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Working with a business broker is a great option for many business owners, but not all business brokers are created equal. In many states, business brokers do not have any licensing requirements, which means that it's really up to the broker to invest in education, professional development and training.
Unfortunately, this often means the burden falls onto the seller to ensure that the broker they work with is worth the commission and will serve as a value-added resource throughout the exit process.
1. How long have you been a business broker?
Given that business brokers largely lack licensing requirements, you should do diligence to understand how much expertise and experience the broker has in main street transactions.
In a similar vein, it's helpful to hear about the broker's journey into business brokering. What was their previous job? What attracted them to business brokering?
Brokers who have experience running a small business themselves, serving as a commercial lender, or acting as a business attorney often bring a wealth of knowledge to the table, which can pay off throughout the sales process.
2. For your last transaction, what was the original asking price? What was the sales price?
Great brokers have a strong understanding of the market and are able to make sure that business owners do not leave money on the table, while also ensuring a reasonable timeline to sell (e.g. less than 9 months).
By asking about specific past transactions, you can understand how accurate their initial valuation was and what the process for adjusting the asking price looked like.
3. How long did it take you to close your last three transactions?
A sales process that drags on is normally miserable for everyone. The seller loses steam and starts to consider shuttering doors, the broker starts to invest less effort in marketing the listing, and buyers start to question why the listing has been up for so long.
Great brokers are able to close transactions below average times. They do this by having smart strategies about buyer sourcing and vetting. They have lending relationships to move things along. They are good partners for educating both parties throughout the negotiation process.
For reference, the median time is around 6 months.
4. How many transactions did you close last year?
Some brokers focus on transaction volume - they'll work with nearly any seller and have a lean process for marketing the listing. The downside to this approach is that the broker may have limited bandwidth to be hands on with any one listing.
Other brokers will take the opposite approach - only taking on 6-10 listings per year.
Given your business and its needs, you should understand what type of broker you need and who those brokers are. If you have a more unique business, you may require a broker who can devote the necessary time to find the right buyer. If you have a more common business, you may find success working with a high traffic broker who's built a brand around his or her brokerage.
5. How do you source buyers?
At the end of the day, a seller is paying a broker for one-part financial advice, one-part education (e.g. educating both the seller and the buyer throughout the process), and one-part sales.
In order for a 10% commission to make sense, it's important that the broker plans to invest time in finding the best buyer. Some brokers will simply post the business on various business-for-sale websites and call it a day. Others will blast it out on an email list. The best brokers will have a plan for identifying and contacting relevant buyers in the nearby communities - whether they're fellow restaurant owners, mechanics at auto shops nearby, or someone who's been asking around about buying a laundromat.
6. How do you vet buyers?
One difference between a mediocre broker and a great broker is a thorough process for vetting buyers. They’ll want to nearly guarantee that the buyer can get a loan and will run the business well.
While a broker's process may vary, the key checks should include proof of funds, relevant work experience, relevant education history, a moral character, good standing in the community, and access to assets to guarantee any loan (e.g. home equity, auto, retirement funds).
7. How do you approach financing?
Some brokers take a hands off approach to financing, while others get really involved in preparing the buyer's business plan and loan application as well as introducing the buyer to the lender who will be the best fit.
It pays dividends to work with a business broker who is intimately familiar with financing options - ranging from SBA 7(a) loans to seller financing to other private sources.
8. What's your commission and fee structure?
Some charge an upfront retainer, while others don't. Generally, you shouldn't be paying a success commission above 10%, even for the good ones.
That being said, if a broker charges an upfront retainer, that's not a bad sign. Business brokers are often dealing with business owners who are simply testing the water. An upfront retainer offers a way for business brokers to filter out owners who aren't serious about selling.
9. What's the most similar transaction to mine?
Some brokers specialize in an industry, while others may focus on a certain region or state. It's important to know which bucket a broker falls in and what that means for your business.
For instance, selling goodwill-intensive businesses such as accounting firms or insurance brokerages are very different from selling more asset-heavy businesses such as laundromats. The buyer profiles can be quite different and the process for underwriting and negotiating varies.
Moreover, for certain regulated industries such as healthcare, it may make sense to only work with a broker who has deep industry experience. Dealing with patient records, HIPAA and doctors is very different from less regulated businesses such as restaurants, bars, florists, and spas. Having a broker who can speak your industry's lingo will go a long way in finding qualified buyers.
Not quite ready to sell?
Subscribe to receive the latest resources for small business owners.
Will founded Beacon with the mission to help the current generation of owners to retire while enabling the next to unleash their entrepreneurial spirit. He comes from a business background having graduated from the Wharton School with a B.S. in Economics.
Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
Calder Capital
Sam Domino