What is a Business Broker? Are They Worth It?
What is a business broker? A common question that is asked through online forums, over the phone, or in the presence of a colleague who may have told you how they sold or bought a small business. For the most part, the profession of business brokers is often overlooked, with many business owners unaware of their existence until they receive an unexpected call or correspondence. This is not surprising, considering the confidential nature of their work. Business transactions rarely make headlines or garner attention unless they involve major Fortune 500 companies merging or acquiring one another like Microsoft acquiring Activision Blizzard or Disney merging with Pixar. The public seldom takes notice when a small business changes ownership, especially if the previous owner had minimal involvement in day-to-day operations. Business brokers are responsible for coordinating thousands of smaller business transactions every year and will continue as long as businesses hold value and owners seek to exit due to retirement, burnout, new opportunities, or other circumstances.
Despite the vital role they serve, many people are often hesitant to approach a business broker due to the perceived high fees associated with their services. While there are some firms that have additional fees that are arguably too high or unjustified, business brokers generally receive an industry average of 10% commission from the completed business transaction. This fee can vary depending on the brokerage firm and the size of the business being sold. However, in most circumstances, this standard fee is actually a modest price to pay for the valuable services that business brokers provide. There are several reasons why a business owner seeking to protect their best interests should strongly consider hiring a certified professional business broker to sell their respective business. Let’s dive into what business brokers offer, what to look for and avoid when selecting a business broker, and why their fees can be worth the valuable services they provide.
What is a Business Broker?
To put it simply, business brokers, also known as Certified Business Intermediaries (CBI), are professionals who assist in the buying and selling of businesses. They act as intermediaries between buyers and sellers, helping to facilitate a smooth and successful transaction. They are knowledgeable about the market, have expertise in negotiating deals and navigating legal aspects, and provide guidance throughout the process. They also maintain strict confidentiality during the buying or selling process to protect sensitive information about the businesses involved. Business brokers understand the complexities involved in such transactions and can offer valuable insights and strategies to help their clients achieve their desired outcomes. Whether that is selling in the shortest time frame, securing the highest lump sum offer, or receiving a favorable interest rate from the transaction. A business broker is expected to meet the business owner’s goal for the transaction while seeking the best offer from a qualified buyer.
What are the Benefits of Using a Business Broker?
Using a business broker can offer several advantages for business owners and prospective buyers. They can save tremendous time and effort by handling all aspects of the sales process while increasing the chances of a successful sale. Additionally, they can provide valuable insights and guidance throughout the buying process, ensuring clients receive fair compensation for the value that was built by the owner. Let’s dig into a few of the valuable benefits that a professional business broker can offer clients:
- Business brokers offer accurate business valuations. With their deep understanding of the market, industry trends, current valuations, and a meticulous approach to thoroughly assessing each individual business, business brokers help business owners make informed decisions. Business owners are often unaware of the true value they have created over the years, and the primary objective is to protect that value and ensure the business owner receives fair compensation. A business owner would be making a costly mistake by simply using an online business value calculator without consulting a professional who can identify value drivers (or dingers) that could significantly increase or reduce the fair asking price of the business. Trusting in the expertise of a professional business broker can provide peace of mind that all the business’s value has been carefully considered before reaching a fair asking price and listing the business for sale.
- Business brokers have an extensive network of qualified buyers and sellers. They can help connect the right parties and facilitate a smooth and efficient transaction. Sellers won’t have to deal with the headache of sorting through hundreds of lowball offers, tire kickers, and unqualified buyers that wouldn’t satisfy the landlord’s or franchisor’s minimum requirements, when applicable. Business brokers will take every precaution to present only reasonable offers from qualified buyers. While this does not guarantee a successful transaction, these precautions save time and effort for both buyers and sellers, making the process much more manageable.
- Business brokers are skilled negotiators who play a critical role as intermediaries between buyers and sellers. They act as the vital link to bridge any communication gaps or conflicts that may arise during negotiations. Their extensive experience and expertise in handling such complex and delicate situations can be invaluable in not only ensuring a successful transaction but also in providing guidance and support throughout the entire process. With their deep understanding of the market dynamics and their ability to navigate through potential challenges, business brokers bring a level of assurance and peace of mind to both parties involved, making them an essential asset in the realm of business transactions.
- Business brokers play a vital role in managing all the necessary paperwork and other details surrounding the transaction. They also work closely with legal professionals to handle the complex legal aspects involved. Keep in mind the business broker assists all parties involved in the deal, often working with the buyer to secure the necessary SBA loan to acquire the business. This meticulous and time-consuming process requires a broker’s expertise to be executed efficiently and accurately. By leveraging their knowledge and experience, business brokers streamline the entire transaction, providing peace of mind to both buyers and sellers.
- A business broker carefully maintains confidentiality. Diligently safeguarding sensitive information and sharing it only with the necessary parties is critical for all parties involved. Confidentiality throughout the process protects business owners against complications that may arise if the sale of the business becomes public knowledge. Many potential issues could occur: Employees may choose to resign, landlords may decide to terminate the lease agreement, suppliers may reconsider their fees, and franchisors may become prematurely alarmed, resulting in complications that could break the deal. A business broker’s commitment to maintaining confidentiality adds an extra layer of assurance, allowing clients to navigate the intricate landscape of business deals with peace of mind.
- Business brokers handle the marketing aspect of selling the business. Business brokers utilize a diverse range of resources to curate a compelling marketing package for your business. They possess the expertise to create an effective marketing plan that appeals to potential buyers and private investors. These marketing efforts are usually at the expense of the business broker, which can vary based on the size of the business and the duration required to identify the right buyer and close the deal.
- Business brokers assist the buyer throughout the acquisition process. Not to be confused with buyer representation, necessary assistance is crucial in helping the buyer complete the transaction. In many cases, this will be a first-time buyer with no previous business ownership experience. A serious buyer will have many questions to understand the business they are attempting to purchase. A broker can expect to receive inquiries from prospective buyers regarding financial statements, daily operations, steps to apply for a legal entity, how to secure an SBA loan, and many more questions to verify the provided information during the due diligence phase. The due diligence process involves a comprehensive examination of all aspects of the business before finalizing the sale. It encompasses a thorough review of all financial documents, legal contracts, and other pertinent information to ensure the business is not only viable but also a suitable fit for the buyer. This level of assistance can be very time-consuming, and a business owner is typically too busy managing or operating their own enterprise to dedicate the necessary time and effort to each and every prospective buyer who presents an offer. Without this assistance, many a deal simply would not reach the finish line.
What is a Business Broker: Red Flags
Do not be fooled into leaving your most valuable asset in the hands of an inexperienced or unqualified agent. While there are numerous business brokers that are reputable and trustworthy, there are bad actors in every industry that do not have your best interest in mind. Here are some red flags you should be aware of.
- The agent asks for an upfront fee or a large retainer before any work is done. This could indicate that the broker is more interested in making money from excessive fees rather than helping you find the right buyer for your business. There is a higher likelihood this type of business broker will gladly take your money, list your business on the marketplace, and disappear until the end of the contract. Do not expect much follow-up or transparency. When pressed for updates, they may attempt to lead you along with breadcrumbs of information to keep you “informed” with no plan to get results.
- The agent appears to have conflicts of interest, such as representing both the buyer and seller in a transaction. This relationship is known as “dual agency,” and it can work in a business sales transaction IF the broker discloses the nature of his or her relationships to all parties in a transaction and is careful not to share with one party any confidential information regarding the other party. A business broker that is not upfront about this relationship between the parties should be avoided.
- The agent is not affiliated with a reputable organization within the mergers and acquisitions industry. Exercise caution when engaging with a listing agent without formal training or certification from IBBA or another reputable organization within the mergers and acquisitions industry. When an agent lacks industry affiliation, clients expose themselves to a greater risk of dealing with agents who may engage in unethical or predatory practices or simply lack the necessary qualifications to do the job properly.
- The agent is NOT a business broker but a real estate agent. It should go without saying that realtors primarily specialize in selling or buying homes or commercial property, which is fundamentally different from selling or buying a business. Regardless of how many deals they claim to have closed, degrees in unrelated fields they possess, or promises they make, exercise caution. Real estate agents have their own organizations that do not provide proper training in the sale of businesses and should not be relied on to deliver satisfactory results for business transactions. Long story short, improper valuations, breaches of confidentiality, unnecessary obstacles, collapsed deals, excessive fees, or a significantly lower return on investment are all common issues when attempting to sell or buy a business with a realtor.
What is a Business Broker: Green Flags
- The broker maintains relevant licenses or designations from reputable organizations within the mergers and acquisitions industry. Aside from the minimum state requirements, business brokers should be expected to have formal training under a reputable organization that is specific to the industry. Business brokers are often trained and certified professionals accredited by the International Business Brokers Association (IBBA), which is considered the leading authority within the mergers and acquisitions industry. Looking for a business broker who has obtained a Certified Business Broker (CBI) designation from this esteemed organization demonstrates a commitment to upholding the highest ethical and professional industry standards, as well as the ability to effectively apply knowledge related to the buying and selling of businesses. Clients are encouraged to look for such designations when selecting a business broker to sell their business.
- The broker is reputable and left several positive impressions on previous clients. There are several ways to find a reputable business broker. One option is to seek recommendations from friends, family, or colleagues who have recently bought or sold a business. You can also consult with other professionals in the industry, such as lawyers, accountants, or financial advisors, for their recommendations. Another approach is to research and compare different business brokers online. Look for reviews and testimonials from past clients to get a better understanding of their track record and reputation. It’s possible to interview potential brokers and ask for references from previous clients before making a decision.
- The broker is local and able to stay in touch. Consider their location, availability, and responsiveness, as you will need someone who is readily available to address any concerns or questions throughout the process.
- The broker does not require upfront fees or a large retainer. A business broker that does not accept upfront fees or payment until the business transaction is completed is more likely to achieve results. They are invested in your success because they do not receive payment until you do. They are more likely to be transparent, provide key updates, discuss options, present offers, and negotiate favorable terms on your behalf.
In conclusion, business brokers play a vital role in the buying and selling of businesses. Their extensive network, negotiation skills, handling of legal aspects, guidance and advice, confidentiality, and discretion all contribute to making the process smoother, more lucrative, and increasing the chance of success. If you are considering buying or selling a business, it is highly recommended to enlist the help of a reputable and experienced business broker. They can make all the difference in achieving your desired outcome and ensuring a smooth and efficient transaction. So don’t hesitate to reach out to a business broker today for their valuable expertise and services! Check out what our clients say regarding our recently sold transactions and see why we are among the top business brokerages in DFW!
