Selling Your Business for the Biggest Profit - Part 3
April 2004
What to look for in a Business Broker
In last month's newsletter article, Pre-Sales Activity You Need to Know, we touched on using a business broker for the process of selling your business. This month, we will offer some tips on selecting the right advisor. Since most small business sales involve the use of professional representation or brokers, what criteria should you use to select the right broker or organization to represent you?A broker can help you in the selling process by:
- Increasing the visibility of your business to interested buyers
- Bringing you high-quality prospects that have been pre-screened
- Acting as a buffer between the seller and the buyer during the negotiation process
- Simplifying sale documentation and filing requirements
Be prepared to interview several brokers both within your geographic area as well as outside of your home turf. Sometimes the most competent industry professionals are located in other parts of the country. You will want to pay specific attention to their success rates and fees. Determining how committed an individual or organization is to selling your business will tell you whether or not you've found the right fit.
Once you think you've found the right match, dig in and learn as much as you can. Check the Better Business Bureau for complaints about the brokerage. Also, check out the deal references and determine how they would propose to market your business.
Some questions to ask are:
What is the broker's background/experience? A competent broker needs experience in valuation, accounting, business development, knowledge in the legal aspects of selling a business in your state, and salesmanship. Specific industry knowledge and successful transactions in your industry are a big plus.
Is the broker a member of a trade association and what accreditations does the person possess? For example, the International Business Brokers Association (IBBA) accredits business brokers with the designation of certified business intermediary (CBI), a recognized designation in the business.
What services are provided? The broker should offer to help you price the business, and should be able to show you how to package and market your business. You are hiring a sales professional with strong financial skills, so look for signs that your broker has these skills and experiences.
Can I talk to the owner? If you're not personally dealing with the owner of the firm, ask to speak to them. Ask the same questions you asked of the person whom you initially contacted. Do you get the same answers? Also, ask what methods of recourse you have if you're not getting any activity on your business.
How will the business be marketed? Discovering what tools, techniques and processes a firm has in its arsenal will help you determine just how capable they are in marketing your business. Although industry experience, connections and contacts are extremely helpful, it isn't always possible to find a broker with the perfect background. In this case, look for a broker with sound fundamental transaction experience in related markets or industry categories.
Is the broker a member of a trade association and what accreditations does the person possess? For example, the International Business Brokers Association (IBBA) accredits business brokers with the designation of certified business intermediary (CBI), a recognized designation in the business.
What services are provided? The broker should offer to help you price the business, and should be able to show you how to package and market your business. You are hiring a sales professional with strong financial skills, so look for signs that your broker has these skills and experiences.
Can I talk to the owner? If you're not personally dealing with the owner of the firm, ask to speak to them. Ask the same questions you asked of the person whom you initially contacted. Do you get the same answers? Also, ask what methods of recourse you have if you're not getting any activity on your business.
How will the business be marketed? Discovering what tools, techniques and processes a firm has in its arsenal will help you determine just how capable they are in marketing your business. Although industry experience, connections and contacts are extremely helpful, it isn't always possible to find a broker with the perfect background. In this case, look for a broker with sound fundamental transaction experience in related markets or industry categories.
It's just as important to know which situations to avoid as it is selecting the right firm. Some red flags that may signal further due diligence are:
The broker wants a significant or total fee paid upfront. Many brokers charge an upfront fee to help cover their costs of preparing you and a marketing document for the sale. However, this fee should not be any more than 10% of the projected final fee. In other words, a nominal charge is often used to determine commitment to the process by the seller, but the lion's share of the brokering fee should be tied to a successful transaction.
During your first meeting, the broker says he or she can get your asking price or higher. Be wary of too much optimism. Most owners overvalue their businesses to begin with, and an unreliable broker might suggest after a brief meeting with you that he or she can get you your asking price or higher for your business.
The broker can't or won't show you printed marketing materials. Brokers must be able to show you several kinds of offering summaries for each business they represent. Ask to see the printed marketing materials the broker puts out for clients. Look at their brochures and presentations, assessing completeness and how well-written they are.
The broker doesn't seem well-grounded in business valuation. Your broker should be able to explain business valuation to you clearly. If he can't, then how can he explain it to a potential buyer?
During your first meeting, the broker says he or she can get your asking price or higher. Be wary of too much optimism. Most owners overvalue their businesses to begin with, and an unreliable broker might suggest after a brief meeting with you that he or she can get you your asking price or higher for your business.
The broker can't or won't show you printed marketing materials. Brokers must be able to show you several kinds of offering summaries for each business they represent. Ask to see the printed marketing materials the broker puts out for clients. Look at their brochures and presentations, assessing completeness and how well-written they are.
The broker doesn't seem well-grounded in business valuation. Your broker should be able to explain business valuation to you clearly. If he can't, then how can he explain it to a potential buyer?
The chances of completing a successful sale will be much higher if you spend the time and effort up front to complete a thorough review before selecting a broker or organization. Remember, they are your salesmen and will be representing you and your business to potential buyers. Choosing the right firm to partner with is one of the most critical decisions in the selling process.
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