When it comes to the sale of your business, the question of how to choose a business broker is often one of the first challenges. If you’re thinking that choosing a business broker to help sell your business will be similar to choosing a real estate agent to sell a piece of property, you’re in for a rude awakening.
Business owners often tell us that they’ve spent months trying to find and then interviewing business brokers with no luck. The simple fact is that every stage of selling your business can be difficult, starting with finding the best business broker.
In this article, we’ll start with a bit of insight on how business brokers look at a small business and determine which ones they will sell. Understanding how business brokers work – and who they work with – is the first step in choosing one to help you sell your business. We’ll also list a few resources for finding a business broker. Lastly, we’ll offer our best advice on how to quickly learn what you need to know about a business broker so you can choose wisely.
How Do Business Brokers Determine Who They’ll Work With?
A 2019 survey of business brokers and advisors in the merger and acquisition (M&A) industry found that 70% of the businesses that contact them end up being unsellable. Put another way, business brokers only work with perhaps 30% of the business owners who inquire about selling.
Going back to the real estate analogy, do the most successful real estate agents refuse to work with at least 70% of the homeowners who contact them about selling? On the contrary!
The best business brokers are extremely selective about the businesses (and owners) they work with. The sale of any business is a complex process that is filled with uncertainty and often comes with a low probability of success. For this reason, the best business brokers are only willing to work with businesses they know will attract the interest of high-quality prospective buyers, among other things.
While some business brokers focus on a certain industry or industries, almost all choose their clients based on the size of the business.
How Business Brokers View the Size of a Business: Sales
Business brokers judge the size of a business by two metrics that are found on the Profit & Loss (P&L) Statement: sales and pre-tax earnings.
The M&A world in general, which includes business brokers, sorts businesses by Sales into the following categories:
- Main Street (Annual Sales < $5M)
- Lower Middle Market (Annual Sales $5M to $50M)
- Middle Market (Annual Sales $50M to $500M)
- Upper Middle Market (Annual Sales $500M+)
You will certainly find variations in how these four main categories are defined. Some say Main Street applies to businesses with less than $2M in annual revenue or even less than $1M. Others say the lower middle market tops out closer to $25M not $50M. Regardless, business brokers and M&A advisors use annual sales as one of the first ways to qualify a prospective client.
How Business Brokers View the Size of a Business: Earnings
Annual sales is a fairly straightforward number to determine. But what do earnings mean, and why would a business broker care?
Pre-tax earnings can refer to a number of financial metrics, including:
- EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization
- EBITDA (Adjusted)
- EBIT (Adjusted or Unadjusted)
- SDE – Seller’s Discretionary Earnings
- SDCF – Seller’s Discretionary Cash Flow
The most appropriate pre-tax earnings metric for your business is influenced by the potential buyer for your business. If the likely buyer is an individual wanting to leave their job and become the owner-operator of your business, they will focus on Seller’s Discretionary Earnings. If the right buyer is a private equity group, they will be more interested in unadjusted or adjusted EBITDA. If your business is anticipating future capital expenditures, buyers may be more concerned with EBIT.
Remember that businesses are valued based on a multiple of earnings. Therefore, nailing down the appropriate pre-tax earnings metric for your business is critical because it gives the business broker a sense of what your business may be worth to qualified buyers.
Why the Size of Your Business Matters
The reason a business broker wants to get a clear sense of the size of your business — based on sales and earnings — is because they want to form their own opinion about the sellability of the business, as well as an expected range where they feel offers would come in.
In fact, the best business brokers will do their own business valuation on your business before agreeing to take it to market. They’ll also use the business valuation as an opportunity to do some of their own initial due diligence in the same way a buyer would.
Most business broker’s compensation comes from their commission or success fee on the sale price of the business. Many business brokers charge an upfront fee as well. Most seasoned business brokers develop a size range of businesses they work with that matches up with the types of buyers they’re good at attracting, as well as their desired success fee.
Experienced business brokers have a cut-off point in terms of their commission, an amount below which they typically won’t go. (While your business may be too small for them to sell, many business brokers are happy to work with a business owner on increasing the value of a business.)
How to Find a Good Business Broker
If you can’t name a single business brokerage firm in your area, you’re not alone. Business brokerage is a small, niche specialty service within the small business ecosystem. Your best resources for how to choose a business broker are using the internet and tapping into your referral network:
Internet directories and business listing websites:
- International Business Brokers Association (IBBA)
- M&A Source (a division of the IBBA)
- Alliance of Merger & Acquisition Advisors (AM&AA)
Your referral network:
- Small business consultants
- Financial planners
- Fellow entrepreneurs
- Networking groups (i.e., Vistage)
Don’t be overly concerned about the geographic location of the business brokerage firm: Many sell businesses located all over the country. Lastly, the majority of business brokers are industry agnostic, meaning they work with almost any type of business.
How to Choose a Business Broker: 5 Tips
You’ll need to do your homework when it comes to finding and choosing the right business broker to help you sell your business. Once you’ve compiled a list of names, you’ll want to do the following five things:
#1: Assess Their Qualifications
What is their background and education? Many of the best business brokers are serial entrepreneurs themselves and have sold their own businesses. They also tend to have both experience and education in accounting, finance, sales and marketing, operations, and other areas of business management.
We recommend choosing an intermediary who has a minimum of 10 years of business brokerage or M&A industry experience. Ask them about the number of business transactions they typically close in a year (boutique firms tend to work with four to six clients at a time). They should also have a proven process that gets results, including a marketing plan for representing your business to qualified buyers.
#2: Read the Business Broker Listing Agreement
It may sound odd, but you can judge a lot about a business brokerage firm by reviewing their listing agreement. Does it seem intimidating, opaque, or overly punitive? Are their fees spelled out clearly, as well as what they’ll be doing to earn those fees? Does it look like the contract was created by a top-tier law firm versus a boilerplate template?
There are several things to look for in a business broker’s contract, but one of the main things you’ll want to determine is how easy it is for either party to terminate the agreement. If it’s not working out, you want to be able to part ways without paying a penalty (sometimes called a break-up fee). Likewise, most good business brokers want the ability to terminate the contract if it becomes clear that a successful sale will be difficult or impossible to achieve.
Regardless of the termination clause, be sure to look over any contract with your attorney before signing it.
#3: Check Their References
The best business brokers can give you a long list of people who will recommend working with them. Ask for references from the following people that they’ve worked with on a deal: attorney, CPA, seller, and buyer.
#4: Interview More Than One Business Brokerage Firm
Interview at least three business brokers before choosing someone to work with. In addition to having the requisite skills and track record, you’ll want to find a firm that feels like the best fit for you, your business, and your goals for a sale. Chances are that — after talking to at least two or three — one will emerge as the clear frontrunner. Your gut will tell you they’re “the one.”
What Makes a Good Business Broker?
Here are some of the qualities you’re likely to find in the best business brokers with winning track records and decades of experience. Notice “salesy” is not on our list:
#5: Strive for a Good Fit
The reality of selling a business is that it is a difficult, time-consuming, complex, and emotionally draining life event. Yes, there is a lot of upside, too. But the process itself is arduous. We wish we could tell you that it’s all sunshine and roses, but alas, selling a business is a difficult endeavor.
Keep in mind that you’re going to be working with a business broker for up to a year during this time of transition. You’ll find lots of different personalities during your search for the right business broker. Do your best to choose one who seems like a good fit for you personally, as well as your business.
The Right Business Broker Adds Value to the Sale Process
The right business broker can set you up for a smooth and successful sale, while the wrong one can bring on a lot of disappointment (or worse). Be prepared for it to take a bit of time and effort on your part to choose the right business broker to help you sell your business. Look for tangible reasons to work with them – like their experience, process, and broker agreement – as well as intangibles like personality and fit.
The advisors at Allan Taylor & Company are ready to start the conversation about selling your business when you are. Our initial conversation comes with no fee, no pressure. Contact us today.