Why Do I Need a Business Broker?

You've decided to sell your small business. Congratulations, that wasn't an easy decision to make. Now you have to decide how to sell. In broad terms you have two choices. You can do it yourself or you can hire a business broker. This is an important decision as well. For most small businesses, i.e. those that sell for between $300,000 and $4 million, a business broker may charge a commission of between 6% and 15% of the sales price. That's a lot of money. Can a broker deliver value in excess of this cost? Following are two key benefits of using a broker.

Most business owners have an unrealistically high assessment of their business' value. It's easy to understand how they can feel this way. Often the business is the culmination of the owner's life's work. There's the emotional investment related to personal sacrifices the owner and his or her family made to the business' success. Selling the business can feel like the logical time for "payback". Additionally, owners approaching retirement can feel pressured to inflate the value to meet their retirement goals.

Placing an unrealistically high value on a business creates two problems. At best you will significantly increase the time it takes to sell. At worst you risk limiting or eliminating potential buyers. Qualified buyers typically have several purchase options available to them and will not waste time evaluating businesses that are overpriced.

Business brokers can help you to succeed by helping you to determine a realistic and defensible price for your business. They do this in two ways. First, the broker will complete a Brokers Opinion of Value. This is an estimate of the business' value based on the owner's discretionary cash flow and a sales multiple that is supported by recent sales of comparable businesses in the sellers industry. Second, the broker can arrange for an appraisal to be completed by independent valuation firm. Professional appraisal will establish a realistic price necessary to attract buyers and support the price in negotiations with buyers. In addition a valuation will be required for the bank and SBA if financing will be required to complete the deal.

The second benefit a broker brings is the ability to find buyers while keeping your sale confidential. The owner of a business for sale faces a bit of a paradox. On the one hand you want to create the largest possible market for your business. You're tempted to advertise, to tell everyone you know, to scream it from the rooftop in an effort to find buyers. On the other hand you have to protect the information that your business is for sale. You don't want your customers to know you want to sell because they might be tempted to try the competition. You don't want your employees to know because they might look for another job. You certainly don't want your competitors to know. You probably don't want your suppliers, your banker, or your landlord to know. So how do you advertise a secret? It's almost impossible for an owner to find a buyer while at the same time ensuring that the information does not fall into the wrong hands.

Brokers on the other hand are perfectly positioned to solve this problem. The first thing a good broker will do is sign a Confidentiality Agreement protecting your information. The broker has access to marketing vehicles the owner does not have. The broker will create ads for relevant websites, business press, broker networks, etc. that contain enough information to attract buyers without identifying you or your business. Potential buyers will respond directly to the broker to request additional information. Most brokers will require potential buyers to sign an NDA before releasing the identity of your business.

These are two ways that good brokers help owners succeed in the sale of their business. Owners are encouraged to do their homework to select the right broker. Ask for references. Make sure the broker's track record is relevant to your business. Read the listing agreement carefully and run it by your attorney before you sign. Make sure you're compatible with the broker; you're going to be working closely together for several months to possibly as long as two years before the deal closes and there will be bumps along the way. But once you find the right broker you will have taken a big step forward on the road to selling your business.


Written By: Michael Thames