permission of the seller.

These examples can go on and on.  Many of the things a broker can do are a matter of style and the buyer or seller will either appreciate the style or not.  Some will help or hinder the transaction.   In some states, there are specific rules.  But, whether there are rules or not, understanding what the broker’s role and practice is will help the parties to know what expectations to have.  Also, know what the broker is not.  Is she an accountant or lawyer?  If not, don’t consider her an expert at law or accounting.

Entries following this entry speak to the role of the business broker for a selling business owner and a buyer looking for a business to buy.