There are a lot of decisions to make when it comes to owning a small business. While you could start a business of your own, it takes time to get a new business up and running and even more time until the business becomes profitable. If you’re not interested in starting a business but still want to receive the benefits that come from owning a business, another option is purchasing a small business that’s already successful. Purchasing an existing business is a big decision, but you don’t have to do it alone. You can use a business broker to help you find and purchase the best small business for you.
What is a business broker, and what do they do?
Business brokers are professionals dedicated to helping their clients purchase or sell their businesses. They can help you find the type and size of business to meet your needs and can help you think through all the aspects of purchasing a business.
The broker acts as a go-between for the buyer and seller. A good business broker is an expert in valuing businesses. They assist in the negotiating process and all the other pieces of purchasing a business. For many people, purchasing a business is the biggest financial decision they’ll ever make. If you’re an inexperienced buyer, your business broker can make sure you consider all aspects of the purchase before making this decision.
How can a business broker help you find and buy a business
While you can certainly buy a business without using a business broker, having a professional on your side can give you an advantage. A broker will learn more about the type of business you’re looking for. They’ll ask questions to learn about your budget, how you plan to finance the transaction, the geographical location you’d like to purchase a business in, and what type of business you’re interested in or have previous experience with. If you’re unsure about any of these aspects, they can help you narrow down your parameters with questions and their own experience.
Once you know what you’re looking for, your business broker will help you find the business. Buying a business can be like buying a house in some respects. You may be able to browse listings online, but having an expert on your side can give you access to businesses that aren’t listed yet. A good broker has access to a professional network and can put out feelers to help you find these businesses. Your business broker may even recommend approaching businesses that fit your parameters to see if the owner would be interested in selling. Most businesses are for sale, as long as the price is right.
Once you find a business, your business broker will help you negotiate a fair price. They’ll help you in the discovery process and make sure you enter the transaction with your eyes wide open. Your broker will help make sure you have the appropriate paperwork completed as well.
The costs of working with a business broker
Business brokers typically receive a commission based on the value of the business transaction. This can vary between brokers and the size of the business, but it’s usually based on the entire value of the deal. The value may be different from the amount of cash exchanged to complete the deal.
Typically, the seller pays the broker fees. If the buyer and seller each have their broker, the broker fees will usually be split 50/50 between the buyer’s broker and the seller’s broker. However, the seller may also elect to sell a small business without a broker.
Commission amount
For businesses with average annual revenue below a million dollars, the commission is often between eight and twelve percent of the sale price. Many brokers will have a minimum fee in the ballpark of $10,000 to $15,000, which may come into play for very small businesses.
Brokers may charge a flat commission on businesses with larger annual revenue. A common formula for calculating the commission percentage is the Double Lehman Formula. The Double Lehman Formula is as follows:
- 10% on the first million plus
- 8% on the second million plus
- 6% on the third million plus
- 4% on the fourth million plus
- 2% of anything over $5 million
Whichever method your broker uses, make sure you fully understand the fee, how and when it will be paid, and who will pay it prior to beginning your work with a broker.
Additional fees
Even though the seller is typically responsible for paying the broker’s fee as a commission, there may be other costs to you while you’re using a business broker to help you buy a business.
Your business broker may ask you to pay a retainer while they are helping you search for your ideal business. This is usually in the form of a monthly fee, and it may or may not reduce the commission paid to the business broker once the sale is complete. The retainer ensures that the broker will still be paid for the work they’ve done on your behalf even if you decide not to purchase a business. The retainer will usually not be refunded if you decide not to pursue the business purchase.
You should also note that some brokers may charge additional fees for work outside of the scope of the deal. These fees could be charged hourly, or there could be fees such as a flat fee for evaluating the business on your behalf, as well as other types of fees. As the client, be sure you know what these fees are. You can also request to approve any work outside of the scope so you don’t have unexpected fees.
Be well aware of both of these types of fees, so you’re not surprised by the final payout at the end of the business relationship.
Negotiating business broker fees and commissions
Even though a broker may quote you a fee based on your needs, you should know that business broker fees are negotiable.
One way to negotiate is to get quotes from multiple brokers. You can compare not only the percentage of the commission but other fees and the services they offer.
You may also be able to get a reduced fee if you already know of a business you’re ready to buy and just want someone to help represent your interests, or if you only need certain services such as a one-time valuation.
Pros and cons of using a business broker
There are plenty of benefits to using a business broker, but there are some downsides too.
Pros
A business broker can help you find a business that fits your needs, your budget, and your plans for the future. They can help you think through all your options. And, once you’ve decided on your ideal business, they can help you find the right business to buy.
Besides just looking at business listings online, your broker can lean on their contacts to help you find a business that might not even be for sale yet. They can even help you approach your ideal business with an offer to buy. They’ll help you create an offer, negotiate a favorable position, and walk with you through every stage of the buying process.
A broker will help you vet companies to make sure you don’t waste time on businesses that don’t fit your parameters. They’ll also act as an intermediary between you and the company you’re interested in, which can help the process run more smoothly and ultimately benefit both parties. A business broker makes sure you’re getting a good deal and have your eyes wide open as you near the final stages of your purchase, and may even be able to help you find financing if you need it.
They’ll also ensure all the paperwork is completed properly and filed with the correct parties, ensuring all aspects of the sale have been completed correctly.
Cons
But while there are plenty of benefits that come along with using a business broker, there are cons as well. One downside is the broker fee itself. While the knowledge and services the broker provides are valuable, you may not actually need them if you’re an experienced business buyer. You might be able to save money by buying the business without a broker, using other professionals such as an accountant to investigate the business, and an attorney to draw up your paperwork.
A broker working for you should always have your best interests in mind, but if they receive a fee based on a percentage of the sale they might be less inclined to help you negotiate a lower price. This could present a conflict of interest between you and your broker, although an ethical broker would still help you negotiate the best sale price.
How to choose the right business broker
Choosing a business broker is almost as important as choosing the business you’ll purchase. There are several key factors you should consider before you enter an agreement with any business broker.
Get referrals
Before selecting a broker, ask others in your network if they have anyone to recommend. Ask for referrals from other business owners you know, especially if they have experience buying or selling a business. It’s also worthwhile to check with your accountant or attorney, as they may have experience completing transactions involving business brokers.
Ask for references
When you have narrowed down your list of potential brokers, ask for references from previous clients. This can give you an idea of how well the broker performed his or her role in previous transactions.
Experience
Learn as much as you can about your potential broker’s experience. How long has the broker been in this line of work? Do they have experience with businesses of the same size, industry, and geographical area that you’re hoping to purchase? Do they have experience with sales of similarly valued businesses?
Availability of businesses
Some brokers prefer to sell the businesses that other brokers in their agencies have for sale. It’s worth asking your potential broker if they look outside their agency for potential matches or if they’ll only focus on making internal sales.
Fee disclosure
Make sure you have full disclosure of all fees your business broker will charge, including any retainer, commissions, and additional fees. If possible, ask your potential broker for a complete estimate of your costs. This includes how and when the payments should be paid, so you can compare brokers before agreeing to one.
Final thoughts about business brokers
Selecting a broker to help you find and purchase a business is a big decision. So, it’s important to take the time to find the right person for the job. Not every broker is ideal for your needs. In some situations, you may elect to not use a broker at all.
Owning a business is an exciting venture, but starting a business of your own can also be exciting and profitable! Not sure which is for you? Learn more about starting vs. buying a business to help you decide which one is best for your situation.