What is a business broker and why would a business owner use one?
In this post, I cover the definition of a business broker, the advantages of using one to sell a business, their responsibilities, fees, and much more.
Here's a full list of what we cover:
Let's get started!
A business broker is an intermediary who assists clients in buying or selling businesses.
Most of these intermediaries sell small businesses worth less than $1 million in value.
Mergers and Acquisitions Advisors and Investment Bankers represent buyers and sellers of companies worth more than $1 million.
Intermediaries can choose to represent clients in selling and buying businesses. They are often paid by a success fee (also known as a commission), which is based on a percentage of the sale price of the business.
Selling a business is a long and difficult process. It can take 6-12 months, or even longer, depending on the industry and specific business.
Brokers work with the small business owner to complete the sale successfully while maintaining confidentiality throughout the process.
They have specialized knowledge of many aspects of a transaction to help with a smooth sale process, including business valuation, negotiation with prospective buyers, and the due diligence process.
Having a quality broker is invaluable. They have to have knowledge about a tremendous number of things, from creating marketing materials to navigating the SBA 7(a) loan process. The value they add throughout the process of selling a business should far exceed their fee.
– Jeff Baxter, President of MidStreet
The best way to find a broker is by searching based on experience and accreditation.
Quality brokers find buyer candidates while keeping the sale confidential.
They know how to quickly identify potential buyers who are serious and have enough financial resources to make sure they won’t waste an owner’s valuable time.
Many businesses rely on the owner for critical functions, such as administrative tasks, operations, or high-level strategy.
If the owner diverts his/her energy to selling their business, those important responsibilities could be abandoned, reducing the selling price of the company and/or creating added stress for an owner.
Quality intermediaries know how to sell businesses and will not shy away from giving sellers accurate expectations, such as how long it will take to sell, or what price they think a business could sell for.
They also know how to identify strengths and weaknesses in a business to present companies in the best light possible, delivering great price and terms to clients.
Experienced brokers have completed many deals and have pre-made legal documents available, as well as relationships with professionals such as transaction attorneys and accountants.
The broker’s success fee is usually paid by the seller once a business sells and is based on a percentage of the selling price of the business. As the selling price goes up, the fee percentage tends to go down.
For businesses worth less than $1 million, an 8-12% fee is common.
For businesses worth more than $1 million, but less than $25 million, a common fee structure is what’s known as the Modern Lehman Scale.
The Modern Lehman pays a success fee of 10% on the first million, 9% on the second million, 8% on the third, and so on until the 8th million and beyond at 3%. See the graphic below and our Success Fee Calculator.
One common question in our industry is, “why do business brokers charge so much?”
The experience required to perform a successful transaction is highly specialized and requires significant experience, time, and effort – far more than a typical real estate transaction.
Here are a few of the basic things a broker does:
Main Street brokers mostly sell businesses worth less than $1 million in value, whereas Merger and Acquisition Advisorsrepresent companies worth anywhere from $1 million to $100 million in value.
M&A (Mergers and Acquisitions) Advisors:
If your company is in the $1 million-$25 million purchase price range, make sure your broker/advisor has experience in selling companies to both individuals and private equity groups or strategic buyers.
Business Brokers specialize in selling businesses, while real estate agents sell real estate.
Many real estate agents perform business brokerage to offer another form of revenue for their firm but don’t have experience selling businesses effectively.
One major difference between the two is that in business brokerage, the intermediary has to protect the confidentiality of their client’s business, whereas real estate agents post identifying information about their properties.
The vast majority of listing agreements for companies doing over $1 million in revenue are greater than one year in length, because of how long it takes to sell a business.
Main Street intermediaries often have listing agreements for six months to a year, because it takes a shorter amount of time to sell a smaller business.
“Co-Brokering,” also known as "Co-Broking," occurs when two brokers work together, in which one represents the seller and the other represents the buyer. The success fee, usually given only to the sell-side broker, is split between the two.
It’s less common for businesses above $1M in revenue to be co-brokered, because of:
While many franchises exist, such as Sunbelt, Murphy Business Sales, Transworld Business Advisors, and VR Business Brokers.
These firms benefit from economies of scale with shared purchases and trainings, but the regional offices vary drastically in terms of quality of service provided.
It’s far less common for businesses doing over $1 million in sales to list with a franchise.
Hopefully, now you understand who a business broker is, the advantages of using one, and some of the differences between intermediaries.
It is difficult to find a high-quality business broker, but finding the right intermediary could mean all the difference in helping a business owner achieve their goals at the closing table.
If you have any questions or comments on this article, I’d love to be of service. Contact me at jonah@midstreet.com