4 minute read

Selling Your Business? Beware, There Are Sharks in the Water: How to Spot Predatory Brokers

Business brokerage can be a "sharky" industry. When business owners are approaching retirement age, people come out of the woodwork offering to help you value or sell your business and not all of them have integrity. We're shining a light on the most predatory operators in the business brokerage world who are actively targeting business owners in communities nationwide.

The Invitation: How These Operations Lure Business Owners

Here is how it works: You get an invitation to an "event" for people who want to learn about selling their business. A company representative will pre-qualify you to attend this free event where they propose to educate you about how you can get an unusually large amount of money for selling your business. There will be about 20-30 businesses in attendance and it's usually in a hotel ballroom.

The Pitch: Unrealistic Promises and Inflated Valuations

Once you get there, they will have a presenter walk you through the "typical broker model" for selling businesses and why your business is better than that. They will work very hard to convince you that their buyer pool is superior to all other platforms for attracting buyers because they have access to strategic buyers and investors. Here is the best part: They convince you that your business could be worth the same multiple of earnings that big tech companies in California and New York are getting. Like any good ruse, it sounds so believable because there is a grain of truth in it. Some companies do sell for crazy high multiples in the investment banking world, but the sellers in the audience are generally owner operators that don't meet that criteria.

Understanding the Numbers: The Reality vs. The Promise

So, let's do a bit of quick math:

Let's say you own a small midwestern distribution company
You're making $2 million in sales
You're putting $250,000 on the bottom line

This is a nice, strong business, but they'll have you thinking they can sell your business for $2.5 million! Somewhere in the back of your mind, you know that YOU wouldn't pay $2.5 million for $250,000 of annual cash flow (and no bank would finance it for a buyer)…but you're feeling hopeful, and they make it all sound very reasonable.

The True Cost: High Fees and Unrealistic Expectations

Here's what makes us deeply concerned: They are going to charge you $30,000 - $70,000 upfront to overvalue your business (setting very unrealistic expectations) and develop a marketing package.

Then they will market your business for sale, but only on their website with other overvalued businesses. They won't bring you any actual buyers since savvy buyers will be able to tell the business is worth much less.

They'll also make you sign a multi-year agreement with them. So, if anyone approaches you about selling your business in the coming years, you must pay them a percentage of the sale proceeds. They've essentially locked up your business for years giving you false hope about what you might get for it; preventing you from retiring and feeling duped when you realize that the multiple of earnings buyers will realistically pay is based on market multiples and bankability.

The Aftermath: Expensive Mistakes and Legal Entanglements

These events feel like a high-pressure timeshare presentation and prospective sellers allow their ears to be tickled and sign on the dotted line. They want the big payout. Don't we all?

But in the coming months and years, they realize they've been scammed out of a large upfront fee and their business can't really be sold for the same multiple as deals that are worth a write up in the Wall Street Journal. These same sellers end up calling us and asking about their options and, unfortunately, we simply have to refer them to their attorney to try and negotiate their way out of the agreement. It's a very expensive and time-consuming mistake.

Protecting Your Business: Finding a Reputable Business Broker

What can you do to avoid this scam and sell your business well? First, if you get an invitation for an "event" like this, throw it in the trash. Then go work with a business broker who has integrity and will set realistic expectations about what your business is truly worth, and how it can be sold. A reputable broker knows how to stage your business for sale confidentially and find you a quality buyer that will carry on your legacy and grow the business to the next level.

Key Warning Signs to Remember:

Invitations to special "educational events about selling your business
Promises of unusually high multiples compared to industry standards
Large upfront fees ($30,000+) before any buyers are introduced
Multi-year exclusive agreements
Emphasis on "strategic buyers" without specific examples
High-pressure sales tactics during presentations

Choosing the Right Business Broker:

Brokers with relevant industry certifications (CBI, M&AMI)
Transparent, success-based fee structures with minimal upfront costs
Clear, detailed marketing plans specifically tailored to your business
Documented history of completed transactions similar to your business size
Strong references from previous clients you can personally contact
Realistic valuation discussions based on market comparables

Visit BizBuySell's Business Broker directory to find a reputable and credentialed broker to guide you through the process of selling your business.