What Is a Business Broker – and Do You Need One?
If you thought selling a home was a roller-coaster ride, consider selling a business! It is a complex process, and the stakes are high. Even if a sale is under $1 million (as most are), there are a host of logistical issues to handle. And there are also emotional issues. As an owner, it is not uncommon to become attached to one’s company, to view it as a parent views their child. It’s your baby, and you want it to thrive – even after it “leaves the nest,” so to speak. It is helpful to have an expert to help you navigate the intricacies – and to set you up for a successful next chapter. What is a business broker, do you need one, and, critically, how much do they charge?
What is a Business Broker?
Is working with a business broker like working with a real estate broker? In some ways, but keep in mind, there is a great deal more complexity, especially when it comes to taxes and governmental regulations. It is its own specialized field.
In short, a business broker is a professional who helps you buy or sell a business. Among their duties on the sales side: estimating the value of a company, advertising it throughout their network, and beyond, interviewing potential buyers, ensuring all applicable documentation is prepared and submitted, and fulfilling licensing and/or permitting requirements. They can also provide invaluable advice and guidance – as well as a vast network of connections – that you can leverage for optimal results.
You do not necessarily need a broker to sell your business; it is possible to conduct the transaction privately. However, engaging the right professional offers a number of benefits, including:
- Experience. How many businesses have you sold? Two? One? Zero? For a significant number of owners, the answer is none. An experienced broker has been involved with the process many times, knows the ins and outs, can anticipate trouble spots, and can draw on their network to connect you with not only potential buyers but also experts you may need (e.g. business attorneys, accountants, etc.). They also know when to accept an offer and when to hold out for a better number, and this can be extremely valuable.
- Confidentiality. Brokers can keep sales confidential, finding buyers quickly and ensuring they have the financial wherewithal to complete the purchase. Keeping the process quiet can have a number of benefits.
- Marketing. This is one of the business broker’s most critical roles. They put together a compelling marketing package and can pinpoint potential buyers within their network (or outside of it) who are motivated to buy.
- Documentation. Brokers handle the reams of financial and legal documents necessary to complete a business transaction.
- Time. Brokers give you back your time. Use it to run your business, engage in high-level activity (e.g. strategic planning), or prepare for a smooth transition.
A business broker can make the difference between a dissatisfying experience – and one that propels you towards the next steps in your career and life.
How Much Do Business Brokers Charge?
Brokers usually work on commission, though the fee can vary. Ten percent is a typical average, but it can vary. For example, for sales under $1 million, a fee of 8-12% is standard. For businesses between $1 million and $25 million, the Modern Lehman Scale is often applied. It is a tiered approach: there is a 10% fee on the first million, 9% on the second, 8% on the third, and so on until the 8th million. For the eighth million and every million beyond that, there is a 3% fee.
The broker’s fee is based on the total purchase price, and the broker is paid at closing. Unlike the residential real estate sector, in business sales, it is usually the seller who picks up the tab for the broker’s fee. If the buyer is represented by a broker, then the commission is generally split (although not necessarily down the middle).
Does a broker ever charge an upfront fee? Well… this can happen. There is a significant amount of work that goes into reviewing financial statements and other documents and preparing necessary paperwork (even if the “paperwork” is digital), as well as time and money associated with marketing and other tasks. Some business brokers do charge an upfront fee. It is typically deducted from their commission at closing.
Other brokers do not believe in charging a fee before they have sold a business. They operate on the theory that they should not list a company if they are not confident in its sellability.
Ask about fees, and how and when they are charged, before entering into a relationship with a business broker. You don’t want any surprises as you go through the process. Or at least, you want to minimize the number of unexpected occurrences!
Selling a business is complex, and there are myriad challenges to navigate along the way. We hope we’ve answered your question, ‘what is a business broker?’ But if you’re looking to learn more about business growth or selling your business, then reach out to us at AMB Performance Group for guidance.