Buying
Business Brokers
Business brokers act as intermediaries between buyers and sellers of a business. They may represent either party in the transaction, and do not take possession of goods or property, or deal on their own account. Brokers differ from dealers in that the latter transact on their own account and may have a vested interest in the transaction. Brokers fill the important marketing function of bringing buyers and sellers together and helping them negotiate mutually beneficial agreements. In addition, they facilitate transactions by providing expertise and advice.
Indeed, brokers supply numerous benefits to both buyers and sellers. For example, sellers benefit because they do not have to spend time and money searching for buyers. Qualified brokers have access to people that are in the market to purchase a company, and they know how to attract and screen potential buyers much more quickly than do typical business owners. The broker may also be able to help the seller place an accurate value on his enterprise, devise a strategy to transfer ownership over time, address necessary paperwork, and overcome legal hurdles related to taxes.
The buyer also benefits from the broker's access to business buying and selling channels. A buyer that goes to a broker may be able to find a business that suits his abilities, wants, and financial situation much more quickly than he could working independently. Moreover, good business brokers will not accept businesses that are overpriced, dependent on illegal activities, or otherwise fatally flawed, thus saving buyers the legwork of finding this out for themselves. In fact, good brokerage firms turn down as many as half of the businesses that they are asked to sell. In addition to screening, the broker can help the buyer determine what he or she can afford and may be able to assist in arranging financing to purchase the business. And, as with sellers, business brokers can provide help with licenses, permits, and other paperwork. In addition, it is the broker's duty to ensure that the interests of the buyer (and the seller) are protected by any contracts or agreements relating to the sale.
All of these services can be of great value to business buyers and sellers, but perhaps none is as valuable as the broker's status as a buffer between the two sides. The skilled business broker will diplomatically field and address sensitive questions and concerns that, were they delivered directly between the buyer and seller, might damage or ruin the prospects for completing a deal. Brokers that can address the concerns of one side without ruffling the feathers of the other are invaluable to the negotiating process.
For their services, brokers typically receive in compensation a percentage of the total value of the transaction. The fee may be paid by the buyer, seller, or both parties, depending on the nature of the transaction. Commissions vary widely, usually depending on the size of the transaction and the level of service provided by the broker.
The Brokerage Process
Although it is a broker's chief function, bringing buyer and seller together is often the easiest part of his/her job. Closing the transaction, however, is often a complicated process, colored by a spectrum of factors that are unique to each situation. For instance, the seller of a business often views the enterprise as his or her "baby," and subsequently place a value on it that may be greater than its actual worth. Similarly, a buyer may fail to appreciate the amount of work involved in building a business to a certain point. Other major factors that can complicate an agent's task include financing, which can become very complicated, and problems related to employees and/or clients of the business being sold.
As Susan Pravda and Gabor Garai observed in Mergers and Acquisitions, the process of securing an agreement typically is a multi-faceted one. Once a business broker brings an interested buyer and seller together, he or she often attempts to set a target date for completion of the transaction. This is usually accomplished by means of a letter of intent in which the buyer and seller agree to move toward a deal. The importance of the letter of intent is that it serves as a framework around which to structure negotiations. The letter also reduces ambiguity and misunderstanding, and ensures that both parties are serious about pursuing the transaction. Finally, establishing a deadline through a letter of intent helps to keep the buyer and seller focused on the big issues, rather than on minor details that can drag the deal out for months on end or kill the sale.
After setting a target date, the broker's next task is to close the price gap between what the seller wants and what the buyer is offering to pay. A wide range of considerations have to be taken into account here, including value of inventory, value of accounts receivables, value of community goodwill, inclusion or exclusion of equipment in final purchase price, tax issues for both buyer and seller, etc. Another possible obstacle to a sale that often crops up around this time is "seller's remorse." Seller's remorse commonly occurs during the latter stages of negotiations, when the seller suddenly realizes that he/she is relinquishing control of the company that has been a cornerstone of his/her life (and often the life of his/her entire family) for many years. Seller's remorse can kill the deal if the broker fails to confront it early in the negotiations by assuaging the seller's concerns.
After the framework for an agreement has been reached, the business brokering process moves on to due diligence, wherein various legal technicalities which could thwart an otherwise legal arrangement are identified and addressed. For example, the buyer might want to ensure that he or she was procuring the legal rights to all patents held by the firm. It is the broker's job to facilitate due diligence to protect parties on both sides of the deal.
In the final stage, the broker helps the buyer and seller iron out and sign a final contract. This stage is the one most likely to entail the use of attorneys on both sides, even for smaller transactions. The best way for the broker to reduce the chance that the deal will fail at this critical juncture is to try to address all questions and concerns in the letter of intent and due diligence stages. Despite his best efforts, one or both parties may employ brinkmanship tactics that threaten to scrap the entire deal, such as significantly raising the asking price or demanding that some new contingency be added to the agreement. At this point, the broker's expertise as mediator and peacemaker is key to ensuring that the transaction goes through.
Business Brokers and the Entrepreneur
Whether an entrepreneur is looking to start a business through a purchase or sell an existing business to start on a new idea, it is essential that he/she take steps to ensure that the services of a skilled and qualified broker have been secured.
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.
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.
Transactions Brokers
In some states of the USA, business brokers act as transactions brokers. A transaction broker represents neither party as an agent, but works to facilitate the transaction and deals with both parties on the same level of trust. Most states that operate business transactions as Transactions Brokers also operate Real Estate transactions as Transaction Brokers.
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), 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.
Top 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.
The "listing" contract
Although there can be other ways of doing business, a business brokerage usually earns its commission after the business broker and a seller enter into a listing contract and fulfill agreed-upon terms specified within that contract. The seller's business is then listed for sale, often on a Business specific Multiple Listing Service (MLS) in addition to any other ways of advertising or promoting the sale of the property.
In most of North America, a listing agreement or contract between broker and seller must include the following: starting and ending dates of the agreement; the amount of compensation due to the broker.
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 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.
