- Definition of a Business Broker
- Advantages of Using a Business Broker to Sell a Business
- Broker Commission (Success Fee)
- Intermediary Responsibilities
- Main Street vs. MidStreet Business Brokers
- Business Broker vs. Real Estate Agents
- Listing Agreements
- Franchise vs. Non-Franchise
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Definition of a Business Broker
A business broker is an intermediary who assists clients in buying or selling businesses.
Most of these intermediaries sell small businesses worth less than $1 million in value.
MidStreet Brokers, Mergers and Acquisitions Advisors, and Investment Bankers represent buyers and sellers of companies worth more than $1 million.
A common misconception is that business brokers sell failing businesses. The vast majority of brokerage firms sell businesses with a history of success.
Intermediaries can choose to represent clients in selling and buying businesses. They are paid by a success fee (also known as a commission), which is based on a percentage of the sale price of the business.
For the purposes of this article, we will focus on intermediaries who represent sellers of businesses worth less than $25 million.
Brokers work with the small business owner to complete the sale successfully while maintaining confidentiality throughout the process.
They have specialized knowledge of many aspects of a transaction to help with a smooth sale process, including business valuation, negotiation with prospective buyers, and the due diligence process.
Having a quality broker is invaluable. They have to have knowledge about a tremendous number of things, from creating marketing materials to navigating the SBA 7(a) loan process. The value they add throughout the process of selling a business should far exceed their fee.
– Jeff Baxter, President of MidStreet
Advantages of Using a Business Broker to Sell a Business
Find Buyers While Protecting Confidentiality
Quality brokers find buyer candidates while keeping the sale confidential.
They know how to quickly identify potential buyers who are serious and have enough financial resources to make sure they won’t waste an owner’s valuable time.
Allow the Business Owner to Focus on Running the Business
Many businesses rely on the owner for critical functions, such as administrative tasks, operations, or high-level strategy.
If the owner diverts his/her energy to selling their business, those important responsibilities could be abandoned, reducing the selling price of the company and/or creating added stress for an owner.
Experience in Completing Transactions
Quality intermediaries know how to sell businesses and will not shy away from giving sellers accurate expectations, such as how long it will take to sell, or what price they think a business could sell for.
They also know how to identify strengths and weaknesses in a business to present companies in the best light possible, delivering great price and terms to clients.
Documents and Relationships with Other Professionals
Experienced brokers have completed many deals and have pre-made legal documents available, as well as relationships with professionals such as transaction attorneys and accountants.
While a business owner should have representation from an attorney experienced in transactions, using pre-made forms reduces attorney fees.
Business Broker Commission (Success Fee)
The broker’s success fee is usually paid by the seller once a business sells and is based on a percentage of the selling price of the business. As the selling price goes up, the fee percentage tends to go down.
Some brokers also charge retainers to cover their expenses incurred during the process of selling and refund them once the sale closes.
For businesses worth less than $1 million, an 8-12% fee is common.
For businesses worth more than $1 million, but less than $25 million, a common fee structure is what’s known as the Modern Lehman Scale.
The Modern Lehman pays a success fee of 10% on the first million, 9% on the second million, 8% on the third, and so on until the 8th million and beyond at 3%. See the graphic below and our Success Fee Calculator.
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Business Broker Responsibilities
One common question in our industry is, “why do business brokers charge so much?”
The experience required to perform a successful transaction is highly specialized and requires significant experience, time, and effort – far more than a typical real estate transaction.
Here are a few of the basic things a broker does:
- Help determine the price of the business
- Prepare and deliver Confidential Information Memorandum (CIM) and video
- Develop a Blind Profile for the business
- Perform buyer outreach, screen and qualify buyer inquiries, manage buyer/seller meetings
- Assist in evaluating buyer proposals, negotiations, and structuring of a potential transaction
Even though the intermediary represents the seller in a transaction, once a buyer and seller agree to an offer, often the broker will spend most of their time with the buyer to complete the transaction.
Main Street vs. MidStreet Brokers
Main Street brokers mostly sell businesses worth less than $1 million in value, whereas MidStreet Brokers represent companies worth anywhere from $1 million to $25 million in value.
MidStreet intermediaries and M&A (Mergers and Acquisitions) Advisors:
- Have more experience in dealing with sophisticated buyers
- Are more selective with which businesses they list, and
- Are generally more organized than their Main Street counterparts
Business Broker vs. Real Estate Agent
Business Brokers specialize in selling businesses, while real estate agents sell real estate.
Many real estate agents perform business brokerage to offer another form of revenue for their firm but don’t have experience selling businesses effectively.
One major difference between the two is that in business brokerage, the intermediary has to protect the confidentiality of their client’s business, whereas real estate agents post identifying information about their properties.
The vast majority of listing agreements for companies doing over $1 million in revenue are greater than one year in length, because of how long it takes to sell a business.
Main Street intermediaries often have listing agreements for six months to a year, because it takes a shorter amount of time to sell a smaller business.
Listing agreements usually include a “tail period,” in which the intermediary is entitled to their fee if the business sells within a certain period of years after the listing contract expires.
Co-Brokering in Business Brokerage
“Co-Brokering,” also known as "Co-Broking," occurs when two brokers work together, in which one represents the seller and the other represents the buyer. The success fee, usually given only to the sell-side broker, is split between the two.
Co-Brokering is more popular in specific areas of the country, like regions in Florida or the Midwest.
It’s less common for businesses above $1M in revenue to be co-brokered, because of:
- The variance in the quality of brokers
- The risks of a breach in confidentiality, and
- The disparity in value the sell-side advisor provides to the transaction
Franchise vs. Non-Franchise Brokers
These firms benefit from economies of scale with shared purchases and trainings, but the regional offices vary drastically in terms of quality of service provided.
It’s far less common for businesses doing over $1 million in sales to list with a franchise.
Hopefully, now you understand who a business broker is, the advantages of using one, and some of the differences between intermediaries.
It is difficult to find a high-quality business broker, but finding the right intermediary could mean all the difference in helping a business owner achieve their goals at the closing table.
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