The Must-Have Guide to Business Brokers

What is a business broker?

Fundamentally, business brokers act as a buffer between negotiating parties during a business transaction. They work on behalf of their clients, who could be on the buying or selling side of any deal, to help prepare them for entering the market, find the right targets, and manage negotiations.

As Investopedia puts it in their definition:

Business brokers help those who want to buy or sell a business.

At a time when emotions can, and often do, run high and there’s a significant amount at stake, having an objective, experienced party by your side can streamline the process and make it much more straightforward to handle – particularly for sellers who still need to concentrate on running their company at the same time as marketing it to prospective buyers.

As part of a business sale, brokers can alleviate the time-consuming process of finding an ideal buyer. The top business brokers will have a clear understanding of who’s active in the market right now and will have contacts to them. Then, once they have separated the wheat from the chaff, they can play a key role in guiding negotiations and other elements of the sale.

Meanwhile, from a buyer’s perspective, a business broker can identify available acquisition targets in the market that meet their parameters, such as size, industry and location. They can also start communications between both parties and once again manage the negotiations before the deal is concluded.

According to IBIS World, today the business broker industry in the US is worth around $1 billion, with nearly 4,000 companies working in this field. As M&A activity levels continue to increase, the role that these professionals are playing is becoming more and more sought-after.

Within these 4,000 businesses is a mix of independent business brokers and ones working for larger business brokerage firms. Both are viable options provided they can demonstrate their experience and expertise in working with clients in your circumstances.

However, it is also worth noting at this point that business brokers typically work with clients classified as small and lower middle market companies. While this is not universal, it is more likely that companies with a greater enterprise value than these brackets will seek the assistance of a larger M&A advisory firm or investment bank to perform these actions on their behalf.

What do business brokers do?

As highlighted in the above section, the primary aim of a business broker is to support their clients through a transaction, whether it’s a business for sale or somebody looking to purchase a company.

But there’s a lot that goes on between initially engaging a broker and the conclusion of negotiations. Transferring the ownership of a company one way or the other is full of complexities and barriers that those who haven’t been through this process before will likely find extremely difficult. A business broker is there to make each step easier.

If you’re seeking help on how to sell your business, a broker can help to:

• Establish a probable selling price for the business (as well as potential ways to enhance this)
• Prepare marketing documentation (e.g. Offering Memorandums) to prospective active buyers
• Conduct thorough buyer searches based on the seller’s needs and goals
• Select other members of the sales transaction team
• Interview and qualify potential buyers
• Attend meetings and complete paperwork on behalf of the seller
• Handle the legal aspects of completing a business sale
• Manage the ins and outs of the due diligence process
• Lead negotiations and other meetings involving the selling and buying parties

Conversely, when working with somebody seeking to acquire a company, a business broker can:

• Establish the qualities and characteristics the buyer is looking for from their acquisition
• Prescreen available businesses on the market based on these criteria
• Analyze prequalified companies deeper to determine their strengths and weaknesses
• Reach out to and interview potential targets to identify the best option
• Attend meetings and complete the relevant paperwork
• Handle the legal aspects of completing a business sale
• Manage the ins and outs of the due diligence process, which includes determining if the sale price is fair
• Lead negotiations and other meetings involving the buying and selling parties

This is just an overview of some of the key functions a top business broker would conduct on their clients’ behalf. Yet, approximately only 10% of all deals completed involve a business broker, suggesting that at present many are forgoing the benefits of business brokerage – and there are many!

The benefits of working with business brokerage firms

We’ve already illustrated how much a business broker can cover on behalf of their client to make either buying or selling a company easier. But the benefits they offer extend a lot further than their understanding of this process.

Evaluate and determine business valuation

One of the fundamental questions someone preparing for exit will typically ask early on is “how much is my business worth?” This answer will vary from client to client, and not simply based on the location or type of industry they work in. You have to take into consideration:

• The value of your intangible assets
• Projections for company growth in the next 3-5 years
• The current market conditions

Therefore working with an M&A broker that has good experience and a firm grasp on the market will be able to determine an accurate value for your company, so you can expect to attract interest from buyers.

Protect confidentiality

A crucial component of any business transaction is maintaining strict confidentiality throughout. You don’t want the potential of business-critical information and documents leaking out to competitors, employees or customers.

For sellers, this could hurt your chances of securing a premium offer. For buyers, any leak could make you seem untrustworthy to prospective acquisitions.

With a deeper understanding of the legal processes involved during negotiations, business brokers can help ensure that confidentiality is kept intact throughout, even if a transaction doesn’t end successfully. This protects both you and the other party from any fallout.

Speed up the buying or selling process

When you have a company for sale, you may not have ample time available to secure a deal at the optimal time. Preparing your business, producing marketing materials, searching the market, managing due diligence and negotiations… it all adds up to time you likely won’t have free, particularly when you’re still trying to run your own company.

This is somewhere the best business brokers shine. By having access to databases of active sellers/buyers, and experience of what to do when deals encounter roadblocks on the way, this professional insight can take days, weeks, months, maybe even years out of the time it can take to finalize a deal.

Secure financing for investors

For buyers or investors, it is likely they might need some financial assistance to acquire their targets. There are numerous options available, which is handy – but only if you know which is the best fit for your circumstances. Again, working with a business broker can help eliminate any confusion here.

They may be able to lend a hand in screening the various financing options available to a buyer before coming back to run these past the buyer or investor. This can clarify the right path to take, so there are no unwanted implications beyond the close of negotiations.

Supports you emotionally and professionally

While commercial business brokers are keenly focused on the details involved in any transaction, they also play a key role in managing relationships and emotions during this process. Buyers and sellers need to work closely to get a deal over the line, and this can cause high levels of stress on both sides.

Through their experience of the steps involved, a business broker should form a strong relationship with their client to ease any burden and keep them focused on the goal. Particularly for sellers, emotions and doubts can run high when it comes to letting go of the company they’ve spent years investing into.

The support of a top business broker can be a valuable crutch in these times, so that all parties are looked-after and working towards a successful conclusion.

These are just some of the advantages of working with someone who knows how to broker a deal. It is this insight, experience and pleasantness that will be crucial in maximizing the potential of the transaction to their client.

Of course, the choice of hiring a business broker is not a guaranteed success. This decision can come with several drawbacks, be it:

• High fees
• Insufficient expertise, or being unspecialized in your industry
• Conflict of interests
• Inaccurate information/research

A lot of these potential disadvantages can be minimized by finding a good, effective business broker. But these don’t grow on trees, and a mediocre broker can cause more headaches than solutions.

Here, we’ll outline some of the elements you should consider when comparing potential business brokers to work with.

How to find a good business broker?

When it comes to choosing a business broker to support you during the purchase or sale of a company, there are several factors you need to assure yourself of:

1. They have the experience and expertise that they claim
2. There’s good chemistry between your team and theirs
3. They will deliver a return on your investment

These are the three key statements that you’re looking to satisfy. In order to confidently tick all these off in your search for the best business broker available, consider taking the following steps.

• Get referrals from the business broker’s former clients to get a sense for how they operate
• Check their reviews online, and whether they provide a track record of successfully completed transactions
• Gauge the percentage of successful transactions they’ve supported against those that weren’t completed
• Use resources like IBBA (The International Business Brokers Association) to find local business brokers that are professional, trusted members
• Perform your own due diligence into the broker, as you will need to ensure you can work in partnership with them
• Get in contact with the brokerage firm to check if you are in-sync and you can imagine yourself working with them
• Don’t work with business brokers that take a profit-first approach – they should care for you as a client

When you believe you’ve found someone that meets your conditions and demonstrates strong expertise and experience, you can feel more positive about your chances of securing an optimal deal.

How much do business brokers charge?

The all-important question – what does a business broker charge? Well, there is no blanket answer, but brokers’ fees generally range from 5% to 10% of the selling price of a business, depending on your negotiations with them, state laws, etc.

There are two main charges that business brokers will present to you for their work:

1. A success fee/commission – this is a price determined based on the value of your company, which is then covered after your business is successfully sold
2. A retainer fee – this is a flat fee paid at agreed-upon intervals to secure the continued services of a broker or M&A firm

A term you might also want to familiarize yourself with is the Double-Lehman Scale. Often used among business brokers working in the lower middle market, Double Lehman pricing charges a 10% rate on the first million of a company’s price, then 8% for the next million, then 6% for the third, 4% for the fourth and 2% for every million after this.

This is an alternative to a flat commission rate that other business brokerages use. Both are equally viable, but it is worth checking with any prospective broker as to what system they employ so you know what to expect.

Finally, be wary of brokers that demonstrate the following:

• Brokers that push foreign investors that will pay many multiples higher than current market value
• Brokers whose fee tail lasts over a year after the end of your contract with them, as this can lead to sellers being forced to pay a fee to them if they close a deal with another buyer during this tail fee period

Experiencing success with business brokers

We hope this breakdown of who business brokers are, what they do and why you should consider their support when executing your exit plans.

Having a professional alongside you when selling or buying a business can make a definitive difference in not only maximizing the value of your transaction, but streamlining what can otherwise be a complex, challenging process.

Remember – If you are ready to start your journey to exiting your business, Generational Equity will help get you there. Our associates specialize in unlocking the potential value of middle market companies, with the aim of closing a deal that fulfils your personal and professional goals.

If you’d like to learn more about our approach, speak to our advisors on how we guide you through every step of a sale.