Most owners benefit from working with an experienced business broker. A good business broker can shepherd your business through the sale process to the most successful outcome while leaving you free to focus on continuing to operate and build your business so you can obtain a higher sale price.
Given the key role that business brokers play in the sale of your business, finding the right broker for your small-business sale is one of the most important decisions you'll make throughout the selling process. You need to find a broker to whom you can relate and that you are confident can successfully sell your small business.
Straight Talk, Up Front
Before hiring a broker, make sure to check his or her experience, credentials, and certifications. Look for things like membership in the International Business Brokers Association, a respected, national brokers' professional organization. It can help you find a business broker who is committed to the industry and who will operate with high professional standards.
You also, naturally, want to ask about the broker's policies, fees, and commission rates, as these will vary from broker to broker. Most brokers will ask for an exclusive listing agreement that is at least six months long and has a commission rate of 10 percent to 12 percent.
Many brokers also have a minimum fee for small businesses, and some may ask for a small retainer or upfront fee or for you to cover advertising costs.
Like all things small business, however, remember that rates and policies are negotiable, so be sure to discuss these items with your potential broker.
Finally, you want to ensure that you relate well to the broker. He or she is going to be your guide and partner through the sale process. You don't need to be best friends, but you do need to get along and trust that he or she is going to do all he or she can to get you the best sale result.
What to Cover in Your First Broker Meeting
I asked a few of the top business-for-sale experts in the U.S. for their recommendations to help you get the most out of your initial broker meeting. Here's what they had to say:
1. Roger Murphy, president and CEO, Murphy Business & Financial
During your first meeting, get a solid idea of how your broker qualifies buyers and whether he or she works with buyers to seek financing. Brokers should verify that buyers have the ability and cash necessary to purchase your business and be able to help them secure the necessary capital. A buyer profile and financial statement should be obtained.
When the buyer needs outside financing, your broker should be able to refer him or her to a lender with whom the broker has an established relationship. Often, an experienced broker will take the Confidential Offering Memorandum to the lender in advance of finding a buyer to obtain a preapproval, including an acceptable deal structure. This saves a significant amount of time, given that a buyer can immediately start working with a lender who is already familiar with your deal.
You should also discuss your goals for the sale. Do you need all cash at closing, or can you handle owner financing? All cash will result in a smaller buyer pool and, often, a lower price, while offering some owner financing can increase your sale price and qualified buyer pool.
It's best to be frank when you're discussing your goals. Let the broker know what you plan to do with the sale proceeds. If you plan to use the cash immediately, then the idea of owner financing may be more of a problem for you versus someone who is planning on investing the money for retirement down the road. A discussion about the transition or training period that you're willing to offer a buyer is also important.
2. Andy Cagnetta, CEO, Transworld Business Advisors
It's critical to understand how your broker values your business and how she will maximize your sales price. Your broker should have access to published comparables and rules of thumb to apply your business to determine a fair value. These are available through BizBuySell.com (the author's company) and other resources.
An experienced broker will ask you questions during the first meeting to uncover any hidden earnings that will help maximize your business value. This includes understanding how you normalized your earnings to ensure multiples are applied properly. Your broker will also ask about officers' salary levels, pensions, additional perks, or discretionary items such as cars, insurance, travel, and entertainment. Additionally, your broker will discuss the state of your books and records to make sure they will hold up through a due-diligence process.
You should also plan to ask questions to determine how your broker will find buyers, specifically, the right buyer for your business. You must find an ideal buyer for your business to maximize price, and choosing the right business broker is essential to that process.
3. Ron Johnson, chairman, ABI Business Sales, and IBBA fellow
Make sure to find out how your broker plans to maintain confidentiality about your potential sale. Brokers should require that any interested buyer complete a confidentially agreement, that is, a nondisclosure agreement, also known by its initials, NDA.
The broker should always be present in any meetings or conference calls between you and potential buyers. Experienced brokers will always steer the conversations in a productive manner and in a fashion that protects confidential business data, such as customer names and vendor contacts.
Use this meeting to determine whether your broker cooperates with other brokers. This is an area that many brokers disagree on. Some believe that they can broker the best deal by being the single middleman representing both the seller's and the buyer's interests to arrive at a fair outcome. Others choose to work with other brokers to improve their chances of finding the best buyer for their seller.
Both approaches work, but be sure that your broker isn't refusing to cooperate with another broker solely because he or she wants to keep both sides of the commission.
Also, not all cooperation is equal. Some brokers may be willing to cooperate, or "co-broke," with any broker, while others co-broke only with other brokers who meet certain criteria, usually based on the other broker's credentials and experience.
Some states require brokers to have a real estate license, which can add another layer of complexity to this issue. However, it's important to remember that not all real estate brokers are business brokers. Business sales are very different from real estate sales, with confidentiality and business valuation the primary differences, as well as the entire marketing-and-sales process. Be sure to know if a real estate license is needed in your state and ask about the broker's business-sale experience.
Of course, in addition to the above, be sure to ask any other important questions that concern or are of interest to you.
The success of your business sale is largely dependent on your broker's efforts and abilities. So invest some time up front to ensure that you understand your broker and his or her plans to represent your business.