Business Brokers

Business brokers act as intermediaries between buyers and sellers of a business. They may represent either party in the transaction. They do not take possession of goods or property or deal on their own account.

Brokers differ from dealers in that the latter transact on their own account and may have a vested interest in the transaction. Brokers fill the important marketing function of bringing buyers and sellers together and helping them negotiate mutually beneficial agreements. In addition, they facilitate transactions by providing expertise and advice. As Richie Lowe Areinz points out succinctly in NZ Business, "[B]usiness brokers generally sell an intangible, such as the expected profits or in some cases the losses of a business. Real estate agents sell bricks and mortar. Put another way, agents sell land and buildings while business brokers usually sell an entity or business activity leasing space within a building."

Brokers supply numerous benefits to both buyers and sellers. Sellers benefit because they do not have to spend time and money searching for buyers. Qualified brokers have access to people in the market to purchase a company; they know how to attract and screen potential buyers much more quickly than do typical business owners. The broker may also be able to help the seller place value on his enterprise accurately; he or she can devise a strategy to transfer ownership over time, address necessary paperwork, and overcome legal hurdles related to taxes.

The buyer also benefits. A broker may be able to find a business that suits the buyer's abilities, wants, and financial situation much more quickly. Moreover, good business brokers will not accept overpriced properties, those based on illegal activities, or businesses otherwise fatally flawed. They save buyers the legwork of qualifying prospects. A good brokerage firm typically turns down as many as half of the businesses offered it for sale. In addition to screening, the broker can help the buyer determine what he or she can afford and may be able to assist in arranging financing to purchase the business. And, as with sellers, business brokers can provide help with licenses, permits, and other paperwork. In addition, it is the broker's duty to ensure that the interests of the buyer (and the seller) are protected by any contracts or agreements relating to the sale.

All of these services can be of great value to business buyers and sellers, but perhaps none is as valuable as the broker's status as a buffer between the two sides. The skilled business broker will diplomatically field and address sensitive questions and concerns that, were they delivered directly between the buyer and seller, might damage or ruin the prospects for completing a deal. Brokers that can address the concerns of one side without ruffling the feathers of the other are invaluable to the negotiating process.

For their services, brokers typically receive in compensation a percentage of the total value of the transaction. The fee may be paid by the buyer, seller, or both parties, depending on the nature of the transaction. Commissions vary widely, usually depending on the size of the transaction and the level of service provided by the broker.

THE BROKERAGE PROCESS

Although it is a broker's chief function, bringing buyer and seller together is often the easiest part of his/her job. Closing the transaction, however, is often a complicated process, colored by a spectrum of factors that are unique to each situation. For instance, the seller of a business often views the enterprise as his or her "baby," and subsequently places a value on it that may be greater than its actual worth. Similarly, a buyer may fail to appreciate the amount of work involved in building a business to a certain point. Other major factors that can complicate an agent's task include financing, which can become very complicated, and problems related to employees and/or clients of the business being sold.

As Susan Pravda and Gabor Garai observed in Mergers and Acquisitions, the process of securing an agreement typically is a multi-faceted one. Once a business broker brings an interested buyer and seller together, he or she often attempts to set a target date for completion of the transaction. This is usually accomplished by means of a letter of intent in which the buyer and seller agree to move toward a deal. The importance of the letter of intent is that it serves as a framework around which to structure negotiations. The letter also reduces ambiguity and misunderstanding, and ensures that both parties are serious about pursuing the transaction. Finally, establishing a deadline through a letter of intent helps to keep the buyer and seller focused on the big issues, rather than on minor details that can drag the deal out for months on end or kill the sale.

After setting a target date, the broker's next task is to close the price gap between what the seller wants and what the buyer is offering to pay. A wide range of considerations have to be taken into account here, including value of inventory, value of accounts receivables, value of community goodwill, inclusion or exclusion of equipment in final purchase price, tax issues for both buyer and seller, etc. Another possible obstacle to a sale that often crops up around this time is "seller's remorse." Seller's remorse commonly occurs during the latter stages of negotiations, when the seller suddenly realizes that he/she is relinquishing control of the company that has been a cornerstone of his/her life (and often the life of his/her entire family) for many years. Seller's remorse can kill the deal if the broker fails to confront it early in the negotiations by assuaging the seller's concerns.

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