5 Red Flags in Choosing a Business Broker

When selecting a broker to sell your business, be aware of the following tips…

The broker wants a significant or total fee paid upfront.

Many brokers have begun taking upfront fees, but generally the total fee is a combination of an upfront fee and commission paid upon sale of the business. An unreliable broker meets with you, runs some quick numbers, tells you that you can get your price or even more for your business, and then asks for a check to get started. In many cases, business owners are so relieved that they’ve found a broker and elated that they’ll write a check on the spot, without checking any references.

During your first meeting, the broker says he or she can get your asking price or higher.

Be wary of too much optimism. The key to selling is that the price be reasonable. According to Tom West of Business Brokerage Press in Concord, Mass., most owners over value their businesses. An unreliable broker might suggest after a brief meeting with you that he or she can get you your asking price or higher for your business.

The broker doesn’t have a Web site.

Most likely, if the broker doesn’t have a site, he or she is behind the times. The Internet is a powerful marketing tool for business brokers, according to Cooper. Is the site well-written? That’s another way to gauge a broker’s competence, he adds.

The broker doesn’t seem well grounded in business valuation.

Your broker should be able to explain business valuation to you clearly and if he or she can’t, then how can he or she explain to a buyer what your business is worth? Make sure your broker is confident in this area.

The broker is not licensed to sell or lease real estate in your state.

Ninety-two percent of business brokers have a real estate license, according to an annual survey of business brokers West conducted. Even if your business doesn’t include real estate, make sure your broker carries the license. Also be aware that if a broker holds a real estate license doesn’t mean he or she should be selling commercial or residential real estate too. A good broker will hold the licenses but be focused on selling businesses.

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.

How to Find a Good Business Broker

Anyone interested in buying or selling a business should always consult with a good business broker because they posses the know-how and resources to get the best price and help you avoid the devastating pitfalls of the buying or selling process. How do you find a good business broker? Well, you go out and look. Where? The internet of course, but asking someone who has sold or bought a business is also a good source and probably the better of the two. Unfortunately not everyone knows someone who has worked with a good business broker and must rely on the expansive web to begin a search.

You should begin your search before you commit to buying or selling a business. I once had a gentleman call me wanting advice on buying a coin laundry and we went through the process of buying the business, a few things to look out for and the general principles behind how a business is priced. After a little exchange of questions and answers between the two of us it started sounding as though this buyer had not done the proper due diligence and that he was possibly overpaying. Problem was… he was already under contract to purchase! At that point even the best business broker can’t help unless you are able to find a way out of the contract, which won’t be easy if the seller is getting a premium on the transaction.

A simple keyword search for business brokers will bring about a plethora of willing brokers but the trick is finding one that is good and easy to relate with. You shouldn’t be afraid to ask questions of the broker, i.e., “What’s your experience?”, “Do you have any credentials?”, etc. It’s always nice to work with someone that clicks with you.

Things process of selling a business and what a business broker can do for you are:

Step 1 is to contact small and medium sized Business Brokers for information about how they charge, what they charge and how you generally feel about them. Select a Small and medium sized Business Broker.

Step 2 is to work with your broker in establishing the most appropriate asking price and put broker and client understandings on paper in the form of a listing agreement. The listing price is the price you agree to sell the business if the broker brings a qualified buyer willing to purchase at that listing price.

Step 3 is to supply your broker with all relevant information about the small and medium sized business so that they can complete an offering memorandum. The broker will discreetly and confidentially make the market aware of your small and medium sized business’s availability including some general information about the site.

The 4th step is for your broker to screen and qualify potential buyers.

Step 5 is for you, with the help of your broker, to negotiate a price and terms agreeable to you and a buyer.

Step 6 is the removal of contingencies explained in the contract to purchase the small and medium sized business.

The final step is to close the transaction.

Your broker will continue to work with you after the sale with any remaining terms and/or conditions of the sale until the seller is completely separated from the business.

  • Educate you regarding the process and issues faced when selling a small and medium sized business.
  • Keeping the transaction confidential.
  • Conduct a pricing analysis to determine the best asking price for your small and medium sized business.
  • Develop an effective marketing strategy to sell your small and medium sized business.
  • Put the offering package of the small and medium sized business in front of the most buyers.
  • Pre-qualify potential buyers prior to divulging sensitive information.
  • Manage transactional details and paperwork.
  • Help establish terms of sale.
  • Assist the buyer in an effort to give the transaction the most potential for a successful closing, i.e. financing.

The most important thing you can do when you are thinking of buying or selling a business is to at least speak with a broker or two. The good one is the one that gets you pointed in the right direction. Most brokers, especially the one that will care for your business, will be happy to spend a half hour to an hour talking to you on the basic points.

My Business Broker, My Banker

When you buy a business (or a franchise) the seller traditionally are willing to pay a finder fee or commission. Brokers will charge anywhere from 5-20% of the purchase price for listing the business. Franchisors will pay referral fees depending on what the total price of the franchise is. How can that be of benefit to you when you are buying your business?

During tough credit times most brokers are willing to carry back some portion of the commission to help the buyer and the seller complete the transaction. Some business brokers live and die by the idea that they will absolutely never carry back a commission, consequently they can and will kill the business purchase. When using these techniques remember that business brokers are professionals and they need to make a living to. These techniques are not to pull the wool over their eyes, they’re merely present to help you negotiate better.

Here are a few steps to get your business broker or franchise consultant to help finance your acquisition.

1. Listen to the first piece of information the business broker wants to know – Several brokers will start off their relationship with a buyer by initially asking, “How much cash can you put down IMMEDIATELY on this business if you were going to buy it?” This is the business brokers’ way of playing poker. Remember the object (the true object) of poker is to get the other party to show the maximum risk they are willing to accept. If you tell the business broker that you have $100,000 then they will try to get you to put even more down.

2. Ask the broker how business is going – This is the thermostat to knowing whether or not the broker is willing to play ball or not. A broker whose business is thriving may not worry about lending a qualified borrower a small amount of money to finish the acquisition. On the other hand a starving broker may be more than willing to lend money to get some portion of the commission.

3. Avoid engaging in a contract directly with the broker – Traditionally the business broker has engaged the seller for a listing. A business buyer can engage a broker to help them buy a business; however in many states brokers do not split commissions. Consequently a contract with the broker with the buyer may lead to a very odd relationship.

4. Ask the seller how much of a commission they are paying the broker – Here is your opportunity to play poke. Most business sellers feel like they are getting nailed to the wall when they are selling the business. They are giving up 5-20% of the business to some guy or gal that the seller considers to be a glorified real estate agent! What did they do in the past 20 years to earn this huge portion of the seller’s retirement fund? I find getting to see the listing agreement is one of the easiest parts of negotiations.

5. Ask the broker where to come up with the remainder of the money – The broker will try to get you to put more cash on the table. The greater the cash you commit to buying the business the more likely you are to close, and be successful with your new venture (according to the business broker.) When and if there is a “boot” or remaining funds that you need to come up with ask the business broker – frankly where to find it at. They may direct you to some lending sources, but a good broker may consider doing a carry back with the seller to accommodate the transaction.