Beware False Prophets When Selling Your Business

Back in the 1980s, I used to write a regular property column for The Sunday Times. The article that attracted the most attention by far was entitled, “Beware False Prophets.” It was a warning to the public about how to avoid being caught out by estate agents who overvalue their property in order to gain a business advantage. I received a huge number of letters from people who had been caught out by this scam and I was flattered to learn that quite a number of my estate agency clients kept a copy of my article in their presentation packs for years afterwards.

Overvaluing is the oldest trick in the book. Agent A advises correctly that a property should be put onto the market for £400,000. Agent B advises a sale price of £500,000 and gets the job. Over the next two or three months, they work to get the price down and eventually sell the property for £400,000. Shortly after completion, the two agents bump into each other in the street. Agent A says, “I was right about that property in such and such a street then?” Agent B says, “You were, but who got paid?!”

One would have thought that in an age where so much information is available online, vendors would not fall for the overvaluing trick but through a combination of vanity and slick selling techniques, they still do. The classic ruse is for Agent B to refer to a special group of buyers that Agent A does not have access to. “We have an office in Posh Town down the road”, or “We have an office in London”, or “We have an office in Moscow. As a result, we have access to all these wealthy buyers that don’t register with Agent A and that is how we will achieve the extra £100,000 for you.” It’s all nonsense, of course, particularly the bit about Moscow!

The best way to avoid your competitors from taking instructions off you by overvaluing is to provide copious amounts of comparable evidence during your valuation appointment. I would start by showing the vendor just three properties, one that is cheaper than theirs to manage their expectations, one that is obviously better than theirs to put a cap on their expectations and one that is as close as possible to their own. Their response and body language as you present these properties will give you valuable feedback about their expectations.

If this doesn’t work, you need to have further evidence in your presentation pack of other properties sold and the prices achieved, and properties that are overpriced and have stuck on the market. You will also need statistics about your competitors such as their instructions to sales ratio, average time on the market and average percentage of asking price achieved.

There is, however, no point in pressing your argument so hard that you offend the vendor and lose the instruction. As the old saying goes, you can’t sell what you haven’t got. There comes a time therefore when you will have to agree to take the property on at a price that is a little higher than you advised with a view to going for a price reduction later.

Overvaluing does not only affect the housing market. It is also prevalent in many other sectors such as auction houses and cars that are sold on a sale or return basis. It also affects business transfer agents and I have come across some shocking examples recently of firms that have grossly overvalued a business.

The scam usually starts with an email, a letter to your office, a letter to your home address or even a cold call. “Have you ever thought of selling your business?”, they ask. “If so, we have a fabulous buyer for a business like yours.” The salesman will push hard for a face-to-face meeting and, at the meeting, they will tell you that your business is worth £2 million. In reality, the established multiples of profit and turnover suggest that the business is only worth £1 million. However, this evidence is more difficult to find in the business sales market. Even if you challenge their valuation, the salesman will tell you about the special group of buyers that only they have access to from private equity or Asia or a particular buyer who has more money than sense and is desperate to buy something.

The next stage is to extract an upfront marketing fee from you. This can be anywhere from £2,000 to £20,000 or more, depending on the value of your business and what the salesman thinks they can get away with. In return, they will produce a glossy brochure about your business with lots of lovely pictures and pie-charts. This has very little to do with selling the business.

The next step in the scam is when they send you a list of dozens or even hundreds of potential buyers for your business. This looks impressive but in reality they are often just bought from a commercial marketing list and are nothing more than a list of your competitors. You will then hear little or nothing more from the broker. When you chase them, you will get credible excuses for the lack of response. Then you will get less credible excuses until it finally dawns on you that you’ve been scammed and that the upfront fee paid has probably been lost. You might think about taking legal action but you probably can’t because they provided a brochure in return for the fee paid.

Unfortunately, this is not the end of the matter. You will probably still want to sell your business and, if so, you will probably instruct another broker, hopefully one chosen with more care this time. Having had your fingers burned once, you will instruct them on a No Sale, No Fee basis, and make sure that your business goes onto the market at the correct guide price. A buyer is found and the sale goes through. You start to look forward to your retirement. Then you receive a nasty surprise. The first broker sends you a huge bill for the sale that the second broker was entirely responsible for. When you tell them to get stuffed, they refer you to Clause 192 of their Agreement which says that if your business is sold to any of the people on the list that they provided, then a fee will be due.

Over the years, I have met dozens and dozens of business owners who have fallen for this scam. So, how can you avoid being caught out? Fortunately, there are five simple rules. One, choose your broker with care. Two, be very suspicious of brokers who cold call you. Three, take time to ensure that the recommended guide price is realistic. Ask to see comparable evidence of other sales. Four, don’t pay any fee upfront. And five, read the terms and conditions carefully before you sign them.

Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than forty years. 

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