Business Brokers – What’s their purpose anyway? Part 1: The Business Brokers’ Business Model

The time has come to sell your business. This is a rather daunting undertaking with organisational-, financial-, legal- and social hurdles to overcome and it makes sense to look for help. Your first option might be an internet search on how to sell a business and you’re immediately bombarded with business brokers who claim to be able to sell it quickly and at the highest value. They have professional looking websites and promise lists of qualified buyers looking for businesses just like yours. But then you dig a little deeper and you start finding stories about business sellers who have been ripped off by unscrupulous business brokers who didn’t do much for the exorbitant commission they demanded. I’m hoping that this blog can help you to decide whether you need a business broker, and what they should be offering you if you decide to list with one.

As a business owner you’ll know that your decision on the use of a business broker should be based on sound financial reasoning. This means that hiring one should be based on at least one of these reasons:

  • They can save you time, effort and money during the selling process.
  • They can sell the business for more that you could on your own (in addition to their fees).

If neither of these conditions is met, they are making money at your expense. Unfortunately, it’s extremely hard to quantify the value they might add to your business (since you’ll never have a comparative offer) so I’ll focus on the functions they may help with and what the services they offer which should add value.

However, before I start with the services business brokers offer, it’s worth considering the business brokers’ business model.

The Business Brokers’ Business Model

It might be stating the obvious, but business brokers are in business to make money. This means that their efforts will naturally gravitate towards the markets where they can make the most profit for the amount of time they are willing to put in. For some business brokers this means focussing on a particular area and/or industry or specialising in businesses of a particular size. For others this might mean putting a smaller amount of effort into many more businesses to cast a wider net. Needless to say, more personal attention should be the order of the day from the business seller’s point of view. Increased marketability of a business, and thus increased opportunity to earn a commission, will determine the amount of effort a business broker will put into selling a business (or whether they will list it under their name). Thus, businesses offered by business brokers generally seem to be profitable, well run and established. Very few business brokers will help you to sell a business that is struggling or a fledgling. These businesses are more likely to be served by business incubators.

There are generally two ways in which business brokers charge. They can charge a commission on the sale of a business or they can charge a service fee based on the number of hours they have put into a particular function (such as valuing the business or creating a marketing brochure). The way they structure their billing should immediately indicate the level of service one might expect from them. If they want a large, upfront payment for services and no commission, they may be tempted to tail their service off once the billable work is done. If they charge only a commission, they may be tempted to advertise with little or no business preparation. A fixed commission might tempt them to try to sell more businesses at a lower price. The best compromise is generally a payment for upfront services followed by a “selling price” dependent (sliding scale) commission, sometimes with the upfront payment deferred or taken out of the commission on sale. Note that commissions seem to be anything between 3% and 15% depending on the size of the company, country and level of service offered by the broker. This should suggest that commissions can be negotiated between seller and broker.

Note that, in most countries, to charge a commission on the sale of businesses and the property tied up in them, business brokers need to be registered estate agents and that this is generally the only qualification they need. Due to this relatively low barrier to entry, there is very real scope for unscrupulous- or incompetent business brokers and in difficult current market conditions there has been grumbling about estate agents moving in on business brokers’ turf without the proper knowledge required to sell businesses. To mitigate this, there are regional and worldwide business brokers associations and it is certainly worth investigating if a potential broker is a member.

In the next blog I will consider the functions business brokers perform in the process of selling a business.

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