Sellers beware

Thursday, September 30, 2004

YARMOUTH, Maine - A red-hot mergers and acquisition market has spawned a surge in brokers looking to cash in on providers who don’t know the ropes when it comes to maximizing the sale value of their companies.

The scam, which is unethical but not illegal, works like this: A broker approaches an HME with a would-be buyer who, the broker says, has expressed interest in the company. The broker says the HME has to pay him a fee only if the interested party acquires the company. The broker then tries to complete the deal before another buyer comes in and makes a higher bid.

“If someone is saying, I have a specific buyer who wants to buy your business, that means you are not going to get top dollar,” said Bruce Burns, president of the M&A firm Affinity Ventures in Albuquerque, N.M. “If they are only going take it to one buyer, then you aren’t going to find out what the other six or seven buyers will pay for your business, and the range can be 30% to 40%.”

In June, for example, Burns brokered a deal for an HME company, and three potential buyers submitted offers, ranging from a low of $5 million to a high of $8.5 million.

“That’s a huge difference,” he said.

“My recommendation is that if a [broker] comes to you and says, ‘I’ve got a buyer’ or ‘I know a buyer,’ or ‘I know someone who would be interested in your company.’ Say, ‘Fine, get your fee from the buyer.’ The conversation stops right there,” said Dexter Braff, president of The Braff Group, an M&A firm in Pittsburgh, Pa.

The bottom line, Braff added, is that as the owner of a company, you never want to work with a broker who has a financial interest in who the buyer is. When that happens, the broker has a clear conflict of interest.

“If a broker is doing his job, he doesn’t care who the buyer is,” Braff said. “You can bet that where there’s one buyer, there’s usually dozens more ready and willing to get into the mix.”

When deciding on a broker, check references and make sure he has a good rapport with Lincare, Apria and all the big buyers. Some shoddy or unethical brokers have been banned from bringing deals to the big buyers, Burns said. Additionally, most brokers require a nine- to 12-month contract with a 12-month trailer. If a broker comes with a limited group of potential buyers and tries to lock you up for longer than that, say forget it.