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What do business brokers do?

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It is estimated that there are approximately 3,000 business brokers in the US.  Given this relatively small number, many people are unaware of what business brokers do.  Business brokers serve as intermediaries who facilitate the sale of small-medium sized privately held businesses.

 

What services are provided?

  • Develops Broker’s Evaluation of Value and assists client with establishing a selling price
  • Develop the confidential business review, which is an outline of the business for potential buyers. This is the cornerstone of the marketing of the business, and will only be provided to prospects after they have signed a non-disclosure agreement (NDA) and have been qualified by the buyer.
  • Market the business locally and nationally while maintaining confidentiality.
  • Set up meeting between qualified buyers and sellers
  • Facilitate meeting between buyers and sellers
  • Prepare offer to purchase for buyer.
  • Serve as an intermediary during the negotiation process after an offer has been made. This can be a very sensitive time for both parties.
  • Facilitate the due diligence process. Offers are almost always contingent upon further examination of the business and business records, a process known as due diligence.
  • Assist buyer in obtaining financing
  • Schedule and facilitate the closing process
  • In some cases they provide consulting services for a fee

Is Licensing Required?

While business brokers operate in a similar fashion to real estate agents, business brokers focus on the sale of businesses and not real estate.  In cases where the business owns real estate, the business broker will need to be a licensed real estate agent or work with one to handle the real estate portion of the transaction.  Currently, there are 17 states that require business brokers to be licensed by the real estate licensing commission: Alaska, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Minnesota, Nebraska, Nevada, Oregon, South Dakota, Utah, Washington, Wisconsin, and Wyoming [1].  This list is changes frequently so check with your particular state.

Whom Do They Represent?

While traditionally business brokers have represented the seller, it is becoming more common for them to represent buyers.  Some states allow the broker to represent both buyer and seller if both parties agree, called dual agency; and in some states, brokers can act as a transaction broker,  In both of these cases, the broker has the same obligation to each party.

 What qualifications do they have and what training do they undergo?

A business background is important to be a successful business broker.   Typically, brokers have years of business experience and/or a business education.  Some of the skills they need are sales, accounting and financial analysis, with an emphasis on communication skills.

There are numerous training programs available.  Several professional organizations offer training programs for business brokers.    The American Business Broker Association offers a training seminar several times per year.   Other online training can be found with a quick search, but caution should be used and research should be done to verify they are reputable,

The American Business Broker Association awards the Accredited Business Intermediary (ABI) credential to its members.  The International Business Broker Association awards the Certified Business Intermediary designation.  These designations allow you to have confidence that you are dealing with a qualified and reputable broker.  In addition, some states offer their own credentialing to qualified members.

How Are They Compensated?

Compensation for brokers has traditionally been commission paid by the seller at closing.  Some brokers have moved to a partial up-front fee, with the fee usually credited against commission.  This helps brokers defray the marketing costs associated with listing and selling the business and helps to identify serious sellers.

A survey of business brokers conducted in 2015 showed that 86% of the respondents reported they charge 8-12% commission for Main Street businesses (less than $5 Million in revenues annually), with 10% the most common.   Two additional notes: Generally, the smaller the business, the higher the percentage rate of commission, and some very small businesses may be sold on a minimum fee basis.

[1] https://businessbrokeragepress.com/industry-resources/state-licensing/

Why Use a Business Broker?

When you are ready to sell your business, should you choose a business broker?   Many business owners struggle with whether to attempt to sell the business themselves or to hire a business broker.    There are many benefits to using a business broker.  Here are what I consider the most important benefits.

One of the main concerns that any business owner has who is trying to sell his business is keeping the sale confidential.   If employees were to find out that the business is for sale, some would be concerned about their future and possibly seek other employment.  If vendors were to find out, some might be concerned which could make future business transactions more difficult.  If customers were to find out, some would be worried about the company’s future or their commitment to quality and would avoid doing business with the company.  If competitors were to find out, they might use it against the company with customers and/or vendors.

It is very difficult for business owner to list the business himself and field inquiries from interested prospects while at the same time keeping the sale confidential.   A business owner might try doing this with a blind box ad, but it is difficult to maintain anonymity when you call the prospect.   A business broker can provide the necessary confidentiality by serving as an intermediary between the business owner and the prospects, and by presenting only interested and qualified parties to the business owner.   A certified business broker will ensure that prospects inquiring about the business are properly evaluated: each should be interviewed and sign a Non-Disclosure Agreement.

Another area that a business broker can help is with the valuation of the business.   Establishing a value for your business is more difficult than you might imagine, there hundreds of variables that affect the value.   If the price established is too low, the problem for the business owner is obvious; however, establishing too high a price runs the risk of scaring away qualified prospects.   A certified business broker will work with you to conduct a financial analysis of your company and recast the earnings of the company to show what the true profitability of your business is.  He will then use this information to provide you a Broker’s Evaluation of Value for the business.

Effective marketing will help get the best price possible for the business.  Knowing where to promote the business both locally and nationally is an important part of the marketing campaign.  In addition, marketing materials will need to be produced that not only convey information about the business, but also move the prospect to inquire about the business further.  A good business broker is an expert in marketing the business and can ensure that the first impression the prospect has is a good one.  This can result in multiple offers that will drive the best price possible.

While the business is in the process of being sold, someone will have to be actively running the business.  Most business owners have enough hats to wear and enough distractions from the core business to worry about all of the tasks involved in the sale of the business.  Engaging a business broker allows the owner to focus 100% of his time and energy into the business.  After all, a business that is well managed and growing is going to bring a better price that one that has struggled recently because the owner was preoccupied.

Once a prospect has entered into negotiations for the business, the business broker can further serve as an intermediary between the parties.  Without someone in this role, negotiations can become contentious and more than a few deals have been lost by what was said in the heat of negotiations.  The business broker serves as a buffer and a conduit between the two parties.   The broker will communicate things said by each party in an effective and productive way that keeps the process moving forward.

It is estimated that 80% of all businesses that are sold involve some type of financing.   Ultimately financing can have an impact on the size of the deal.  A good business broker can help the buyer obtain financing for the business.  Most brokers are familiar with the SBA lending process and SBA friendly banks as well as other creative ways to obtain financing like using the buyer’s retirement savings account to fund the purchase.  Ultimately financing can have an impact on the size of the deal.

When you are ready to sell your business and decide that you would like to hire a business broker, please call Bruce Williams at Integrity Business Intermediaries at (318) 780-8604 or email bruce@integritybus.com