When buying a business, what's the going rate for hiring a broker, and who is responsible for paying it?
Norm Brodsky is a veteran entrepreneur.
I'm planning to purchase a business but have concerns about the broker who found it for me. He wants to charge me a 25 percent commission. Because my offer was unsolicited, he says, the seller (a friend of his) isn't willing to pay the full commission but will split it with me if I allow the broker to represent both of us. Aren't commissions usually paid by the seller? Isn't that one awfully high? —Name Withheld
I'm no fan of business brokers. I'm not saying they're all crooks. Some really do provide excellent service, especially those who focus on particular industries. But most business brokers are generalists. In other words, they claim to be so knowledgeable about business in general that they are able to do a good job advising any buyer or seller on any type of transaction in any industry. That's baloney on the face of it. In my experience, moreover, enough of these generalists are ethically challenged, so to speak, that it's a good idea to be very cautious when dealing with them.
As for this particular broker, I told the writer—we'll call her Peggy—that I believe that what he was doing was unconscionable. A broker's fee is simply one component of the overall price of a deal. By asking Peggy to pay the fee, the broker was saying, in effect, that the price he originally quoted was not accurate. The actual price is 25 percent more. That is to say, he lied. Although he may claim to be representing Peggy in the transaction, it's clear that he's acting strictly in his own interest—and not at all in hers.
Therein lies a lesson: Most brokers can be counted on to represent themselves. A broker's livelihood depends, after all, on 1. Making sure the deal gets done and 2. Doing it for as much money as possible. Of course, that's also what sellers want. I advised Peggy to hire a good lawyer to represent her and to have as little to do with this broker as possible. She later told me that she had decided not to go forward with the acquisition. Under the circumstances, I told her, that sounded like a smart move.