What You Should Know About Working With Business Brokers
Not unlike what you see in the real estate sector, business brokers tend to be paid by sellers: something you need to keep in mind if you're a buyer. At the same time, an experienced broker can help you narrow your search to the kinds of businesses that meet your search criteria. As a seller, a broker can help you streamline everything from pricing your business to marketing it to buyers.
Given that buying or selling a business might be the most important decision you ever make, Inc.com has assembled some tips from different vantage points, those of a buyer and a seller, to help make your experience working with a business broker as profitable as possible.
Working With Business Brokers: Buyers Beware
When Jackie Coan's husband, Pat, opted for early retirement from Proctor & Gamble back in 2001, the couple hooked up with a broker to help them find a franchise they could buy to restart their careers. Coan, who bought an ActionCoach franchise with her husband, shared her tips on how, as a buyer, to get the most out of your relationship with a broker:
- "The Broker is your representative to help you find the right fit," she says. "Financials are not the only qualifier; make sure that you can see yourself having fun in your new business. It has to fit your personality, your lifestyle, and your future exit strategy."
- "Remember that every business that is built will have its ups and downs," says Coan. "Be sure that your broker communicates that with you and not make promises of income potential because, technically, all he or she cares about is his or her commissions. The successful brokers are the ones that keep in touch with you long after the sale is completed."
- "Make it clear what fees, if any, will be involved," says Coan. "Usually the seller or franchiser pays the broker's fees, but make sure what you are told adheres to industry standards. Always look to work with established and licensed business brokerages."
- "Do your own due diligence," she says. "The broker may not have every answer about the state of the business. Before pulling the trigger, be sure to ask for the books and ask your CPA to help you review the company's financial information."
- Ideally, the broker you work with has walked in similar shoes to your own, says Coan, where they, too, have made life-changing decisions. "You also want a broker who is successful because that's proof that he or she knows the trade."
- "Be about your financial comfort zones and investment capabilities," she says. "There is nothing more frustrating to a broker than to find out that you don't have the means to invest."
Working With Business Brokers: Sellers Beware
If you've reached the point where you'd like to sell your business, consider the following questions before deciding on a broker. These tips are excerpted and shortened from Chapter 4 of Barbara Findlay Schenck's useful book, Selling Your Business for Dummies. To order the book for the full-length version of these tips and to get more of Findlay Schenck's advice on selling your business, visit the book's website.
1. What Are the Broker's Qualifications?
When interviewing brokers, learn their qualifications by asking these important questions:
- Are you certified? Find out if the broker is a Certified Business Intermediary (CBI), which is the gold standard in the business brokerage world.
- Are you a member of the International Business Brokers Association? To verify your broker's membership, you can go to the IBBA business broker search site and conduct a quick search for the broker's name.
- How long have you served as a business broker? Ideally, you want to work with a broker with a track history that goes back at least several years.
- Do you work full-time or part-time as a business broker? This question is important because you want to know whether the broker is likely to be on the job when a question or need arises.
- Do you have a real estate license? Most business brokers are licensed realtors, which is a requirement in many states and important to you if your deal includes the sale of a building or other real property.
2. Does the Broker Have Good Web Presence?
Visit the broker's site to see how fast it loads, how easy it is to use, and the kinds of businesses it offers for sale. If you like what you see, ask for information about how the site is used:
- How much traffic does your brokerage site generate? How many people actually visit the site each month?
- How many offices in your network use this site?
- How many brokers are in your office?
- How many businesses are currently listed on your site?
- How many qualified buyers are already in your database?
3. What's the Broker's Recent Track Record?
You can find out a lot about the broker's experience and success levels, and also about the business-for-sale marketplace you're entering, by asking the following questions.
- How many businesses like mine or in my size range did you sell last year?
- On average, how long were last year's listings on the market before they ended in closed sales?
- How many of the site's listings did you represent? This gives you a good idea of whether the broker is a major player in the brokerage and what kind of volume the broker handles.
4. How Does the Broker Market Listings?
A major reason owners list their businesses for sale with brokers is to gain the leverage of a professionally managed marketing program. Beyond posting your ad on the brokerage site, find out how else your business will be advertised by asking these questions:
- In addition to your own brokerage site, what other online business-for-sale listing sites do you use?
- Do you place classified print ads for your listings?
Also ask the broker to show you a sample of the selling memorandum (or selling book) that he or she prepares for clients so you can get a sense of the caliber of document the broker prepares and presents to buyer prospects.
5. What Do Recent Clients Have to Say About the Broker's Performance?
The broker's website or marketing materials may include testimonials from clients who've listed with the broker. Additionally, ask the broker to provide names of owners who've sold over the past six months and who you can contact for references.
6. What Does the Broker Charge?
Most brokers charge what's called a success fee, which is a commission based on a portion of the price paid at closing for your business. Usually, the commission is 10 percent. Ask what other fees might be involved.
7. How Does the Broker Price a Business?
Ask the broker for information on the following points:
- What method does the broker use to establish the asking price for a business like yours?
- What percentage of variance does the broker advise you to expect between the asking price and the closing price?
- Over the past year, what's the average percentage of asking price received by the broker's closed listings?
8. Has the Broker Been Sued?
When it comes to the broker's professional reputation and reliability, you want to know two things:
- Has the broker ever been sued by a listing client or a business buyer, and if so, when and why?
- Does the broker carry professional liability insurance? This type of insurance protects service businesses in the event that a provider is somehow negligent and a client suffers financial harm. There's only one answer you want to hear when you ask if your broker carries professional liability insurance, and that answer is "Yes."
9. Will the Broker Agree to Carve Outs?
Most broker agreements are called exclusive listing agreements because when you sign the agreement, you grant the broker the exclusive right to sell your business or its assets. In other words, you agree not to work with a number of brokers at the same time. The exclusive broker has sole rights to your sale for so long as the listing agreement lasts, which is typically not less than six months.
The one exception, if your broker agrees to it, is that you may negotiate a carve out or limited exception for a certain buyer prospect. For instance, if you've already been talking to a partner or associate as a buyer prospect, you may exclude that person from the listing agreement, and therefore from the sale commission. Unless you have a prospective buyer waiting in the wings, this clause doesn't really matter, but if you know of someone who may become your buyer, be sure to get a carve out written into your listing agreement or you'll pay the commission on the sale in spite of the fact that you brought the buyer to the deal.
10. Will the Broker Assist You Even Without a Listing?
Many brokers offer services, even without a listing agreement, for an agreed-upon fee. For somewhere in the range of $1,500 or $2,000, a broker may be willing to help you get your business-for-sale documents ready for presentation. The broker may even offer to credit the fee against the sale commission if you decide later on to list your business with him or her.
Darren Dahl is a contributing editor at Inc. Magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, NC.