What is a business broker?
What is a business broker?
When considering selling your business, you may hear from or work with a business broker. But who are these people and what role exactly do they play in the M&A process?
To put it simply, a business broker is a professional who manages the purchase and sale of a business. This role involves management from the initial assessment right through to the final settlement. If you intend to sell your business, using a business broker can be useful, but you don’t actually need to hire one to ensure a fair, smooth, and successful process. As we will see, there can be some disadvantages, as well as benefits, to hiring a business broker.
But to really understand these benefits and downsides, we need to describe the responsibilities and skills of business brokers in more depth.
The Role of a Business Broker
A business broker can be an individual or a company – but their common goal is to assist in the purchase and sale of small and medium-sized enterprises (SMEs). These agents can carry out a number of different tasks to help you achieve your acquisition and offloading objectives. It’s common for business brokers to specialise in enterprises belonging to specific industries; some will also possess unique characteristics or skills that they become widely known for.
You want a business broker to help you secure a favourable price, submit paperwork according to guidelines and on time, and meet any licensing and permitting requirements. Business brokers are paid through commissions. They will get a cut of the proceeds gained from the transactions that they helped to arrange and oversee. The regulation of business brokers varies depending on the jurisdiction, with some requiring licences and others not.
Historically, the broker always represented the seller, but now buyer representation has become more common. The broker representing one party in a transaction will typically create a fiduciary duty between the broker and the party represented. However, some jurisdictions allow dual agency representation of both buyer and seller (assuming, of course, that all parties agree to the arrangement).
Any business broker worth their salt will have a strong business background and/or education. Various degrees, certificates, and diplomas can be gained to make one adept at this role. In Australia, this will mean having a certificate III or diploma in real estate practice or property services. Some business brokers have university qualifications in related areas, including business, management, and accounting. If operating – or working with clients – in Southeast Asia, you also want to make sure that business brokers in those jurisdictions have the necessary licences and qualifications.
What Do Business Brokers Do?
We’ve already summarised what business brokers do, but we haven’t yet detailed the various tasks they might be expected to carry out. Their many duties may include:
Drafting an offering summary, which is sometimes called a confidential business review, a confidential information memorandum, or simply a “book”. This document acts as one of the most critical marketing tools for the offering. It is provided to prospective buyers only after they have signed a confidentiality agreement and been qualified by the business broker.
Marketing the business to the widest possible audience while also maintaining strict confidentiality. Here we find one of the main differences between business brokers and real estate agents. The latter put a sign in front of their properties without the need for confidentiality and advertise widely the specific location of those properties. In contrast, business brokers are trained to keep details confidential.
Introducing prospective buyers to the business owner after confidentiality agreements have been executed.
Facilitating meetings between the business owner selling their company and prospective buyers.
Drawing up offers to purchase the business.
Handling negotiations between the parties after an offer has been agreed upon.
Facilitating the due diligence investigation (offers to buy are almost always made dependent upon a further due diligence investigation).
Assisting the buyer in obtaining business acquisition financing.
Accepting and listing businesses for sale, and analysing their performance and market value.
Offering advice to buyers on the merits and downsides of businesses, as well as the terms of sale.
Assessing buyers’ needs and locating businesses for their consideration.
The Advantages of a Business Broker
Business brokers can offer you many benefits. After all, executing company purchases and sales is a highly complicated undertaking, one which can cause a lot of stress and sleepless nights. Business brokers have specialised knowledge of the tax and legal implications involved in such transactions and hence will know how to cut back on costs, as well as minimise the risk of potentially detrimental issues cropping up later down the line.
If you outsource this complex legal work to professionals, this should ensure that a satisfactory deal is seamlessly made. This will also allow business owners to continue to focus all their energies and attention on day-to-day operations without getting distracted and stressed out by the dilemmas entailed by selling a business.
Moreover, companies hire business brokers to identify suitable companies to purchase or to increase the chances of selling. In either case, the expertise and contacts of business brokers will enable a smooth transition and a favourable price being received or paid. It’s wise to choose a business broker that is well-reviewed, reputable, and with a long history in their role. These business brokers will have had plenty of experience in creating successful relationships with people seeking to buy businesses as well as those looking to sell. Experienced business brokers will also understand how to market a company for sale and be able to distinguish serious buyers with adequate financial resources from those who are unserious (and who lack the necessary financial backing). Business owners may struggle to do the same, which – without the help of a business broker – could lead to a low of stressful interactions and problems.
A business broker with merger and acquisition experience will understand the market. They also have access to recent sales statistics and know how to utilise various techniques to direct you to a fair market value. A reputable broker may additionally work with a local valuation expert to assist in the process. Many SME owners overprice their companies and, as a result, take a long time to sell (and may never sell at all). By pricing your business strategically, a business broker will help you sell faster.
Furthermore, selling a business relies on marketing tactics since presenting your company in the best possible light will maximise the sale price. A quality broker will be savvy when it comes to print ads, internet marketing, direct mailers, and database marketing.
Business brokers are also professional negotiators and, as such, know how to overcome obstacles that prevent a sale from closing. A quality broker won’t let personal emotions get the better of them during the negotiation process.
There is no shortage of stories showing just how effective brokers can be. As a case in point, business broker Roy Levy, working for Sydney-based brokerage Core, helped a garden hardware business find an interest and suitably qualified buyer in Melbourne. Challenges included dealing with Sydney going into strict lockdown in 2021. Hands-on product and systems training for the buyer, who was to travel to Sydney from Melbourne, therefore became impossible.
Levy found a creative way to deal with this challenge. He helped both parties arrive at an agreement to carry out training sessions online, via Zoom. Levy also facilitated a positive relationship between seller and buyer during this time, so that a level of trust and goodwill was established. After two weeks, the training was a success, and the sale was concluded in spite of the tricky COVID-19 restrictions.
The Disadvantages of Working with a Business Broker
One of the main reasons that can make business owners hesitant about hiring a business broker is the issue of price. Their services don’t come cheaply. Business brokers are paid through commissions based on an agreed-upon percentage – typically upwards of 5% and sometimes as high as 10% – of the sale price they secure for the enterprise. For many companies, this represents money well spent, especially when they work out the savings the business broker was able to attain.
Another difficulty that comes with using a business broker is that the perfect match can be hard to find. You might spend weeks looking for a professional who meets your needs and expectations. This might encourage you to settle with less-than-ideal services, which could potentially hurt your sale as well as result in an unpleasant and stressful working relationship. This is why you need to ensure the broker you choose sincerely wants the best for your business and doesn’t just try to make an average sale as quickly as possible. While a quick sale is ideal, a faster process doesn’t always mean a better sale.
Not all business brokers have enough experience in the field, and those lacking relevant experience will hinder your sale and the price you’re seeking. If you notice any red flags during their time working with you on a sale, it’s best to end the contract and look for a better business broker. These red flags can include various mistakes, delays, failing to meet your standards, inaccurate information on the market, choosing the wrong buyers, and not listening to what you want out of the sale. All of these errors can significantly affect the sale of your company.
In an article for Forbes, Richard Parker (who has owned 13 companies, and sold 12 of them) describes a case in which a business broker spelled trouble for a business owner named Diana. She was approached by a brokerage to help her sell her school supply chain worth $9,000,000. Their presentation was impressive, which included their track record. They had an upfront fee of $25,000, and they would provide Diana with a business plan even if they were unable to sell in the end. In the end, no sale was made and the supposedly robust business plan included nothing Diana didn’t already know. This is why business owners need to be diligent before hiring someone else to assist in the sale.
Choosing a reliable and effective business broker requires a bit of effort. Many of them will have a great track record when it comes to selling businesses, but, as is the case in any profession, some will be better (and more specialised) than others. To get started, you should look at the percentage of companies a business broker has sold out of all the companies they’ve tried to sell. After assessing track records, the next step should be choosing a broker with relevant experience in the same industry as your company. Aligning a decent track record with specialisation will offer you the best chances of landing your desired sale price.
SMEVentures sometimes works with sellers who have hired brokers, but more often than not, we buy directly from a business owner who hasn’t engaged with a broker. It’s important to realise that hiring a broker isn’t always necessary and, in fact, you can be a lot better off selling without one.
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