WHAT IS A BUSINESS BROKER:
The Complete Explanation (2020)
If a business broker is so important, why have you never heard of them?
Well you might be surprised...
Despite being a relatively unknown profession, they provide a TON of value to business owners.
In this guide I'm going to explain what they do, the value they create...and 3 ways to find the best broker.
Let's get started.
Business Broker Definition
In this chapter, I'll answer the question "What is a business broker?"
I'll also explain broker licensing requirements, commissions, and fees.
Let's dive in.
What Is A Business Broker?
If you ever sold a house, you probably used a realtor.
The realtor helped market the home, coordinate with buyers, ensure paperwork is done properly, and help get the transaction across the finish line.
A business broker is similar to a realtor except that they focus on businesses (which is a much more complicated transaction).
Brokers determine pricing, create marketing materials, coordinate with buyers, facilitate due diligence, and push the deal through closing to name a few steps.
This process is explained in greater detail in Chapter 2.
A business broker can also be called an intermediary or a business transfer agent.
This is might not sound right...
But only 17 states have requirements around business broker licensing.
Meaning someone off the street could just declare that they are a business broker in 33 states.
States in blue require brokers to have a real estate license.
Illinois requires registration with the state securities commission.
While the rest have no requirements around licensing.
Why does this matter?
When hiring a business broker, especially in a state without licensing, you’ll want to heavily vet them due to the lack of licensing. This is discussed further in Chapter 3.
There are 2 common ways for brokers to make money and it's almost always an expense incurred by the business seller.
So if you're a business owner, this section is for you.
The majority of a business broker's pay is from a percentage of the total selling price of a deal, just like a real estate agent.
10% is the industry standard, but some brokers may be as low as 5% or as high as 15% depending on deal size.
The 2nd form of payment is through fees at the beginning of the transaction.
There is no guarantee that a business will sell, but there is a guarantee that the broker will put a lot of work into the deal.
Therefore, some brokers charge a fee for the upfront work.
Typically it’s anywhere from $3k to $15k. If the business sells, this fee will then be removed from the closing commission they charge.
A broker's percentage is based on the total selling price of the business.
If you, as the seller, receive half of the selling price in cash and the other half as a loan to the buyer, you still owe the broker their commission on the total selling price in cash.
Business Brokerage Services
Now you know what a business broker is, but what do they do?
For simplicity, I’m going to break down the role of a broker into:
On The Market
Appraisal: Most business owners don’t know the market value of their business.
Brokers have extensive experience calculating a selling price based on qualitative and quantitative business factors and the current lending environment.
Confidential Business Listing: Brokers compile high-level information about the business to pique a buyer's interest without disclosing the business.
This typically includes the most recent annual revenue, EBITDA, seller’s discretionary earnings, inventory, industry, and the number of employees.
Marketing Materials: The major marketing piece a broker creates is an Information Memorandum. This is anywhere from 3-30 pages outlining the business in detail for potential buyers. This is only shared with serious buyers after signing an NDA, but it is created before the business is on the market.
On The Market
Advertising The Business: The broker will push the listing information through their network. This often includes online avenues like Biz Buy Sell, their own network of buyers, and their brokerage website.
Prescreen Buyers: Only ~2% of potential buyers lead to a sale.
The best part?
Brokers ensure that you as a seller doesn’t waste time with the 98%.
This includes verifying the buyer’s proof of funds and interviewing the buyer to ensure they are serious and qualified.
Coordinating Buyers & Sellers: Buyers usually require meetings with the seller to ask about the business before putting in an offer. The broker helps coordinate all meetings and answer any questions either side might have.
Letter of Intent (LOI): 90% of small business buyers are first-time buyers. This means they need guidance through the process.
The first major step for a serious buyer is putting together an LOI. These follow a standard format so the broker can speed things up by giving the buyer a blank template to construct their offer. Brokers also help the seller with counter-offers.
If the broker works for the seller, they should not help fill out the LOI for the buyer. Merely give them a blank template to help speed things up.
Due Diligence: Once an LOI is accepted, due diligence begins. This allows the buyer to access and analyze all qualitative and quantitative information about the business. The stage lasts about 2-4 weeks.
The broker facilitates the transfer of all materials throughout the process.
Help With Financing: First-time buyers usually aren't knowledgeable about obtaining financing. Business brokers are well connected with local lending institutions and can help the buyer obtain financing.
Closing: Finally, the broker will set a closing date and coordinate with all applicable parties. Attorneys, lenders, buyers, sellers, and more will all need to be present.
Business brokers typically have an extensive closing checklist to ensure everything goes smoothly.
Hiring a Broker
If you’re considering selling your business, you’ll want to think about hiring a business broker.
I’ll help you identify the key areas that a broker adds value to you
And the steps to finding and hiring the right business broker.
Value Of A Business Broker
Below are 4 overarching benefits of using a broker. It’s important to determine how valuable each area is to you and your business:
Focus On Your Business
Most small business owners don’t have enough time to focus on running the business and selling it. The intensity of the selling process may cause you to lose focus on the business and cause revenue to decline.
Something no buyer wants to see.
Would it be a problem if customers, vendors, competitors, or employees found out your business was for sale? Employees, for instance, might feel uneasy and start looking for other jobs.
Issues can arise at any point in the selling process. Complicated issues like the financial structure of a deal might require the experience of a broker. But other times, simple issues like a spat between the buyer and seller just need a mediator to push the deal forward.
If your business is particularly difficult to understand or is worth several million, a broker can bring specific industry knowledge and connections to the table.
Hiring A Business Broker
Finding A Broker
Here's my favorite tip:
Go to Biz Buy Sell and search for businesses for sale that are similar to your region and size and see which brokers they are using.
If you see one pop up repeatedly, they are a good place to start.
Lastly, you can ask around for referrals. Local lenders, attorneys, accountants, and chambers of commerce will know brokers in your area.
Vetting A Broker
Before signing any listing agreements, make sure your broker is experienced and knowledgeable.
Interview at least 3 brokers to see which you feel most comfortable with.
Look for some form of credentials like Certified Business Intermediary (CBI), Certified Business Broker (CBB), or Certified Main-Street Business Broker (CMSBB).
Ask for references of past clients and actually call them.
Review their past listings and what percentage of those they were able to close a deal on.
Here's what your looking for:
Broker Listing Agreements
Listing agreements give the broker the ability to market and sell your business.
This chapter lists the 5 main types of listing agreements.
Note that the contract with the most flexibility for you isn't always in your best interest.
Key Components Of Listing Agreements
Start & End Date - Small business listing agreements typically last a year, but larger deals may go longer.
Commission - This will state the percentage of the sales price the broker is entitled to upon closing and how it is paid out.
Upfront Fees - Any fees for appraisal and marketing will be included in an “additional fees” section.
Types Of Listing Agreements
Sole & Exclusive - Most common listing agreement. States that the broker receives all agreed upon fees when the business sells, regardless of who buys it.
Sole & Exclusive; with exclusions - You want to sell but already know someone interested in buying your company. This agreement excludes the broker from a commission if the buyer(s) is one of the predefined people.
Sole & Exclusive; one party - You’ve already found a serious buyer and you just want a broker’s help with the final steps. This agreement is only valid for that specific buyer(s).
Agency - This gives the seller more flexibility because both the broker and seller have the right to sell the business. If the seller is successful, the broker does not receive a commission.
Open - Multiple brokers can market the business and whichever broker successfully brings a buyer, receives the commission.
While the most flexible arrangements will sound the most attractive, you might want to reconsider.
Selling a business is a long and tedious process that usually takes 6 to 12 months. The best brokers aren't going to accept deals which might result in hours of work and no pay.
If you want to best broker, you might have to sacrifice on flexibility.