The SMERGERS Blog

Business Brokers

Wed 13 Jun 2018

Selling a business is never an easy task so you can always enlist the services of a broker to sell your business.

 

Who is a business broker?
It’s easy. Think of a real estate broker, who sells houses. Business brokers are just like that, except, they sell businesses.

They are intermediaries between a business owner who’s selling their business and an acquirer who want to purchase it. They play an important role in sale of businesses in providing expertise needed to get the sale done, a trait most small business owners lack. Also, selling a business takes time, so working with a broker allows the business owner to focus on operating the business while the broker does the leg work required to complete the sale.

In simple terms, a business broker help a seller and buyer complete a sale transaction

 

Duties of a business broker


The business broker has to ensure that the sale transaction is carried out within the stipulated time frame without any compromise on the market value of the business, whilst maintaining confidentiality about the business. Some of the duties required of a broker are – 

 

1) Advising seller on the process for sale

 

2) Structuring the method/type of sale (Asset vs Stock sale, Upfront payment vs Deferred payment, etc.)

 

3) Pricing of business and valuation

 

4) Drafting the offering summary which is document floated to potential buyers about the business on sale, its assets, liabilities, financials statements, etc.

 

5) Marketing the offer and finding potential buyers

 

6) Buyer-Seller meeting

 

7) Negotiations

 

8) Offer writing for purchase – This is when an interested buyer offers his terms for purchase of the business to the seller

 

9) Managing the Due diligence process – Which includes review of all licenses, registrations, financial statements, Govt. approvals, inventory check, etc.

 

10) Arranging for financing for buyer (if required) – Many buyers who’re ready to make the purchase need some financial support to complete the transaction. The broker works with banks and other financial institutions to arrange for finances through loans and other financial instruments.

 

11) Closing of transaction – Completing the paperwork and ensuring disbursement of the money as agreed

 

Compensation for brokers

 

Brokers typically make between 8% and 12% in the US with 10% being the median. In developing countries like India, the number hovers between 3-7%.
Irrespective of the country, smaller the business, more the commission paid to the broker (which is understandable given that the time put in by the broker is almost the same, irrespective of the size of the business).
The fees are generally paid by seller at closing of the transaction, though it’s common that the seller pays a portion of the fee upfront as a retainer to help the broker manage his expenses.

 

Representation methods


Like in most brokerage industries, business brokers fall into 3 categories –

1) Sell side broker
These are brokers who’re engaged by the business owner to help them sell their business

 

2) Buy side broker
These are brokers who work with the medium and large enterprises to help them find and buy small businesses which are available for sale

 

3) Transaction broker
These are brokers who don’t favour either party but provide advisory services which are required to complete the transaction

 

Training and Licensing


Many countries have small, but a tightly knit business broker community which has a members association. These associations arrange for trainings for new entrants into the industry. The American Business Brokers Associations organizes bi-annual training sessions where existing members mentor and train new ones. In India, digital platforms like SMERGERS and Tworld are leading the way in helping individuals become business brokers by providing them with tools and resources to enter the industry. Most countries do not require a license for business brokers to practice their profession.

Business brokerage is a great industry with strong professionals

 

Challenges


There’re a few challenges that most business brokers confess to.

1) Maintaining confidentiality
Businesses for sale can’t be marketed too openly. Amongst other reasons, customers and employees lose trust in the business if they know it’s up for sale. The broker has to ensure that the sale advertisement reaches as many potential buyers as possible without being too loud about it. Even during and after the sale process, clients of business brokers don’t like them sharing information about their business to many people. It takes great skill to get to potential buyers whilst maintaining confidentiality about the sale

 

2) Networking with other brokers
The business broker community is very small in most countries – Ranging from 3000 in the US to about 7000 in India. There’s a strong need for organization in the industry for professionals to meet and engage with each other. Real estate brokers have a strong network of other brokers they constantly work with to get deals done, and there’s a requirement for business brokers to do the same as well. Again, digital communities like SMERGERS are working towards bridging this gap.

 

3) Pricing the business
Arriving at the optimal pricing and valuation for a small business can be tricky. There’s a lack of access to data on sale prices of businesses in the same domain, and arriving at valuations through traditional methods like DCF don’t work efficiently for small businesses. SMERGERS has a wealth of data of small business multiples which could act as a guideline for SME business valuations.

 

4) Financing
Many buyers are looking for financing options to purchase businesses, but it’s getting increasingly difficult to arrange for that funding. Deals fall off at the last moment due to lack of financing options for the buyer. There’s an acute need for the broker community to work with banking and financial institutions to arrange for the loans required to ensure deals happen. Broker should also explore the possibility of seller to providing some form of seller financing.

 

How to find a broker to sell your business?

 

If you’re looking for a broker to sell your business, here are a few ways to go about it

1) Looking online
A simple Google search will retrieve contact details of brokers in your city who help in sale of businesses.

 

2) Digital platforms
Websites like SMERGERS and Transword help business owners in finding curated and trustable business brokers.

 

3) Broker organizations
Many countries have broker organizations for businesses and getting in touch with them makes it easy to find a broker in your city/area

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