Business Brokers

Business brokers act as intermediaries between buyers and sellers of a business. They may represent either party in the transaction, and do not take possession of goods or property, or deal on their own account. Brokers differ from dealers in that the latter transact on their own account and may have a vested interest in the transaction. Brokers fill the important marketing function of bringing buyers and sellers together and helping them negotiate mutually beneficial agreements. In addition, they facilitate transactions by providing expertise and advice.

Indeed, brokers supply numerous benefits to both buyers and sellers. For example, sellers benefit because they do not have to spend time and money searching for buyers. Qualified brokers have access to people that are in the market to purchase a company, and they know how to attract and screen potential buyers much more quickly than do typical business owners. The broker may also be able to help the seller place an accurate value on his enterprise, devise a strategy to transfer ownership over time, address necessary paperwork, and overcome legal hurdles related to taxes.

The buyer also benefits from the broker's access to business buying and selling channels. A buyer that goes to a broker may be able to find a business that suits his abilities, wants, and financial situation much more quickly than he could working independently. Moreover, good business brokers will not accept businesses that are overpriced, dependent on illegal activities, or otherwise fatally flawed, thus saving buyers the legwork of finding this out for themselves. In fact, good brokerage firms turn down as many as half of the businesses that they are asked to sell. In addition to screening, the broker can help the buyer determine what he or she can afford and may be able to assist in arranging financing to purchase the business. And, as with sellers, business brokers can provide help with licenses, permits, and other paperwork. In addition, it is the broker's duty to ensure that the interests of the buyer (and the seller) are protected by any contracts or agreements relating to the sale.

All of these services can be of great value to business buyers and sellers, but perhaps none is as valuable as the broker's status as a buffer between the two sides. The skilled business broker will diplomatically field and address sensitive questions and concerns that, were they delivered directly between the buyer and seller, might damage or ruin the prospects for completing a deal. Brokers that can address the concerns of one side without ruffling the feathers of the other are invaluable to the negotiating process.

For their services, brokers typically receive in compensation a percentage of the total value of the transaction. The fee may be paid by the buyer, seller, or both parties, depending on the nature of the transaction. Commissions vary widely, usually depending on the size of the transaction and the level of service provided by the broker.

The Brokerage Process

Although it is a broker's chief function, bringing buyer and seller together is often the easiest part of his/her job. Closing the transaction, however, is often a complicated process, colored by a spectrum of factors that are unique to each situation. For instance, the seller of a business often views the enterprise as his or her "baby," and subsequently place a value on it that may be greater than its actual worth. Similarly, a buyer may fail to appreciate the amount of work involved in building a business to a certain point. Other major factors that can complicate an agent's task include financing, which can become very complicated, and problems related to employees and/or clients of the business being sold.

As Susan Pravda and Gabor Garai observed in Mergers and Acquisitions, the process of securing an agreement typically is a multi-faceted one. Once a business broker brings an interested buyer and seller together, he or she often attempts to set a target date for completion of the transaction. This is usually accomplished by means of a letter of intent in which the buyer and seller agree to move toward a deal. The importance of the letter of intent is that it serves as a framework around which to structure negotiations. The letter also reduces ambiguity and misunderstanding, and ensures that both parties are serious about pursuing the transaction. Finally, establishing a deadline through a letter of intent helps to keep the buyer and seller focused on the big issues, rather than on minor details that can drag the deal out for months on end or kill the sale.

After setting a target date, the broker's next task is to close the price gap between what the seller wants and what the buyer is offering to pay. A wide range of considerations have to be taken into account here, including value of inventory, value of accounts receivables, value of community goodwill, inclusion or exclusion of equipment in final purchase price, tax issues for both buyer and seller, etc. Another possible obstacle to a sale that often crops up around this time is "seller's remorse." Seller's remorse commonly occurs during the latter stages of negotiations, when the seller suddenly realizes that he/she is relinquishing control of the company that has been a cornerstone of his/her life (and often the life of his/her entire family) for many years. Seller's remorse can kill the deal if the broker fails to confront it early in the negotiations by assuaging the seller's concerns.

After the framework for an agreement has been reached, the business brokering process moves on to due diligence, wherein various legal technicalities which could thwart an otherwise legal arrangement are identified and addressed. For example, the buyer might want to ensure that he or she was procuring the legal rights to all patents held by the firm. It is the broker's job to facilitate due diligence to protect parties on both sides of the deal.

In the final stage, the broker helps the buyer and seller iron out and sign a final contract. This stage is the one most likely to entail the use of attorneys on both sides, even for smaller transactions. The best way for the broker to reduce the chance that the deal will fail at this critical juncture is to try to address all questions and concerns in the letter of intent and due diligence stages. Despite his best efforts, one or both parties may employ brinkmanship tactics that threaten to scrap the entire deal, such as significantly raising the asking price or demanding that some new contingency be added to the agreement. At this point, the broker's expertise as mediator and peacemaker is key to ensuring that the transaction goes through.

Business Brokers and the Entrepreneur

Business brokers can be invaluable to both buyers and sellers of small businesses, but the quality of these agents can vary tremendously. Business brokerage firms have traditionally been a notoriously unregulated group, and while there have been some improvements in this regard in recent years, complaints about incompetence and/or questionable business practices still crop up. Whether an entrepreneur is looking to start a business through a purchase or sell an existing business to start on a new idea, it is essential that he/she take steps to ensure that the services of a skilled and qualified broker have been secured.

There are, of course, certain basic kinds of information that any buyer or seller should obtain when shopping for a business broker. "When you're looking for a broker to help you buy or sell a business, ask about the broker's level of experience and pursuit of continuing education," counseled Nation's Business. "When getting references, ask for the names of not only buyers and sellers but also attorneys, accountants, and commercial bankers." Another basic aspect of an agent's operation that should be checked is its exclusivity policy (some brokers will list businesses only if they can do so exclusively, a requirement that limits the business's visibility). But there are other steps that can be taken as well, as business executive Shannon P. Pratt told Inc. magazine. For example, a broker's record of sales as a proportion of total listings can provide significant insight into his or her abilities. Brokers who are unable to deliver sales on more than 50 percent of listings on the market for six months to a year should probably be avoided. "A broker who can document a successful track record of sales to listings is preferable to one that can't," said Pratt.

Other recommendations that Pratt gave to Inc. included the following:

Determine how often the broker's listing price corresponds to the eventual sales price. "I'd be much more favorably inclined to work with a brokerage if its average selling price is within at least 20% of the average listing price," remarked Pratt.
Inquire about the broker's affiliation with highly regarded industry groups, like the International Business Brokers Association, which maintains rigid standards for its members.
Inquire whether the broker specializes in specific geographic regions or industries. A broker who has primarily dealt with manufacturing firms may not be the best choice to help a business owner sell his or her restaurant.
Look for tell-tale signs of unethical or incompetent behavior. Does the broker accept bogus listings (those that are listed at ridiculously inflated prices or owned by owners uncertain of their desire to sell)? Has the agent prematurely leaked private information about your company to potential buyers? Is the broker favorably adjusting a company's income statement to an excessive degree? Unfortunately, these signs often become apparent only after a buyer or seller has established a relationship with the agent. In such cases, business experts counsel entrepreneurs to sever all ties and move on to another broker or method of purchase/sale.

Agency relationships with clients and customers

Traditionally, the broker provides a conventional full-service, commission-based brokerage relationship under a signed listing agreement with a seller or "buyer representation" agreement with a buyer, in most states thus creating under common law an agency relationship with fiduciary obligations. Some states also have statutes which define and control the nature of the representation. These are then clients of the broker.

Agency relationships in business ownership transactions involves the representation by a business broker (on behalf of a brokerage company) of the principal, whether that person or persons is a buyer or a seller. The principal broker (and his/her agents) then becomes the agent of the principal who is the broker’s client. The other party in the transaction who does not have an agency relationship with the broker is the brokers customer.

Transactions Brokers

In some states, business brokers act as transactions brokers. A transaction broker represents neither party as an agent, but works to facilitate the transaction and deals with both parties on the same level of trust.

Dual or limited Agency

Dual agency occurs when the same brokerage represents both the seller and the buyer under written agreements. Individual state laws vary and interpret dual agency rather differently.

If state law allows for the same agent to represents both the buyer and the seller in a single transaction, the brokerage/agent is typically considered to be a Dual Agent. Special laws/rules often apply to dual agents, especially in negotiating price.
In some states (notably Maryland^[1]), Dual Agency can be practiced in situations where the same brokerage (but not agent) represent both the buyer and the seller. If one agent from the brokerage has a home listed and another agent from that brokerage has a buyer-brokerage agreement with a buyer who wishes to buy the listed property, Dual Agency occurs by allowing each agent to be designated as “intra-company” agent. Only the principal broker himself/herself is the Dual Agent.
Some states do allow a broker and one agent to represent both sides of the transaction as dual agents. In those situations, conflict of interest is more likely to occur.

Types of services that a broker can provide

Since each state's laws may differ from others, it is generally advised that prospective sellers or buyers consult a reputable broker that is affiliated with the State Business Broker association such as [TABB]www.tabb.org

Some Examples:

MPSP Valuation - Most Probable Selling Price Valuation; a form of limited scope appraisal that can encompass a Comparative Market Analysis.
Comparative Market Analysis - an estimate of the businesses value compared with other businesses for a similar type. This differs from an appraisal in that businesses currently for sale may be taken into consideration (competition for the subject business).
Exposure - Marketing the business to prospective buyers.
Facilitating a Purchase - guiding a buyer through the process.
Facilitating a Sale - guiding a seller through the selling process.
FSBO document preparation - preparing necessary paperwork for "Sale By Owner" sellers.
Hourly Consulting for a fee, based on the client's needs.
Preparing contracts and leases. (Not in all states.)

General

The sellers and buyers themselves are the principals in the sale, and business brokers (and the principal broker's agents) are their agents as defined in the law. However, although a business broker commonly fills out the offer to purchase form, agents are typically not given power of attorney to sign the offer to purchase or the closing documents; the principals sign these documents. The respective business brokers may include their brokerages on the contract as the agents for each principal.

The use of a business broker is not a requirement for the sale or conveyance of a business or for obtaining a Small business or SBA loan from a lender. However, once a broker is used, A special escrow attorney^[2] sometimes called a settlement attorney (or party handling closing) will ensure that all parties involved be paid. Lenders typically have other requirements, though, for a loan.

The market served by business brokers generally involves the sale of businesses with transaction values less than $10 MM. Larger privately held companies are classified in the Middle Market and will employ firms that specialize in Mergers and Acquisitions, or M&A. However, business brokers do participate in mergers and acquisitions activities when it involves a transaction between two or more smaller companies. Business Brokers and M&A firms do overlap activities in the extremes of their market. These extremes are called the Transitional Market, or TransMarket.

Business brokers and sellers

Services provided to seller as client

Upon signing a listing contract with the seller wishing to sell the business, the brokerage attempts to earn a commission by finding a buyer for the sellers' business for highest possible price on the best terms for the seller. To help accomplish this goal of finding buyers, a business brokerage commonly does the following:

Ensures Confidentiality--Brokers have established systems in place to protect the confidentiality of a business.
Appraisals--Most business owners have no idea what their business is worth. Certified Business Brokers are trained in business valuation and can help business owners understand the true value of all their hard work and sacrifice.
Market Knowledge--Brokers make their living selling businesses. They are in the market on a daily basis conversing with Buyers. A local business broker understands the local market as well as what a business is worth.
Saves time and stress
Listing the business for sale to the public, often on a Multiple Listing Service, in addition to any other methods.
Based on the law in several states, providing the seller with a business condition disclosure form, and other forms which may be needed.
Preparing necessary papers describing the business for advertising, pamphlets, tours, etc.
Advertising the business. Advertising is often the biggest outside expense in listing a business.
Being a contact person available to answer any questions about the business and to schedule showing appointments
Ensuring buyers are prescreened so that they are financially qualified to buy the business; the more highly financially qualified the buyer is, the more likely the closing will succeed.
Negotiating price on behalf of the sellers. The seller's agent acts as a fiduciary for the seller. By not being emotionally tied to the transaction, Business Brokers are in a position to more effectively negotiate on a Seller's behalf. This may involve preparing a standard offer to purchase contract by filling in the blanks in the contract form.
In some cases, holding an earnest payment in escrow from the buyer(s) until the closing. In many states, the closing is the meeting between the buyer and seller where the business ownership is transferred and the businesses name is conveyed.

Business brokers attract prospective buyers in a variety of ways, including listing limited details of available businesses on their websites and advertising in business newspapers and magazines. Brokers also directly approach prospective buyers and sellers to gauge interest.

The "listing" contract

Although there can be other ways of doing business, a business brokerage usually earns its commission after the business broker and a seller enter into a listing contract and fulfill agreed-upon terms specified within that contract. The seller's business is then listed for sale, often on a Business specific Multiple Listing Service (MLS) in addition to any other ways of advertising or promoting the sale of the property.

In most of North America, a listing agreement or contract between broker and seller must include the following: starting and ending dates of the agreement; the price at which the business will be offered for sale; the amount of compensation due to the broker.

Brokerage commissions

In consideration of the brokerage successfully finding a satisfactory buyer for the property, a broker anticipates receiving a commission for the services the brokerage has provided. Usually, the payment of a commission to the brokerage is contingent upon finding a satisfactory buyer for the business for sale, the successful negotiation of a purchase contract between a satisfactory buyer and seller, or the settlement of the transaction and the exchange of money between buyer and seller.

In North America a commission in the 10% to 12% range is considered "standard" for business brokerage services and is typically paid by the seller at the closing of the transaction. The standard commission is likely to be lower in the United Kingdom (see Lehman scale). Commissions are negotiable between seller and broker. The commission could also be paid as flat fee or some combination of flat fee and percentage, particularly in the case of lower-priced businesses, businesses in the multi-million dollar price, or other unusual business assets. The details are determined by the listing contract.

Out of the commission received from the seller, the broker will typically pay any expenses incurred to do the work of trying to sell the listed businesses, such as advertisements, etc.

All compensation to a broker paid by a third party must be disclosed to all parties.

Licensing of business brokers

In the US, licensing of business brokers varies by state, with some states requiring licenses, some not; and some requiring licenses if the broker is commissioned but not requiring a license if the broker works on an hourly fee basis. State rules also vary about recognizing licensees across state lines, especially for interstate types of businesses like national franchises. Some states, like California, require either a broker license or law license to even advise a business owner on issues of sale, terms of sale, or introduction of a buyer to a seller for a fee. The following require a license to practice as a business broker: Arkansas, California, Colorado^[3], Florida, Georgia, Idaho, Illinois, Michigan, Minnesota, Nebraska, Nevada, Oregon^[4], South Dakota, Utah, Wisconsin, and Wyoming.

In all states the broker must be a licensed real estate agent if real estate interest is involved in the transaction or the transfer of real estate interest is a requirement for the sale.

Associations of business brokers

The largest association of business brokers in the US is the International Business Brokers Association ([1].

The Association of Professional Merger & Acquisition Advisors (APMAA) is the newest national organization and was formed to bring together business brokers, intermediaries, corporate M&A professionals, and individuals providing transactional support services (such as attorneys, accountants, certified valuation analysts, and banking officers). The APMAA also offers an on-line discussion board/forum where the public can ask questions and get answers from M&A professionals.

In addition to the IBBA and the APMAA, there are several other national associations that serve both the business broker and the public including the American Business Broker Association and the Maxbizvalue Network.

Many states have their own associations, e.g., the Texas Association of Business Brokers, Florida Association of Business Brokers, and California Association of Business Brokers.

The most well known sponsored designations are the following:

Certified business intermediary (CBI) an IBBA designation

Accredited Merger & Acquisition Advisors (AMAA) an APMAA designation

Accredited business intermediary (ABI) an ABBA designation

References

External links

Florida Department of Business and Professional Regulation
ABBA American Business Brokers Association
APMAA Association of Professional Merger & Acquisition Advisors
Carolinas - Virginia Business Brokers Association
IBBA International Business Brokers Association
MBBI Midwest Business Brokers & Intermediaries
TABB Texas Association of Business Brokers

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