A buyer's due diligence often results in a failure to close a transaction due to a broker's ineffectiveness in conducting their own due diligence prior to taking the listing. The costs associated with “failure-to-close” are relatively small for the buyer contrary to the broker. Listing a “flawed” business may take a toll on the broker's time, money, reputation, and missed opportunity while also damaging their relationship with a legitimate buyer.
While a buyer's due diligence focuses on the accuracy of business information, the broker focuses on the quality of the business to determine its potential for a sale. The result of the broker's pre-listing due diligence should maximize a broker's return while increasing the quality level of businesses for sale in the local market. The following questions should be considered:
An effective and well-researched due diligence focuses on the “big picture” and is expected to provide answers to questions such as: Do I really have a business for sale or is it a glorified and fanciful assets fire sale? Will the business's books and records prevent a sale? Is the timing right for a sale? Will adverse effects associated with ownership transfer render it un-sellable? And most important: Are price expectations realistic and attainable?
Taking on a low quality listing offers limited prospects for a reward. Brokers are paid only at closing, right? Junk listings carry a hefty price tag:
Taking the mentioned downsides, why do brokers service low quality listings? Why would an otherwise sensible and logical professional fall into the same trap repeatedly? Consider the following:
Smart resources management is a major success factor for a broker's business, and success is measured by successful closings. Brokers recommend a due diligence clause in all purchase agreements yet they fail to practice the same before investing their time, effort, and talent in a listing agreement. A minimal time investment in a broker's due diligence investigation can help avoid junk listings and lead to greater effectiveness and financial rewards.