August 7, 2020

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Could You Be Dealing With a Bad Business Broker? Here are the Signs

(Jun. 17, 2020) — Just like people can have bad reputations, so can businesses. For example, payday loan companies have a bad reputation as companies that give people money during financial crises but trap them in a cycle of debt that’s hard to get out of. Because of that reputation, people turn to payday loans as a last resort option and accept the fact that they’re probably going to get cheated.

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Could You Be Dealing With a Bad Business Broker? Here are the Signs
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(Jun. 17, 2020) — Just like people can have bad reputations, so can businesses. For example, payday loan companies have a bad reputation as companies that give people money during financial crises but trap them in a cycle of debt that’s hard to get out of. Because of that reputation, people turn to payday loans as a last resort option and accept the fact that they’re probably going to get cheated.

But for businesses, just as it is with people, there are always red flags that let you know a business is shady. This is especially true in the brokerage world. Just as there are red flags to watch out for with mortgage brokers, there are equally bright, waving red flags to watch out for with business brokers as well.

So how can you tell who’s a bad broker and who’s a good one? It can be a little hard to tell sometimes, but one important thing to make yourself aware of is to not confuse a broker’s personality with their business practices.

A business broker can be extremely likable with a great personality but have very poor business practices that could potentially come back and haunt you later on.

The bottom line is that there are good brokers and there are bad ones. You may not be able to immediately tell the good ones from the bad ones, but there are certainly some habits and signs that will let you know you’re dealing with a bad one.

If a broker does these things, you’re dealing with a bad broker.

Signs You’re Dealing With a Bad Broker

Could You Be Dealing With a Bad Business Broker? Here are the Signs
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The Broker Informs You of Upfront Fees

If a broker or firm charges upfront fees, that doesn’t necessarily mean that they’re a bad broker or firm. Where the scandal lies is the justification behind the fees… It needs to make sense why you’re being charged fees upfront and it needs to clearly be explained what your money is covering. They also need to show you a breakdown of the fees as to how the dollar amount was determined.

If the broker can’t provide an explanation of the fees, this is an immediate red flag that you can nip in the bud without dropping any cash or getting too involved. In fact, there has been so much fraud within brokerage firms that CNBC reported an aggregate $2.4 million in fines last year from brokers that caused investors harm.

The Broker Tells You About Their “Exclusive” Buyers List

Lots of brokers have this “exclusive” or “secret” buyers list that contains vetted buyers who come back to brokers to buy businesses again and again. Think of them as the cream of the crop of buyers.

Once a business is listed, the broker will only announce it to the exclusive buyers first to give them first choice in businesses to buy… You can only hope your business makes this list.

This isn’t a fair business practice. It’s good for the “cream of the crop” buyers, but what if the broker doesn’t view your business as one that’s a good fit for the exclusive buyers? They’ll just leave your business to sit? They could view your business as second-rate and only show it to what they deem as “second-rate” buyers, and that’s not fair to you or those buyers.

The Broker Doesn’t Give You a Detailed Business Valuation

The whole point of seeking a business broker is to get your business sold, right? Yes! So, if all a broker can give you is a back-of-the-envelope calculation of what your business is worth, you’re definitely dealing with a bad broker. Your business valuation is ultimately the asking price they’re going to present to interested buyers.

The broker you deal with should be able to provide you with a detailed valuation report thoroughly explaining your business’s value in all facets. You may not agree with the dollar amount listed, but you should be able to look at your report and see and respect the time and effort put into it to thoroughly break down your business.

The Broker Simply Doesn’t Seem Interested in Working With You or Your Business

In order for a business broker to truly represent you and your business to interested buyers, they need to really get to know you and your business. They need to ask you questions about your business such as what makes your business so special, why do you want to sell, and what are your future plans after the sale… They need to know as much as possible about you and your business in case a buyer has questions.

When a broker doesn’t ask those types of questions or show any type of enthusiasm, it could be a major sign that you’re dealing with a bad broker or that the broker has flat-out lost passion for their work. This could be especially true for brokers who’ve been in the industry for a long time, but it’s not always the case.

Seeing this type of behavior could potentially let you know that they may burn out midway through the acquisition process.

Takeaway Tips

Selling your business is a major business move, and you’re putting your trust in a complete and total stranger. That reason alone is why you have to do your own research on brokers and check out credentials, years of experience, sold businesses, etc. In your interactions with different brokers, pay attention to these signs because these are signs you can pick up on before any real money or time is invested.

Ideally, you want to work with brokers in your local area, especially if you’re selling a brick-and-mortar business. If you’re in St. Louis, look up St. Louis brokers… the same goes for any other city your business is located in.

If you’re still torn between a broker or two, take the information you’ve gathered on their credentials, years of experience, etc, and combine it with your interactions between them and see which one is a better fit for you and your business.