The following exchange is based on a conversation I had with a large broker, although I should point out it’s a conversation I could have had with most brokers:

Me: ‘Why are you putting a price on these businesses that is way out of kilter with what the business is actually worth?’

Business Broker: ‘I know that’s wrong, but it’s the sales team, the people who go out to do the evaluations, they get paid their commission based on that figure, so the higher it is, the more they get.’

And there’s the inherent problem…

If the salesperson, says your business is worth £1 million, then your upfront broker fee is £10,000 and, if he’s on 20% commission, he gets £2,000 of that.

If he says your business is worth £100,000, he’s not going to able to charge you £10,000 upfront – he might only be able to charge you £1,000 – so his 20% is only worth £200.

Also, he’s a salesperson – He needs you to sign that contract. He knows if he says your business is only worth £100,000, you’re going to be disappointed. You probably won’t want to sign up. However, if he says it’s worth £1 million, you’ll grab the pen out of his hand and say, ‘Where do I sign?’

Especially if he adds, ‘The guys at the office have got buyers lined up. The phone’s ringing all the time, the market’s red hot right now.’

So you sign the contract based upon the £1 million valuation. That’s what you think you’re going to get as a result of selling your business. The small print says they can’t guarantee you anything, but you believe the story you’ve been told about your business being worth £1 million, and the market being red hot, and the phones in the office ringing all day long.

You pay your £10,000 and start planning the holiday you’ll go on when the business sells and the money hits your bank account. Maybe it’ll come through in time for a summer cruise?

Meanwhile, the Salesman has now got his £2,000 – He’s definitely going on holiday this summer!

And he never needs to speak to you ever again, so whatever the outcome, there are no consequences for him. He’s going to pass you over to someone else in his office, managing your expectations is now their problem!

You think your business is worth £1 million – and that’s the only figure you’re ever going to remember. You won’t remember any other number he said and you certainly won’t remember that the small print says he can’t guarantee anything.

The person trying to find a buyer for your business is telling enquirers the business is worth £1 million even though they know it isn’t, and even though the potential buyers also know it isn’t. A sale at that price is never going to happen. And that’s the tension inherent in the business.

According to UK Business Brokers, (http://ukbusinessbrokers.com) brokerages, on average, sell only about 20% – a measly one-fifth – of the businesses they take on. 

Business brokers hate being compared to estate agents, but there is an indisputable similarity.