How to handle brokers wanting offers before due diligence

We have all heard of “The battle of the sexes”. What is not as well-known but as difficult a battle “is the one between “brokers and business buyers” regarding getting a business’s financial information.

This article will discuss:

1. How to get listing brokers to release the required information you need in order to determine if you have any interest at all in making an offer. Regardless of what you are willing to pay.

2. If that does not work, how to make a level playing field so you are willing to write a deposit check with a Letter of Intent (LOI) or Purchase Agreement.

Before I get into the techniques that will be talked about I need to tell you my credentials in this area. I started in 1992 as a business broker, taking listings and selling businesses. I never demanded any kind of offer or LOI before releasing financial information.   I want the buyer “to know before they go”. When we accepted purchase offers the escrow closed 99% of the time. There were no contingencies when we opened escrow because all contingencies and the due diligence was done before we went to escrow. That way we never had escrow cancellation fees and we didn’t have failed escrows.

I act as a dual agent 95% of the time, and not one buyer ever felt that I was working only for the buyer. The reason that they felt that way was because it was true. Full disclosure with both parties kept me out of any litigation even if the buyer and seller were unhappy with each other.

As a buyer you need to understand the inside story between business brokerage owners and their agents. Then use this information to impress upon the listing agent, not the seller, what this article talks about.

• The listing agent is a dual agent acting for both the buyer and seller if there is not another unrelated agent representing the buyer. The only way a broker can get out of this stringent relationship is to have the buyer sign a document approving of the listing broker not representing him. NEVER SIGN SUCH AN AGREEMENT FOR ANY REASON WITH OUT YOUR LAWYER APPROVING IT. If your Lawyer is willing to approve it, I would get a second opinion and get 50% of the sales commission returned to you.  When I am working for a buyer, I do the reviews that a buyer’s agent should do, but since I am not legally the buyer’s agent but his CPA, I still want to see the listing agent be on the hook as a dual agent. Then if the deal goes sour, you can sue the broker alone or with the seller.
• This article is not the place to explain why the broker being a dual agent, requires him to a very high standard of responsibility to the buyer as well as the seller. Everyone reading this article knows that brokers act like they are working only for the seller and not the buyer. That is fiction and does not stand up in court.
• Since the listing agent is really a dual agent, who is working for you, make him work for you. Tell him that you want at least 3 years of complete P&L and balance sheets, employee payroll worksheet, accounts receivable aging report, sales breakdown by customers. You also want to see the detail for the brokers add-backs. Please understand this is only 50% of what is needed for due diligence but it is a start for you to go to a professional to get a professional’s opinion of the business. If the broker pushes you hard for an LOI with a deposit check, explain you are interested in this business but only interested enough to want a closer look, not close enough to put your name on a piece of paper even if it says it is non-binding. If it is so non-binding why does the broker push so hard to get you to sign it? The simple answer, not the legal answer is that they can start pushing you through the buying process, to closing. While doing this, they are orally telling you to forget the due diligence steps, while at the same time the written contracts have clearly written clauses where you the buyer states “I have hired my own due diligence experts, and legal counsel, and I have not relied on anything the broker has told me or given me.” Then when the business turns out not to be what you thought it was, the broker can tell you. “It is not my fault. You should have done your due diligence.” That exact story has been told to me dozens of times.
• Just hold your position on not signing. Sell the broker on giving you the requested financial information. Remind him that he stands to make a giant commission when you buy the business (10-12% of the selling price).  If the broker lets you walk away because he would not release enough information to wet your whistle, then he is the loser, not you. The odds are over 80% you would of rejected that deal if you would of played it his way. His way means wasting hundreds of hours and tying up lots of money in deposits.
• If all else fails and the broker will not release the requested information, I have one more idea in my bag of tricks. First explain that hiring a CPA to review the business is an expensive proposition. This is your response to their asking for you the buyer to have skin in the game. You then ask them to put some skin in the game. The broker has probably told you a dozen times that the books accurately reflect the financial situation of the business…….even though they have not studied the financials and done their own due diligence. Tell them you want the seller to match your deposit amount that is going into escrow. If when you have your CPA finish his review and the net profit or gross sales are off more than 10% the seller will pay for the cost of the due diligence. Now you have leveled the field. When the seller refuses, you know that he does not have as much confidence in his numbers as he represented.
• Now, you should be able to ask for the requested financial information again. If that does not work, walk away and know that there was something that probably would be found upon review. I hope this helps in your negotiation for documents.