Business Sellers Beware!

The fact that only one in ten business owners experience the purchase or sale of a business before it comes time to sell their business makes them a vulnerable target, which became very evident in the 1990s when the Geneva Companies swept the country by fleecing thousands of business owners out of millions of dollars (see verdict). 

Since then other companies have formed to employ variations of the same scam.  They are extremely good at it or it wouldn't work!

So before you fall victim, consider the following questions before you commit to listing your business for sale.

Is the company or individual licensed to practice in your State? 
Though licensing requirements do little to ensure competent representation, few organizations and individuals running scams are licensed.  They know there is little in the way of enforcement and they typically will take their chances. Check with your state department of commerce if your state requires business brokers to be licensed license

Who will be doing the work and who will be representing your organization on a daily basis?
A common practice is to sell business owners international and Wall Street connections, but then once the up-front money is paid and the seller has listed, the seller is passed to a local broker (typically an inexperienced broker that is not yet aware of the scam).  Make sure that it is clear and in writing who you will be working with and how.

Is there an up-front fee?
If so, what does it pay for and are there any guarantees?  Organizations running the “Geneva scam” typically charge a non-refundable fee of $35,000 to $50,000 for research and marketing preparation.  In same cases, they will try to sell business value enhancement consulting services, which can add $20,000 to $50,000 to the price tag.  While legitimate organizations provide these potentially valuable services, legitimate organizations will typically charge as they go and will provide some type of guarantee related to the work.  Further, legitimate organizations will not pressure you in their sales process.  So, beware of a large up-front, non-refundable fee.

Do they have experience working with any other local businesses? 
Again, many of these organizations tout international and Wall Street connections and thereby provide a list of out-of-state references that are hard to verify.  If it is not possible for them to provide a local reference, ask to see a list of their completed deals.  This may not be a reasonable request for small, specialized firms, but any company doing business internationally and across America should be able to provide a long list of verifiable transactions, not just a few references.

What will be done to promote your business? 
Often, the up-front fees are to prepare for going to market and encompass a valuation (pricing) and the development of supporting documents (particularly what is commonly referred to as a Confidential Business Review).  Many times, some type of industry analysis is included.  However, this information and related materials are only useful if done in conjunction with an overall marketing approach.  Since most of these companies pass-off the actual representation to a local broker, they will be hard pressed to provide solid answers related to ongoing marketing and promotion issues.  Make sure any promises that are made are in writing.

It can be difficult to identify fraudulent service providers as they are extremely good at couching their programs to mirror what might otherwise be considered legitimate services.  

By verifying license status, calling references and asking the right questions, you may be able to avoid shady brokers and having the value of your business damaged. 

Resources

Links to Articles and Websites

Articles

Article: Scam alert: GW equity? (services and influence of business brokers on selling of business by business owners) The Business Owner, May 2007.
http://www.highbeam.com/doc/1G1-165971685.html

Article: For Sale: The American Dream. By Joseph Rosenbloom, INC Magazine, November 2009. The tag line for this article is: Need help selling your business? Lots of folks out there claim they can help you get the most for your business. Don't believe everything you here.
http://www.inc.com/magazine/20011101/23612.html

Article: Selecting a Business Broker to Sell Your Business - 12 Tips. By Peter Siegel, MBA. Posted on the SCORE website.
http://www.score.org/selecting_business_broker.html

Article: Selling Your Business - Advice on preparing to sell your company. By Coli Gabriel. Inc. Magazine article. Tips include choosing the right type of buyer, avoiding a costly audit, and dealing through brokers and other intermediaries. http://www.inc.com/magazine/19981101/1035.html

Article: Selling Your Business by Yourself? Not a Good Idea. By Areinz, Steve Smith. NZ Business, September 2005. http://findarticles.com/p/articles/mi_qa5373/is_200509/ai_n21378419?tag=content;col1

Article: How to maximize Your Price When Selling Your Business. By Kevin E. Rex. San Fernando Valley Business Journal, Oct 06.
http://findarticles.com/p/articles/mi_hb274/is_22_11/ai_n29305837?tag=content;col1

Websites

Website: This website provides links to state and local government agencies
http://www.statelocalgov.net/

Website: The United States Small Business Administration (SBA) provides loans programs that are often used by buyers of businesses. Learn more about them and other services the SBA offers.
http://www.sbaonline.sba.gov

Website: The Securities and Exchange Commission (SEC) exists to protect investors, maintain fair, orderly, efficient markets, and facilitate capital formation.
http://www.sec.gov

Website: A list of articles on business valuation published by Bannister Financial in their newsletter.
http://www.businessvalue.com/valarticles.htm

Website: This website provides information on business valuation and resources as well as industry and company information, economic data, and more.
http://www.valuationresources.com

If you are aware of a website or article that may be useful to a someone pursuing the sale of their business, please let us know. Email CS@BusinessBrokerReferral.com.