It’s time to hang up your hat and sell your business. You may have heard from other small business owners that using a business broker to sell your company can be easy and fast. But what about the real cost of using a broker?
Before we break down the pros and cons of using a business broker to sell a business, let’s review what a business broker does. A business broker is an intermediary between the seller and the potential purchaser of a small business. Their job is to get the best price possible for your business, ensure that the transaction meets all the legal requirements, and check that relevant documents are correct. A business broker will charge you a percentage of the selling price as their commission.
Now, let’s talk about finding a business broker.
How to Find a Business Broker
There are many business brokers; a quick search online will give you a list of brokers near you. But every profession has good and bad practitioners; business brokerage is, unfortunately, no exception. Some unscrupulous business brokers may claim that they have several potential purchasers for your business who will pay an excellent price. In reality, they may just be saying what you want to hear so they can add your business to their portfolio.
When you’re selling your business, you want to find a professional business broker who is working with and for you. Here are some pointers to find yourself an honest business broker.
Word of Mouth Referrals
As a business owner, you have made a considerable number of contacts over the years. You know clients, suppliers, and fellow business owners. Have any of them ever used a business broker? Ask around and find out as much information as you can. You can also ask fellow members of your business association or club.
Do not stop your search at just one referral. Gather the contact information of various business brokers and do your research to see which one would best fit your needs.
Membership with International Business Brokers Association
Your potential business broker should be a member of the International Business Brokers Association (IBBA). This group is the largest association of its type in the world. Its website states, “When it comes time to sell or buy a business, choose to work with an experienced IBBA Member who will guide you through every step of the process. Look for the Certified Business Intermediary (CBI) designation to identify individuals who have met our highest standards for education, ethics, and professionalism.”
Belonging to a professional association like the IBBA is not absolute proof of competence. Nevertheless, you should require that your business broker is a recognized professional.
Research Potential Business Brokers
Expect any business broker you contact to tell you that they are exactly the person you need. Take the claim with a grain of salt. Even if someone referred you to this business broker, research them.
Make sure they are who and what they say they are. Find out if the potential business broker has experience working within your business’s field and look for client testimonies somewhere other than the broker’s website.
Realistic Views of Your Business
A good business broker will give you an honest assessment of how much they can hope to sell your business for. They might offer suggestions about making improvements that will add value, or they may suggest selling as is.
It’s a fact of life that a lot of small businesses owners just aren’t able to sell. Competition and eCommerce can effectively kill off demand for your business. A reputable business broker will be honest about this; they may suggest cutting your losses, or they may find a company to merge your small business into their larger firm. Again, make sure your business broker has the experience to do what is necessary to sell your business.
Potential Cost of a Business Broker
A business broker should work on commission. If they don’t sell your business, they do not get paid. This is not an ideal system because it can lead to ‘dumping’ – the quick sale of your business for a quick commission. In the case of dumping, the price you get for your business might not be as much as you expected. Also, you have to pay their commission which further cuts into your profit.
A common commission you can expect to pay is between eight to twelve percent of the selling price. But a business broker may have a minimum commission of between eight and fifteen thousand dollars, regardless of the selling price. So there is a chance you may have to pay more than the eight to twelve percent if your business did not sell for as much as you were hoping.
It’s okay to be skeptical of a business broker. You have built your business from the ground up, and you want it to be treated with the respect it deserves. Watch out for business brokers that
- Trap you into a contract that guarantees them a fee (sometimes a substantial fee) even if your business does not sell.
- Promise to sell your business quickly (or unrealistically quickly).
- Ask for an upfront fee. The broker hasn’t done anything yet. Don’t pay them until they take action.
- Make exaggerated claims about the number of potential purchasers. You know your business better than anyone. Is it likely that there is so much demand?
- Are not completely clear about the terms and conditions of your contract with them. Read your potential contract carefully and ask for clarification when necessary. Don’t sign anything until you’re in complete agreement. You may even want to work with an attorney to ensure your needs are being met in the contract.
- Overvalue your business. You probably have a good idea of the sort of price that your business might sell for. Any estimate that is way above this is suspect.
Why You Might be Better Off Alone
You may have decided to use a business broker because you’re under the impression that a business broker will have access to potential purchasers that you do not. This isn’t entirely true. The contacts that you’ve built up over the years form a network of potential purchasers that you can tap into.
Advertise to Find the Right Buyer
To find the right buyer to purchase your business, you have access to multiple tools. We already mentioned your business connections; the following tool would be the internet. The internet offers access to a wide range of websites connected to your field of activity. You may find that you can reach potential purchasers through online posts.
Additionally, you can advertise your business in trade magazines and contact people in your various business associations or clubs. You can easily reach a large number of potential purchasers with just a little bit of effort.
Legal Guidance and Paperwork Processing
Using a broker might spare you from all the tedious paperwork. But if you choose to sell yourself, you still have access to the support you need. Thankfully, your lawyer or accountant can act as your go-to paperwork person.
By completing your selling paperwork, you have the potential to save thousands of dollars—money that can be better spent in retirement or on your next venture.
While a business broker has its advantages, selling on your own is just as feasible (see: how to sell a business without a broker). Plus, you can save your money instead of paying high broker fees.