Business Brokers – What’s their purpose anyway? Part 3: Do you need one?

In the previous two blogs I discussed the business brokers’ business model and the services they generally offer. In this blog I will discuss when one should consider using their services.

As mentioned in the first blog in the series, they should add value to the transaction. I.e. they should save the business owner time, aggravation and/or money over the course of the business sale process.

The question then becomes how much of the business sales process the business owner is prepared to- or capable of tackling on their own. I will investigate the sales process step by step as per the infographic in the “Process of Selling/Buying a Business” blog.

Preparation to Sell

Preparing a business for sale requires the finalisation of financials and any outstanding tax issues, collection of data one might require for the sale of a business (of which the financials are part) and getting the business in order so that it can command its highest price. To finalise the financials and deal with outstanding tax issues one will require accountants. To get the business in order should be an ongoing concern of any business owner. It should not just come up when the business is to be sold. If the business owner has an experimental nature, they will have tried to improve their bottom line constantly. If they are a little more settled or have been complacent about- or a little more distant (not being involved day-to-day) to the running of their business they may want to have a closer look at improving profits and cutting some of the dead weight in the business. Either way, myopia or “not seeing the woods for all the trees” may have set in and getting a second opinion on improvements that could be made could be invaluable. Suggestions could come from trusted advisors or business partners, management coaches or -consultants or very dedicated and highly trained or experienced business brokers that specialise in the businesses particular industry. Alternatively, the process of collecting the relevant data required for a business sale (see What you really want to know when investing in- or buying a business ) and improving the factors that go into a company valuation (see below) might highlight where the business should be focussing attention to increase sales or margins or where it could be reducing expenses or cutting dead wood.

Company Valuation

Company valuation is a rather tricky field because there is no correct, definitive value to a business. The only moment the value of a company is set is at the moment of sale of some of its shares when a willing buyer and a willing seller agree. Company valuations are based on some or all of the following factors:

  • Available information on the business (size, profits, assets, liabilities, sales figures, operations, organisational structure, human resources, branding/marketing, customer base, position etc.).
  • Comparative industry standards for price, saleability (demand) as well as past, current and future (forecast) market conditions.
  • Assumptions and models for future earnings of the company.

As such a valuation can become quite subjective. Business owners tend to believe that the value of their company is higher than it is because they price in the effort it cost them. Business buyers tend to believe that companies should be valued lower than the asking price because they need to price in uncertainty (and because they need this as a negotiating starting point). When business brokers are asked to get involved with valuations, they have to walk the line between offering the seller a price at which they will be happy and the buyer a price which is an enticing starting point for a negotiation. Unfortunately, businesses are not advertised with enough information to justify the valuation. The price thus just sets the price bracket the potential buyer is shopping in. Whether or not they will eventually see value in the business will only be ascertained during the negotiation and due diligence process. Business brokers can help by offering a valuation service (or recommending a valuation company) and by tempering the sellers’ expectations. They can however also convince the seller to drop their price in an effort to sell the business quickly to get their commission. The next blog will consider business valuation more closely.

Create Marketing Presentation

Marketing presentations should tell enough of the story to entice potential buyers to have a closer look but not so much that it puts the business at risk. As such they tend to be released in a two-staged approach. Initially, very limited information such as asking price, profit or free cash flow, location and type of business is used as the marketing profile. Once a potential buyer has committed to a non-disclosure agreement, more sensitive and substantial information can be supplied. The sort of information that is required for the in-depth portion of a marketing presentation can be found in my blog series about “Due Diligence Information”.

Most business brokers will help to create the “limited information” presentation. The level of information for the “in-depth” presentation varies may be considered beyond their scope because they feel that it gets too close to the potential conflict of interest of helping with the due-diligence (see below).

Advertisement

The level and approach to advertising a business for sale depends on the size of the business and who it is being marketed to. At their simplest level, businesses are sold to current employees and/or managers who have learnt the ropes and paid their dues in-house. This generally happens in consulting businesses like accountants- and law offices (with people making partner) where continuity of the client relationship with people inside the company is important.

If the business is in a very specific industry that requires specialised skills and knowledge to run (e.g. engineering consultancies or medical services), it is likely to be marketed on a one-to-one basis to potential buyers within professional networks. Though business brokers are in the business of networking broadly, they often don’t have the connections in specialised fields required. Often, these businesses are more likely candidates for mergers or acquisitions than sales to new owners.

The less specialised the knowledge required to run a business and the smaller it is, the more likely it is to be broadly advertised to the general public. Examples of these kinds of businesses are restaurants and convenience stores. Advertising used to be done in classifieds but have quickly moved to internet based advertising pages. These businesses are generally marketed with as little information as possible and require more stringent vetting of potential buyers (due to their broader advertising spread). Business brokers generally act in this section of the market though they may decide to specialise in particular markets (such as restaurant and entertainment or manufacturing businesses) and business sizes within this segment. Business brokers will generally market listings on their own websites and social networks (Facebook, LinkedIn) as well as “business for sale” style websites (which individual business owners also have access to). They will also root out “tire kickers” who are interested in business information but do not have the means or knowhow to complete the sale.

Qualify Buyers / Sellers

To make sure that the business deal has the best chance of happening, one needs to make sure that one doesn’t waste ones efforts on potential buyers (or businesses) that do not have the means or knowhow (or desired level of profit or potential) that are prerequisite. This requires credit checks (and/or checking assurances about funding) as well as a small personal interaction (at least). Business brokers guard against “tire-kickers” and people trying to glean information about the business for reasons other than sales interest but peoples intentions are generally fairly clear and easy to ascertain. Credit checks require varying levels of permission (depending on country) but there are generally online solutions to getting these done easily.

Non-Disclosure Agreement

Non-disclosure agreements attempt to secure the business sellers right to keep to business information out of public reach and (sometimes) to stop potential buyers from setting up competitive operations. They also generally act as the primary hurdle for business brokers to release more information towards potential buyers and thus protect the business broker from the seller should information leak (by giving the seller another party to hold liable). Generally non-disclosure agreements don’t seem to be a very effective way to legally stop information getting into the wrong hands since they are easily circumvented. They do, however, indicate a level of interest and intent from the buyer and will allow negotiations to be more open. Sample non-disclosure agreements can also easily be found online or obtained from lawyers. Most business brokers will insist on using their own non-disclosure agreement.

Negotiation

Negotiation is often referred to as an art and practiced negotiators often have an advantage at the negotiating table. Generally business owners get some experience at negotiating (with suppliers and clients) in the course of running their business but the stakes are somewhat higher when negotiating for the sale of the business. The outcomes of negotiations are generally affected by the amount and quality of information that gets shared and the emotional state of the negotiators. The more a party thinks with their heart rather than their head, the more likely they will be taken advantage of during a negotiation. Having an external party can mitigate the effect of emotions on the negotiation but increases the complexity in information flow (needing approval for what can and cannot be shared). At the end of the day, the information that the agreement is based on needs to be accurate and comprehensive. Should information that would affect the deal not be disclosed, it might form the basis for a breakdown of the deal (at best) or legal action. For more information on business negotiation, check out my blog on “Business Negotiation”.

Letter of Intent

The letter of intent is a legally non-binding document detailing the buyers’ intent to make an offer on a business. It is usually given during or after negotiations and states the details of the business deal and that it is contingent on a successful due diligence which is bound by the confidentiality agreement. Business brokers generally have samples of these letters on file but they can also be easily found online or obtained from lawyers.

Due Diligence

Business brokers who are hired by sellers generally don’t get involved with due diligence because there is a conflict of interest between the buyers’ and sellers’ intentions at this point. Buyers need to verify all the information that the negotiation and tentative agreement is based on before signing the final contract. Business brokers might be hired by buyers to aid in this process (especially if they already had them help out during the negotiation process) though accountants might be more suited for this role. Please check my blog series on “Due Diligence Information” for the sort of information that would be useful and easily verified.

Legal Agreement

Though legal agreements are available for download from the internet (which could be amended to fit the business deals particulars), both the buyer and seller of a business will want the peace of mind that comes with a lawyer having set up the paperwork. Business brokers will generally have a lawyer they can recommend. Some might have sample agreements on file (as case studies for different business deals) but most will be reluctant to take on the responsibility of having these amended and used without a lawyer.

Conclusion

So the question remains: Do you need a business broker? The answer is: It depends on the business you’re trying to sell, how fast you want to sell it and how much effort you are willing to put in yourself. None of the services offered by business brokers are so specialised that reasonably savvy and involved business owners could not learn to do them themselves in the time required to prepare and sell their business.

Some businesses are not suitable for sale with the help of business brokers. These are:

  • Businesses that are struggling.
  • Fledgling businesses that have not had enough time and resources to show a profit (i.e. businesses that are priced on their potential).
  • Businesses that are highly specialised or so big that they attract the attention of Merger and Acquisition groups.
  • Businesses that are so small that their sale will not compensate brokers adequately for their efforts.

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