IMPORTANT ADVICE ON AVOIDING UNETHICAL BEHAVIOUR OF A BUYER AND WHAT IT CAN COST WHEN BUYING A NORTH CAROLINA BUSINESS

CHEATERS NEVER WIN

We all know that a North Carolina Business Broker works for a commission.  It is called a “Success Commission”. This is just as true in South Carolina and Virginia, of course. 

Just like with home buying, the party(s) paying the 6% or whatever it may be, sometimes looks for ways to get out of it. Ethically, as long as you do this BEFORE signing the Listing Agreement, that is just using head. There are options all over the Internet as low as 1% and even DYI. But once signed, trying to get out of it, or chisel it down, once a buyer and a seller have struck a deal?  That is unethical behavior. 

WHAT ABOUT THE SUCCESS COMMISSION OF A BUYER’S SIDE REPRESENTATIVE?

The same applies. 

Make your “Yes”, YES and your “NO”, NO. 

If you don’t like the fee structure or percentages, don’t sign the Agreement. Don’t bulk at the fee after the Buyer’s Rep has done all the work for you. Trying to negotiate a lower fee, in the Eleventh Hour, thinking you have him over a barrel?  That is also unethical behavior.

EXPLAIN BUYER SIDE FEES, PLEASE

The fee depends on the service provided. Pro Biz, for example, uses a simple $125.00 per hour fee for Consulting and Business Advising.  Typically, we will request a Retainer.  On smaller deals, we begin with a $2,500.00 Retainer. This is not the same as a flat fee.  A Retainer of $2,500 means you have pre-paid for 20 hours.  ($125.00 X 20 = $2,500.00). When the Retainer is used up, you will be billed by the hour for more services. The Retainer is where we start with most new Clients.  It may be to help you find a business, review one you have found, interact with the listing business broker, review financials and generally to be a sounding board and a second set of eyes.  The fee is nonrefundable.

WHAT ABOUT A SUCCESS COMMISSION?

Pro Biz has 30 years’ experience on the Selling Broker side and success commissions were our bread and butter.  We also offer to find you a business and take you through the LOI, due diligence and the Closing on a ‘success commission’. When working on a success commission, the clock is not running by the hour, such as the above Retainer. The success commission is typically 5%, which is one half that of a selling broker’s commission. 

A SUCCESS COMMISSION IS A CONTINGENCY COMMISSION 

It is risky for Pro Biz.  We could bring you a business, you enter into an LOI and somewhere in due diligence it fails to meet your satisfaction. You don’t pay if it does not Close. We have just lost out. That is why the commission is 5% and not 1%.  There is more risk and more work. Much more.

WHY IS FINDING A PERFECT BUSINESS SO HARD?

First, there is no such thing as a perfect business. That said, there are two categories.  The first are those publicly advertised for sale.  This is the vast majority. Business Owners know to do this. If you are selling your house, you choose a real estate agent.  If you are selling your business, you use a business broker. The problem for you, the buyer, is sorting through the public ads. Like buying a used car, the odds are not in your favor. You have to ask, “If it’s so good, why is he selling it?”  

The second option is a business not publicly advertised. These are “diamonds in the rough’.  These are few and the really good ones are rare.  So, a 5% fee is a bargain.

ENTER THE COMMISSION CHEATER

Returning to our topic, Cheating. Only three times in 30 years has a Pro Biz Buyer seemingly pulled off cheating the system. The first two, 20 years ago. The third one is doing this as I write. It is a very disappointing case. 

I’ll write more about it in the next article.  UNETHICAL BEHAVIOUR Part 2.  

Litigation is expensive and cheaters get stuck with both sides when they lose. The post-closing consequences, that I will point out may exceed One Million Dollars.

Title:

UNETHICAL BEHAVIOUR REGARDING BROKERAGE COMMISSIONS 

Part 2

LOW BALLING

I will not name names. Suffice it to say I thought he was an honorable man. The Agreement was two-fold, $125.00 hourly fee, i.e. $2,500.00 Retainer for 20 hours over 90 days, or a 5% Success Commission. He had several companies he was pursuing and he went with the Retainer. When the 90 days was up I requested another bank wire of funds, as he was far exceeding the 20 hours.  This was the first sign that should have alerted me: he delayed but continued to utilize my services. 

Much time went by and the unpaid hours were really adding up.  Each deal we worked on, he found many things to try to justify chopping the price and terms, and what we call, “Low-balling’.  

WASTING PEOPLE’S TIME IS STEALING

 It is my job to help a buyer save as much as possible, but there is a point where complaining about pricing and playing hard ball results in the seller and the broker refusing to deal with him further. The selling broker’s time is valuable. The Owner was being taken away from running his business only to have the buyer push him to the wall, time after time. 

I began to suspect I was never going to get reimbursed for my hours either. At that point, I shared with him a business I had listed in the past and that the owner had recently had a health scare and would be motivated for a sweet deal for the buyer. This now shifted from ‘hourly’ to ‘Contingency’ or “Success Commission” and my one chance to catch up. He understood perfectly that he had to add 5% to the price he would offer and pay for the business.  Again, low-balling, the seller said. ‘No thanks”.

A SECOND SWEETHEART DEAL – TO DIE FOR!

Now in the second half of 2021 a second such sweetheart deal came to my attention. Based on my 30 years on the seller side, a wonderfully profitable Raleigh business that I had previously listed and had offers as high as $20,000,000 for before Covid-19, and on which my listing had expired.  The Owner now had a critical health issue and was going to close the doors!  He would take 10% of the last highest bid, just $2M, but it had to be quick and clean.  I brought this to the buyer and he jumped on it.  Almost too good to be true.  But continued to chip and chisel all through due diligence and I had to save the deal on several occasions. Finally, this week the papers were to be signed and the money distributed. Happy Occasion? Should have been!

RENEGE:  GOING BACK ON YOUR PROMISE

The day before closing, the buyer tells the attorney that the Pro Biz Agreement was not “renewed” back at that first 90 days of initial Retainer. That of course, is false, as we have been working all along, (renewed de facto), even if the agreement’s wording could be somehow misconstrued by a less than ethical attorney. They cancelled paying Pro Biz the success commission at the last moment.

LITIGATION

Now, the cost of this unethical behavior will be determined by a court of law. The buyer hopes Pro Biz won’t fight it, as it will burn up countless more hours. But here is what you should know. In my 30 years of business brokerage, this only happened twice before.

In the first instance, our attorney obtained an Emergency Injunction and stopped the closing. Eventually it closed and we were paid.  A year later?  That business is closed.  I still drive by the abandoned building now and then and just shake my head.  

CHEATERS NEVER WIN

The second instance, the buyer, seller and their attorneys conspired to cheat, and not even tell us it had closed.  We found out after the fact. Our lawyer sued. The Judge, when it finally got to court, was so incensed at the gall of the closing lawyers and buyer and seller, not only did he award us our commission and court costs, but he tripled the damages.  TRIPLE! I repeat, “Cheaters Never Win’. 

2021, CHEATER NUMBER THREE

Why am I sharing this on my websites? To attract buyers to engage Pro Biz to represent them?  No, to coach you on something that could cost you a million dollars.

You see, Covid-19 had really hurt the sales and revenues of the Raleigh business involved. As the Consultant, with years of familiarity and history of the business from when it was listed for $20 million, I had a Proposal.  This Proposal would have added more than a million dollars to the bottom line within a year.

You see, the cost of dishonesty turns off the previous owners. They aren’t going to go out of their way to help ‘this’ buyer once the closing and the brief period of transition is complete. 

That is also the cost of “Low Balling” during negotiation to the point of obnoxiousness. 

And, forcing me into litigation is not the best way to get from me what I know that they do not know.  A certain million-dollar plus ‘net profit’ former customer. Based on my relationships, I could have and would revived this customer for them. THAT is the cost of UNETHICAL BEHAVIOUR.

BOTTOM LINE

CHEATERS JUSTIFY THEIR ACTIONS AND BEHAVIOURS – BUT ANY SHORT TERM WIN, SOONER OR LATER,  REVERSES.

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