Why a Broker Should Conduct a Pre-Listing Due Diligence

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:

• What is the level of motivation for the seller to sell?
• How educated is the seller?
• What is actually being sold?
• What is the quality of the financial information?
• What other assets are being sold (equipment / intellectual property)?
• What impact does the local economy have on this business?
• What is the SWOT of this business?
• What is the business value?
• Is the price the seller seeks realistic?

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:

• Service costs: advertising, working the phone, showings etc.
• Cost of lost opportunities.
• Cost of lost goodwill with buyers and co-operating brokers.
• Bad publicity from dissatisfied and disappointed sellers.
• Damage to the broker's reputation.
• Rare, yet real possibility for a liability claim by the buyer.

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:

• Quota pressure to produce new listings that value quantity rather than quality.
• Broker's strategy to limit themselves to produce listings for co-brokerage.
• Broker's strategy to take on any listing to attract sellers to his other listings.
• Poor office procedures and/or inadequate enforcement of the same.
• Aggressive and persuasive seller.
• Taking the listing is a pre-requisite for listing a promising and prominent listing.
• Broker is amateurish and unprofessional.

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.