Regardless of who buys your business, you will need a strategy on how to sell it. Your options are to sell directly to a buyer you trust or engage a business broker.
Business brokers go by lots of names – investment banks, intermediaries, advisors – but they are all paid third parties that represent you – the seller of a business. Depending on the quality of the broker, they can be a huge bonus or a real roadblock to a transaction. At ValueStreet we are friendly with a wide range of intermediaries and we believe they add value in many situations. We also engage directly with business owners on a regular basis. Ultimately, the decision on whether to hire a broker boils down to your level of comfort with the transaction and the buyer.
Our managing partner, Jim Moran, wrote a widely-praised piece on the pros and cons of working with a business broker for Entrepreneur.com. We’ve modified and improved the article for the purposes of this guide and included it below. You can also read the original here.
Working With A Broker: The Premise
Business brokerage is an important part of the small business for sale industry. It is also poorly understood by many small business owners. At the heart of the confusion is a lack of understanding about what a business broker does and what separates a good broker from a bad one. Another common question is what kinds of sellers need a broker’s services at all, and what the sales process might look like without a broker. These are important questions we will attempt to answer for you.
The fundamental economics of business brokerage are fairly simple. In exchange for a commission on the sale of your small business (typically 10-15% of the sale), a broker will create a marketing plan that translates into an auction for your business’s assets. This benefits you as a seller; the more eyes you get on your business, the more competition there will likely to be to acquire the assets you’re selling.
Good brokers can add a lot of other value as well. Since the brokerage process will solicit quite a few phone calls and e-mails, they can help eliminate the day-to-day interactions related to selling your business, helping to screen “tire kickers” (people who have no intention of making a purchase) from ever making it through your door. Your broker can also be of huge help in crafting the narrative around your business to inspire people to part with their hard-earned money — all the while helping you navigate the emotional ups and downs that accompany the selling process.
Many of the positive features of brokerage can also be negatives depending on your outlook as a seller. First, businesses sold via brokerage can often receive interest from a higher percentage of independent, inexperienced buyers. Most of these buyers have good intentions in pursuing your business; they may just lack the experience or capital to close the transaction. It will be up to you to judge their ability to operate your business or come up with the required capital.
The financial considerations around brokerage are also very real and tangible depending on the size of your business. Consider that, on a $1 million transaction, a broker’s commission will leave your take home income somewhere between $850,000 and $900,000 before taxes. This is a significant cost and one that requires serious consideration.
What To Look For If You Decide To Hire A Broker
If you decide to hire a broker, here are our recommendations on how to identify a top-performer who will be worthy of the commission you pay him:
1. Be choosey about whom you work with.
If you’re going to do your research before buying a new sofa or TV, it only makes sense to do your due diligence when hiring a broker, too. Better yet, treat the process as if you were hiring an employee: Interview candidates in person and ask about the business types they typically work with, the number of listings in their roster, etc.
Let’s say, for example, that a broker claims to have 35 active listings ranging in price from $50,000 to $25 million. Impressive, sure, but those numbers could be an indication of an overworked, distracted and commission-hunting broker. A better answer might be, “I sell in X and Y industries, and I have four listings at the moment.” This is someone who likely has a client’s best interest in mind because it’s an indication that they only take the listings they know they can sell, and sell well.
2. Inquire about marketing practices.
Using business-for-sale websites as the crux of a marketing strategy isn’t typically the sign of a quality broker. Business News Daily reported that Businessesforsale.com alone averaged roughly 73,000 business listings around the world — not exactly the best way to drum up demand for your business.
Instead, look for a broker who uses a mix of inbound and outbound marketing strategies. In addition to online sites, this might include anything from a proprietary email list, to confidential inquiries, to industry-specific, targeted ads. The goal here is to attract buyers for your business, which calls for a broader marketing plan.
3. Network, network, network.
As with anything in business, the best results often come from networking. If you’re thinking you might want to sell, start attending industry events and asking your peers whether they know any potential buyers. Seek input from your attorney, CPA and other business professionals — you never know who might have the right connections.
Also, vet brokers early in the process to get a sense of their professionalism. Someone who won’t give you the time of day until you’re ready to sell will treat prospective buyers the same way.
Business brokers with high levels of professionalism and experience can keep sellers and buyers moving forward with a deal, even when all seems to be lost. For first-time sellers or inexperienced owners, in particular, a broker can be a helpful guide. The important thing is to understand your needs, do your homework ahead of time and stay involved throughout the process.
Going It Without A Broker: What The Process Looks Like
It is possible, and common, to sell your business without an intermediary. Here are the steps you should undertake to make the process as seamless as possible. You will notice that some of these steps are similar to our advice for finding a good broker.
1) Talk to your CPA, attorney, and other industry partners about finding qualified buyers – Your professional network can be a gold mine when it comes to sourcing potential buyers for your business. Business service professionals have nothing to gain and everything to lose (your trust) if they offer you a poor referral, which tilts the odds in your favor. Speak to your CPA, attorney, and other networking contacts about what type of sale you may be interested in, then wait for feedback (or follow up at a later date). Speaking to vendors, consultants, and even competitors in your industry is the best way to drum up interest from strategic buyers. You can ask that all details remain confidential until you agree to meet a potential buyer. You may be surprised at the interest level.
2) Identify local (or non-local) investment firms that meet your criteria – There has never been a better time for you, as a seller, to find an institutional buyer for your company’s assets. Small business private equity firms like ValueStreet exist for this very purpose, and there are more firms appearing every day. Your task as a seller is to do your initial homework on the firm of interest, and then ensure your business fits the target firms investment criteria. Once you’ve done so, reach out to somebody at the firm and present the high-level details of your business in a professional and cohesive way. The feedback you receive (and how quickly you receive it) will be a good indication of what it will be like to work with that firm going forward.
3) Consider business listing sites as a last resort – Business-for-sale listing sites are a broker’s best friend in drumming up interest for your business. They can be just as effective for you as an independent seller, assuming you understand the caveats. Remember to keep your business’s details confidential and do not reveal identifying attributes that would allow buyers to find you with some quick Googling (For example, if your company was founded in 1967, don’t put the exact year in the listing. That is a specific enough detail to attach to a search query and find you via your about us page in a simple search). Also, remember that you will need to do a lot of pre-screening of candidates and handle lots of phone calls or e-mails to find a qualified buyer.
Some general rules of thumb
Regardless of whether you take the brokered or non-brokered route, there are a few things you should be sure to do to give yourself the best odds of a successful sale.
1)Find a good M&A attorney – Leverage your personal network or do some online searches to find a competent transactional attorney to handle your sale. Do not use your buyer’s attorney or the first general business attorney recommended to you. Find an experienced industry professional.
2)Have a general idea of what your business is worth. The IBBA (International Business Brokers Association) publishes a quarterly survey with data from recent business sales. Understand what businesses of your size are selling for, and study basic valuation methodologies to familiarize yourself with the qualitative features that will make your business more or less valuable than others in your industry.
Regardless of the path you choose, you will need to be familiar with the sales process to negotiate well with a potential buyer. We’ll look at that process next.