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Ask the Advisor: Getting Ripped Off By Pest Control Business Brokers

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Question: I called a business broker who handles pest control companies and he said the buyer will pay his fee. How can he represent me, but get paid by the buyer?
 Jeff (from Florida)

Answer: The short answer is: he can’t. The reality is, he will be representing neither you nor the acquirer in the transaction. He will be representing his own interests and will be selling your business to the buyer who is willing to pay him the most. Not a good situation to find yourself in if you are selling your life’s work.

 Brokers who act as finders provide absolutely no value whatsoever to a seller. In fact, in a lot of ways, they cost a seller a tremendous amount of money.

Here’s why:

He’ll Exclude All Buyers Who Won’t Pay Him

Since the buyer is actually writing him the check, he’ll only show your business to acquirers who are willing to pay him, excluding the low payers and no payers of his fees. Most finders in the pest control industry end up selling the business to one of two acquirers, the two most likely to pay him a finders fee. Because most of these brokers have no training whatsoever in accounting, finance, law, tax or valuation, and lack any real deal making experience, you would be better off having your 15 year-old-nephew call up the acquirer and ask for a finder fee for presenting your company, at least you’ll keep the money in the family.

A Rose by Any Other Name….

Just because someone tells you that the buyer is paying their fee, doesn’t mean that’s the case. The money comes from somewhere, and 99% of the time, the buyer subtracts the broker’s fee from the proceeds that they are willing to pay to the seller. So by working with one of these brokers, not only have you excluded a massive portion of the buyer universe from your sale, you’ve also written him a check, by allowing the acquirer to subtract that from the deal, for doing absolutely nothing for you and representing the buyer’s interest. Let’s face it, if the buyer doesn’t do the deal, this guy won’t get paid. And since he’s dealing with a very small acquisition universe, he is going to do everything in his power to get that deal done whether it benefits you or not. Oh, and by the way, since he never signed a contract with you, he has no fiduciary duty to represent your interests, so you’ll never be able to sue him after he rips you off.

There are certainly instances when advisors work on the buy-side and they are paid by an acquirer to find acquisition targets and execute the deal. Any time anyone comes to you and says the buyer will pay my fee, make sure he is up front with you about who the buyer is and he is a RETAINED buy-side advisor, not a finder.

 Remember, there is no such thing as a free lunch. When YOU HIRE a broker who is being paid by the acquirer, you need to understand that he is not representing you and for every deal, there is a finite pool of cash to go around. The fees have to come from somewhere, and most likely they are coming from you, disguised as a buy-side fee. So if you are going to pay some knuckle-head to put together a deal for you, you might as well pay a competent M&A professional, who is an expert in valuation, deal structuring and the legal and tax implications of a transaction, who will relentless represent your interests through a competitive process. By doing anything else, you’ll get what you pay for, and in this case, you’ll be paying to get fleeced by a broker and his buyer.

Give us a call today at 215-525-0689 to talk to an M&A advisor with expertise in the pest control industry.

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