Business brokers play a vital role in the business sales process. In this business broker guide, we discuss everything you need to know about working with a business broker when you sell your company. Notably, this includes the role of the business broker, how much they charge, and what you can expect from your broker through your sales journey.
What is a Business Broker?
A business broker is a professional who helps facilitate the sale of a company. Their role is to ensure the seller (the company owner) receives fair market value for their company during a sale. In some cases, a broker may work directly with a buyer as well to ensure they secure the best deal possible.
They also help maintain the confidentiality of the sale and ensure the process moves smoothly from start to finish. Specifically, a business broker’s role involves providing a professional, market-based valuation and leveraging their private connections, databases, and other channels to facilitate a deal with a qualified buyer who is willing to pay fair market value and meet the seller’s non-financial goals (i.e. maintaining the same workforce).
What Certifications and Licenses Does a Business Broker Need?
There is no such thing as a “business broker” license. However, there are certain requirements that brokers must fulfill in certain states. For instance, there are 17 states that require business brokers to obtain a real estate license. In other states, a real estate license may not be required, but unlicensed brokers may be required to work with a real estate broker if the sale involves the transfer of real estate.
Certifications are also not required to practice as a business broker in the United States. However, there are many reputable certifications that business brokers can obtain. Certifications are a great way for business brokers to demonstrate their extensive knowledge and expertise of the steps involved with facilitating a business sale as a broker. Specifically, the most reputable certifications a business broker can obtain include the International Business Broker Association (IBBA), American Business Brokers Association (ABBA), and M&A Source Certification.
How is a Business Broker Different Than a Real Estate Agent?
A real estate and business broker deal with different assets; real estate brokers deal with the transaction of real estate properties, whereas a business broker deals with the transaction of a company.
You should work with a real estate broker if you buy or sell a real estate property that is not associated with a business sale. However, if you are selling your company now or in the near future, then you should work with a business broker. As mentioned, a business broker can also assist you if there is real estate included in your business sale. For example, if you are selling your manufacturing company and are including your warehouse(s) in the sale, then you should work with a business broker. The broker can determine the full value of your company and seek a buyer for fair market value.
How Much Does a Business Broker Charge?
This is one of the most frequently asked questions. The answer depends on the specifics of your company (including its size) and the types of fees the broker collects (see below). Business brokers who require a payment upfront usually charge between $500 and more than $40,000, depending on the anticipated sale price.
The good news is there are many brokers who only work based on success fees, which minimizes the initial risk for business owners who are planning and executing their exit strategy. For success fees, the broker fee percentage is between 6% and 12% of the sale price; a standard starting point is 10% of the sale price.
Success Fees vs. Upfront Fees
Success fees and upfront fees are the primary ways in which a business broker is paid. Some brokers only charge upfront fees and others may only work on commission, whereas others may charge both. Here is a brief overview of the two payment methods:
- Success fees are paid upon the completion of the business sale. This is usually a percentage of the sale price. The exact amount is agreed upon when the business owner hires the broker for their services.
- Upfront fees are exactly as they sound. They are payments the business owner makes to the broker before they begin the sales process. Upfront fees are, in most cases, fixed prices paid by the business owner.
As mentioned, some brokers charge both upfront fees as well as take a percentage of the sale upon completion (success fees). It is important to determine the payment terms with your business broker before you work with them and/or sign any contracts or documents they present.
Niche vs. General Business Broker: Which Should I Choose?
The primary difference between a niche and general business brokerage is that a niche brokerage specializes in a certain industry (or alternative type of “niche”). On the other hand, a general business brokerage offers its services to most business types.
A niche broker, particularly one who is proven with experience and good reviews, may provide an accurate valuation as they are highly familiar with your industry (and recent sales data within your industry). However, niche business brokers are not always able to match their clients with an ideal buyer. This is because they have more limited access to buyers as they only specialize within the industry, and they do not always find success with fielding offers from outside of your industry.
The primary benefit of choosing a general business broker is the ability to gain access to more potential buyers. Oftentimes, the buyer a seller chooses is not directly involved in the same industry. Also, although the business processes may vary for each industry and business type, the way in which the company is sold is the same. So, the advantage of “specialization” that niche brokers provide is minimal to non-existent as a general business broker can provide the same services and produce the same quality of results.
7 Tips to Choose The Business Broker That is Right for You
Choosing the right business broker to help you sell your company for fair market value is perhaps the biggest decision you will make during the sales journey. A business broker who is not a good fit could lead to a range of issues, whereas you can feel confident that you can maximize the sale price and avoid setbacks by choosing a qualified broker you trust. Notably, consider the following tips when you choose your business broker:
- Choose a broker that is realistic and sees the full value of your company
- Consider the experience level (and avoid rookie business brokers)
- Verify the success of a business broker with case studies, testimonials, references, etc.
- Choose a broker that is certified and licensed in your state
- Ensure the broker you choose can maintain the confidentiality of the sale
- Take time to understand your broker’s sale strategy (and choose one who presents a strategy you support)
- Avoid brokers who charge upfront fees
What to Expect When Selling Your Company With a Business Broker
The sales process is different for every seller. However, in general, you should prepare for the range of emotions that are involved, the valuation process, and the marketing and negotiations stages. Let’s take a closer look at these key aspects of the business sales process for the seller.
The Emotions of Selling a Business
First, you should prepare for the range of emotions you may experience when you sell your company. These emotions can range from positive feelings such as excitement and pride to more negative emotions such as uncertainty and sadness. It is important to come to terms with the range of emotions before you begin the sales process. Otherwise, they could influence your decision-making and cause you to make decisions that are not in line with your long-term goals.
A business valuation from a qualified business broker helps business owners understand how their company is performing and what opportunities are available now and in the future. This is often the first step of the sales process and happens even before you make the difficult decision as to whether or not you should sell. There are several benefits of a professional valuation from a qualified and experienced business broker (rather than a generalized opinion of value). These benefits include:
- Calculate (and Justify) Your Fair Market Value During a Business Sale
- Make Informed Decisions to Improve Your Company’s Value
- More Leverage During Negotiations
After your valuation, you are able to make informed decisions as to whether you should sell right away or continue improving your company’s value. This information also helps you formulate your asking price and negotiation strategy. Ultimately, once you decide to sell, you move forward with preparing your company and officially marketing your company to prospective buyers (via your business broker).
Buyer Response Times
In some cases, a buyer may respond in as little as 24 hours after signing a non-disclosure agreement (NDA) and reviewing a confidential information memorandum (CIM). Although, it usually takes them much longer. Most interested buyers respond within a week or two if you have a justifiable asking price and/or are willing to negotiate. In some cases, buyers may take several months before they finally decide to respond to your inquiry. This is important to understand as buyer response times impact the length of the sales process.
After you receive responses from potential buyers, the negotiations and contingency plans take place until a deal is secured with a signed letter of intent (LOI). It can take anywhere from four months to more than a year to sell your business. On average, you can expect your sales journey to take between six and eight months.
Sigma Mergers and Acquisitions Has Helped Sell More Than 600 Businesses
Are you searching for a qualified and experienced business broker? If so, then contact our office at Sigma Mergers and Acquisitions. We have operated for 20 years and have since helped hundreds of business owners sell for fair market value or greater. If you would like to get started with a free, no-obligation business valuation, then contact us today.