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Business Brokers – How to Choose the Right One

The vast majority of small businesses are sold without the assistance of business brokers.

But if you do decide the hire a broker, here are some suggestions on how to pick the right one and how to structure the agreement in your favor.

What Business Is The Broker Actually In?

In many states there is no training or certification needed to become a business broker. In other states, brokers are required to hold a real estate license.

In these states it’s common to find real estate agents that do business brokering as a side business. If you deal with a broker who is also a real estate agent, make sure that being a business broker is more than just his hobby.

You will pay a pretty penny for the broker’s expertise and experience – you should make sure they have that experience when it comes to selling businesses and not just experience selling houses.

Questions To Ask

If you hire a broker you will be working with them closely for months to come; they will have access to your most confidential business records; the amount of money you put in your pocket at closing will be influenced heavily by the quality of work they do.

Therefore, you absolutely must check them out.

Here are some questions you should ask any prospective broker before hiring him:

1. How long have you been a broker?
2. Have you ever owned a business?
3. How many businesses similar to mine have you helped sell?
4. Can I see a blank version of your Listing Agreement?
5. What percentage of you income comes from brokering and how much from real estate (If applicable)

Ask them to provide you with references from previous clients. Then, I suggest you do something very unusual: Actually call the broker’s references!
I know a lot of people ask for references just to see how the person will react when asked (and to see if they actuality have any). But you can learn a lot about the broker’s reliability and professionalism by talking to people who dealt with that broker when they were in the exact same spot you are in.

Business Broker Fees

There are two benefits a broker can provide the business seller. First, he can locate potential buyers while maintaining the seller’s confidentiality. And second, a broker will qualify these potential business buyers so the seller saves time by not having to deal with weak prospects.

The big negative of dealing with a business broker is his fee, which averages 10-12% of the sale price. This fee is charged to the seller.

There is also a minimum fee. A very small business will pay a flat amount, typically $8-$10,000, instead of the commission. For a business worth $50,000 this minimum fee actually works out to be a higher percentage than the 10-12% industry average. But as a matter of practice, brokers usually won’t be interested in your business unless the asking price is above $100,000.

These fees are the reason most business owners choose to sell their business themselves and rely on their lawyers and accountants for the professional assistance they need.

The Broker Agreement

If you decide to use a broker you’ll be asked to sign a broker agreement which will detail the his fees. If possible, have your agreement include the following clauses:

Timing of Payments – Have it written into the agreement that the broker’s fee will be paid at the time you receive the purchase price – not at the time the sale is closed. This way, if you finance part of the sale price over a number of years, you pay the business broker as you get the money, not all up front.

Length Of Agreement – Your listing agreement should be for a limited time. If the broker locates the buyer within that time he gets paid. Be careful of lengthy agreements that lock you in with one business broker for more than 6 months. If he doesn’t produce, you want to be able to try other options. A 6 month business broker agreement is the longest you should allow. However, because selling a business can be a lengthy process, 3 months is usually too little time for the broker to find the right buyer. Try to settle on something between 3 and 6 months. If after six months, you haven’t closed the deal but you think the broker has done a good job, you’re always free to extend the agreement. But you want to be free to decide on an extension 6 months from now, not today.

Broker’s Guarantee – Include a paragraph stating that if you find the buyer, you don’t have to pay the commission. Without this clause, the broker is usually paid no matter who locates the buyer. Before signing any listing agreement, it is best to have your attorney review it to make sure your interests are protected.

Business Brokers: Who They Are And What They Do

Since business brokers operate under the radar, many people don’t know who they are and what they do. If you are curious to know, business brokers are intermediaries who work with both buyers and sellers in order to facilitate the sale of small and medium size privately owned businesses.

For you to be a business broker you need to have the right level of education. For example, you must have a business background. You must also have attained business brokerage training from a recognized professional body such as the American Business Brokers Association.

Functions of business brokers

The brokers perform many duties such as:

  • Valuing a business
  • Marketing a business that needs to be sold. While they advertise the business, they maintain strict confidentiality. For example, they don’t mention the exact business that is being sold. They also don’t mention the owner of the business.
  • They introduce prospective buyers to the business
  • Facilitate meetings between buyers and sellers
  • Handle negotiations between the buyer and the seller after an offer has been made
  • Schedule and facilitate the closing of a transaction
  • Draft a confidential business review. The document is very important and is provided to prospects after they have signed a confidentiality agreement.

How brokers work

The professionals usually work with commissions. This means that they get a commission after selling a business. In most of the cases, the commission ranges from 8 to 12%. Most of the brokers charge a 10% commission; however, when the business being sold is small, the commission is usually higher.

How to work with a business broker

The first thing you need to do is to ensure that you hire the right broker. This calls for you to do a lot of research in order to identify a reputable one. Some of the things that you should look for when hiring include: experience, professionalism and specialization.

Once you have found the right professional you should give him/her all the details that he/she needs to work. For example, if you are interested in buying a business, you should give the broker a list of all the types of businesses that you are interested in. You should also mention the amount of money that you are ready to invest.

Conclusion

From the above information, it’s evident that business brokers have a role to play in the buying and selling of businesses. To ensure that you are on the same page with the broker, you should regularly communicate with him/her.

Selling Your Business – Pros and Cons of Working With a Business Broker

Selling your business is something that most business owners do only once in a lifetime. So how do you make sure everything goes well? Many business owners consider working with a business broker, an expert in selling businesses, to make sure they maximize the sell price of their business. Is this always a good idea? Lets look at the pros and cons of working with a broker:

Why you should work with a business broker when selling your business

1) A broker has (hopefully!) sold many businesses for prior clients, and you can use that expertise to learn the basics of the process and avoid making careless mistakes.

2) They can act as a facilitator to the transaction, making sure that negotiations go smoothly, the transaction proceeds at the right pace, and that the business is ultimately sold with all parties satisfied.

3) A broker may reduce your upfront costs of selling the business, as many brokers will pay for creating sales collateral and advertising the business at their own expense in exchange for a fee when the business sells. They also may have insights as to what advertising mechanisms deliver the best “bang for the buck” to make sure as many potential buyers as possible are exposed to your business.

4) They can provide expert advise related to market conditions and can help evaluate potential offers to buy your business. For example, a business broker will typically provide a free initial estimate of the sales price of your business, and can provide information on what similar businesses may have recently sold for in your area.

5) A business broker can help preserve the confidentiality of the sale. By having a third party involved, buyers can interact with the broker instead of the business owner, making it easier to protect the identity of the business for sale.

With so many good reasons why a broker can help sell a business, no wonder that most businesses that are sold ultimately involve a business broker. However, there are downsides to working with a broker that a prudent business owner should consider.

Why you should NOT work with a business broker when selling your business

1) Business brokers may charge a large commission. The amount of commission varies based on many factors, such as the ultimate sales price, geographic location, and the skills of the broker. For a “main street” style business selling for less than a million dollars, it would not be unusual to see between a 10% to 20% commission fee. Some brokers will also have a guaranteed minimum, on the order of $10,000 or $15,000. You should only hire a business broker if you believe that the time and effort involved justifies this price, or if you believe they will raise the selling price by more than the amount of their commission.

2) A great broker is worth their weight in gold, but a bad (or even mediocre) broker costs far more than they are worth. In many cases, the sale will be lost due to incompetence on the part of the business broker. If you are not confidant that the business broker can not only increase the transaction value, but can also increase the chances of actually getting the business sold, then you are probably better of managing the sale on your own.

3) Do not work with a business broker if you go into the transaction not knowing what you want out of it. Many times business brokers will contact you proactively, letting you know that there are buyers interested in buying your business. Selling a business is a big decision, and one that you should enter into with a great deal of care. Make sure that you are talking to a broker because YOU made the decision to sell, and that you have properly educated yourself about the process and the ultimate consequences of your decision.

Working with a business broker, when done properly and for the right reasons, can be a great benefit to selling your business. By educating yourself about the different factors involved, you have taken an important first step towards getting your business sold. Best of luck!