What is a Business Broker? And Why You Should Use One
Business Broker Definition
A business broker is a company or individual who performs as an intermediary to assist sellers and buyers in the process of selling small businesses. They help sellers with determining the value of a business, advertising the business for sale, identifying the right buyer, negotiating with buyers on behalf of the seller, and facilitating the due diligence process to ensure a smooth closing. Some brokers work specifically for buyers by helping them locate the right business to fit their needs, obtaining a loan through a business lender, negotiating with sellers on behalf of the buyer, and working in tandem with the listing broker to help complete the due diligence process in a timely manner.
Business Broker vs Real Estate Broker
Business brokers help by making the process of selling a business as easy as possible for their clients, similar to how real estate brokers make the process of selling property as easy as possible for their clients. In fact, some states like Florida actually require business brokers to hold a real estate brokers license. The sale of a business will sometimes include the sale of commercial property along with it. A business broker needs to understand both the real estate world as well as the business world in order to be proficient in their duties to their clients.
The big difference between business brokers and real estate brokers is that business brokers choose to specialize their knowledge and expertise with businesses instead of property. They are constantly studying courses and books specific to business and business brokering. They are fully engaged with these types of transactions and have a much firmer understanding of how to successfully sell businesses than their real estate counterparts.
Good business brokers will also have memberships to certain associations such as IBBA (International Business Brokers Association) and BBF (Business Brokers of Florida). These organizations help brokers by offering them specialized education programs, useful tools for business valuations, templates for legal documents, sources for advertising businesses for sale, and a community for brokers to network with each other so they can share questions and learning experiences.
Why a Seller Should Use a Business Broker
The process of selling a business is very time consuming and complicated. The amount of knowledge and resources needed to be effective at selling a business is beyond what most business owners have time for. An owner wanting to sell should be focused on operating their business and making it as attractive as possible to potential buyers. This would be extremely hard to do if they were diverting hours every day to the tasks needed to complete to sale of the business.
Having a broker who specializes in selling businesses will allow the owner to focus on their company and not get bogged down and stressed out with trying to determine the most probably selling price, putting together a twenty-page Confidential Information Memorandum, listing the business for sale on numerous marketplaces, answering tons of inquiries from buyers and brokers, weeding out the non-serious inquiries, and negotiating back and forth with any offers. Also, most sellers don’t even want their staff to know they are selling, which becomes a whole issue in itself. Hiring a broker helps to maintain confidentiality while the business is for sale.
Why a Buyer Should Use a Business Broker
For someone interested in buying a business, it’s just as important to have a broker representing them. A buyer’s broker, known as a sales broker, will be able to listen to the buyers needs and help them find the right business to suit them. They know how to negotiate the best terms for the buyer, and make sure everything looks good during the due diligence investigation into any business of interest.
One thing we focus on with our clients is what their strength is. Are they better with sales, administrative tasks, or management? If we can identify which trait they excel at, then that helps us with targeting a business they can start growing immediately. To do this, we would find a business in the field of their interest that is insufficient at performing what the buyer is proficient at. For example, say a buyer wanted to own a coffee shop. We would ask the buyer about any experience they have with coffee shops. Maybe we learn that they managed one for five years and they know all the ins and outs for how to manage a coffee shop properly. This information would be great to know if we happened to find a coffee shop for sale that’s performing ok, but we learn the management is doing a poor job. Now we’ve found an inefficiency that the buyer can easily improve on to increase revenue in the short term.
When it comes to negotiating a deal, it’s important to understand that the listing broker works for the seller. The seller is the brokers client, and any buyer who comes to the table is a customer. This means listing brokers have a fiduciary responsibility to look after the seller’s best interest. This is a good thing for the seller, but not so good for a buyer who doesn’t have their own broker. The buyer would be left negotiating with an experienced broker on their own, and the broker is going to be fighting hard for the best deal possible for his seller. A good sales broker will be able to find faults in the business or it’s valuation and use them to leverage a more favorable deal for the buyer.
Navigating Due Diligence in a Business Acquisition
Even after a buyer makes an acceptable offer, there is still a ton of work to be performed in the due diligence process. This process can be exhausting and lengthy depending on the size of the business and what’s being transferred.
Brokers will make sure the buyer has financing and any required licensing in place before closing. They will ensure suppliers and vendors are introduced to the buyer and any new contracts are formed. Any merchant accounts for using credit card systems will need to be transferred to the buyer as well. If the business is renting its space, the broker will communicate between the buyer and landlord to create a new premise lease. If the property is being sold with the business, the broker will create a separate contract for the sale of commercial property and engage in all the due diligence needed for that as well. There is also a final inventory count to see exactly how much is due from the buyer for inventory costs at closing. Brokers are familiar with final inventory accounting and depending on the amount of inventory the business has; they may recommend a third-party inventory company to handle this task right before closing.
One final piece of advice for both sellers and buyers is to make sure you use an attorney who is experienced with business sales and closings. The attorney will help with reviewing all documents, ensuring the transaction is fair, and closing the deal. It’s important to use an attorney familiar with business sales or commercial real estate, otherwise they can delay the transaction for months and months, sometimes causing a deal to fall through completely. Most attorneys practice under adversarial conditions, and this is not helpful when everyone else is trying to negotiate a deal that’s a win-win for both sides. Attorneys will often charge an hourly rate, so you want one who knows what they are doing and won’t cost you tens of thousands of dollars in wasted time that leads to a deal falling apart but you still owe the bill. Listen to your brokers advise for attorneys they have worked with and trust to get the job done accurately and timely.
