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How to Choose an Honest Business Broker

Don’t get caught out working with an unscrupulous business broker—learn to spot the warning signs to minimise risk.

When it comes to selling and buying businesses, it’s essential to work with a broker you can trust. But what’s involved in choosing an honest dealer, and what separates trustworthy business brokers from the rest? 

1. Check their paperwork

In Australia, business brokers should be licensed, insured, and a member of industry associations like the Australian Institute of Business Brokers. If a business broker is unwilling to provide licence or insurance details, consider engaging another company, as you may not be protected if something goes wrong.

2. Ask them to explain the reasoning for their valuation

Less professional brokers, with fewer scruples, often sell business owners pie-in-the-sky valuations. They say, “I can get you $3 million for this,” or “You can absolutely sell for X amount,” even if the business is not worth anywhere near that amount. These brokers sell dreams that can’t be realised, which creates a bad name for the industry.

Instead, choose a business broker that can confidently explain the reasoning behind their valuation—such as strong market conditions, buying trends, and interest rates.

3. Know what you’re going to get for your investment

At the end of the day, you want a return on your investment, including on marketing and upfront costs. So, the last thing you want is to work with a business broker who says, “My fee is $5000,” without explaining what’s included.

Ideally, a business broker will break down all costs and fees. You should know exactly what you get for your investment. For example, a trustworthy broker may say, “I’m going to write you a 20-page information memorandum, and here’s an example of what I’m going to do. Then I’m going to build a targeted list of buyers. I’m going to put out a teaser, which doesn’t identify your business, to these buyers. Then I’m going to call them individually, and I’m going to advertise in all of these publications”. They will explain what you’re paying for.

4. Ask for the broker’s list-to-sell ratio

Here’s a horror story for business owners looking for a quick sale: some firms don’t have any intention of selling your business. They’re just happy to collect the listing fee. A reputable business broker will have a high list-to-sell ratio, so be sure to ask them what their list-to-sell ratio is.

5. Be wary of one-man bands

While smaller business brokers can do a great job, it’s worth doing your homework first. Do they seem professional? Have they invested in technology to assist in what they’re doing? Do they have a national brand, or highly developed systems and procedures? If a business broker seems disorganised or unreliable, they probably shouldn’t be trusted to help sell your business.

Shonky operators exist in almost every profession, and the world of business brokerage is no different. The good news is that it’s possible to find a business broker you can trust—provided that you do your research and ask the right questions.

Mark Jason
LINK NSW, Director

For further information about this article, contact your nearest LINK Business Broking Office.