Are Brokers Unbiased?

Business brokers put a selling party and a buying party together, and they help the parties arrive at a purchase price and generally draw up some, or all, of the contracts necessary to complete the deal.  Business brokers are paid on commission, which is usually 10% of the purchase price.  As a result, they have an incentive come up with the highest transaction price possible.

In addition, some brokers will claim that they are experts in valuation.  However, very few of them will be members of these recognized appraisal organizations:

American Society of Appraisers
American Institute of Certified Public Accountants
Institute of Business Appraisers
National Association of Certified Valuation Analysts

These organizations abide by the Uniform Standards of Appraisal Practice or USPAP.    The USPAP ethics rule states the following:
It is unethical for an appraiser to accept an assignment, or to have a compensation arrangement for an assignment, that is contingent on any of the following:

1. the reporting of a predetermined result
2. a direction in assignment results that favors the cause of the client
3. the amount of a value opinion
4. the attainment of a stipulated result; or
5. The occurrence of a subsequent event directly related to the appraiser’s opinions and specific to the assignment’s purpose.

If a broker takes a commission based on the amount of a value opinion it would be a direct violation of USPAP’s ethics rule.  Therefore, a business broker taking a commission would not meet the generally accepted standards of valuation.  It is hard to claim that you have a non-biased opinion when, you are incentivized by high prices.

Furthermore, many brokers will claim that they work for both parties.  Of course, it is easy to see how a selling doctor could see the broker as representing his or her interests.  Furthermore, the are both interested in seeing the highest transaction price possible.  Is the buying doctor also interested in paying the highest price possible?  Clearly the broker is not motivated to represent the best interests of the buying doctor.

How does a business valuation specialist do business?

A BV specialist will represent the deal that they are forming.  Part of the specialist’s job is to remain unbiased so that the deal is as fair as possible.  The most important thing that they need to balance is the purchase price.  The only way to create an equitable purchase price is to abide by the rules established by the Uniform Standards of Professional Appraisal Practice.  Fee based valuations are necessary for transparent and non-biased results.

How much would it cost to sell my practice?

Below are estimates of the cost of hiring a broker to sell your practice vs. the cost of getting an appraisal and some consulting support through the sales process.
Large business ($3 Million in revenue) Assume a value of $1,500,000

Broker cost: $150,000

Direct option $6,500:

Medium sized business ($1.5 Million in revenue) Assume a value of $750,000

Broker cost: $75,000

Total for the direct option: $6,500

Small business ($750,000 in revenue) Assume a value of $375,000

Broker cost: $37,500

Total for the direct option: $6,500

In conclusion, a BV specialist, will be competitive across all sizes of practices.  Therefore, if you can attract a buyer on your own going without a broker will save you a small fortune.

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