Three Ways to Know On the Spot if You’re Talking to a Capable Business Broker

Can you fog a mirror?

If so, congratulations, you are legally qualified to call yourself a business broker in the state of Tennessee! That’s right, no license required and no training needed. To call yourself a business broker in Tennessee all you need is the ability to wake up and get out of bed. And we wonder why so many Tennessee business owners are frustrated when it’s time to sell their business?

I was frustrated watching my father go through the process of selling his business. He met with a guy who called himself a business broker who told my 67-year old Dad he could get him enough “to comfortably retire.” My Dad didn’t know what his business was worth, so he signed up with this guy then never heard from him again (although the guy did cash the retainer check my Dad paid). Fortunately, my Dad learned a few good lessons from this experience and was later able to sell his business.

Fast forward a few years later ……

I was interested in buying a business so I found a sharp (i.e., smooth talking) business broker who introduced me to a very interesting business. However, as I started my due diligence, I found some accounting irregularities that a freshman accounting student would have seen. To this day, I don’t know if that business broker hadn’t paid attention to the financial statements (which is bad), or had paid attention and decided to not tell me about the accounting problems (which is worse). Either way, this guy was my inspiration to become a business broker. I decided to set a higher bar of quality, believing business owners like my Dad, or business buyers like me deserved competent, honest, smart, and hard working business brokers.

Today?

But I have to tell you, it’s not much better today. I frequently come across men and women who claim to be a business broker, yet they don’t have a demeanor or sense that would lead you to believe they could be trusted to handle the transfer of a business owner’s life work. In about a third of the engagements I take, the business owner is in some stage of distress (health, family crisis, financial crisis in the business, loss of key employee, etc). It’s critical for that business owner to have a trusted advisor with a been-there, done-that base of experience. Since there is no training or designation in the state of Tennessee to help you filter through who is or is not capable, let me offer a three-point test by which you can evaluate on the spot the competence of the business broker:

1. Show them three years of financial statements then ask them to tell you on the spot what they think your valuation would be. Valuation is not as hard as most business brokers try to make it seem. The fact is, an experienced smart business broker can look at your financials and give you a credible range of valuation before you have time to return from the coffee machine. How they answer this question tells you a lot about his/her financial skills and honesty.

2. Ask them how they would market the business. Now, at this point you’re likely to hear them brag about the size of their database of buyers, which is (I’ll be polite) a pile of heaping garbage. Short of just luck, most businesses need to be proactively marketed, and I mean well beyond the business-for-sale websites that, you the business owner, could do yourself. You want your broker to be able to on the spot give you a cogent explanation of how he/she intends to root out a buyer. How they answer this question tells you a lot about his/her strategic skills.

3. Ask them if they’ve ever negotiated or been a principal in a strategic alliance, or if they’ve ever negotiated a bank re-financing (not their home). I am constantly amazed just how inexperienced most business brokers are in the real world. Sure, many have run and sold their own company (and are now looking for something to do) but this doesn’t mean they have the skills and sensibilities to get your business sold on the best terms. How they answer this question on the spot tells you a lot about his/her real breadth of experience.

Most business brokers in Tennessee can fog a mirror. But since there are no licensing or professional qualifications required, it’s up to YOU to ask the hard questions to gauge their skill, intelligence and competence. Failure to do so, proceed at your own risk.

 

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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