By Jigar Desai
Due to COVID-19, there are many businesses being sold and bought. Business owners are choosing to step aside from their business. This could be due to financial troubles or the desire to retire. Before a business owner can sell their business and enjoy the benefits after, they must first decide whether to sell the business themselves or to hire a broker to assist them. Hiring a broker has its advantages and disadvantages. We will go over them to help a business owner decide which path is best for them.
What is a Broker?
In general, brokers assist small to medium sized businesses and sell to potential buyers who tend to want to oversee the daily activity of the business and play an active role. Larger businesses can use a broker, but can also use an investment banker as the transactions are more complex. A business broker is a professional who aids a business owner to sell a business or a potential buyer to purchase a business. Depending on the state, a business broker may require a license. A broker will estimate the value of the business through evaluation tools, advertise the sale, and conduct interviews with potential buyers. This is similar to the job done by a real estate broker used by those selling their homes.
Brokers help guide the business owner through the sales process. After all, a business owner who knows how to run a business might not know how to sell one. A business broker, who is experienced in the industry after many years of work, will actively work for the sale while an owner operates the business. During the sales process, the business owner will still need to operate the business to keep the profits high and the business sellable. This could be the case for many years as a business sale can take two to three years. Brokers use their connections in the market to leverage their ability to sell the business. Brokers have made hundreds of sales, so they are familiar with which third-parties are reliable in the sales process. Third-parties, such as lawyers, accountants and financial professionals are typically needed to help facilitate the sale. They manage the NDAs, financial documents, and sales contract. Brokers manage this process to make sure it is completely correctly and on time by creating a marketing package, helping to determine the appropriate price for the business, and negotiating for the business.
Brokers get paid on commission. It varies by firm, but the typical amount is 10% of the total sale price of the business. Brokers typically charge an upfront fee that is subtracted out of the commission that is paid to them at the end. This is because a broker must do a lot of work up front, such as marketing and negotiations, and ultimately there is no guarantee the business will be sold so they may not even earn the commission. Brokers that do not charge an initial fee could be a desirable option, as they are confident that they are able to sell the business.
Tips on Finding a Broker
A business owner should seek out a broker who has the qualifications they are looking for. Brokers should be certified by the Certified Business Intermediary. According to the IBBA, a Certified Business Intermediary is a prestigious designation given to intermediaries who have proven professional excellence. To check whether a broker is certified by the IBBA, a business owner can check a potential broker’s accreditation on their website. In some states, a business owner is required to have a realtor’s license. A business owner should obviously look for a broker who is experienced and has been certified for a while. Also, a business owner should make sure their potential broker is well experienced in the industry they are operating in and have a great track history of making timely sales. This experience should be tailored to the business owner’s size of business.
Most importantly, a business owner should inquire about the cost of the brokerage services, choosing one that they can afford. A business owner should ideally find a broker that offers their services for a little to no upfront fee. A business owner should keep in mind that the brokerage commission of the sale is charged before the business owner pays taxes on the sale. A possible clause a business owner should implement into the contract with the broker that may save them money is a carve-out contract. When a broker is hired, the business owner grants the exclusive rights to sell the business or assets. Therefore, the broker has the rights to the sale until the listing is sold, which could be for years. A carve-out clause allows the business owner to choose a specific buyer that is exempt from the broker’s listing. For example, a business owner might already have a prospective buyer ready to purchase before a broker was hired. Since the carve-out clause named the prospective buyer, the broker would not close the sale and receive a commission because the business owner conducted the sale without the broker’s help. A broker can also be hired to provide limited services by a business owner looking to not spend too much money on the sales process. A broker can create business-for-sale documents for the business owner without creating a listing for a fee of a few thousand dollars. This could be a viable alternative for a business owner who is looking to sell their business but is struggling financially during COVID-19. Barker Donelson provides more information on carve-out contracts and their use.
There are many ways to find a suitable broker to sell your business. The most preferred way to find a high-quality broker is through peer referrals. A business owner should go through their trustworthy contacts of other business owners who have recently sold their business and seek referrals of business brokers that can assist them. The aforementioned IBBA provides more information on certified brokers and can be a valuable tool in finding a broker with great qualifications. MileIQ provides further tips on how to find a broker. If a business owner does not have any local referrals from their peers, they can look towards their chamber of commerce to see if a member has a referral. Lastly, a business owner can find a broker through an online directory. Keep in mind that a business owner should be diligent and screen a broker to see if they are a right fit first. BizBuySell is a common online directory that is used by business owners to find a local broker to assist them.
Advantages and Disadvantages of using a Business Broker
An important aspect of selling a business is to maintain confidentiality throughout the sales process. This may seem counterintuitive, as typically a sale requires marketing. However, sometimes if employees, suppliers, competitors, or customers know about the sale of a business, it could adversely affect the business. A broker can manage the confidentiality of the sales process, while a business owner can focus a majority of their attention on their business operations.
A business owner is linked to a business even after the sale, such as a scenario involving seller financing. This is why it is important to sell the business to a qualified buyer, someone who can run the business without missing a beat. A broker will set up interviews with a potential buyer to gauge whether they are financially qualified and have the necessary professional experience to purchase the business. A broker will be able to run credit reports and conduct extensive research on a potential buyer to make sure the sale goes through smoothly. On the buyer’s side, a broker can help secure them financing.
A broker will create a teaser of your business. A teaser is one or two-page document that summarizes the business and highlights its benefits. Corporate Finance Institute explains what is contained in a teaser. A potential buyer will read the teaser and sign an NDA if they are interested in receiving further business documents that describe the business in further detail. A teaser provides value to the business as it is the first document the potential buyer reads, giving them some insight into the business. This is a part of the overall marketing plan that the broker creates for the sale of the business. A broker will use their connections and various marketing channels to link an owner’s business to potential buyers who are looking for a business similar to that of the owners. Most importantly, a broker will take the business documents and do a market study to create a value for the business. A broker can help a business owner get the maximum value out of selling their business by using tools to set the purchase price. A broker uses their knowledge of an industry, local businesses, and the current and projected profits of the business to create a purchase price. Lastly, a broker will be able to handle negotiations for the business owner. This involves not only the purchase price, but the manner of financing, the down payment and the clauses involved in the sales agreement.
A common reason for a business owner to not use a business broker when selling their business is because of the cost. As mentioned, the upfront fees and the post-sale commission can cut into a business owner’s profits, especially if the sale is their retirement plan. An owner who sells their business themselves could save thousands of dollars. Another reason for a business owner to not use a broker is because of difficulty in finding a quality broker. Due to the importance of the job, a high-quality broker is needed but is often difficult to find. A business owner is providing the broker full rights to sell their business on their behalf, so a business owner must conduct research to ensure they are trusting the right broker. A business owner should also keep in mind the industry that they operate in; if the business is in a unique industry, then a broker may not be able to provide experienced guidance. Finally, a business owner may fear that a broker’s intentions do not align with theirs. A broker is paid on commission, so an incompetent broker may have a motive to sell the business, despite unfavorable terms for the business owner.
Selling a business is an important feat in a business owner’s career. Often, business owners do not possess the skills necessary to sell their business or do not have the time to. A business broker provides experienced guidance and can manage tasks for the business owner while they are still running the business operations. Despite the great value a broker creates, a business owner must weigh the costs it provides and the amount of research necessary to have a quality broker.
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