Business Brokers – What’s their purpose anyway? Part 2: Business Brokers Services

The previous blog had a look at the business brokers’ business model. This blog will consider the services they actually offer. These services can be grouped under several headings:

Value enhancement and Valuation

There is no one “correct” way to establish a value for a business. The most accurate measure of a business’s value is the price at which a willing seller will sell to a willing buyer. For businesses that are listed, a value of a business can be ascertained because there are likely to be at least a few trades of a business’s shares on a regular basis (since there is a willing buyer and seller for a share in the business). Though this won’t be the fixed price when buying a large chunk of a business (these are generally done at a premium to the individual share price), the market capitalisation of a listed business is generally a good starting point of its value.

For businesses that are not listed, there will much fewer share interactions so this is not a viable method of valuation. At this point, valuations are generally an estimate of current replacement value of assets held in the businesses as well as/or an estimate of the future value it can create through sale of its products/services or the strategic advantage it might offer. There may also be an element of comparison to asking prices for similar businesses which are currently for sale. For more information on business valuation, check out my blog on “Business Valuation: A “How to” guide”.

Since valuation is partially subjective, enhancing that value through changes in a company (structure, product, service, operations, marketing, etc.) can have variable results though increasing profits is generally a good sign. Very committed business brokers, as part of their service, work with business owners to ensure that a business presents as well as possible when it comes to selling it. This may be a relatively long-term (18 months to 2 years prior to listing) commitment of business coaching and/or management consulting.

Most business brokers will offer a valuation service (either themselves or by affiliated specialist valuation companies). Note that business brokers walk a fine line between presenting business owners with a price that is high enough for their expectations for their business (which are often inflated due to years of blood, sweat and tears) and low enough to be market related and give the business a good chance to sell. Either way, the valuation is just a starting point for negotiations and buyers are going to present valuations to substantiate their point of view of the company (which are always going to be lower than or equal to the asking price). The negotiations will determine at what price (between the asking price and buyers valuation) the business will eventually sell if the sale goes through.

Note that, before a business can sell, its financials generally have to be in order and it needs to be in good standing with the taxman. Some business brokers will help with this though most generally represent businesses that aren’t likely to have these hurdles to overcome.

Marketing

To market a business to potential buyers, business brokers generally set up a marketing presentation. This presentation usually contains some general business information, a SWOT analysis and a reason to sell. It may also be quite a bit more comprehensive covering human resources, ownership structure, services and products, operations, assets and liabilities and more detailed financial information (essentially information gathering for due-diligence). To set up this presentation, business brokers will need to spend varying amounts of time (depending on the comprehensiveness of the presentation) in the business and with its financials. This presentation is shared with potential buyers (usually after a non-disclosure agreement is signed) but control over who gets to see this sensitive information should be at the forefront of the business brokers (and business owners) intentions. Vetting of potential buyers will be considered under the next heading.

Business brokers will have you believe that marketing a business for sale to the general public is fraught with danger. For bigger transactions, businesses are generally marketed directly to potential buyers or institutional investors. If not marketed directly, businesses are generally marketed anonymously out of fear that knowledge of its “for sale” status might affect current trading. It is assumed that this happens due to changes in relationships between owners, managers, employees, clients and suppliers and that a competitor may attempt to find out more about the running of the business or to jeopardise the sale. One should consider as well that business brokering is a rather cutthroat business and that some of them attempt to “steal” mandates by approaching business owners directly. Thus business brokers have a vested interest in keeping the business anonymous (or signing a “sole-mandate” agreement with business owners).

There is an advantage to having multiple potential buyers because sellers can play them of against each other during a negotiation. The likelihood of attracting several buyers depends on the saleability of the business and the effectiveness of its marketing. Note that, depending on the compensation structure, business brokers may have more interest in finding single potential buyers rather than multiple buyers for each business. Once a viable buyer is identified they may feel that their time is better spent focussing on their other listings.

The amount of data released and under which conditions (e.g. initial marketing, “non-disclosure” agreements in place or “letter of intent”) forms part of the dance during the negotiation process.

Negotiation

Before a negotiation can get under way, business brokers often vet buyers, ostensibly for their financial status and fit as owners of the business. Buying a business often requires a substantial financial investment (depending on the business deal the current business owner might be interested in). Note that it is in both the business owners’ and  business brokers’ best interest to find buyers who are most likely to complete the sale process and that a large section of responders to marketing attempts are likely to be “tire kickers”. Doing credit checks can be fairly routine nowadays though it generally requires consent. Business brokers who claim to have “hundreds of qualified buyers looking for businesses just like yours” often neglect to mention that these buyers are qualified only because they have subscribed to the brokers website or mailing list. This is a marketing ploy by some business brokers to attract new listings. If they had serious buyers their time would be better spent looking for businesses than waiting for them.

Negotiation is a fine art. It’s an interaction between two or more parties who have different expectations and agendas and it involves information (and its interpretation) and sometimes emotion. The hope is that a mutual agreement, that all parties can live with, can be reached but by negotiators natures, it can be quite adversarial.  Business brokers can either represent or advise the buyer or the seller during the negotiation. They often see themselves as a buffer between the buyer and seller in the hope of taking out some of the emotion that these parties might have invested in the company or the sales process. It should be noted though that they will never know the business as well as the business owner and that their interest will always slant towards the completion of the agreement first (so that they can get paid) and secondly towards the party who will eventually pay them. Often both buyers and sellers have business brokers to represent- or advise them during the negotiation. The value of a good negotiator cannot be underestimated but, once emotion is mitigated as a factor, the business information should be the guiding factor to reach an agreement. For information on the sort of information required please see my blogs on “Business Information” and “Due Diligence Information”. For more information on business negotiation, check out my blog on “Business Negotiation”.

Administrative

By virtue of dealing with many business sales, business brokers will have a good idea of all the administrative-, financial- and legal processes required as well as the local regulations that may pose stumbling blocks. They also have a vested interest in making sure that the process doesn’t stall or slow down since they generally only get paid once the deal is done. This means that they will keep up the pressure on both the buyer and the seller to complete the transaction. Given that the buyer and seller will generally have an interest in getting the deal expedited the business brokers’ knowledge and contacts might be useful.

A notable exception to the administrative services that the sellers’ business brokers generally offer seems to be help with the due diligence. This is the process where the buyer verifies the information that the negotiated agreement is based on. Business brokers usually cite a conflict of interest when it comes to this task and pass it on to (or suggest) accountants.

In the next blog I will consider when a business broker will add value to a business deal.

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