Should you use a small business broker to sell your business?
While there may be some debate about how to assemble the best deal team, there’s no question that business owners need help from highly qualified professionals to achieve a successful sale of their business. Simply put, selling a business is not a DIY project.
In this article, we’ll look at the primary benefits of using a small business broker to help you sell your business. We’ll start with a few words of caution and try to clear up a common misperception. We’ll also discuss the qualities of a good business broker, and share a few resources to find a broker with a good track record to help you sell your business.
The Difference Between Small Business Brokers and Real Estate Agents
There’s a lot of confusion about the overlap, or lack thereof, between business brokerage and a role we’re all familiar with: the real estate agent. Many business owners think that a business broker is basically a real estate agent who sells businesses. There are a number of problems with thinking of the two as analogous.
Many business brokers are indeed licensed to sell real estate. In fact, most states require business brokers to hold an active real estate license. However, you won’t see business brokers referring to themselves as real estate sales professionals. Business brokers go by a few different names, including business broker, business intermediary, transaction advisor, business transfer specialist, and mergers and acquisitions (M&A) advisor. While they may sell land and buildings as part of a transaction, they are primarily focused on pricing and selling the business entity as a going concern.
Commercial real estate agents and brokers, on the other hand, typically sell only real property assets. They do not sell businesses, personal property, cash flow, or intangible assets. The exception may be income-producing businesses where the majority of the value is in the real estate, like car washes, gas stations, and storage facilities.
Most importantly, the skills required to sell a business are not the same as those needed to sell real estate. Business brokers should have skills to varying degrees in the following areas:
- Financial accounting
- Corporate finance
- Contracts & contract law
- Business valuation
- Business operations
- Business management
- Sales & marketing
- Economics (local, regional, national)
- Industry-specific knowledge
- Investment theory
- Personal financial planning
- Behavioral finance
Many business brokers have a background and education in the following areas:
- Entrepreneurship (many have started and sold their own businesses)
- Finance (stockbrokers, financial planners, investment managers, commercial lenders)
- Business (e.g., Masters in Business Administration, Finance, or Accounting)
- Accounting (CPA, CFO)
- Corporate consulting
- Executive management
Here are two data points to ponder:
Number of Business Brokerage firms in the U.S. – 3,935 firms (average of 3 employees) [Source: IBISWorld]
Number of Real Estate Brokerage firms in the U.S. – 106,548 firms and 3M+ licensees [Source: National Association of Realtors]
TIP: Think of business brokers and M&A advisors as scaled-back versions of investment bankers, not real estate agents who sell more than real estate.
A Quick Word About Business Brokerage Fees
The best business brokers are highly skilled professionals who should be the cornerstone of the business owner’s deal team. Success fees (commissions) typically range from 8% to 12% and are based on the sale price of the business. Some business brokers charge upfront fees and/or monthly progress fees as well.
Also, unlike real estate, there is no real industry standard when it comes to business brokerage fees: Each firm can charge whatever works for them – and their clients – in their market. Be sure to ask!
Why Hire a Business Broker to Sell Your Business?
While the price tag may seem high, a seasoned business broker should more than pay for themselves with the value they add to the business sale process. Here’s how the best business brokers earn their fees:
They Have a Buyer Network
One of the main reasons you hire a business broker to sell your business is because they have access to a large pool of potential buyers. The best business brokers spend years cultivating an internal list of qualified buyers. They are also familiar with all of the methods and resources available to cast the widest possible net when attracting buyer interest.
They Have a Proven Process
As boring as this may sound, having a clear and established process is essential to getting deals closed. Sophisticated business buyers ask a broker what their process is, and so should you.
The best business brokers will give a very clear, step-by-step description of how the process for selling your business will work. This will include how they vet prospective buyers, manage the due diligence process, and handle common obstacles that can delay or derail a deal.
It’s through this process that strict confidentiality is maintained. This is usually one of the initial questions every owner has for a business broker: How will the sale of my business be kept confidential? Unlike real estate, you can’t just stick a sign out front and advertise the address on a business listings service.
Business brokers have several ways of keeping business sales confidential, including:
- Careful wording, frequency, and visibility of information about the sale
- Qualifying prospective buyers using a disciplined, uniform process
- Requiring buyers to sign a confidentiality and non-disclosure agreement (NDA)
- Managing all communication between parties from beginning to end
TIP: The hallmark of the best business brokerage and M&A firms – regardless of size – is that they run a very tight process. And they almost never deviate from it.
They Have Excellent Negotiation & People Skills
Selling a business can be an emotionally charged event. It’s common knowledge that when both emotions and dollar signs are running high, the situation can quickly become volatile. Common cognitive biases, if not overcome, can turn into roadblocks. Business owners benefit from having a seasoned professional, with intimate knowledge of both the selling process and deal structure, acting as a buffer between themselves and the buyer.
The best business brokers are adept at keeping the conversation moving forward, especially during disagreements. M&A professionals are creative problem solvers who know how to negotiate the structure and terms of a transaction. They know what’s good for the seller is typically bad for the buyer, and vice versa. They acknowledge the highest priorities for each side while keeping their thumb on the scale in their client’s favor as much as possible.
Lastly, the best business brokers work hard to maintain the relationship between buyer and seller throughout the entire transaction. There is still plenty of work to be done post-sale. Ownership transition periods can take months, or even a year (depending on what the parties agree to). Good deals are based on good relationships, both of which need to last well beyond the closing date.
They Have a Sales & Marketing System
As a business owner, you may be extremely good at selling your business’ product or service. But chances are you are not good at selling a business – even your own.
The best business brokers know how to market businesses to the right types of buyers. The primary way they do this is through two marketing documents. The first is a one-page teaser (also called a blind profile). The teaser gives a minimal amount of non-identifying information about the business for sale and invites a prospective buyer to learn more.
After a buyer candidate has been qualified by the business broker and signed an NDA, the broker will provide a Confidential Information Memorandum (CIM). Also referred to as “the book,” the CIM offers a compelling narrative – supported by limited financial information – about the business for sale. A well-done CIM should provide a buyer with everything they need to know about whether or not they want to move forward.
A good business broker will also coach you, the owner, on how to interact with buyers. What to say or not say, and when to say it. Interactions with buyers should be well-coordinated – almost like choreography. Seasoned intermediaries know how to speak the language of the buyer, and present the opportunity to purchase your business in the best possible light.
They Collaborate With Other Advisors
Business owners need to enlist several highly specialized advisors to help with the sale of a business. These advisors are referred to as your deal team. In addition to a business broker, the owner’s core deal team typically consists of:
- Attorney (specializing in Corporate Transactions and/or M&A)
- CPA (with experience in business transactions)
- Financial planner (for managing post-sale proceeds)
Your business broker will also be communicating and coordinating with members of the buyer’s deal team. The business broker is quite literally in the middle of the deal – it’s why they are often referred to as intermediaries.
The best business brokers also know exactly which questions and issues need to be addressed by other members of the deal team and work collaboratively to get results and answers.
Their Expertise Is Both Deep and Wide
Here’s a little-known fact of business brokerage: The industry has a 90% failure rate. In other words, only one out of 10 people who try to make a career out of business brokerage actually succeed. Why? Because it is simply that hard.
Take another look at the list above with the skills that the best business brokers rely upon. While business brokers have deep expertise in the nuances of deal structure and how to run a proper sales process, they must also have a solid understanding of legal, tax, banking, and a host of other professional services.
It’s often said that the business broker or M&A advisor should be the number two expert in every area of dealmaking. That’s a whole lot of technical expertise that takes years to acquire.
With years of experience under their belts, business brokers and M&A advisors also develop well-honed instincts. Having great instincts may seem like a minor detail, but it is an invaluable quality in any dealmaker. It takes a seasoned broker to recognize the small but subtle cues that indicate whether a buyer intends to move forward in good faith, or is trying to re-trade a deal.
Most business brokers are generalists (i.e., don’t specialize in one particular industry). As such, they are adept at applying their expertise across different business models, industries, deal structures, and buyer types.
They also keep an eye on the future and do their best to help sellers avoid post-deal problems. This can pay for itself many times over if it keeps the buyer and seller from entering into a costly dispute after the sale is complete.
Lastly, business brokers are extremely good at setting appropriate expectations for both sellers and buyers. Again, this may seem like a minor point, but it is one of the hallmarks of a great dealmaker. From helping you understand the value of your business to setting deadlines with buyers and sticking to them, a good broker knows how to keep disappointment and frustration at bay.
Selling a Business Is Not a DIY Project
Most small business owners only get one chance to sell a successful business. And once the deal is done, there are no do-overs. There are plenty of pitfalls, and mistakes can be costly. It is a complex process and no place to go it alone.
Resources to find a broker:
Business listing and industry websites
- International Business Brokers Association (IBBA) [main street]
- M&A Source [high-end main street & lower middle market]
- Alliance of Merger & Acquisition Advisors (AM&AA) [middle market]
- BizBuySell.com [main street & lower middle market]
- Small business consultants
- Financial planners
- Business owners
A good business broker will be by your side from the day you prepare to go to market to the day of closing. They will work with your deal team, as well as the buyer’s, to quarterback the entire process of selling. Hiring a small business broker should pay for itself by finding a great buyer for your business, negotiating the best possible asking price and terms, and helping you avoid costly mistakes.