Brokers For Hire

There are good brokers and there are bad brokers, and it's not always easy to tell one from the other.

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Business brokers -- deal makers in buying and selling companies -- are for the most part an unregulated lot. Fourteen states require that they have a real estate broker's license, hardly a credential at all. In the remaining 36 states, anyone with a telephone and a glint in his eye can hang out a shingle. Complaints about brokers' ineptitude and questionable tactics are widespread, and it's not easy for prospective buyers and sellers to separate the good from the bad.

Some business brokers are the first to acknowledge that their reputation isn't so great. In recent years, for example, brokers in Texas and Florida have formed self-accreditation services to improve their image. They still have a ways to go, says Wally Stabbert, president of the Institute of Certified Business Counselors, a nationwide business brokers association in Walnut Creek, Calif. The 150 members have passed competency exams and subscribe to a code of ethics. "A large percentage of business brokers in this country I wouldn't consider for membership," Stabbert says.

And rightly so, says Chicago businessman Matt O'Connor, a 32-year-old former Big Eight certified public accountant. O'Connor started looking in 1982 for a small manufacturing company to buy. Over the next year, he spent countless hours jawing with more than 50 brokers. O'Connor wanted a leveraged buyout of a company with sales under $5 million that would generate enough income to finance loans to cover the purchase price. When he called on several large business brokers, they told him his proposed deal fell below their minimum limit (see box, "Who'll Do Your Deal?" page 108). Many of the smaller brokers O'Connor spoke to seemed baffled by his idea. "I got the feeling that some of them didn't understand lveraged buyouts," he says. In 1984, O'Connor did arrange a leveraged buyout of the 20-employee Jebco Screw & Rivet Manufacturing Co., in Chicago -- without a broker. Now he observes dryly, "There are a lot of brokers, and there are a few excellent ones."

Just how many brokers there are and how many deals they do in the course of a year is open to conjecture. Thomas L. West, president of the 400-member International Business Brokers Association, estimates that brokers operate 2,000 offices nationwide and that full-time brokers sell up to 75,000 companies a year. The great majority of these companies sell for less than $300,000, and it's in the low end of the market that most brokers earn their bread and butter. Numbers aside, though, the real question for most people who are contemplating buying or selling a business through a broker is how to tell the "few excellent ones" from the rest.

Beyond the obvious inquiries -- what deals has the broker done? what is his or her personal background? references? -- there are a few other areas you can investigate. One is a broker's record of sales as a proportion of total listings, says Shannon P. Pratt, a former business-school professor who heads Willamette Management Associates Inc., a Portland, Ore., business-appraisal firm. "A broker who can document a successful track record of sales to listings is preferable to one that can't," says Pratt. If a broker averages below a 50% sales rate on listings offered for six months to a year, both buyer and seller should look elsewhere.

Pratt suggests a further test: how frequently does the broker's listing price correspond to the eventual sales price? Where a wide divergence is common, the broker is apt to be misleading the seller about the true value of the company and wasting prospective buyers' time. "I'd be much more favorably inclined to work with a brokerage," says Pratt, "if its average selling price is within at least 20% of the average listing price."

A broker's academic degrees and business experience have less to do with competence, says Pratt, than affiliation with such industry groups as the International Business Brokers Association. If a broker has dealt specifically in the industry or geographic area of the company for sale, that's a plus.

Good brokers can be the key to structuring the elements of a deal -- advising a stock or assets sale, for example, and mediating disputed points. Some even help out in finding sources of financing.

As a buyer or seller, once you have located what you hope is the right broker, must you then rely entirely on good faith to see you through the deal? Well, not exactly, say the experts. In dealing with brokers, beware of these common pitfalls:

* BAIT AND FISH.

One device employed by brokers is what could be called bait and fish: the broker offers a seller the bait of a supposed buyer's interest in the company when the broker actually has no particular buyer in mind. If a seller takes the bait, the broker begins fishing around for a buyer. The same ploy can work in reverse if a broker approaches a buyer pretending to have a seller in the wings. Besides being deceptive, the bait-and-fish tactic can waste a lot of your time. If a broker's overtures smell fishy, you can ask for enough specifics to determine if the client is for real.

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