certified business broker
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Business Broker

From Wikipedia

A business broker is a person or firm who/which acts as an intermediary between sellers and buyers of small businesses.

Business brokers, also called business transfer agents, or intermediaries, assist buyers and sellers of privately held small business in the buying and selling process. They typically estimate the value of the business; advertise it for sale with or without disclosing its identity; handle the initial potential buyer interviews, discussions, and negotiations with prospective buyers; facilitate the progress of the due diligence investigation and generally assist with the business sale.


Agency relationships in business ownership transactions involve the representation by a business broker (on behalf of a brokerage company) of the selling principal, whether that person is a buyer or a seller. The principal broker (and his/her agents) then become the agent/s of the principal, who is the broker’s client. The other party in the transaction, who does not have an agency relationship with the broker, is the broker's customer.

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Agency relationships with clients and customers

Traditionally, the broker provides a conventional full-service, commission-based brokerage relationship under a signed agreement with a seller or "buyer representation" agreement with a buyer. In most states this creates, under common law, an agency relationship with fiduciary obligations. Some states also have statutes which define and control the nature of the representation and have specific business broker licensing requirements.

Agency relationships in business ownership transactions involve the representation by a business broker (on behalf of a brokerage company) of the selling principal, whether that person is a buyer or a seller. The principal broker (and his/her agents) then become the agent/s of the principal, who is the broker’s client. The other party in the transaction, who does not have an agency relationship with the broker, is the broker's customer.

 Dual or limited Agency

Dual agency occurs when the same brokerage represents both the seller and the buyer under written agreements. Individual state laws vary and interpret dual agency rather differently.

  • If state law allows for the same agent to represents both the buyer and the seller in a single transaction, the brokerage/agent is typically considered to be a Dual Agent. Special laws/rules often apply to dual agents, especially in negotiating price.
  • In some states of the USA (notably Maryland[1]), Dual Agency can be practiced in situations where the same brokerage (but not agent) represent both the buyer and the seller. If one agent from the brokerage has a home listed and another agent from that brokerage has a buyer-brokerage agreement with a buyer who wishes to buy the listed property, Dual Agency occurs by allowing each agent to be designated as “intra-company” agent. Only the principal broker himself/herself is the Dual Agent.
  • Some states do allow a broker and one agent to represent both sides of the transaction as dual agents. In those situations, conflict of interest is more likely to occur.

Types of services that a broker can provide

Broker services vary widely depending on the practice and skill set of the broker. The most common services provided by a broker to a client are:

  • Assist client in establishing a MPSP Value - Most Probable Selling Price Valuation; the techniques used by individual brokers can vary greatly in this process
  • Develop a comprehensive Information Memorandum on the company; normally a 15-30 page document outlining the business for potential buyers
  • Conduct buyer searches
  • Exposure - Marketing the business to prospective buyers
  • Screen buyers for ability to complete a purchase
  • Coordinate negotiations and provide deal structuring advice
  • Provide overall deal management to guide the client through the entire process
  • Help maintain confidentiality of the sale
  • Hourly Consulting for a fee, based on the client's needs

Perhaps one of the biggest services provided by brokers is the ability to allow owners to stay focused on running their business during the sale process which can be take on average 6 months to 12 monthes to complete.

General

The sellers and buyers themselves are the principals in the sale, and business brokers (and the principal broker's agents) are their agents as defined in the law. However, although a business broker commonly fills out the offer to purchase form, agents are typically not given power of attorney to sign the offer to purchase or the closing documents; the principals sign these documents. The respective business brokers may include their brokerages on the contract as the agents for each principal.

The use of a business broker is not a requirement for the sale or conveyance of a business or for obtaining a Small business or SBA loan from a lender. However, once a broker is used, A special escrow attorney sometimes called a settlement attorney (or party handling closing) will ensure that all parties involved be paid. Lenders typically have Special requirements for a business related or SBA loan.

The market served by business brokers generally involves the sale of businesses with transaction values less than $10 M. Larger privately held companies are classified in the Middle Market and will employ firms that specialize in Mergers and Acquisitions, or M&A. However, business brokers do participate in mergers and acquisitions activities when it involves a transaction between two or more smaller companies. Business Brokers and M&A firms do overlap activities in the extremes of their market. These extremes are called the Transitional Market, or TransMarket.

Business brokers and sellers

Services provided to seller as client

Upon signing a listing contract with the seller wishing to sell the business, the brokerage attempts to earn a commission by finding a buyer for the sellers' business for highest possible price on the best terms for the seller. To help accomplish this goal of finding buyers, a business brokerage commonly does the following:

  • Ensures Confidentiality--Brokers have established systems in place to protect the confidentiality of a business.
  • Appraisals--Most business owners have no idea what their business is worth. Certified Business Brokers are trained in business valuation and can help business owners understand the true value of all their hard work and sacrifice.
  • Market Knowledge--Brokers make their living selling businesses. They are in the market on a daily basis conversing with Buyers. A local business broker understands the local market as well as what a business is worth.
  • Saves time and stress
  • Listing the business for sale to the public, often on a Multiple Listing Service, in addition to any other methods.
  • Based on the law in several states, providing the seller with a business condition disclosure form, and other forms which may be needed.
  • Preparing necessary papers describing the business for advertising, pamphlets, tours, etc.
  • Advertising the business. Advertising is often the biggest outside expense in listing a business.
  • Being a contact person available to answer any questions about the business and to schedule showing appointments
  • Ensuring buyers are prescreened so that they are financially qualified to buy the business; the more highly financially qualified the buyer is, the more likely the closing will succeed.
  • Negotiating price on behalf of the sellers. The seller's agent acts as a fiduciary for the seller. By not being emotionally tied to the transaction, Business Brokers are in a position to more effectively negotiate on a Seller's behalf. This may involve preparing a standard offer to purchase contract by filling in the blanks in the contract form.
  • Negotiating facility lease assignment or transfer, negotiating with creditors, assisting Buyer in obtaining financing.
  • In some cases, holding an earnest payment in escrow from the buyer(s) until the closing. In many states, the closing is the meeting between the buyer and seller where the business ownership is transferred and the businesses name is conveyed.

Business brokers attract prospective buyers in a variety of ways, including listing limited details of available businesses on their websites and advertising in business newspapers and magazines. Brokers also directly approach prospective buyers and sellers to gauge interest.

 Brokerage Compensation

There are three forms of Brokers compensation; hourly, retainer, and success fee (commission upon a closing). A Broker may use any one, or combination of these when providing services. The most common form of compensation is a success fee commission where the payment of a commission to the brokerage is contingent upon finding a satisfactory buyer for the business for sale, the successful negotiation of a purchase contract between a satisfactory buyer and seller, or the settlement of the transaction and the exchange of money between buyer and seller. Just as major investment banks normally charge a retainer for services, more business brokers have started to embrace this practice as well. The retainer helps covers the upfront costs incurred by the broker to perform services and shows a commitment on the part of the client (seller or buyer) that they are serious. Certain types of merger and acquisitions transactions involve securities and may require that an intermediary be securities licensed in order to be compensated.

In North America success fee commissions range from 5% to 12%. Usually, the smaller the transaction, the larger the commission. "Main Street" businesses, those with revenues between $100,000 and $1,000,000 can expect commissions to average between 10% - 12%. Commissions are determined between the client (seller or buyer) and their broker and are normally paid at closing.

The standard commission is likely to be lower in the United Kingdom (see Lehman scale). Commissions are negotiable between seller and broker. The commission could also be paid as flat fee or some combination of flat fee and percentage, particularly in the case of lower-priced businesses, businesses in the multi-million dollar price, or other unusual business assets. The details are determined by the listing contract.

Out of the commission received from the seller, the broker will typically pay any expenses incurred to do the work of trying to sell the listed businesses, such as advertisements, etc.

All compensation to a broker paid by a third party must be disclosed to all parties.

Why use a business broker?

The process of buying or selling a business requires dedication and the attention of a professional with the knowledge of the complete flow of a business transaction, as well as a team in place to accomplish every aspect of the transfer.  Marketing and facilitating a business transfer is a full-time job!  You deserve someone who will work as hard as you do.  A qualified broker will save business owners and prospective buyers money by helping them avoid costly mistakes, effectively marketing the appeal of the business, and maximizing exposure to serious, qualified buyers--all with complete confidentiality.

If you are interested in selling your business and don’t know the answer to any of the questions below, you could benefit from the assistance of a professional broker (and you are not alone!)

  • How do you reach qualified buyers, including possibly competitors, without disclosing your intentions to sell?
  • How do you evaluate your business objectively to ensure you receive top dollar for your investment and avoid costly negotiating tactics?
  • How do you prepare and provide the information a prospective buyer will require to interest him in pursuing your business in favor of other options?
  • How do you arrive at the best price and terms, including the intangible and goodwill values of your business?
  • How do you maximize your favorable exposure to potential offers while minimizing your potentially damaging public exposure to customers, competitors, employees, and suppliers?
  • How do you market your business in all of the appropriate markets, databases, and media efficiently, effectively and confidentially?
  • How do you screen and pre-qualify buyers, determine their motivations, managerial capabilities, and financial strength?
  • How do you effectively sell your business, diverting significant time, effort and resources to that process, while continuing to manage your ongoing business productively?

Business owners have focused their entire lives on growing and developing their businesses and seldom know how to answer all of the questions above. That is where a professional BBN Affiliate Broker can come in. The sale of your business demands a professional, just as running your business has demanded your professional attention.  BBN Affiliate Brokers have the expertise, tools, and professional team to market and sell your business successfully on a national basis. The objective is to protect your business investment and maximize your net after tax profit on the sale.  It is to your advantage and in connection, your broker’s as well, to obtain the best possible price that a reasonable buyer will pay.  BBN Affiliate Brokers strive to maintain high ethical standards and communicate in an open and honest manner in all of business relationships.

What affects the selling price?

Several factors come into play and can affect the sales price.  One of the most critical is the “terms” or the amount of down payment and the amount financed.  Over eighty percent of all businesses sold above $100,000 are sold with one-third or less down and the owner financing the balance.  Asking for one-half down will reduce the price by approximately twenty percent.  Asking for cash will reduce the price to about forty to sixty percent of the amount attainable with one-third down.   

Down payment or the “terms” is a key factor, because a buyer is trying to buy as much business as possible for the money available for down payment.  So, when a seller asks for $200,000 down on a $400,000 value business, buyers prefer to continue looking until a $600,000 value business is found where the owner will accept $200,000 down and finance the balance. The seller who asks for all cash or a large down payment is not going to succeed in obtaining the full fair market value of their business, because buyers know they can buy three times as much business for the same investment. In a nutshell, high percentage down payments cause buyers to discount offers.  

A second critical factor is the quality of the information provided to a prospective buyer.  The value of the assets and cash flow generated by the business must be provable and verifiable.  A professional business broker will be able to assist the business owner in arriving at these values.

The third most important factor that effects the sales price of a business is whether there is competition among prospective buyers for the business. Competition creates higher selling prices, as we all know from basic economic principles.  When a business owner asks for more than the fair market value for their business or does not offer reasonable terms, there will be few, if any, buyers interested in acquiring the business. On the other hand, when a business is priced realistically and with proper terms, multiple buyers are likely to pursue acquiring the business. A buyer who knows he has other buyers competing for the business will be motivated to offer the price being asked to ensure he does not lose the business to another buyer's better offer.

 

What do I need to do to help sell my business?

The first thing you need to do is offer the business at a realistic price and with reasonable terms.  You need to provide as much information as is possible to the broker so a professional marketing package, including a business profile, can be prepared on your company.  The quality of the business profile will greatly enhance the “saleability” of a business. A package prepared by a BBN Affiliate Broker will contain the financial, operational and historical information about the business.  Informed buyers make better offers. Other things a seller can do are:

  • Continue to run your business in a normal manner.
  • Keep the business clean and organized (on paper and in person), so potential buyers will like what they see.
  • Liquidate or set aside obsolete inventory and unneeded equipment before you place the business on the market.
  • Notify your broker of any material changes in your business.
  • Forward monthly financial statements to the broker as soon as they are completed. 
  • This will keep your marketing package current. Do not meet with potential buyers without your broker being present. 
  • Avoid direct negotiations.
  • All offers and counter-offers should be in writing and should be presented by the broker. 

If you're thinking about selling your business, or would like to know what your business is worth, contact Certified Business Broker Robert Dean for a free Business Evaluation. Phone: 310-793-6757. Email: info@robertdean.biz.