I’m often asked by business owners if they should use a business broker when selling their business. My standard answer is, “It depends.” Let’s look at what a business broker is and some of the pros and cons of using one.
What Is a Business Broker?
A business broker is an individual or company that assists in the purchase and/or sale of a business for a fee. Business brokers may provide a variety of services including informal valuation of a business, listing services, marketing services, negotiations, due diligence, and help with paperwork. Not all brokers provide the same services.
Fees may include fixed fees and variable fees as a percentage of the transaction value. Business brokers are regulated by each state; some jurisdictions requiring licenses and others not.
You can locate business brokers through attorneys, accountants, on-line, and through professional associations, such as the International Business Brokers Association (IBBA).
Advantages of Using a Business Broker
Knowledge of the Market
An experienced business broker may understand the marketplace for your type of business and can accurately estimate the value of your business.
Please note: an estimate from a broker is not the same as a formal business valuation provided by an independent and qualified business valuation expert.
Buyer Connections
Brokers have access to a network of potential buyers and can market your business to their contacts and network. A good broker can also screen potential buyers for you.
Experience with Transactions
A broker is familiar with the process of selling a business and the paperwork that comes with it. Experienced brokers may have referral contacts with lawyers familiar with business sales who can draft the documents you’ll need.
Handle Administrative Tasks
The right broker can ease the administrative burden on you when you sell your business. Running a business is hard enough without having to manage new administrative tasks.
Professional Marketing Materials
A good broker creates high-quality marketing materials and presentations that showcase, in the best light, your business to potential buyers.
Discreet Marketing
Brokers can market your business discreetly, maintaining confidentiality and preventing competitors, employees, and customers from knowing that your business is for sale.
Deal Structuring
An experienced broker can help structure a deal in a way that is advantageous for both parties, potentially offering creative financing solutions that might not have been considered otherwise.
Emotional Buffer
Abroker can serve as an emotional buffer between you and a potential buyer. This can be particularly helpful during negotiations.
Disadvantages of Using a Broker
While there are many advantages to engaging with a business broker, there are some disadvantages as well.
Fees
This is one of the biggest negatives to using a business broker. Total fees can be high and fee structures differ among brokers. While fees are negotiable, it can be confusing for a business owner to sort through the value each broker provides for the fees they charge. Fees vary by the size, type, and complexity of your business. Here are some of the fees you may run into with a business broker:
- Listing Fee
- Commissions
- Retainer Fee
- Valuation Fee
- Success Fee
Most brokers charge a commission, typically a percentage of the sale price, with a minimum fee for a smaller business. The commission is usually 10% to 15% of the sale price. Some brokers may also charge an upfront fee for their services, regardless of whether the sale is completed. These fees can vary from $1,000 to $2,500. Valuation service fees can range from $0 to several thousand dollars. If you’re speaking with a broker, make sure what fees apply to your situation and get it in writing.
Conflicts of Interest
While no broker will probably admit this, they are incentivized to close a deal quickly over ensuring the sale is a win for everyone.
Less Control
Using a broker means relinquishing some control over the sale process, which can be uncomfortable for some business owners.
No One Knows Your Business Better Than You Do
No one knows your business better than you do. You are in the best position to present the strengths and uniqueness of your business to potential buyers. Plus, you can answer all the operational questions a potential buyer may have. A broker cannot do either of these.
In addition, you know your customers or clients, employees or contractors, suppliers and vendors and a broker cannot. If these other stakeholders are important to the success of your business, only you can have their interests and concerns in mind. For example, a broker doesn’t know your long-time customer or clients and cannot know what kind of buyer will meet their needs and expectations.
Engagement Period May Be Long
The engagement period is the duration during which the broker is engaged to sell your business. Typically, this is 6-12 months, but I’ve heard of periods as much as 24 months. Keep in mind during this time you’re obligated to use the broker if he/she brings a buyer to you. Combined with an exclusivity agreement (explained next), you may be locked into using a specific broker for a long time even if they aren’t getting results.
Exclusivity
Most brokers want to ensure they earn a commission if they sell your business. As a result, they may ask you to sign an exclusivity agreement. This means even if you bring a buyer to the table the broker will charge you fees.
Emotional Distance
Most business owners are attached to the business they’ve built. Using a business broker may make you feel disconnected from the sale process. This can be challenging because, as I said earlier, no one knows (or cares about) your business more than you do.
Summary
Because you may not have worked with a business broker before, interview several business brokers and be aware of the advantages and disadvantages of using this service. Keep in mind a broker will not guarantee a sale at the price and conditions you want. Be cautious about what a broker tells you and verify the broker’s expertise and experience with clients they’ve served.
Let’s Have a Conversation:
What concerns you the most about selling your business? Have you considered hiring a broker? For what reason(s) might you decide to go the broker route? What cons do you see in this process? If you have questions or remarks about using a business broker to help sell your business, please leave a comment below.
