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April 25, 2023Pros and Cons of Using a Broker to Sell a Business
If you’re a business owner looking to sell your business, you may be wondering, “Should I use a broker to sell my business?” After all, why pay a commission when you can just find a buyer yourself? While it’s true that you could sell your business on your own, there are several good reasons to hire a broker to help you with the process. In this entry, I’m going to explore some of the pros and cons of using a broker to sell your business, as well as some steps you can take to ensure you’re hiring a reputable one.
Follow Along With The Financially Simple Podcast!
This week on The Financially Simple Podcast:
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(0:44) What is a business broker?
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(3:00) A simple analogy: For Sale By Owner vs Realtor
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(4:50) Why you should use a broker to sell your business
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(8:00) Personal experience with an intermediary
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(9:05) How do you choose a broker?
What Is a Business Broker?
Before we really get into the meat of today’s subject, I want to be clear about what a business broker is. A business broker is a professional who specializes in helping people buy and sell businesses. They work with business owners to prepare their businesses for sale, find qualified buyers, negotiate the terms of the sale, and close the deal. A good business broker can make the process of selling your business much simpler and less stressful. They have experience and expertise that can help you avoid common pitfalls and get the best possible price for your business.
FSBO vs Realtor: A Simple Analogy
Selling a home and selling a business may seem like very different things, but there are similarities in the options available to owners. In the same way that a homeowner can choose to sell their property themselves (known as For Sale By Owner or FSBO) or to work with a licensed realtor, a business owner can also choose to handle the sale themselves or work with a broker.
At first glance, the FSBO route might seem like an attractive option to some business owners, but there are several reasons why using a realtor could be easier and result in a better outcome. To better understand this let’s look at how a realtor might give a homeowner an edge in selling their home.
Why a Homeowner Might Choose to Work with a Realtor
One major advantage of working with a real estate agent is their ability to find leads through an exclusive Multi Listing Service (MLS). This enables them to get your listing in front of as many buying agents as possible.
Another significant advantage of working with a realtor is the ability to take the burden of showing and staging the home off your plate. This means that you won’t need to rearrange your schedule to accommodate interested buyers. Likewise, you have the peace of mind knowing that your home will be presented in the best possible light.
Getting the Best Price and Navigating Legal Requirements
Pricing and negotiations is often a complex process. You don’t want to price so high that it scares potential buyers away. At the same time, pricing too low will hurt you in the end. But beyond listing an accurate and fair price, you’ll need to be a skilled negotiator. Working with a realtor who knows the market can ensure that you get the maximum value for your home.
In fact, a 2017 study by Collateral Analytics found that FSBO sales received an average sale price that was 6% lower than comparable listings sold through a realtor. On the other hand, the National Association of Realtors (NAR) found that FSBO homes typically sell for around 26% less than other homes, using a different methodology. These statistics illustrate the importance of pricing to attract buyers and achieve the highest sale price possible.
With any sale of this magnitude, there are going to be contracts and legal hurdles to clear. Working with a licensed realtor can ensure that all legal processes are handled correctly. Real estate agents are required to take classes to renew their licenses every few years, which means they remain apprised of any changes in the legal landscape.
On the other hand, if you chose the FSBO route, you may need to hire a real estate attorney to ensure that the sale and closing are done by the book. The average cost of a real estate attorney ranges from $150 to $350 per hour. However, you may be able to find one who offers a flat rate. These rates typically fall between $500 and $1,500, but in some cases, it is determined by the sale price of the listing.
FSBO Roadblocks and Time Considerations
Choosing to go it alone may present some unexpected problems as well. Many buying agents refuse to show FSBO listings because there are risks involved, and they aren’t guaranteed a commission. Similarly, many potential buyers may be put off by the idea of viewing the home with you rather than a trusted realtor, as they may perceive the sale as less legitimate or professional.
Finally, time on the market is a crucial consideration for many business owners. For example, where I live—in Tennessee—the average time a home is on the market in Tennessee is 69 days. That’s about 34 days to get an offer and an additional 35 days to close. On the other hand (and this is one area where FSBO has a statistical advantage), 77% of FSBO homes sell within two weeks. However, this number could be skewed by the fact that up to 50% of FSBO sales already know the buyer. You may not have this luxury when selling your business and it’s important to note that the time it takes to sell a business can vary widely depending on the industry, market conditions, and other factors.
At this point, you might be thinking, “Justin, I thought this post was about using a broker to sell my business.” It is. I just needed to provide a relatable parallel. Now that you’ve got this contrast between FSBO vs using a licensed real estate agent in mind, let’s look at whether using a business broker to sell your business is right for you.
Here are some of the key benefits of working with a broker to sell your business:
Confidentiality
When you work with a broker, you can be sure that your business will be marketed confidentially. Brokers have the experience and expertise to create marketing materials that will attract qualified buyers without revealing sensitive information about your business. They also have the tools and processes in place to protect your confidentiality throughout the sale process.
A broker knows when and how to disclose proprietary information in the business sale process. It should help you rest a little easier, knowing that your trade secrets aren’t being displayed for anyone to take advantage of.
Access to Qualified Buyers
A good broker has a network of qualified buyers who are actively looking to buy businesses. They also have access to databases and other resources that can help them find potential buyers who may be a good fit for your business. This is similar to the Multi Listing Service used by realtors. Having access to this database can help your broker put your business in front of as many potential buyers as possible, while also narrowing the field to those that would be most interested in purchasing it.
Valuation Expertise
One of the most important steps in selling a business is setting the right price—just as when you’re selling a home. A broker can help you find the market value of your business based on its financial performance, market trends, and other factors. They can also provide advice on how to improve your business’s value before putting it on the market.
Skilled Negotiation
Negotiating the terms of a business sale can be complex and stressful. A broker can act as a mediator between you and the buyer, helping to ensure that both parties get a fair deal. They can also help you navigate issues that may arise during the negotiation process.
Your Time is Valuable
Selling a business can be a time-consuming process. Working with a broker can help you save time by handling many of the details of the sale process for you. This frees you up to focus on running your business and preparing for the transition to a new owner. This is extremely valuable when you consider that the average business sale can take from 6 to 11 months. That’s nearly a full year that you can continue focusing on your business.
What to Watch Out for When Using a Broker
Look, selling a business is a complex process that requires time, effort, and expertise. Business brokers can help with all of these things. However, using a broker also has its downsides. Let’s look at some things you should watch out for when working with a business broker.
Broker Fees
Let’s be honest. This is probably the primary reason you’re even questioning whether to use a broker to sell your business. Admittedly, one of the most significant cons of using a broker is the cost. However, knowing what I know now, I probably would have walked away with significantly more money from the sale of my first two businesses had I used a broker. Typically, business brokers charge between 10% and 20% of the total sale, which can take a large bite out of your profits. For example, if a business sells for $500,000, the broker’s fee could be anywhere from $50,000 to $100,000. It’s essential to understand how much the broker will charge before signing a contract and to negotiate the fee if possible.
Inconsistent Regulation
Business brokers are not regulated in every state, which means that some brokers may not have the necessary licenses, training, or experience to handle the sale properly. Making matters even worse, some states allow brokers to be dual agents, representing both the buyer and the seller, which can create a conflict of interest. To avoid this, you should research the regulations in your state and ask the broker if they have any conflicts of interest before signing a contract.
Not All Brokers are Created Equally
Another potential downside of using a broker is that not all brokers are created equally. Because the industry is largely unregulated, anyone can become a business broker, regardless of their qualifications or experience. To protect yourself and your business, you should do your due diligence and research the broker’s track record, reviews, and references before hiring them. If a broker is unable or unwilling to provide this information, walk away!
Incentivized to Sell
Here you might be thinking, “If I’m using a broker to sell my business, I want them to sell my business!” That’s true, but there’s also a time when this can become a detriment. You see, brokers are typically paid on commissions. This means they have the incentive to sell the business for as much as possible. However, this can also work against the seller’s interests.
Let’s take a closer look. If your business could receive a $600K purchase price but the broker chooses to sell the business for $500,000 because it will close faster (meaning they get paid faster), they may receive a commission of $50,000 instead of $60K. While this may not seem like a big difference, it can have a significant impact on the seller’s profits. You see, while the broker is only missing out on $10K, you’re losing $90,000 in the deal. Therefore, you should ensure that the broker is acting in your best interest and not just trying to make a quick sale.
Choosing a Business Broker That Works for You
Ultimately, the choice to sell your business “by owner” or to work with a broker is up to you. However, I challenge you to really consider all angles and speak to a trusted advisor before making your decision. Choosing incorrectly could cost you tens of thousands—if not hundreds of thousands, or even millions—of dollars, and even damage your reputation and future business prospects.
If you’ve decided to work with a broker to sell your business, it’s important to choose the right one. Here are some tips to help you find a broker who can help you get the best possible outcome:
1. Look for Experience
Find a broker who has experience selling businesses like yours. Ask for references and check their track record of successful sales. If possible, speak with other business owners who have already gone through the process with a broker. Pick their brains and see what they have to say about their experience. This could be a great way to find a good broker.
2. Ask About Their Marketing Strategy
A good broker will have a clear strategy for marketing your business to potential buyers. Ask them to explain their approach and the channels they will use to reach buyers.
3. Consider Their Communication Skills
Because you’ll be working closely with your broker throughout the sale process, it’s important to choose someone who communicates well and keeps you informed at every step. Additionally, pay attention to the questions they ask. Are they inquisitive and detailed? A broker that can ask good questions is one that knows what information they need to communicate to prospective buyers.
4. Understand Their Fee Structure
Brokers typically charge a commission based on the sale price of the business. However, they might also require a retainer. The retainer could be a one-time fee, or a recurring monthly premium. Make sure you understand their fee structure and how it will impact your bottom line.
5. Trust Your Instincts
Ultimately, you want to choose a broker who you feel comfortable working with and who you trust to represent your interests throughout the sale process. Chances are, you haven’t gotten to this point in your business without having good instincts. If you speak with a broker and you don’t get a good feeling about them, walk away. You can always find another broker.
Wrapping Up…
Friends, selling a business is a significant decision, and it’s important to approach the process carefully. While you can technically sell your business on your own, using a broker can provide many benefits, including access to a wider network of buyers and professional marketing materials. By choosing the right broker and carefully considering your options, you could sell your business and move on to the next chapter of your life.
Of course, the right broker could also tell you, “It isn’t time to sell.” If that’s the case, work with your business advisor to address the 8 key areas that have the most direct impact on your business’s value. Just be patient and get back to work. Doing the right thing at the wrong time is the wrong thing.
Hey, I know life is hard, and trying to sell your business can be frustrating. But life is good and using a broker to sell your business doesn’t have to be frustrating. With some careful consideration and a conversation with your advisors, finding the right broker can be at least, financially simple. Hey, let’s go out and make it a great day!
If you’ve been told “It’s not the right time…,” or if you don’t have that trusted business advisor in your corner, reach out to our team to learn how we could help.
