18 years ago when i was cutting my teeth as a “baby broker”, I ended up doing a ton of deals in Lawn and Landscaping. Later in vacation rental management. I called Andy Cagnetta up and said “This is the key to success!” I and I alone had discovered the key to our business and the future of business brokerage.
Now in my 18th year of brokerage, I’m a bit more seasoned, wiser I believe. Just today I was a post from a friend of mine who has shifted his brokerage to an industry specialization. So with that, I thought I would opine a bit about the pros and cons of industry specialization as a broker and how it matters or doesn’t matter to a seller.
The theory on specialization is pure Marketing. If you a seller or a buyer you like the idea that there is something special about the person dealing with your business. Sellers tend to place a ton of importance on perceived insight and comfort with an industry. The dirty little secret is that brokers have access to the drivers for an industry in our internal publications and in larger firms like Transworld our staff of Professionals. I can’t tell you how many times I have had folks ask me if I had experience in a particular industry. I always get a good chuckle on this. The reality is industry experience is something to consider but not really the primary element by which a broker adds value. Let’s lay out the positive and the negative
THE GOOD
- A deeper understanding of your industry’s risks and needs. Specialized brokers have a deep understanding of the unique risks and needs of their clients’ industry. This allows them to provide more tailored coverage and risk management solutions. TAILORED – AINT THAT CUTE…MAKES YOU FEEL SPECIAL RIGHT
- Stronger relationships with carriers. Specialized brokers often have strong relationships with carriers that specialize in their industry. This gives them more leverage to negotiate better rates and terms for their clients. IF YOU HAVE DONE MORE OF ONE DEAL ITS POSSIBLE YOU GOT RELATIONSHIPS WITH CARRIERS AND OR INDUSTRY SPECIFIC CONTACTS THAT CAN AID IN A TRANSFER
- Ability to identify and mitigate risks. Specialized brokers can help you identify and mitigate potential risks that other brokers may not be aware of. This can help you reduce your overall cost of risk and protect your business from financial losses. WHEN YOU DO ENOUGH DEALS YOU LEARN WHAT BUYERS WANT VS WHAT SELLERS THINK THEY WANT AND COACH (IF YOU ARE LISTENED TO) SELLERS TO THE BEST OUTCOME
BAD
- Limited pool of buyers. A specialized broker may have a limited pool of qualified buyers for a seller’s business. This is because technical buyers often look for businesses with specific characteristics, such as a certain size, revenue, or location.
- The best buyer is not usually in the industry. Not to be a capitalist in all things but people in one industry generally pay less for the blue sky as they come with benchmarks and or rules of thumb from their experience. Multiples paid with industry folks tend to be lower statistically.
- Higher fees. Specialized brokers often charge higher fees than general business brokers. This is because they have specialized knowledge and expertise in a particular industry. The theory and selling story is since they “know so much” you should pay more for that expertise. The reality is a business is a business. The nuances of one industry over another is easily accessed with broker resources and the world of the internet.
- Less negotiating power. Sellers may have less negotiating power with a specialized broker than they would with a general business broker. This is because specialized brokers may have a limited pool of buyers and may be more motivated to close a deal quickly. Supply and demand is key here and the rules of economics that govern business apply. Exposure to the widest economic buying pool is best. Therefore
In addition to these general problems, there are also some specific problems that sellers may encounter when working with a specialized business broker:
- Conflict of interest. Some specialized brokers may also represent buyers in the same industry. This can create a conflict of interest, as the broker may be motivated to close a deal that is not in the best interests of the seller.
- Lack of transparency. Some specialized brokers may not be transparent about their fees or their relationship with buyers. This can make it difficult for sellers to make informed decisions about the sale of their business.
Overall, it is important for sellers to weigh the pros and cons of working with a specialized business broker before making a decision. Sellers should carefully research different brokers and ask questions about their experience, fees, and relationships with buyers.
Here are some tips for sellers who are considering working with a specialized business broker:
- Ask the broker about their experience selling businesses in your industry.
- Get a clear understanding of the broker’s fees and how they are calculated.
- Ask the broker about their relationship with buyers. Do they represent both buyers and sellers in the same industry?
- Get everything in writing, including the broker’s fees and the terms of your listing agreement.
If you are concerned about any of the potential problems associated with working with a specialized business broker, you may want to consider working with a general business broker instead. General business brokers have experience selling businesses in a variety of industries and may have a larger pool of qualified buyers.