How can a “consultant” who is engaged by the prospective buyer of a business develop a “conflict of interest”? By placing himself in a situation where his self-interest would enable1 him to act in favor of the seller rather than his buyer client.
Such a conflict of interest is typically found between a “buyer’s broker” and his buyer client. As it involves all or part of a brokerage commission going to the “buyer’s broker” (if and when the deal closes), it is never a good position for a buyer to place himself in because the “buyer’s broker” will have both a financial self-interest in getting the deal to close and a disincentive to get the lowest price for the buyer. (Lower price to buyer typically leads to a lower brokerage commission.)
Matters can get worse for the buyer. As an experienced consultant, I can tell you that it can be a struggle to get full information on a business. This as sellers are often afraid that a buyer will discover problems which will dampen buyer enthusiasm – and brokers rarely do much to assist the buyer in getting the info; instead, they prefer to beat the drum for a fast closing (and payday).
So beware the “buyer’s broker”– whom you will often find masquerading as a “consultant”. Deluding the buyer by posing as a team player, the “consultant” will embrace the buyer (“sizing him up” in the process) and then attempt to steer the buyer to a deal from which the “consultant” can profit from brokerage commissions. By then he will have reached out to either a seller or a “seller’s broker” for a deal that might fit his buyer and he will introduce the buyer to the deal in exchange for his participation in a brokerage commission. This will often be promoted as being “brokerage commission free” to the buyer, however, the conflicts of interest involved will work to significantly reduce buyer value – and perhaps even extinguish it.
Now in the course of searching for a business, a prospective buyer may need to deal with a business broker. Provided a business broker represents only a seller, he does not have a conflicting self-interest with the buyer of a business. However, buyers must remember that as the broker is working for the seller, his legal and ethical obligations are strictly to the seller rather than the buyer. In fact, a broker has no obligation to inform the buyer, or the buyer’s representatives of anything. This being the case, a buyer should not trust a broker2.
Here follow a few general observations on business broker tactics:
Ideally, a broker should function as a facilitator. Some do. Others use tactics that tend to discourage “due diligence”, and encourage a buyer to act impulsively. Examples include: demanding “offers” or financial or legal commitments before “full” information on the business will be released, or suggesting that another buyer is prepared to act if you do not.
Experienced brokers know the chances are good that there are problems with the business (frequently, that’s why it is for sale), and the more information available to the buyer, the greater the opportunity for the buyer to identify problem issues. Problem identification tends to suppress buyer enthusiasm, which leads to lower or no offers. Accordingly, many brokers attempt to frustrate buyer drill-downs.
Except for me, all of the laundromat “consultants” out there maintain at least a backroom business broker operation. (Some will deny being brokers – at least initially.) Why the back-room? Primarily to disarm you – people are far more inclined to trust a “consultant” than a “broker”. As I have set forth above, you might then be steered towards a purchase in which the “consultant” stands to make huge brokerage commissions rather than, or perhaps in addition to, “consultant” fees.
Just bear in mind: I am paid my modest fee up front. From that point on my sole self-interest is preservation of my reputation (won over the course of three decades) – and the key to that is getting the very best deals for my clients. I do exactly that and I even guarantee it.
You need the genuine consultant who serves only one master: you.
1 It is sufficient to be in a position to do it. A “conflict of interest” is not necessarily about an act which might further the broker’s self
interest over his client’s; instead, it is about being in a position to take such action. It then remains only for human nature to take its
2 This is an absolute necessity. For over three decades I’ve studied and verified thousands of “fact sheets”, and I can tell you that
revenues are commonly overstated, expenses are almost always understated, and some categories of expense are even omitted. My
skill in identifying these issues is the reason I can offer my conditional money back guarantee (see my site).