Buying and selling a business can be a tough process. If you are selling a business, you need to find an appropriate buyer and deal with all the paperwork, compliance, negotiations and finance. For those buying, it can be a challenge to find a business which has been properly valued and contains all the financial information needed to make an informed decision to purchase. Business brokers are on hand to work as the buffer between the seller and buyer to facilitate the process from start to finish.
This level of support comes at a price, and brokers charge a considerable fee. Finding the right one to manage the buying and selling process can be a challenge in itself, as the industry is largely unregulated. However, a top-quality broker will be able to value the business at its true worth, attract quality buyers, understand all relevant compliance, deal with the paperwork, and sort out the financial transaction.
Whether you are a thriving business owner looking to sell your company or a savvy entrepreneur looking for your next investment opportunity, business brokers can help guarantee everything goes smoothly throughout the transaction. The top-quality brokers will manage all the details – including business valuations, ensuring complete confidentiality, and checking that all regulations are correctly followed during the sale.
The article provides a guide to better understanding the business broker industry so that you can make an informed decision when it comes to appointing the best broker for your business. Be sure to note down any important points that will want to ask a potential brokerage.
WHAT IS A BUSINESS BROKER?
In simple terms, a business broker is a company or individual that assists in selling or purchasing businesses. Some will work independently, while others are part of a more prominent brokerage firm – which may also include specialists that can help with licensing, permitting requirements, and weed out unqualified suitors.
The transfer of a company is a very complex and expensive process. Brokers look after a variety of tasks to help the deal go through fairly, smoothly, and legally. Some brokerages specialise in supporting companies of a specific size, industry, or unique characteristic.
Among the countless challenges that must be overcome include establishing a reasonable negotiation price, going through escrow, and closing the deal. These may seem like straightforward enough steps, but many issues can arise at each sale stage, resulting in a business broker being well worth their fee.
A business broker will also protect the confidentiality of the businesses by requiring interested buyers to agree not to disclose any details of the prospective business sale. Discretion is a substantial part of the process, as any information leaked can damage the deal.
WHY DO YOU NEED A BUSINESS BROKER?
The main value a business broker can bring is to act as the buffer between the buyer and seller. Unlike those with a vested interest, the broker will feel much more comfortable saying things that would otherwise be unexpressed to both parties. For example, a broker can tell the business owner that the valuation is too high and relay what needs to be done to complete the deal openly and candidly. In addition, they have the negotiation and mediation skills to discuss how the differences in viewpoints can be resolved.
Suppose an entrepreneur is on the lookout to buy an existing business. In that case, a broker can assist with the search and find a business that fits their parameters, including location, industry and size. They may even have access to companies which are not yet on the market so that the interested buyer can get in before a bidding war starts. Brokers typically charge a commission of between 5% and 10% of the purchase price. However, a broker's assistance (especially to first-time business buyers) is often worth the cost. It is viable to save a bit of money by hiring a broker near the end of the final negotiation phase, but you will miss out on the support they can offer during the entire process.
When including a business broker during the whole process, they can offer assistance in the following ways:
- Prescreening businesses – An experienced broker will likely turn down many of the companies they are asked to sell. The reasons vary, but it tends to be due to the seller being unwilling to provide the full financial disclosure or because they believe the business is overpriced. Going through a good broker will mean you will avoid these bad risks.
- Helping you identify your interests – If you are looking to buy a business, a broker will start off by learning about your skills and interests to help them select some business options that are right for you. You may even discover an industry you never considered a good fit for your investment.
- Assisting with admin – Business brokers are up to date on the latest laws and regulations affecting everything from financing and escrow to licences and permits. They have the knowledge and contacts to cut through the red tape and speed up the selling and purchasing process.
- Negotiating – During the negotiating process, brokers really show their value. They help both buyer and seller stay focused on the ultimate goal of closing the deal and smooth over issues that may arise.
Working with an expert can mitigate the risks you may neglect if you try to go at it alone. All it takes is a mistake on a form, forgetting a fee, or misunderstanding a process for the deal to go bad or the process to be pushed back by months.
HOW TO PICK THE BEST BROKERAGE FOR YOUR BUSINESS?
The role of a business broker is incredibly important – they are managing the purchase and sale of businesses, after all. They usually operate on a commission basis, and most firms you find on the market will offer comparable services, so how do you choose the right one for your needs? Certain factors need to be considered when comparing brokers side by side.
The following points will help ensure you work with a business broker that can accommodate your individual needs:
- Annual revenue – If you want to sell your business, the company's annual revenue will be one of the first requests on any valuation form. Certain brokers will have a minimum annual revenue stream for sellers they are willing to represent. At the top end of the range, these figures can start around £1 million, £5 million, or even £10 million, so you will need to make your company revenue qualifies for the broker even to consider the deal. However, a few business brokers on the market do work with smaller companies that generate more modest annual revenues. There are likely to be fewer options, but some are out there.
- Buying or selling – Whether you are selling or buying a business, both go through a business broker to facilitate the big transactions. However, some brokerages may favour one form over the other. You should be able to figure out what service the broker prefers by visiting their website. As a seller, you will be looking for services which aim to help you get competing bids and maximise the end sale value. On the other hand, buyers will be searching for brokers that list a lot of businesses at a fair price and have tools for narrowing a search. It is possible to find some brokers that offer an even split of services aimed toward buyers and sellers – but most will lean one way over the other.
- Industry expertise – Seek out a business broker that has experience selling companies in your industry. They will more likely have an existing relationship with potential buyers and private equity groups that want to invest in a specific space. If the brokerage is unable to prove any success stories or evidence of recent sales of business in your niche, you should probably look for an alternative brokerage for representation. Examples of industries with specific needs include online businesses, technology, franchises, and financial services.
PROS AND CONS OF USING BUSINESS BROKERS
Many business owners question whether business brokers are really worth the fees they charge. However, unless you understand the processes and regulations around the selling and buying of businesses, not having an expert by your side can lead to some costly mistakes.
Of course, before going out and hiring a broker, it is worth weighing up the pros and cons of their services. It may possibly be that you do not need that cushion between you and the other party or multiple interested parties if you are lucky.
Some of the main advantages of using a business broker include:
- Valuing a business – Brokers have fanatic insight into what companies are truly worth and if experienced enough, can usually derive a business value fairly accurately. Without a business broker by their side, it can be difficult for business owners to place a realistic valuation on their business. For buyers, they may end up acquiring a company that was priced above its correct value.
- Presenting the business – Glossy marketing tends to come hand in hand with business brokers. They are fantastic at packaging up a company to show it in its best light to tempt potential buyers. Without a business broker and their team of advertising experts, a seller may be unable to market their business in a way that will attract high paying buyers.
- Drawing in Buyers – Aside from the brochures, business brokers also have the know-how and contact to entice buyers. The established brokerages have vast databases of potential buyers and can send out business-for-sale alerts to their contacts when there is a new business listing.
- Confidentiality – This industry is all about being discrete. Business brokers conduct themselves in a confidential manner, keeping the sale of the businesses in confidence to ensure no competitors, employees, suppliers and other relevant parties are not informed that the business is up for sale.
- Gauging buyer intent – Brokers are great at quickly ascertaining whether a potential business buyer is serious or not. They can save you from having to deal with a lot of time wasters. It is often the case that sellers attempting to go through the process without a business broker will invest a considerable amount of time nurturing a potential buyer only to find out that they are not serious or qualified.
- Convert interested buyers into a sale – If you want to create competition among interested buyers, you will want to get yourself a business broker. They are fantastic at creating hype in a way that can move buyers into making an offer and closing the deal. When sellers make their initial offer, business brokers can interpret and even suggest changes that will make it more likely the business sale will take place.
- Intermediary services – It is common for sellers and buyers to not completely trust one another. The business broker can act as the middle person to relay information and provide transparent communication. They can also help lead the seller and buyer towards compromise when needed.
- Knowledge of business-for-sale transactions – A broker knows every little detail of what is needed to close a business sale transaction. Most buyers and sellers will not understand the nuances of getting the deal done, so it is better to have an experienced business broker involved to facilitate the process and ensure everything does not tumble down at the last hurdle.
On the flip side, the main disadvantages of appointing a business broker include:
- One-sided interests – It is standard that a business broker represents the seller. If you are the buyer, the appointed broker may not be fully aligned with your best interests. Although most brokers will be supportive of both parties, it is worth keeping in mind that the broker may hold more loyalty to the seller.
- The broker fee – Business brokers come with a high price tag. As noted earlier, they typically charge a commission of between 5% to 10% of the total business selling price. At the end of the day, this is a huge amount of money, so some sellers will attempt a For Sale By Owner (FSBO).
- Not all are competent – Due to the business broker industry being largely unregulated, finding a competent good broker can be a challenge. There are some cases where individuals that simply think they would make a good broker will go out and start a brokerage with little or no experience. Be very careful. If you engage an incompetent business broker, it can be a complete financial disaster.
- Pushed to sell too low – Business brokers tend to only get paid once the sale has gone through. Although this would naturally indicate the broker would want to get the best price possible, there are occasions when an untrustworthy broker may underprice to sell a business quickly.
IS IT POSSIBLE TO GO AT IT ALONE?
Many business owners, especially first time sellers and buyers, are tempted to try a DIY method, believing it will save money and get the deal done quickly. Unfortunately, the process involved can be tedious and complex. If you are undecided about selling or buying a business without a broker, it is crucial to understand your responsibilities.
You will be accountable for ensuring all the deal's legal and financial aspects are completed correctly. An excellent place to start is by performing a desk analysis. In addition, it is sensible to bring on an accountancy expert to ensure you are fully aware of and understand the business's financial position.
When it comes to the point where you are ready to put a deal together, find a professional legal advisor. The seller or buyer will also need to be available and responsive to answer all your questions. Expect a lot of back and forth due to the lack of a broker who typically does the legwork.
At the end of the day, the business owners know their business best, so it is possible to negotiate a deal that is agreeable to both parties. However, the buyer and seller will need to ensure that they look out for their own interests as there will not be a broker to do it for them. Once the deal is completed, a significant broker fee would have been saved, but whether the best deal had been negotiated is not always the outcome.
Selecting the best broker for your needs can require a lot of effort. However, many business brokers are great at their job while others are not, meaning it can be well worth the time you put in. A good indicator of their skills is to check the percentage of businesses they have managed to sell out of the ones they have tried to find buyers for. Once the broker's track record has been assessed, it is worth selecting one with the relevant expertise in your field.
As no national regulatory body overlooks business brokers in the UK, it is worth being extra cautious. If you have any major concerns, you can go to the Financial Conduct Authority, the financial regulatory body in the UK. Although business brokers are not yet required to register with the FCA, reports of any bad dealing may lead to a better-regulated industry.
FREQUENTLY ASKED QUESTIONS (FAQS)
How to sell a small business with a business broker? There are a lot of legal and financial implications when it comes to selling a business, but it is possible to do it without a business broker. You will first need to get your business ready for sale so that it is as attractive as possible to attract potential buyers. The following stages will include getting a business valuation, creating a sale brochure, preparing due diligence, finding a buyer, negotiating, and closing the deal.
How much does a business broker cost? Different brokerages will charge different amounts, but the broker commission will likely be around 5% to 10% of the price you sell your business. For small businesses, the fee structure could vary slightly. For example, they may charge “£5,000 or 10% of the selling price, whichever is higher” or even an advance retainer, plus marketing fees, and then 10% of the selling price. The cost of a broker does vary, so shop around.
How is a business valued? Many factors come into play when valuing a business for sale. The first aspect of the valuation will hinge on how much profit a buyer can make balanced against the potential risk involved. Past profitability and asset values are a good starting point, but other intangible factors like customer loyalty, brand value, and intellectual property can often add the most value.
Does it take a long time to buy or sell a business? The length of time it takes to buy or sell a business will depend on the market conditions and what is for sale. A typical business sale process is between five to eight months from start to finish. However, you should allow a whole year to manage expectations as various issues can cause delays.
What tax will I have to pay on selling my business? The tax implications when selling a business depend on your personal circumstances. Unfortunately, some form of tax is inevitable, so it is worth getting advice on the tax regime applicable to you. Ideally, you will get this advice at the beginning of the selling process, as it can have a huge impact on how best to structure the business sale deal. Presently, the tax on limited company sales or qualifying assets in the UK is still in favour of the seller – with capital gains tax from as low as 10%. Specialist tax advice is highly recommended as part of your preparation for the sale of a business.