“I recently talked to a business broker who claimed they were selling 90% of their listings. I doubt this claim, but I don’t want to discount it entirely. Is it possible for a broker to accurately measure their success rate? If so, is a 90% success rate possible?”
Unfortunately, we believed this, too, at one point. We began collecting the data so we could track our own success rate. We prepared a spreadsheet and began documenting the results but ran into some serious problems collecting data within the first few months.
One seller contacted us and told us they wished to take their business off the market.
How were we supposed to count this? Successful or unsuccessful? Or do we ignore it? We placed this one on the sideline so we could decide later and attempted to continue counting. We ran into more and more problems and eventually stopped counting. Why?
This article tells you what happened when we began tracking our success rate and offers you advice regarding how accurate other brokers’ claims regarding their success rates might be.
Business Broker Success Rates and Reality
Let’s list some scenarios we ran into:
We had a mid-sized landscaping company on the market, and a private equity group was interested in purchasing the business. Unfortunately, the seller’s employees told the owner they would refuse to cooperate and that they wanted to buy the business. The employees couldn’t obtain financing, and the deal died.
How do we count this? After all, we were successful — we brought a buyer to the table, and the buyer made an offer that the seller accepted. However, the seller’s employees killed the deal, which was beyond our control. Should this be considered successful or unsuccessful?
Another owner contacted us and told us he wished to take his business off the market in order to reinvest in the business to build it back up before putting it on the market again at a later date. Most of the offers we received were below what the owner wished to sell for, so based on this information, the owner decided it was best to build the business up before attempting to sell it.
How should this be counted? The owner is pausing the sale while he builds the business before attempting to sell it again. Is it considered a “work in progress” and not counted, or is it considered unsuccessful?
We had a Powersports dealer on the market for approximately four months, when the owner phoned us and said another dealer had approached him with an offer to buy his dealership. The owner ended up selling to the other dealer.
The business successfully sold, but we did not generate the buyer. Was this successful or unsuccessful? We certainly would have sold it if we were given enough time, but we didn’t because the owner ended up selling to another dealer internally within the franchise.
A business owner who had cancer contacted us. They asked if we could sell the business as quickly as possible. We put the business on the market and developed a frenzy of activity. However, the owner passed away in the middle of the negotiations, and the buyers faded away because the owner was instrumental in the transition process. No buyer was willing to buy the business if the owner was not there to ensure a smooth transition.
We likely would have been successful if we were given enough time, but the owner passed away in the middle of the sale. The business was then sold to the employees for a rock bottom price. How should this be counted?
An owner of a service business retained us to sell their company. Unfortunately, 90% of the revenue was generated from one customer. We told the business owner upfront that the company would be very difficult to sell but that we would give it our best shot, provided they were willing to pay our up-front fees. We had the company on the market for nine months when the owner decided it would be wiser to take the business off the market and restructure the business to reduce customer dependencies.
The problem is the same here. How should this be counted? We possibly would have been successful, but we were not given a full chance, and this was a long shot to begin with.
We had a large weight loss clinic (no pun intended — the business was large) on the market. We generated a few dozen buyers and were in negotiations with several of them. During one meeting, the owner had a sudden shift in tone and demanded that a buyer provide a non-refundable $100,000 security deposit if they wished to talk again. The owner had a similar shift in tone with other buyers and scared them away. We took the business off the market and stopped the sale process.
I later found out through the owner’s wife that the owner was having a terrible bipolar episode that may have been triggered by his mother’s death. His behavior was beyond our control, but we ultimately were unsuccessful. How did we count this?
We were selling a service business when the industry suddenly encountered major changes. The business was hit hard, and revenue quickly plunged by 70%. Despite our best efforts to sell the business, we were unsuccessful. The owner decided not to sell his business at a depressed price and took it off the market.
How do we count this? Revenue declined by over 70%. Was this in our control? We could have been successful if given enough time, but the owner chose not to sell at the depressed price.
Business Broker Success Rates and Why Don’t Most Businesses Sell?
The ugly truth that most brokers and M&A advisors don’t talk about is that a significant proportion of businesses do not sell.
Often, they don’t sell due to circumstances beyond the owner’s control, such as a recession, loss of a significant customer, industry downturn, or the actions of a third party such as a landlord or franchisor. Sometimes, they don’t sell due to ineffective marketing by the broker. Sometimes, the owner pulls the plug early in the process and takes the business off the market. And sometimes, the “forces that be” pull the plug on the owner.
All of which raises the following questions:
- Exactly how long is enough time to give a broker to sell a business to determine if they are successful?
- How do you count the data if it’s a long-shot, but the broker is willing to help anyway?
- How should the data be counted if the seller jeopardizes the transaction and the seller’s actions were beyond the broker’s control?
- What happens if a major recession or other economic calamity hits and the revenue declines by 50% or more?
- What if the buyer discovers major issues during due diligence and the transaction fails to close due to no fault of the broker or M&A advisor?
- What if the buyer and seller fail to negotiate the terms of the purchase agreement, so that it comes to a standstill and the deal dies?
- How do we count the data if the seller loses a major customer during due diligence, the seller refuses to negotiate the purchase price, and the buyer refuses to move forward?
- How is the data counted if the owner decides to put the sale on hold and takes the business off the market?
- What if a third party, such as a franchisor or landlord, kills the deal through their actions? (This happens far more often than you might think.)
In other words, how should the data be counted if a circumstance beyond the owner’s control results in no deal? There are some gray areas as well — how should the data be counted if the broker believes the business is overpriced, but the business owner believes their asking price is justifiable? What about the actions of third parties that the broker could have possibly anticipated? And so on, ad infinitum.
As you can see, measuring success rates is inherently difficult, if not impossible.
If you talk to a broker who claims they have a specific success rate, we suggest you consider the following:
- When was the last time the broker updated their “success rate” on their website? Or have they mysteriously claimed the same success rate every year for the past ten years? We have been secretly tracking brokers who claim a specific success rate on their websites, and less than 25% update their information on an annual basis.
- Ask the broker when they started tracking their success rate. Then ask the broker to list their success rate by year since they began tracking it.
- Ask the broker how they would handle the data above. Would each scenario be counted as successful or unsuccessful?
- Ask to see the actual data and how it was calculated (i.e., the spreadsheet that was used to tabulate and calculate the data).
- Ask the broker what time period their “success rate” covers. Is it the last one year, five years, ten years? If they claim it was 96% last year, ask the broker how many businesses they represented last year. At a 96% success rate, one would need a minimum of 25 businesses (24 out of 25 = 96%), so the data would have to occur in increments of 25s (i.e., 25 clients, or 50 clients, or 75 clients, etc.).
Claims regarding success rates are suspect at best. It’s more likely an unsubstantiated claim and that no attempt was ever made to actually measure the data. In more blunt terms, it’s a lie — unless they can provide answers to the questions above and back their claim with actual data. Would you hire someone whom you can’t trust to sell your most valuable asset?